Cisco’s numbers were a big disappointment to investors, and they focused on two issues that are in fact the key ones for Cisco (and the market) at this point. First, Cisco’s gross margins were off, and that’s likely due to discounting forced on Cisco by competition. Second, Cisco suffered in the critical switching space, the place where most enterprise investments and the key data center investments would be likely made. Even service providers today are more likely to buy switches or switch/router gateways than pure routers. Thus, it seems likely that either the market is unexpectedly soft or that Cisco is losing share here.
I think it’s the latter. The problem Cisco has is the classic incumbent market leader problem. They can’t accept organic sector growth, they can’t hope to gain market share, and so they have to look for adjacent opportunities. The problem is that these are proving harder to grow quickly than Cisco had hoped, and in the meantime the lack of focus on core business sectors has created a greater risk of market share loss. There are plenty of drivers for that outcome, too.
Switching, meaning Ethernet and lower-layer technology, is highly price-sensitive because it’s the largest category of network investment enterprises make. It’s also hard to differentiate because, well, bits are bits. Thus, while enterprises are eager to modernize their data centers, it’s proven difficult to demonstrate that switching features are relevant to that task. The goal, after all, is IT modernization and switching doesn’t link well or even directly to IT features. For service providers, switching is mostly about aggregation, which is also a hard application to differentiate. There’s no clear link between switching and the service layer where the money is, because vendors (including or even especially Cisco) haven’t worked hard enough to create one. Thus, going cheaper is a powerful motivation, and everyone is under pricing pressure.
This is bad for Cisco, of course, but it’s not a good sign for the market overall either. Gaining market share against Cisco based on price is a kind of hollow victory; you only set the stage for commoditization and loss to Huawei or ZTE. I hate to keep beating the same drum, but the problem is that without new revenue hooks to pull through infrastructure, operators can’t keep investing and they certainly can’t value small feature advantages over larger price advantages. Industry: beware!
Nokia’s falling status and confidence continues, with leaked documents from CEO Elop suggesting that perhaps the MeeGo alliance isn’t going to perform and renewed rumors that Nokia will adopt Microsoft’s Phone 7 or Google’s Android, or maybe both. The fact that this debate is happening at all, and in public, is evocative of the gulf between what Nokia needs to be as a 21st-century marketing machine and what it is—an old-line conservative in a market that no longer values either attribute.
The question at this point is whether any choice it might make could possibly matter. Probably not, I think, not because of the confusion and loss of confidence that the current debate creates, but because the issue has even come up. With a lead in the phone space, and with a smartphone OS that could have been a contender (so to speak), Nokia has passived itself into irrelevance.
We live in a consumer age, a time when there are both players eager to offer whatever the current fad might require and frameworks to facilitate the offering. That kind of situation doesn’t create many opportunities for the guy who thinks that he can wait for a market opportunity to develop and then to support it with superior engineering or a known brand.
The question isn’t what Nokia is going to do (same as always—not much) as much as what some of the other entities in a similar situation will do. Ericsson comes to mind, and NSN obviously. Alcatel-Lucent, I think, has demonstrated with lightRadio that it’s capable of doing something compelling, but even that significant step needs service-layer buttressing. Their announcement in a socially linked call center is another good sign, but it would have been better had this app been linked to a service-layer strategy for enterprises and operators and not just an atomic announcement. Innovation is the process of authoring services for the masses these days, not pushing bits. It would have helped Cisco, or NSN, or Ericsson, or Alcatel-Lucent, or Juniper in the current quarter. Sooner or later somebody will figure this out.
Then there’s HP. The company finally made an announcement of WebOS-based products derived from the Palm DNA, but the announcement was hardly earth-shaking. A small Pre-like cellphone/smartphone and a 9-inch tablet were announced, but no pricing or release dates or carrier deals were firm. Thus, the whole thing looks like a place-holder, initiated about six months after the time for place-holding was past. HP needs to make something of WebOS and the Palm deal, and they need (more than Microsoft) to be successful in the appliance business. They didn’t offer anything that would be truly compelling.
The nine-inch tablet is their biggest gamble, and hope. It takes on the iPad more directly than most of the other tablets, which focus on the 7-inch form factor, but corporations tell me they like the smaller tablet and HP has a much tighter relationship with the enterprise than with the hip consumer. The website positioning is clearly targeting the consumer too, so HP is doubling down and chasing Apple in its core market with a comparable product. There are some interesting features; wireless keyboard and wireless integration with the HP phones, but whether they’ll sustain the product in a market that will be really hot by the time HP even gets a product in the field is another matter.
Maybe Nokia needs to team up with HP.