Knocked Over by the Winds of Change

RIM turned in a truly ugly quarter and announced its new handset family would be late.  The company is a poster child for the biggest challenge in technology, which is how a company that’s very successful under a given market paradigm can confront a major paradigm shift.  RIM was king of the smartphone when the smartphone wasn’t that smart, and they failed to recognize that the iPhone truly changed the picture.  Once you get caught behind the wave, change-wise, there is little or nothing you can do to catch up.

In the phone/tablet space, of course, RIM isn’t the only guy looking at the dust generated by the Leaders of the Pack.  Microsoft has fiddled through more firestorms in their market than I can count and only their massive market power has kept them from disaster—so far.  Interestingly, the tablet that was the proximate cause of RIM’s problems is also the cause of Microsoft’s.  Yes, phones changed radically, but it’s the tablet that really changes things.  By creating a portable device that’s less than a PC and more than a phone, you not only capture a bigger chunk of PC apps, you create behavior that can be more easily translated down-size into a phone.  Thus, the tablet provides a bridge for big-screen fans to cross to ease their way into little screens.  A tablet failure makes a phone failure all the more difficult to survive.  RIM is learning that now.  The question is whether Microsoft will learn it.

Apple, responding perhaps to Amazon’s Kindle Fire, is now rumored to be prepping a 7-inch tablet.  That’s going to put another stepping-stone on the bridge from large to small, and only magnify the extent to which the workers and consumers of the world become dependent on “point-of-activity intelligence”.  We are transforming the whole of the communications market and the evidence is literally all around us every day.

In network equipment, I’d assert we have a similar (and related) shift underway.  The value of networking can’t be expressed in “convergence” any more; we converged.  Pushing bits has become less profitable every year, and operators are naturally focusing on what’s MORE profitable.  If you harken back to the golden age of telephony, you’d recall that custom local access special services (CLASS) like call waiting were the real cash cows, and they were LOGIC features not BIT features.  UBS analyzed some recent private equity buys in the networking space and noted that there’s typically a pretty significant software contribution in their makeup.  To quote the (dry) words of their summary, those being bought:  “had a higher relative degree of software orientation vs. the broader comm equip industry, and we believe this reflected in the [margin] profiles”.  That’s because software creates features at a lower cost and a faster pace, which is just what you want to see if your bit-intensive business is trapped in the market shifts caused by things like smartphones and tablets.

UBS also downgraded Juniper, citing secular demand issues (the bit market sucks), a slow ramp on QFabric (positioning has been uninspired except in a few narrow verticals), and management defections to Cisco.  The latter point is, I think, doubly troubling.  First it’s never a good thing when your arch-rival can get good people out of your organization.  It suggests that they have a better opportunity trajectory than you.  Second, most companies face change not from the top down or the bottom up, but from the middle.  Thought leaders there can get an audience with the top people and at the same time be connected with the implementations.  That’s where Juniper has been losing most of their people, at a time when they need to have software insights that are real and integrated.  Of course, the Street being what it is, another analyst firm upgraded Juniper yesterday.  You can take your pick.

RIM took its pick, and believed the mindless supporters of the status quo.  The whole of network equipment, faced with exactly the same pressures for change from exactly the same forces, has to make a choice now, and every one of them is doing just that.  Some just don’t realize they are.  If you want to find an equipment winner, Dear Buyer, look for people who are not just standing their ground.  Soon there will be no ground for them to stand on.


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