Today, we’re digesting some interesting data points on two giant market players, Apple and Cisco. Both companies have been the subject of Street research focus and both have demonstrated a mixture of weakness and strength. Because these two players have such a dramatic influence on their markets—and through them on our lives—we need to understand what’s really going on, so let’s look at Apple and Cisco and see.
Apple is arguably the most significant market driver in the whole of technology. Their whole appliance drive, culminating in the iPhone and iPad, literally launched whole industries and created a truly seismic shift in the mobile broadband space. The company has become an icon, but underneath that iconic status is a concern that Apple simply may lose its innovation. That’s likely what sent the shares tumbling yesterday.
Concerns are warranted, but not as much about innovation as about TAM. Apple’s challenge is that you can’t create a broad market for high-end products, so your strategy has to be either to surrender prices and margins and go after the broad market, or to limit yourself to the segment that can pay your price. The latter move will obviously mean you’ll have to jump into new spaces regularly to refresh your TAM, and this is what Apple supporters need to be worrying about. How many gadgets can we expect yuppies to hang from body parts so Apple can continue to leap from opportunistic stone to stone?
The manifestation of Apple’s challenge can be found in its cloud position. Of all of the major players in the tech space, Apple has the most anemic cloud story. Why? Because a rich cloud begats a poor device; ceding service intelligence to the network makes the device simply a front for the service and virtually guarantees a price-based market in appliances. Apple wants a high-margin market. But the classic problem with “market denial” is that you can deny progress but it’s hard to force competitors to do that. Especially when the network operators (AT&T, Verizon, etc) want MORE customers and are the primary conduits for moving new devices into customer hands. Android’s success is less due to Google than to operators who can’t sell smart data services to people with older dumb phones.
Cisco’s incumbency is in network infrastructure, and there they enjoy the higher margins that Apple does with appliances. While they’ve had some market-share ups and downs, Cisco has always been a sales machine and has exploited its leadership well. In addition, competitors to Cisco have been fairly non-insightful in developing the kind of “new-problems-demand-new-solutions” story that’s needed to unseat a market leader. But Cisco under the covers has that same TAM problem; routing and switching isn’t growing fast enough to make Cisco a growth company and gaining market share normally requires the same kind of new-problem story for an incumbent as for a competitor. The problem is that incumbents don’t want to say that new problems demand new solutions for fear they won’t be part of the shift.
The Street, after a Cisco conference, is saying that Cisco’s position is much better than most people believe. I got two research reports on that thesis just this morning, and the reports are true and insightful at one level and dangerously short of the mark in another. Cisco’s position ISN’T better, but its competitors’ position is worse.
Every single strategic initiative in networking today is aimed at making switching and routing into the very kind of market that Cisco doesn’t want to have. Software-defined networking (SDN) is aimed at substituting central control for distributed, adaptive, device behavior in building networks. That would likely bring about lower device prices, and also radically change the value of incumbent vendors by making incumbent networks just candidates for replacement with the new paradigm. A strong SDN story could mess up Cisco’s whole positioning in a single quarter, and that’s the truth. What’s also true is that Cisco’s competitors are so namby-pamby about SDN on their own that they avoid road signs with any of the letters of the acronym. Who among them has an SDN position that’s not reactive, and how can you unseat an incumbent by reacting to that incumbent and not driving them relentlessly?
Here’s the net-net for both companies. TAM expansion is the only path to growth for a market leader, and TAM expansion demands that you take a new issue in the marketplace and use it to build a bridge from the old to the new, from the existing base on which you depend to the base through which you’ll grow. Cisco’s genius with SDN has been that they’re capturing the functional benefits of SDN without embracing the technology changes. That doesn’t deliver “standard” SDN, but since the whole standards process is about as broken as politics, that’s not the issue. The issue is that Cisco can do enough with “SDN-in-a-brown-paper-bag” to make the step from it to “real” SDN difficult to justify. You don’t have to offer the best, just offer something good enough that the price of the best is too high to bear. And if SDN is networking for the cloud, Cisco can cross SDN’s bridge to become a cloud player, an IT giant, just like it wants to, and browse the fields of fertile TAM there.
Apple’s problem is that they have no strategy to build that same bridge, not so much because the bridge doesn’t exist but because first they fear its foundations will sink the bank of the river they’re already on, and because they can’t see the other bank in the fog. Where could Apple’s fertile field of TAM be? Glasses, rings, wallets? Making all these things “smart” would certainly create opportunity, but the smartness would necessarily require surrender of functionality and functional integration to the cloud. That makes an iPhone an expensive form of window-glass.
But what Cisco and Apple have in common is their dependence on continued lackluster competitive reaction. Google and Microsoft have given Apple a lot more running room than they needed to; in point of fact the move to the cloud at a breathtakingly aggressive pace would benefit both those players rather than hurt them, yet they’ve been unimaginative in their positioning and product offerings. Alcatel-Lucent, Ericsson, and Juniper have almost embraced Cisco’s defense of the status quo even though they’re losing in it, and every day the golden fields of TAM that these guys could move into get more brown and distant. So what’s the net? Both Cisco and Apple are at risk, dire risk. But both are being buoyed up by competition that fears risk more than Cisco and Apple do.