I noted in an earlier blog that some of the tech giants seemed to be shedding parts of their businesses, parts that would at one time have been considered strongly symbiotic or even critical. Credit Suisse has just suggested that HPE would be worth more to shareholders if it broke itself up and sold off the pieces. At the same time, I’ve noted that some new technologies like NFV seem stalled because without a very broad product footprint, vendors can’t make enough on a deal to justify all the time and attention needed to close it. It’s worth asking whether there’s a fundamental issue in moving tech forward under current conditions, and how it might be resolved.
“Sales account control” was the watchword for tech giants like IBM and Cisco. The idea was that if you could earn enough on a given customer, and with those earnings justify sustaining continuous sales presence, you’d have people in place to feed back customer feelings and plans, and to influence those plans in your favor. This worked back in 2000 when Cisco was one of the top five companies in market cap. If you look at the market-cap rankings as of August 1st, you find companies who succeed by selling lot of stuff by selling inexpensive things to small buyers. Obviously that kills the account control strategy. Does it kill other stuff?
Consumer products are largely self-contained. You don’t have to build a network to buy a phone or use social media or buy a product online. They also tend not to be subject to complex cost justifications; do people ask what the ROI on that new iPhone model would be, or whether they’ll get attention from their friends for having it? The question, then, is whether a simplistic purchase model is essential to tech success these days. You can look at this issue from the IT side in cloud computing and from the network side in NFV.
Suppose I’m a server vendor. Do I go out and sell cloud computing to my customer? If so, am I not making them into at least a partial user of public cloud rather than of my own servers? If public cloud is cheaper than self-owned data centers, wouldn’t a total transition to public cloud end up using fewer servers, reducing my total addressable market?
Suppose then that I’m a virtualization software provider. I don’t have exposure to the server space. I do have an opportunity to sell my software to public cloud providers or to enterprises who want to use cloud principles to get more from their servers (meaning spend less for equal application performance). The cloud transformation doesn’t hurt me one bit.
But the problem here is the sales volume. My server vendor, selling perhaps ten thousand servers, has a boatload of money on the table. My software vendor has a limited licensing fee. The server person, who could justify a significant sales effort given the money at stake, wins if no cloud decision is made. The software person who has a big win from the cloud doesn’t make a lot on the victory and can’t justify anything like the same level of sales effort. Which side will out-sing the other?
So is the public cloud provider the answer? You can see from Amazon’s numbers that the total cloud computing market is still less than 5% of total IT spending. It’s also hard to see how Amazon could expect to send cloud-acolytes out to sing the praises of the cloud from door to door. And basic IaaS, the kind of cloud service that would be relatively easy to adopt, has thin margins. The “real” cloud, the cloud that’s created by adding in the dozens of hosted AWS services, is likely to require application development skill to adopt. Amazon door-to-door looking for architects and developers? Give me a break.
Now to NFV. Like the cloud, the essential value proposition for NFV was cost-based; to replace expensive proprietary devices with software features hosted on commodity servers. This generates four vendor constituencies. We have the server people, the hosting providers. We have the vendors who supply the virtual-function software that gets hosted. We have the vendors who offer the NFV implementation that pulls all this together, and we have network equipment vendors whose proprietary gear the whole process is trying to displace. And we have the same question of “What’s in NFV for me?”
Server vendors could certainly be expected to rush out and promote NFV migration…except that the whole notion of NFV is commodity servers. The challenge for a server vendor who wants to drive NFV is that they have no way of being sure they’d get the server business after they’d done all the education and justification work.
Network equipment vendors would have to see NFV as a “nowhere to go but down” game, so they tend to follow the path of reluctant support. If a customer really wants NFV, it’s best to lose the difference in price between your NFV products and your proprietary boxes than to lose everything. But if the customer is on the fence, let them sit and get comfortable. That means these vendors aren’t trying to lead the charge.
The providers of virtual functions have, according to operators, seen NFV as a kind of license to kill. If NFV is some sort of mandate operators have to follow no matter what, then it makes sense to get as much for your functions as possible. Of course, NFV isn’t a mandate and the cost of VNF licensing is one of the impediments to NFV most often cited by operators. While this group may want to push the market, they don’t have a realistic position to leverage…yet.
The vendors who actually have NFV software, meaning those who can deploy and manage services based in whole or in part on VNFs, the dilemma is most acute. On the one hand, they have the keys to the kingdom, meaning they can make the business case to drive the whole ecosystem. On the other hand, they may not have any real way of monetizing their success because all the operators expect the software to be open-source commodity stuff.
So where does this leave us for both the cloud and NFV? It seems to me that the notion of ecosystemic sales is the correct one, but we may not have the right ecosystems in play.
This is clearly the era of the cloud, but at a deeper technical level it’s the era of virtualization. Virtualization plus distributability of resources equals the cloud, equals NFV. Anyone who wants to drive the market in the cloud or NFV will have to be able to resolve that equation with their own offerings, whether they’re products or open-source distros. That means that today’s tech giants need to be built around two things—networking and virtualization-enabling software. The software handles the translation between abstractions and resource systems and the networking connects the resource systems.
Seen in this light it’s clear that Cisco has all the pieces they need. Rival network vendor Juniper is trying to add in a differentiable virtualization model, which would give them the parts they need. HPE has networking and also has a cloud-and-virtualization vision, and so they have the pieces too. IBM does not; they sold off their network business years ago (to Cisco). The lack of network incumbency is IBM’s biggest problem, and the need to sustain the virtualization-plus-network model is the imperative that would have to guide any HPE shedding of product areas.
They could shed a lot, though. I don’t think the resource systems themselves, the applications or the servers, are essential for success. A vendor can partner with somebody to get reference implementations for deployment, and the purpose of these has to be to validate the generality of their solutions. When you’re trying to move an industry to a whole new paradigm, a broad set of stuff that’s not particularly relevant to the transformation only makes your management focus and sales focus more difficult to direct properly.
“Could” doesn’t necessarily mean “should” though. Every network vendor (save the optical guys) would stand to lose something by a cloud/virtualization/NFV transformation. What servers could do is ease the impact of that transformation by giving them a stake in the hardware that’s growing to cover that which is shrinking.
So watch HPE as a signpost. If they do shed more assets and if their shedding seems to accommodate the technologies that can drive, and at the same time protect against, the transition, then they’ve probably seen the light, and the rest of the industry probably has, or will. If they seem to be just spinning around to gain shareholder value, then they and the industry may be in trouble with the cloud, and all it implies.