Are we in for tech trouble? Cisco’s quarter ended last week, and while their numbers were decent, their guidance disappointed. Enterprise orders fell, and the service provider space continues to be weak. Generally, Cisco has been a bright spot in the network and tech space, so we have to ask whether those spaces are at risk overall. Enterprises and operators I’ve chatted with over the last month have contributed some views, and I’ll share and analyze them here.
The first point both groups made with me is that global economic concerns are rising, which tends to put a damper on capital programs even before there’s a convincing level of risk present. The general view of both enterprises and operators is that trade tension and geopolitical political issues, including Brexit, are going to dampen growth. The question is whether there will be any compensating positives. In the US and EU, it seems likely that some form of economic stimulus will be applied, but that may not be enough.
Buyers overall believe that trade problems, in which category many include Brexit because of its impact on EU/UK trade, will always hurt tech sales, and that economic stimulus can’t make up for it completely because it can’t address the uncertainties that underlie the trade issues. We have not had a global trade war, or currency war, in decades, and we thus have no relevant experience with how either/both would impact the tech industry or the economy overall. Because buyers believe this, it becomes true to an extent by default.
The second point is also made by both groups, but in slightly different form. Both enterprise technology and service provider infrastructure are having increased problems meeting corporate ROI expectations. The providers express this as the “profit per bit” problem, and it’s now almost a decade old. Enterprises are mixed in how they see this issue, and even the mixture is an interesting data point.
The majority of enterprises say that new IT investment to lower overall cost, meaning things like virtualization, are running out of gas. Virtually all buyers focus early attention on the projects with the best business cases, the “low apples”. As those are picked, the ROI on the remaining projects averages lower and lower, making it more difficult to get them approved. This is true of both networking and IT, and it’s probably responsible for the decline in enterprise orders that Cisco reported.
A smaller percentage of enterprises say that the specific problem is with “the cloud”. The simplistic model of cloud migration to reduce costs has not worked for the average project or business. They now recognize that they have to think about applications, and application design and development, very differently to optimize cloud value, but they don’t know how to do that yet.
This second concern is the number one technical issue service providers cite, though frankly I wonder whether they’re just latching on to something to explain their problems. According to the providers, they believed in the NFV Call for Action model, meaning the substitution of hosted features and off-the-shelf servers for proprietary devices. They recognize, overall, that the initiatives aimed at doing this haven’t succeeded, and they accept (overall) that a successful transformation of this sort will require “cloud-native”. Overall, they don’t know what that means, and so they’re stuck with no real projects to execute on.
The smallest group of enterprises say the problem isn’t cost as much as benefit, and that’s also the second-most-held position among operators. ROI can be maximized by lowering the “I” or raising the “R”, which for enterprises would mean more projects to enhance productivity, and for providers, projects that would raise service revenues. Both groups express the same doubt that they have the skills needed to identify things that would boost returns, or to execute projects to deploy them if they could be recognized.
“I know we really need to move up the value chain,” one operator market planner told me, “but that’s just not how we think.” An enterprise architect said “We think of our business processes in terms of our IT capabilities, instead of planning new IT capabilities to shape how we do business.” And these problems are becoming entrenched. Service providers last considered above-the-connection services seriously in the early 1990s according to my surveys, and enterprises ran out of productivity insights just a decade later. Neither group has recovered the initiative.
The third point that both enterprises and operators raise is the consumerization of tech. Thirty years ago, business service revenues and consumer revenues were virtually equal parts of operator revenues. Today, consumer revenues dominate, and consumer services set the infrastructure priorities overall. The big successes in tech sales to non-operators are vendors who sell to consumers—think Apple and Microsoft and how their revenues divide.
You can see the impact of this in the cloud. Insiders tell me that the majority of cloud spending today is actually directed at consumer empowerment not worker empowerment. Social media and content startups have long dominated the cloud space, and only recently has enterprise use of the cloud started to show signs of life. It’s not that the mass market is bad, but that the mass market doesn’t typically value “good” technology as much as good marketing.
Lurking within this point, of course, is the ad sponsorship trap. As long as consumers resist paying directly for services, operators have little chance breaking into that heady up-the-value-chain space. They’re far behind in ad sponsorship, too far to catch up. But ad sponsorship, even for the OTT successes, has its limits. Total global ad spend on all channels and media is only about seven hundred billion dollars per year. My models say that the revenue potential for cloud-based pay-for services is about triple that, but how do you promote something people have to buy when they want it all for nothing?
Consumers value price leadership highest, then “social impact”, and finally features or technology. You can see a bit of this in the fact that Walmart was the big retail success of the quarter, and it’s clearly a price/value play. But as understandable as the consumer priorities might be, and as easily proved as they are, they clearly impact technology products. Further, the enterprise or service provider buyer is a consumer, like all the rest of us, and influenced by consumer tech attitudes.
All these are valid points, but the one that both groups missed and is at least as valid is the short-term thinking of vendors combined with user reliance on vendor initiatives. If you look realistically at these points, what you see is a signal that we’ve had a revolutionary shift in how the tech market works, and we need a revolutionary response. But revolutions are scary to buyers, and vendors don’t want to overhang their current profits to attempt to promote one. At the same time, both enterprises and service providers admit that they do technology planning based primarily on vendor stimulation. They rationalize it by saying that it makes no sense to build technology plans around a hypothetical product set; real products are needed, and only vendors can offer them.
Cisco commented on this particular point, in an indirect way, when it cited the fact that 5G wasn’t generating new vendor opportunity in the near term. This reflects the fact that for vendors looking for service provider opportunity, all traditional methods of cost and revenue enhancement have failed to change the ROI equation, so the vendors are relying on standards-driven transformations. We can’t make 5G look good, so we want to make it look mandatory, and that’s not working.
On the plus side, Cisco also cited “communications and collaboration”, and in particular “cognitive collaboration” as part of their desire to “accelerate the future of work”. Might that be an example of a vendor trying to address the future and the evolution to reach it? Sure, but it could just as easily be an example of Cisco’s well-known marketing hype.
Buyers need to take more control, or at least look like they’re about to do that. Vendors could, and many do, run futuristic projects behind the curtains to avoid contaminating current sales. However, they could tie the two in to create differentiation, providing that the process of educating the buyer to understand the future and how to evolve to it wasn’t prohibitively difficult.
Open-source projects could be one solution to this. Think of open-source as “tech nerds do innovation”, which both enterprises and service providers alike find a bit uncomfortable. However, there are a lot of open-source projects, and despite their nerdy roots, they’ve recently accomplished more than proprietary planning and development has been able to accomplish. The question is whether they can make a more direct and solid business connection, deliver high-level benefits and make CxOs understand how they’ll do that. So far, open-source has been great for the architecture-level stuff but struggling with the true application layer. If buyers can figure out how to get that benefit connection to work, then open-source might break the benefit stalemate…finally.