Why is it that we always seem to miss the obvious? OK, we had a COVID wave, during which some areas were locked down and many people avoided going out, particularly to “social gatherings”. Economic data shows that they accumulated record savings. What happens when the restrictions on their lives are lifted? Answer: They spend some of those savings. Call it “rebound behavior”.
How about this corollary? People stayed home, so what did they do? Educate themselves by reading the classics, or watch TV? You can guess that one. In a desperate attempt to find something to watch after the first week of isolation, they use some of that money they’re saving to subscribe to pay TV. What happens when they can go out again? Answer: They go out, and thus they’re not home to watch that pay TV, so they cancel their subscription.
The pandemic created massive shifts in human behavior, which created massive shifts in economic behavior. Returning to “normal” doesn’t mean that somehow with the advance of the calendar, we erase the past. We recover from it. That’s a big part of why we’re having inflation now, and it’s a big part of why we’re seeing changes in the market sectors that were impacted by the behavioral changes. In tech in general, and networking in particular, it would be nice to know what changes are transitory, part of rebound behavior, and what are likely to persist.
Objectively, the current impacts on the global economy and markets are related to “inflation”, and I put the term in quotes for reasons you’ll soon see.
Inflation the increase in price for goods, almost always associated with an excess of money to spend. The most familiar cause of inflation is boosting the money supply—we saw that with Confederate currency during the US Civil War, and with the German mark during the waning days of the Weimar Republic. A similar, though usually less dramatic, source is excess economic stimulation, which some have said is a factor in the current situation. But there’s another factor at play here, which is the fact that consumers during the pandemic accumulated record or near-record savings, and denied themselves a bunch of things. Pent-up demand is a powerful force once the factors suppressing demand are eased.
The normal response to increased demand is that happy vendors increase supply. That’s been a problem because there’s constraint on supply chains created by both COVID and the post-COVID mindset. We had a lot of people working from home or out of work. Not all were willing to return to business as usual. We had business failures, people who found other positions, and all this created distortion in the labor markets. Governments have also been stressed by conditions, including civil unease, and have responded by trying to gain advantage somewhere. In short, we’re in flux in the global economy, while the economies of the world adjust to the evolving market realities. That’s why global stock markets have been so volatile.
Are we in, or about to be in, a recession? If so, it will be an unusual one. Unemployment traditionally spikes when we’re entering a recession, and that’s not happening. Consumer spending usually dives, and that’s not happening either…yet. The question, from a broad economic perspective, is whether these twin not-yet factors turn negative because of increased worry, before some of the economic shifts and shakes have shaken out. If they do, then we can expect that there will be a recovery in the second half. If not, then when we finally see daylight will depend on how far our twin factors go down the tube before we see stability in the fundamentals of the global economy.
For tech, we can expect a variation on the theme here. Business will typically try to plan capital purchases for stable economic conditions. If they see an issue, they will often take action to minimize their exposure if things get worse. Some banks’ decision to increase reserves for bad loans is an example, and so are decisions (so far by a limited number of companies) to slow-roll tech spending plans, particularly new projects and new spending predicated on a general improvement in revenues. This sort of reaction tends to happen when there’s a perception of risk that crosses over into another budget period. Companies (assuming, for convenience, calendar-year budgeting) will often push projects into later quarters if they feel uncomfortable with conditions.
As of today, I’m not hearing too many cases of project deferral. So far, the largest constraining factor on vendor revenues has been delivery challenges created along the slippery slope of the current supply chain. Since the supply chain constraints on the production of goods is also perhaps the largest source of inflationary pressure, that means that fixing the supply chain would fix things overall, fairly quickly. When, then, could we expect some relief there?
That’s hard to say. I’ve attempted to run my model on buyer behavior to guesstimate something, but this is uncharted territory. I told a friend in the investment business that I expected that the quarter just ended (April-June) would still probably generate some unhappy news, but that it would also generate some good news. The next quarter, then, would be when I’d expect the good news to dominate. Given that the stock market is driven by the prospect of something more than by its realization (by the time what’s coming is clear, everyone else has already taken action, so you need to move on rumor), we could expect stocks to be somewhat ahead of overall economic conditions.
That doesn’t mean that tech is going to roar back to pre-COVID days, but better. A lot of buyers have been planning for the worst, and some of the steps they’ve contemplated wouldn’t be inappropriate in good times. As is the case with the economy overall, there’s going to be a race between positive moves with the supply chain, and negative reactions to inflation, central bank interest rate increases, and overall economic concerns.
Two things will make the difference between tech vendors at risk and tech vendors with an opportunity. The first thing is breadth of the products on which their revenue depends. This is not a time when the broadest solutions win; it magnifies the risk that at least some of those products will be under project deferral pressure. The second thing is a strong link to a credible future requirement set. Buyers are still looking forward, but they’re potentially looking beyond their normal horizon. If they see a vendor who seems to offer something outstanding in support of a distant shift, that vendor will look better in the near term. This second point is linked to the concept of a “planning horizon”.
From the very first, my surveys of enterprises have indicated that companies considering capital purchases will assign an expected useful life to those purchases (three to five years), but in the last two decades they’ve responded to increased interest in “technology substitution” by defining what is in effect an expected useful life of the approach or architecture on which their purchases are based. Over time, enterprises have tried to look further forward than the “useful life” of equipment, thinking that when a piece of equipment reaches end-of-life, it would likely be replaced by a comparable device. However, if the entire approach is now subject to review, an obsolete piece of equipment may not be “replaced” directly, but be part of a broader shift in approach.
What I am seeing from some enterprises is an indicator that the planning horizon is being pushed out, as well as the “useful life” period being extended. That means that enterprises are now sensitive to risks to approach, which means they want to see vendor engagement with the kinds of future developments that could create a change in approach. This is why having a strategy that specifically links to credible shifts in technology and architecture is a benefit.
The obvious question is just how a vendor could create links to credible shifts in technology and architecture. It’s likely the answer to that would be different for enterprises versus service providers, and perhaps even across the various global regions. It’s also likely that the best answer would include things that aren’t particularly to the advantage of the vendors.
Start with a basic truth, which is that pure connectivity is under pricing pressure from both sides. Consumers may well believe “bandwidth hype” more than enterprises, but neither group is showing buyer behavior that suggests that they’d pay more per unit capacity than they do today. In fact, there are strong signs that they would want to pay less. What’s needed to boost tech is simple; credible benefits. Simply increasing bandwidth doesn’t deliver that, particularly for businesses. We need to go beyond.
What lies beyond? That’s a question that could have been addressed two decades ago. In the business space, I noted that we’d seen cyclical changes in tech spending that reflected periods when new tech opened new business benefits for exploitation. We ended our last one in roughly 2000, and we’ve not had one since. Could we have? I think so, and three waves of spending improvement, validated by real government data, seems to back that up. We have an opportunity to answer the “what’s beyond” question today, too. The long-term success of tech in avoiding commoditization depends on doing just that.