Where Tactics Meets Strategy–Software

There’s probably no doubt in the minds of anyone that Wall Street and Main Street see things differently, particularly after the 2008 financial crisis.  Every quarter we get a refresher course in why that is but sometimes the differences themselves are enough to blur the lesson.  To make it clear again, let’s look at some of this quarter’s results in networking.

Ericsson is one of the giants of the industry, which is interesting given that the company seems to make less and less gear every year.  Faced with plummeting margins on hardware, Ericsson elected to stake its future on professional services.  The theory, IMHO, was that equipment vendors were going to take root in current product/technology silos and refuse to embrace anything new for fear it would interfere with quarterly profits.  Given that, a gulf would grow between what vendors produced and operators needed, a gulf Ericsson would be happy to bridge through professional services for a nice billing rate.  With professional services to boost sales, Ericsson has fended off product-oriented competitors, even Huawei.

Huawei is every network vendor’s nightmare.  The Chinese giant has low equipment prices but at the same time has been investing heavily in R&D, as the company’s recent opening of an NFV lab in Xi’an demonstrates.  Huawei has also been improving its own professional services portfolio and reputation while sustaining their role of price leader even there.  I’ve seen Huawei’s credibility rise sharply in emerging markets, and also in Europe.

Ericsson’s tactical problem in this quarter reflects this, I think.  The US is the only area where Huawei is weak and US operators underperformed, which hurt Ericsson where they should have been strongest.  The question, though, is whether this is some temporary setback or whether the US is leading the rest of the world into capex caution.

The strategic problem Ericsson faces is that professional services are gap-fillers.  You get integration specialists because you have to draw on multiple product sources for optimal deployment.  You get professional services/development projects to fix that disconnect between needs and products.  But product vendors and buyers aren’t stupid; everyone knows that as a new technology becomes mainstream it adapts itself to mainstream demand, which means the mainstream isn’t demanding professional services any more.

The Street’s focus with respect to Ericsson is (no surprise) on the short-term.  “Ericsson Q4 Earnings Miss on Dismal North America Business” is a typical response.  Yes, an explosion in the US could have driven Ericsson up, but so could a sudden rush of orders from Mars or Titan, either of which were about as likely.  The big question for Ericsson is whether you can be a network company without anything significant in the way of product breadth.

Then we have Juniper, and their issues seem to be more internal than with competitors.  OK, I get the fact that they’ve had three CEOs in a year.  I get the fact that that old North American capex thing is hitting them too.  But the Street has liked them all along, particularly after this quarter’s report.  It’s not that Juniper did well—they were off in sales by about 11% year over year.  It’s not that they gave great guidance; they were cautious.  It’s almost like the same analysts who said that Ericsson’s problem was North American sales think that somehow those sales will recover for Juniper.

Again, let’s look deeper.  Juniper has focused on cutting costs, and on buying back stock.  You can only cut costs to the point where you have to outsource the CFO role on earnings calls.  You can buy back stock to sustain your share price only to where you have a company with one share of stock (and yes, you could sustain the price of that share at about twenty-four bucks) and a boatload of debt incurred to fund the buybacks.  You can build shareholder value in the near term by shrinking.  You can even see your stock appreciate if you buy back a lot and shrink a lot in costs.  But darn it, you’re getting rewarded for losing gracefully, for offering hedge funds a shot at making a buck from you while your real market opportunity drifts away with your costs.

Networking is in transition because revenue per bit is declining and network equipment is all about bits.  Unless you can do something to bring in new revenue, you are going to shrink.  No new revenue from bits will ever be seen again, so you have to go beyond bits.  But you can’t expect operators to all buy one-off solutions to their problem in the form of professional services.  They will buy solutions, which means they will buy software.  Software, then, should be the heart of both Ericsson’s and Juniper’s transformation, and a step in harmonizing the tactical and the strategic, the network marketplace with Wall Street.

Ericsson is actually more of a software company than most vendors, on paper.  They bought OSS/BSS giant Telcordia years ago, and operations has been a big part of their success.  Their challenge is that Telcordia was never rated as “innovative” in my surveys of operators, and since Ericsson took it over its innovation rating has declined significantly.

Juniper has never been a software company, and in fact a lot of Juniper insiders have complained that it’s never been anything but a big-iron router company.  Yeah, they’ve had this Junos thing as part of their positioning, but that’s about router software.  Juniper’s big opportunity came with its Junos Space product, which was actually (like, sadly, a lot of Juniper’s initiatives) a truly great insight that fell down on execution.  Space could have evolved to become the orchestration, management, and operations framework that sat between infrastructure and OSS/BSS.  They could have turned Ericsson’s OSS incumbency into an albatross and rocked Cisco.

Orchestration, management, and operations unification can create immediate benefits in operations costs.  That could for a time help network vendors to sustain capex growth in their buyer community.  In the long term, this trio is what creates new revenue opportunities, which handles the strategic issues.  Happy buyers, happy shareholders, what more can you ask?

Well, though, what now?  Well, darn it, the answer is clear.  Network vendors need to buy into software.  It’s hopeless for them to try to do internal development of a software position.  It’s also hopeless for Ericsson to try to rehabilitate Telcordia or for Juniper to bring back Space.  They need a new target, a new division left to manage itself and reporting directly to the CEOs to bypass as much politics.  And they need to look at that management, orchestration, and operations stuff as the focus of that new area.  Otherwise, tactical focus to accommodate the absence of a strategic product strategy will lead them to the abyss.

Culture hurts network vendors in attempting to move to software-centricity. “Quarterly myopia” hurts any vendor who takes a short-term risk for a long-term payoff.  But it’s not just myopia any more, it’s delusionalism.  What IBM or Juniper spent on share buybacks could have bought them everything the needed to be strong again.  It’s one thing not to see danger on the horizon, but not even myopia can justify missing it when it’s at your feet.

Cisco has announced new focus on software and the cloud, but hey we’ve been here before John.  If ever there’s been a company who epitomizes the tactic over the strategy it’s Cisco.  But maybe it’s Cisco we need to watch now, because if Cisco is really signaling that it’s time for them to face software/cloud reality, then it’s darn sure time for everyone to face it.

How, though?  There’s more to software than licensing terms, more to the cloud than hosting.  The next big thing, in fact the next big things are staring us in the face but being trivialized by 300-word articles and jabbering about the next quarter.  We don’t need visionaries to lead us to the future, just people who don’t need glasses.