HP and Network Vendors: Facing Change

Facing up to change isn’t easy; human nature seems to have deeply entrenched the notion that the safest and best is what’s already been done.  Maybe the reason is that new things often produce bad things, particularly for established markets and players.  Today we have two examples of change-facing, one where a company is adapting and another where an industry is still holding back.

HP, while it’s not yet reporting its earnings, is announcing an EPS upside that’s attributable to cost-cutting, and a major restructuring.  HP is the largest computer company but it’s also spread all over the place, with exposure to virtually every segment of a market that’s been unable to sustain profit margins for players in most areas.  With so many guaranteed misses, it’s hard to find a hit that matters.

It’s hard not to see what HP is doing as akin to sticking old shirts in leaking seams.  Consolidating printing and PCs, for example, doesn’t do anything to raise the sales of either product area, or even reverse the generally negative trends.  It manages costs, and if your commitment to a specific market area can be sustained only by continual reductions in your overhead, you’re facing inevitable exit.  Why not exit now and spend the management cycles on something helpful?

HP is also looking a bit bicameral on services.  On the one hand they acknowledge that EDS didn’t do what they expected it to do, and they’re writing off a lot of service deals.  In that regard, they seem to be following a broader industry trend.  A lot of companies jumped on services without realizing that there are good-returning services and bad, just like products.  Now HP seems to be in the position of saying that they know there are good and bad service areas, but they’re not exactly sure which category a given deal might fit.  If you can’t make profits on equipment OR services, where exactly do you expect to make it?  The cloud?  We have seen some solid technology options from HP there, and some preliminary positioning too, but not anything that conveys dazzling insight.  They need dazzling insight at this point, and if they think it’s coming then cost management can keep things going till it arrives.  If it doesn’t arrive (or doesn’t exist) then this is the start of a long and dark process.

Our other item comes from a content delivery conference, where DeepField Networks commented that video is changing the Internet, changing its very topology.  I’ve made this comment before too; the fact is that video valuable enough to care about has a large enough audience in a given area to merit caching.  This tends to focus more and more traffic on metro destinations, which means less and less of the traffic has to transit the “core” or peering structure of the Internet.  In addition, the crummy ROI on Internet bandwidth is forcing nearly all the smaller players out of the market, so the Internet is becoming increasingly (as DeepField says) a conclave of giants.

This is another of those two-level issues, but this time for network vendors.  The current mixture is undermining the hierarchical nature of traffic, which undermines the gadgets that have been largely responsible for creating that aggregation hierarchy—routers.  Some recent semiconductor data suggests that Cisco and Juniper might be selling less in the way of routers these days.  What replaces them?  In a metro world, investment is strongly slanted toward fiber and switching (Ethernet).  Backhaul, of course, is inherently metro so that exacerbates the shift.  The result is a gradual movement to two product groups that are less profitable than routing already and where router incumbents face even more competition.  You could argue that Cisco’s seeming fixation on videoconferencing is an attempt to promote traffic sources that can’t be cached; live stuff has to go end to end.  The problem is that “video” overwhelmingly means syndicated mass-market content that CAN be cached, and so video growth is driving the very trend that Cisco and other vendors fear.

Most network vendors have, like Cisco, responded to this in part by working to reduce costs.  As always, this is great as a way of getting some runway to use in taking off for a brave new vision of the market.  Is there one, though?  I probably sound like a broken record with this point, but in order for big network vendors to succeed their big buyers need a stronger network benefit case, rooted in benefits that are provably those of the network.  Since I think that nearly everyone would agree the cloud is the vision of a future tight cooperative union between IT and networking, it would follow that forging the tools to support that union is the big opportunity.  That’s even true for HP.


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