Juniper’s Numbers Shed Light on the Value-versus-Optics-Driven Revolution Choices

Juniper had their earnings call yesterday, and the refrain was hardly unexpected given general market trends and Juniper’s recent earnings calls.  CEO Shaygan Kheradpir started by saying that the company had made significant progress and the disappointing results were due to “industry headwinds”.  That may be different words than the last Juniper CEO used to use, but the sentiment was the same.

Like IBM, whose focus on near-term shareholder value above all else was the subject of a recent editorial, Juniper is spending money to buy back shares and raise the dividend, both of which have the effect of boosting or at least propping up the stock price.  However, the measures aren’t resulting in unqualified success in sustaining share price, and they’re killing Juniper’s long-term prospects.

Of all the companies in the networking industry, Juniper should be the one facing the transformation to come with the most confidence.  Since its founding about 20 years ago, Juniper had a reputation for technical excellence, and over those years it’s done some of the most innovative and forward-looking things any vendor ever did.  Juniper’s IPsphere initiative, about a decade ago, was in fact a harbinger of SDN and NFV change and had aspects yet to be addressed (but critically important) by both technology revolutions.  They predicted cloud computing, they actually had a product that separated the control plane processing and offloaded it onto a server blade.  They even developed a chip set that could have blurred the line between traditional network hardware and software.

Juniper’s problems arose, IMHO, in part because of a management change—Kevin Johnson and the “Microsoft club” took power—and in part because of the crash of 2008 that put pressure on spending.  Nearly all the critical insights that Juniper had were wasted for lack of execution or improper positioning.  The company’s M&A launched opportunities in both mobile and content delivery, and in both cases the efforts came to nothing.  This, at the very time when both technologies were on the cusp of revolution.

IPsphere and Juniper’s chip and product architectures should have prepared them for SDN and NFV, but the company waffled even to the extent of not positioning announcements for NFV as NFV but as SDN instead.  Their new CEO, brought in so it’s said by a board under pressure from activist investors, decided to “build shareholder value” through financial/accounting means and with that decision funds that could easily have established Juniper as a leader in SDN and NFV bought shares back instead.  As I said, it’s not done all that much for share price.  Juniper’s stock is trading about where it did on the launching of NFV in 2012 and on the one- and two-year anniversaries of that event.

All of the companies in the network equipment space have booted SDN/NFV to at least some degree, IMHO, though Juniper may have the distinction of selling itself shorter than any of the rest.  There’s a valuable lesson to learn from them, though, especially when you consider them in contrast to players like Ciena and Infinera.  If you are selling gear above Layer 1 of the network, then you are in the intelligent network services business whether you acknowledge that or not.  Carriers are shifting their strategies for basic connectivity/transport down the OSI stack in favor of capacity creation and away from the layers that have traditionally supported bandwidth management.  The “Why” is critical to applying a fix to this dilemma, which is critical if you supply switches or routers.

The electrical layer of a packet network is really about aggregation and multiplexing.  Since the seminal report (by the Rand Corporation in 1966) on packet switching, networking has advanced in features and performance by dividing up user flows into packets and multiplexing the packets on a web of physical media (soon optical) trunks.  This provided for full connectivity without dedicated optical paths, something that was essential with cost per bit so high.  But optical prices in cost-per-bit terms have fallen sharply and the cost of managing electrical-layer networks has risen sharply.  In more and more cases it makes sense to dumb down the electrical layer and simply throw bits at the problem.  That’s one of the fundamental forces in the networking space today.  We’re learning to do with agile optics what we used to do with core routers.  Soon we’ll move that understanding further out into the metro networks, where most of the investment is anyway.  When that happens, the impact on the electrical-layer gadgets will be profound.

NFV and SDN have been portrayed as other steps in the diminution of switching/routing layers.  That view is likely why Juniper and others didn’t jump into either of the two as aggressively as they should have.  But the perception that the only thing you can do with new technology is to cut costs is likely a bias among CEOs/CFOs who think the only way to raise their own profits in what they see to be a steady long-term revenue decline is to reduce their headcount.  NFV and to a lesser degree SDN are ways of linking new services, higher-layer services, OTT-like services, to the network.  They are the thing that the network operators need to have.  Even that enterprises need to have.  But you’re not going to get them to fulfill this truly valuable and revolutionary mission by handing the future of SDN and NFV over to bean-counters.  You need revolutionaries.

Everyone has had some of these people, including or even especially Juniper.  I suspect that at this point, with the CEO’s strategy for the company’s future made clear, most of Juniper’s have moved on to greener (read “nearly any other”) pastures.  In the good old days these people would have started companies, but VCs these days only want quick social-media flips, not incipient revolutions.

Ten years ago, Juniper decided not to get into optical.  They’ve decided now, at least implicitly, not to get into SDN/NFV revolution.  As I said, to be fair, so have most of their competitors.  But there is going to be a network revolution over the balance of this decade.  It will either be a transformation of Layers 2 and 3 into the service value network or it will be a transformation of those layers into a simple on-ramp to agile optics.  You either build valuable bits or you just push bits around.  Which mission do you want, dear vendor?  Juniper, sadly, has made its choice.