What Three Earnings Reports Show Us About Tech Progress

We are starting to see earnings reports from technology giants and the results so far aren’t particularly pretty.  We are what we sell, in this industry as in all industries, and so it’s important to look at the trends reflected in quarterly reports to see what’s really happening in our industry.  Today I want to focus on three specific firms—Apple, Ericsson, and IBM.

Apple reported its slowest growth in iPhone sales since the product was announced, and revenues were below Street consensus based on that and on slower-than-expected growth in iPad and Mac systems as well.  This was surprising and frightening to those who believed that Apple would either find or make the Next Big Thing and ride each of its innovation waves perpetually.  That, of course, was never realistic.  It’s always been a question of when the model would run out of steam.  Will Apple, whose Watch sales are disappointing, now move to TVs or cars or maybe both?  Perhaps, but that’s not the issue I want to comment here.

Software is where innovation now is in the consumer space.  New technologies at the device level are important only to the extent that they open new software options.  If that’s true for phones, as I think Apple is showing it is, then we are on a direct path toward the personal-agent and cloud-hosted-feature model that I’ve talked about before.  It makes no sense to ask consumers to pay more for a phone, pay for more traffic (or load networks with it, reducing performance) to drag data to the device for cogitation when you can do all that stuff in the cloud.

IBM is showing something similar in the enterprise space.  The company reported software revenues below consensus and hardware revenues above, which is pretty much exactly what they didn’t want to see.  They do have a bright spot in their strategic target areas like the cloud and analytics, but it’s clear that these areas won’t sustain growth for IBM if they can’t either turn around their core business or sell it off.

The challenge IBM faces is that of transitioning from mining key accounts to evangelizing a totally new market.  While this is a simplistic example, those who sell to the Fortune 500 have only 500 prospects.  What is happening in computing is a shift from a central-batch model that’s sustained us (with modifications) for fifty years to a more personalized and distributed model.  IBM’s deal with Apple has helped it grow in the mobile space, but they haven’t yet considered the fact that if the end-game is to empower workers then you need to aim at approaches that empower all workers, not just those in big current IBM accounts.

Then there’s Ericsson.  They didn’t report bad numbers, but they didn’t show investors any sign of a fundamental change in business strategy and most on the Street agree that one is needed.  Ericsson has relied more on professional services and integration than on having a leadership position in key product areas like L2/L3.  That makes them vulnerable to players like Huawei (the price leader) and Nokia (who now has Alcatel-Lucent’s Ethernet/IP portfolio to add to their own operations/integration skills.

Ericsson’s big vulnerability lies in their lack of product mass.  While it’s possible to win deals on integration alone, it’s harder.  The company who stands to gain the most in total sales will be able to spend more resources on getting the deals.  They also have a higher level of credibility with buyers.  The Street view, which I think is correct, is that Ericsson is now fighting two major rivals in a space that won’t hold more than one leader.  Ericsson is hoping to address its product insufficiency with its deal with Cisco, but Cisco is hardly dedicated to network change and it may be an uneasy relationship.

The dominant common issue here is one of innovation.  All of these vendors are seeing their primary markets commoditize because new and useful features are simply not being added.  Whether you’re talking about a consumer or a giant network operator, your posture on future technology purchases is set by whether there are new benefits that could be harnessed to justify incremental spending.

Incumbents avoid transformational features because it might transform their incumbency out of existence.  Vendors in general fear that transformation opens up enormously long selling cycles that by themselves would defer buying, and bigger vendors fear that their efforts to educate the market will open the door for other competitors who will simply wait for big-vendor education to do its job.  The bigger the transformation, the greater all these risks seem to be.  For all three of these vendors, a big transformation seems to be the only solution.

The second challenge that all these firms face is openness.  Apple has already spawned open-source (Android) competition, and in the cloud everything’s a microservice so brand loyalty is hard to achieve without skirting anti-trust.  IBM and Ericsson both have to contend with open hardware initiatives (the telcos just joined the Open Compute group) and everyone seems to be backing open-source for the cloud, SDN, and NFV.  I think that the initial attractiveness of openness developed out of vendors’ reluctance to accept declining prices as the inevitable consequence of static feature sets.  Open source, open computing, promises to reduce or eliminate hardware and software costs, which is important if cost management is the only improvement you can make.

Open approaches erode the already-limited appetite of vendors for market education, which means that a technology revolution “led” by open technology might never go anywhere because buyers don’t know what to do with the new technology options.  Third-party resources like publications, once the most trusted source on new technology, are now largely ad sponsored and thus not to be trusted at all.  Same for analyst firms.  No wonder that buyers consider “experience of a trusted peer” to be the only validation one can accept from the outside.  But where do experienced trusted peers come from in the early days of a technology?

Apple, Ericsson, and IBM can be forgiven for not running rampant into the brave new world, but they may now have reached the point where the risk of standing still is greater.  IBM in particular has let its brand erode significantly, and you can see in media and Street comments that many Apple fans are frantically looking for good news to counter what might be a slip in Apple’s fortune large enough to raise questions about its future.  Ericsson, already under pressure because of a decision to seek a services-driven revenue model, now faces formidable competitors who have services and products.  So what do these companies, and their peers, have to do?

For Apple, the answer is to build a cloud business model.  I’ve criticized Apple for having such a pedestrian cloud story for two years now, and we may be reaching the point where the omission becomes critical.  Network operators and some competitors (Mozilla, for example) have tried to move to a “thin appliance” phone model, but the efforts have failed because the goal was to do nothing more than replicate current features.  There has to be a Silver Bullet to kill off the old notions, a benefit that justifies the change to the consumer.  I think IoT and other forces are already supplying examples that might be sufficient, and Apple needs to take action before somebody like Amazon or Google grabs the opportunity.

For Ericsson, the obvious answer is to jump out in front of the new-age network transformation movement.  SDN and NFV, taken alone, are not only not going to be enough to move the ball, they’re already in the hands of competitors.  Ericsson has OSS/BSS, and they could easily build that full-range-of-benefits story that operators want to hear.  Look at ONOS, CORD, and XOS, Ericsson.  They are a higher-layer vision of what we know operators want to do, because some (like Verizon) are already starting to do it.  Above all, you cannot let Huawei lead in the practical application of these technologies, and there’s a strong indication that Huawei is moving to do just that.

For IBM, you have to stand for business transformation in the most radical sense.  The business of the future will surely use the cloud, and analytics, and workflow, and mobility.  Everyone knows that and supports all these initiatives—independently.  What IBM has to do is support them collectively, to build the framework of the business of the future by starting with what that business will use technology for, at the highest level.  That means stellar marketing more than anything else, and an associating of “IBM” as a brand with the new wave of worker productivity.

We’ve had productivity waves in the past, since the dawn of computing in fact, but none since 2000.  This is the longest period we’ve ever gone without a major new benefit to drive change.  It’s time for vendors to realize their golden ages all depend on benefit augmentation on a periodic basis.  Otherwise they’re all fighting for scraps, which isn’t pretty.