Cisco and Alcatel-Lucent both delivered their quarterly numbers late last week, and in both cases the numbers were decent, but the fortunes of the two companies’ stock was different. Cisco’s declined after its report, and Alcatel-Lucent climbed significantly. The question is whether there was a difference in the numbers that justified the different investor reaction, and I think there may have been.
Alcatel-Lucent is arguably the broadest-based player among the service provider network equipment establishment, and it also has consistently scored high in strategic influence. The problem the company has is one of cost, and no small part of that problem can be attributed to the now-long-past merger. The Street believes that Alcatel-Lucent is making progress on the cost side, and since that’s the problem the Street sees, it rewards the progress.
Cisco’s problem is growth according to the Street. In the service provider equipment space, the latest Street forecasts are predicting zero capex growth. Enterprise spending on networking is somewhat better, but certainly not threatening to gain double digits. For Cisco to sustain even 10% profit growth annually, it would need to demonstrate that it’s taking market share without sacrificing margins. That didn’t come off in the report, and so Cisco was not rewarded.
To get a bit more color on the picture, we can add in the fact that two other players in the telecom equipment space (Ericsson and Juniper) both missed, with both companies citing a difficult carrier spending environment as the cause. Add this to the Street perspective that there will be negligible to zero growth in capex for 2012 and you have another perspective on Street reaction to the quarterly numbers of Alcatel-Lucent and Cisco. The organic growth potential for the market is minimal; cost reduction is thus the only path to progress, and high-margin, growth-dependent giants like Cisco aren’t favored by that scenario.
The thing that’s interesting, and perhaps a bit disheartening, about all of this is that the True Path to Street Success can only come by addressing the problem with capex, and that can be addressed only by providing operators some path toward higher revenue per bit. I think that Alcatel-Lucent’s and Cisco’s calls acknowledged that in their own way—customer satisfaction or holistic approach both add up to looking beyond your own sales to the customers’ value proposition. The question is whether either company will be able to put together a strong story that really addresses the revenue per bit problem. I think both companies have the ingredients. I think Alcatel-Lucent has a stronger foundation for the story at this point, and higher strategic credibility with the buyer, but I think Cisco has been gaining traction because it’s making its sales organization more articulate at the strategy level.
Ericsson’s problems suggest that what operators have told us in surveys is really true; they want their integrators to be big (if not their biggest) network equipment supplier. We also hear that the operators want a service-layer strategy, a developer strategy, and that they aren’t hearing that from Ericsson yet. It may be that Ericsson is being taken to task for being the only one of the big wireless players who don’t have an explicit service-layer and content approach. NSN and Alcatel-Lucent both do, and in a market where mobile and content seem to be merging, the combination of both is a critical requirement for gaining strategic credibility.
The situation with Juniper, I think, is more complicated. The company doesn’t have a real mobile asset base because it lacks the RAN and IMS elements, and without those it’s hard to engage convincingly in mobile plays. Their new ACX line is targeted at mobile backhaul, but I think there needs to be more in the package to overcome the fundamental fact that competitors have more of the RAN/IMS combination Juniper lacks. The deal Juniper did with BitGravity is aimed at improving their content position, but how much the service management piece they acquired will help things is also a question, in part because it’s not fully exposed and in part because it’s not clear what Juniper plans to do with it. It’s not that Juniper lacks technology (they have some of the best) but rather that they are not showing the ecosystemic and customer-revenue-centric positioning that their main competitors, Alcatel-Lucent and Cisco, seem to be gaining traction with. You can’t present solution elements in a market demanding total solutions, and Juniper still needs to bring this all together in a compelling vision.
But this is a side-show to the big event. The real question here, I think, is whether ANY vendor will promote a real service-layer solution for operators. Does Cisco believe it can just gain market share and avoid the risk of taking a strong stand in services? Does Alcatel-Lucent believe they’ve done enough and the market will step to their window eventually? Does NSN think it can ride a service-layer vision to professional services success, and does Ericsson think it can get to that same goal without a strong position anywhere in the service layer? Huawei, meanwhile, looms for those who think that nothing is needed beyond bits. No matter how you couch cost-based equipment marketing, it ends up spelling “commoditization”, and “Huawei wins” at the same time.