Two Whiffs and a Bunt in Earnings

Earnings reports always give you something, but they don’t always give you conclusive answers.  So it was yesterday with three tech companies, Apple, Netflix, and Juniper.  These three players epitomize the new network ecosystem and its confusion.

Apple missed, no question about it, but there is a significant question on whether the miss really means much. The market wisdom says it’s not Apple’s fault.  After AT&T’s report, which showed that customers might be holding off on iPhones until the new model came out, many had expected Apple to miss on its revenue line.  Their regular schedule of new models is now overhanging the sale of their current ones.  This, with no promise there even will be a new model!

The problem is that none of this should have surprised anyone, and there’s a potentially bigger problem with the Mac sales.  Pundits say that the Mac sales were hurt by the late delivery of the new models in the quarter, but if everyone was waiting for a speculative iPhone model and the same mindset held with Mac’s real models, why didn’t they buy when the products came out?  Pent-up demand is as logical as overhang because it arises from the same notion of unfulfilled expectation.

There may be an element of overhang, and maybe some buyers were too busy at the beach to get to their Apple Store in time for their purchase to count this quarter.  There may also be an element of saturation here.  How many times will even the yuppiest yuppie do an upgrade to be cool?  How long will having the latest iPhone be enough to make you cool?  And there are other questions.  Tablets are overhanging PCs, so clearly they’d overhang Macs too.  Might iPads be cool enough that you don’t need a Mac, so iPads might overhang the Mac even more?  And might Apple’s cloud activity still be half-hearted because they’re afraid that a cloud framework would open their historically closed ecosystem?  We need to watch Apple’s signals carefully here because there are some signs that things aren’t on that hockey-stick trajectory now, and may not return to that trajectory quickly.

Then we have Netflix.  The company missed profits and revenues as costs for programming went up and subscriber growth slowed.  This is the firm that some believed would sweep traditional linear TV out of the market just a year or so ago, and now it’s pretty obvious that Netflix is the one at risk of being swept away.  The problem is simple; you cannot make fresh content and promote it heavily when your business model is based on the presumption that you’re a cost-based alternative.  If you’re in a commodity business you’re a commodity player, and the fundamental reality is that except for very old content, the video space isn’t a commodity business.  People want to watch specific things, not just any old thing.  That means those who have rights to that stuff because they’ve produced it will have an advantage, and their return on investment depends on advertising—commercials.  You can’t make enough in streaming ads to fund the material you’re streaming.

Juniper has the distinction of being the only player in our trio who didn’t miss their numbers, but their guidance was again a bit tepid and it seems pretty clear that Juniper is relying on market changes more than their own changes to boost their sales in the future.  My problem with that is that market changes for everyone in the router/switch business are taking things the other way.  Operators have the same squeeze Netflix has; it costs them more to build capacity but they don’t gain compensatory revenue.  So you have to either help them with the revenue side or expect that they’ll demand steeper discounts on capacity-building and also slow-roll where possible.

Juniper has a decent SDN capability and they’ve articulated it at least in private briefings with some effect.  However, capability and product are not the same thing.  It’s clear from listening to the Street that the future of Juniper in their eyes depends on the PTX and QFabric and security.  OK, SDN and “network virtualization” both impact those spaces in some way.  If Juniper can grab onto SDN principles and leverage them in the areas of PTX, QFabric, and security then they can strengthen all their weak points.  That’s what they need to do, and before more and more of the need for the changes has been pushed up into network virtualization or down into agile optics.  PTX in particular is an assertion that electro-optical coupling in a network core is better than pure ROADMs or OTN.  That can be true if you insert SDN principles, IMHO, but not if you don’t.  Get a move on, Juniper, because others are moving on you.


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