Wall Street, like most everyone, tends to put out prediction pieces at the end of the year. While the Street’s predictions aren’t always right, they do represent the view of a group of people whose livelihood depends on predicting at least major revenue trends. My own research isn’t always right either, so perhaps by looking at both Street and CIMI views in parallel, we can get at least a glimpse of 2022.
Let’s start with software. Most Street analysis says that software is looking promising for 2022, but what’s particularly interesting is in the specific types of software they’re most positive about. “Digital transformation” leads the list, and that topic is first admittedly vague and second a shorthand for a shift to a more direct sales and support model, which (as we’ll see below) also benefits the cloud. Other software categories on the “good” list include work-from-anywhere, data/analytics, DevOps, and security.
All of the secondary software categories are a bit “niche” in nature. That can be proved out by the fact that the specific software companies the Street likes tend to be very specialized, smaller, firms. If software was the Great Tide Lifting Boats, you’d expect to see software giants (with, to follow my analogy, bigger and more numerous boats) getting a lot of lift. Not so.
One common theme across software in general is a Street appreciation for “subscription”, meaning paying a fee (usually annual but sometimes monthly) for software, making software into a recurring revenue stream. Obviously sellers like that sort of thing, and the concept has spread significantly over the last decade. However, subscription software is the space where what the Street likes and what enterprises and other buyers like are most divergent. Subscription software is nice for the software vendor because of that recurring revenue but buyers don’t like it for the same reason software vendors do, and you can see the pushback in action in recent news.
Downloads of open-source LibreOffice hit record levels recently. As perhaps the leading open-source competitor to Microsoft’s Office suite, LibreOffice adoption is a measure of software-subscription angst. We also heard that at least one EU government is working to shift to LibreOffice, and I know a number of enterprises who have done the same already, citing the growing cost associated with subscription services from Microsoft.
Adobe, of course, is largely dependent on subscription software with its Creative Suite, and the back pressure that generates from users is why some analysts don’t like it. However, Adobe serves a community of professionals who’ve spent a lot of time learning the tricks and techniques of the software, so it’s not that easy to discard. Still, the Street increasingly seems to see the subscription model as a mixed blessing.
My view, based on my own experiences and those of enterprises I’ve chatted with, is that subscription pricing is eventually going to face enough back pressure to make it unreliable as a new revenue source. Users want more incremental value year over year, and if that’s not delivered they reason that they’re paying more for less. However, this is most likely to impact software were ongoing integration and support isn’t a big part of the subscription value proposition. Software creates the functional value of IT, so I don’t think the space is in great jeopardy, but I do think that subscription-based software is at risk of benefit stagnation.
The next area is the cloud, and here I think the Street is suffering from a lack of understanding of the whole of enterprise IT evolution. What buyers tell me is pretty simple; they spend where they have a justification. If you look at IT infrastructure broadly, you see that for decades we’ve spent more on IT because we got direct productivity and efficiency benefits from it. IT budgets were at one time biased at about 62% for new projects to improve productivity and 38% for “modernization”. In 2022, I’m told that we’ll see new productivity projects drop below 50% of spending for the third year in a row. All the big IT successes of the past were created by major paradigm shifts that created cyclical upswings in the relationship between IT spending growth and GDP growth overall. We had three such waves in the first 40 years of IT, and we’ve had none since then. It’s not that we’ve not seen change, but not seismic change of the sort that creates big spending jumps. Thus, we’re tweaking the edge of things we’ve done for decades.
What the Street is missing is that this doesn’t mean that things are “shifting” to the cloud in the sense that they’re leaving the data center. What’s happening is that core business applications are seeing modest growth because they tend to grow at the pace of business activity (GDP), but that front-end elements of applications to better support direct online sales and support are gaining, because they improve organizational efficiency. We are doing in the data center what we always did, but we’re doing new stuff more in the cloud. The ramp in IT spending that the Street sees in 2022, and saw in 2021, relate to the use of the cloud to better address sales and support. Obviously, this benefits the major cloud providers, Amazon, Google, Microsoft, and Salesforce, and it’s recently helped Oracle.
The problem in this space is in a sense the same as the problem with subscription software. The cloud is benefitting not from displacing the data center but from its ability to address the more variable workloads associated with online sales/support. In other words, we’re shifting away from human-mediated activity to automated activity in those areas. The cloud is not the driver, the automation goal is. At some point, the shift will be complete, at which time growth will be slower. The cloud will then need specific new drivers, which may favor things like SaaS because it can target a productivity/efficiency benefit more directly. However, if you have to target things specifically to find benefits, you’re still tweaking, not revolutionizing.
The biggest advantage of software as a spending target for enterprises or service providers lies in the fact that features are created through software, and features are what can tie spending to benefits. A shift to a software emphasis makes sense if that’s what’s going on, but the problem is that this isn’t the case for many vendors. Instead, they’re using subscription to play on the capital/expense issue, and software is the only easy place to apply subscription pricing. Software will indeed do better, and public cloud will do better, when compared to the hardware and data center spending still largely tied to GDP growth. But neither software nor the cloud will provide revolutionary returns, not until they address revolutionary benefits.
We can see a trend, and an issue, in Street research. They deal with the market in a helpful way at one level, by favoring companies who represent “innovation” and thus stand to gain the most in market share, revenue, and share price. Right now, they’re saying that innovation is focusing on cost and mistake management—operations, analytics, and so forth. The issue is that they see the market as a series of loosely coupled product segments, where buyers of software and cloud services are supporting processes, not products. Keep this in mind as we move to the next topic, networking.