IBM and the Great Tech Decline

According to one of the financial pundits, “IBM needs revenue growth.”  Forgive me, but that’s not going to win any profundity ribbons, gang.  Every public company needs revenue growth unless it wants its stock to decline at some point.  Recognizing that is probably less useful than recognizing a blue sky on a clear day.  What would be useful would be for companies who need revenue growth to look at the implications of that need.

Buyers will spend more on IT if they can obtain a benefit from the spending, such that the excess of the benefit over the cost exceeds their ROI target.  Probably every CFO on the planet and most first-year students of accounting or economics would know that.  So it follows that if you want to sell more stuff so your revenue increases, you should provide your buyers a greater benefit.

The “benefit” of IT is in almost all cases associated with improved productivity, which means that it can make people work more efficiently.  I’ve personally watched our industry progress from punched card processing to analyze transactions after the fact, to real-time systems and now to point-of-activity empowerment via mobile technology.  The problem is that we tend to think of these steps along the path as being driven by technology.  We had mainframes, then minicomputers, then PCs, then smartphones.  We forget that the reason why these technologies succeeded is that they filled a need, provided a benefit.

For much of the summer and fall, the Street has been whining about the lower levels of carrier spending.  Why are operators dragging their feet on capital spending?  It must be some complicated financial cycle, perhaps the juxtaposition of several refresh cycles that all happened to be in the wane at the same time, right?  Well, why couldn’t it be the fact that operators are earning less revenue per bit every year, and are thus not inclined to increase spending per bit?  Again, it comes back to benefits.

For IBM, though, the big revenue shortfall they just reported is very bad news.  Of all the tech companies we’ve ever had, IBM has been the very best at navigating the twists and turns of the relationship between IT and benefits.  I’ve blogged at past IBM earnings announcements that IBM seems to have lost its way, and I think now it’s clear that they have.  What is less clear is whether IBM really dropped the ball—the problem is IBM’s alone—or whether IBM’s challenges are simply a litmus test for the ills of the industry.

Tech in the last 20 years has been revolutionized by populism in a business sense.  We have seen an enormous expansion in the market for computers, for networking, because we’ve extended computers and networking to the masses.  But where do you go after you’ve done a mass market?  An intergalactic market?  That’s Cisco’s challenge with its “Internet of Everything” story; it’s hard to see what the next tag line would be.  And all of this is foolish for the same reason (which isn’t simply semantic).  Increasing revenues by increasing total addressable market will eventually run out of steam because you end up addressing the total market.  At that point, you have to increase ARPU.

In enterprise IT and networking, which is where IBM is, increasing “ARPU” means harnessing more productivity gains so you can justify higher IT investment.  The problem IBM has had for the last five years is that, as my own surveys have consistently showed, it lost strategic influence with buyers by not being on the leading edge of IT justification.  There was a time when IBM’s views commanded senior management attention automatically; those times have passed.  IBM needs to get back in the lead by showing it has new and credible and different strategies for applying IT to productivity.  They started, belatedly, down a track to work with Apple to develop mobile symbiosis with IT for point-of-activity empowerment, but all they’ve done so far is announce the deal.  They need to show results.

For networking and IT in the broader sense, it’s a consumer market.  The problem with that consumerism is that growing TAM can be accomplished only by lowering costs, which means that there’s a downward pressure on ARPU at the same time there’s a hope of growth in the total market base.  We know from enterprise IT that you can saturate a market—there are only so many “enterprises” possible.  It should be obvious that it takes years to build a new consumer, and that at some point you can’t look to population growth as your strategy for revenue gains.

IBM in IT and Cisco in networking have both been sticking their heads in the sand.  IBM has wanted to believe that companies would figure out their own paths toward higher per-worker investment; they have not done that.  Cisco has wanted to believe that consumer pressure to do more online would force the network operators to spend more on switching and routing even if their ROI on those investments falls sharply.  We are seeing, in both networking and in IT, the signal that this sort of silliness just can’t be tolerated for much longer.  The market will impose logic on firms who refuse to impose it on themselves.

But what I find the most astonishing about all of this is the response toward SDN and NFV.  Networking is an enormous market.  IT is an enormous market.  SDN and NFV create a kind of shunt between the two, to allow an IT company to become a networking giant or vice versa.  Talk about TAM gains; you could potentially increase the size of either the networking or IT markets by stealing from the other.  Cisco could become “the new IBM”.  IBM could become the “next Cisco”.  With a stroke, the problems of one space could be solved by robbing from the other.  So why is nobody doing this?

You can see my concern here, I’m sure.  Have we gotten to the point where we want easy answers and social-media flips instead of incumbent insight or real investment in a revolutionary technology?  For all the hype about the relentless progress of SDN and NFV, the fact is that neither is progressing relentlessly.  We can see, in both areas, the need of network buyers to do better.  Does “better” mean cutting costs by 30% or 40%?  If that’s the case, then winning for the Cisco’s of the world will look a lot like losing.  Same with IT; IBM can introduce cloud computing and new software paradigms, but unless those introductions bring new benefits, their introduction will succeed only if they lower costs to the buyer.  That means lowering IT spending.

IBM is telling us that we have a systemic problem of benefits here.  We’d better listen while there’s time.