Category Archives: Market Research & Intelligence

Addressing SDN Burnout

In the universe of staccato text bursts that is Twitter, I have diagnosed a recent exhaustion of interest in software defined networking (SDN).

To a certain degree, the burnout is understandable. It is a relatively nascent space, generating more in the way of passionate sound and fury than in commercial substance. Some Twitter denizens with a networking bent have even questioned whether an SDN market — involving buyers as well as sellers — actually exists.

On that score, the pointed skepticism has been refuted. SDN vendors, including Nicira Networks and Big Switch Networks, increasingly are reporting sales and customer traction. What’s more, market-research firms have detected signs of commercial life. International Data Corporation (IDC), for example, has said the SDN market will be worth a modest $50 million this  year,  but that it will grow to $200 million in 2013 and to $2 billion by 2016. MarketsandMarkets estimates that the global SDN market will expand from $198 million in 2012 to $2.10 billion in 2017, representing a compound annual growth rate (CAGR) of 60.43% during that span.  I’m sure other market measurers will make their projections soon enough.

But just what are they counting? SDN isn’t a specific product category, like a switch; it’s an architectural model. In IDC’s case, the numbers include SDN-specific switching and routing as well as services and software (presumably including controllers and the applications that run on them). MarketsandMarkets is counting  SDN “switching, controllers, cloud virtualization applications, and network virtualization security solutions.”

Still, established networking vendors will argue that the SDN hype is out of proportion with on-the-ground reality. In that respect, they can cite recent numbers from Infonetics Research that estimate global revenue derived from sales of data-center network equipment — the market segment SDN is likely to make most headway during the next several years — was worth $2.2 billion in the first quarter of 2012. Those numbers include sales of Ethernet switches, application delivery controllers (ADCs), and WAN-optimization appliances.

This is where things get difficult and admittedly subjective. If we’re considering where the industry and customers stand today, then there’s no question that SDN gets more attention than it warrants. Most of us, including enterprise IT staff, do not wish to live in the past and don’t have the luxury of looking too far into the future.

That said, some people have the job of looking ahead and trying to figure out how the future will be different from the present. In the context of SDN, those constituencies would include the aforementioned market researchers as well as venture capitalists, strategic planners, and technology visionaries. I would also include in this class industry executives at established and emerging vendors, both those directly involved in networking technologies and those that interact with networking infrastructure in areas such as virtualization and data-center management and orchestration.

For these individuals, SDN is more than a sensationalized will-o’-the-wisp.  It’s coming. The only question is when, and getting that timing right will be tremendously important.

I suppose my point here is that some can afford to be dismissive of SDN, but others definitely cannot and should not. Is interest in SDN overdone? That’s subjective, and therefore it’s your call. I, for one, will continue to pay close attention to developments in a realm that is proving refreshingly dynamic, both technologically and as an emerging market.

Bit-Business Crackup

I have been getting broadband Internet access from the same service provider for a long time. Earlier this year, my particular cable MSO got increasingly aggressive about a “usage-based billing” model that capped bandwidth use and incorporated additional charges for “overage,” otherwise known as exceeding one’s bandwidth cap.  If one exceeds one’s bandwidth cap, one is charged extra — potentially a lot extra.

On the surface, one might suppose the service provider’s intention is to bump subscribers up to the highest bandwidth tiers. That’s definitely part of the intent, but there’s something else afoot, too.

Changed Picture

I believe my experience illustrates a broader trend, so allow me elaborate. My family and I reached the highest tier under the service provider’s usage-based-billing model. Even at the highest tier, though, we found the bandwidth cap abstemious and restrictive. Consequently, rather pay exorbitant overages or be forced to ration bandwidth as if it were water during a drought, we decided to look for another service provider.

Having made our decision, I expected my current service provider to attempt to keep our business. That didn’t happen. We told the service provider why we were leaving — the caps and surcharges were functioning as inhibitors to Internet use — and then set a date when service would be officially discontinued. That was it.  There was no resistance, no counteroffers or proposed discounts, no meaningful attempt to keep us as subscribers.

That sequence of events, and particularly that final uneventful interaction with the service provider, made me think about the bigger picture in the service-provider world. For years, the assumption of telecommunications-equipment vendors has been that rising bandwidth tides would lift all boats.  According to this line of reasoning, as long as consumers and businesses devoured more Internet bandwidth, network-equipment vendors would benefit from steadily increasing service-provider demand. That was true in the past, but the picture has changed.

Paradoxical Service

It’s easy to understand why the shift has occurred. Tom Nolle, president of CIMI Corp., has explained the phenomenon cogently and repeatedly over at his blog. Basically, it all comes down to service-provider monetization, which results from revenue generation.

Service providers can boost revenue in two basic ways: They can charge more for existing services, or they can develop and introduce new services. In most of the developed world, broadband Internet access is a saturated market. There’s negligible growth to be had. To make matters worse, at least from the service-provider perspective, broadband subscribers are resistant to paying higher prices, especially as punishing macroeconomic conditions put the squeeze on budgets.

Service providers have resorted to usage-based billing, with its associated tiers and caps, but there’s a limit to how much additional revenue they can squeeze from hard-pressed subscribers, many of whom will leave (as I did) when they get fed up with metering, overage charges, and with the paradoxical concept of service providers that discourage their subscribers from actually using the Internet as a service.

The Problem with Bandwidth

The twist to this story — and one that tells you quite a bit about the state of the industry — is that service providers are content to let disaffected subscribers take their business elsewhere. For service providers, the narrowing profit margins related to providing increasing amounts of Internet bandwidth are not worth the increasing capital expenditures and, to a lesser extent, growing operating costs associated with scaling network infrastructure to meet demand.

So, as Nolle points out, the assumption that increasing bandwidth consumption will necessarily drive network-infrastructure spending at service providers is no longer tenable. Quoting Nolle:

 “We’re seeing a fundamental problem with bandwidth economics.  Bits are less profitable every year, and people want more of them.  There’s no way that’s a temporary problem; something has to give, and it’s capex.  In wireline, where margins have been thinning for a longer period and where pricing issues are most profound, operators have already lowered capex year over year.  In mobile, where profits can still be had, they’re investing.  But smartphones and tablets are converting mobile services into wireline, from a bandwidth-economics perspective.  There is no question that over time mobile will go the same way.  In fact, it’s already doing that.

To halt the slide in revenue per bit, operators would have to impose usage pricing tiers that would radically reduce incentive to consume content.  If push comes to shove, that’s what they’ll do.  To compensate for the slide, they can take steps to manage costs but most of all they can create new sources of revenue.  That’s what all this service-layer stuff is about, of course.”

Significant Implications

We’re already seeing usage-pricing tiers here in Canada, and I have a feeling they’ll be coming to a service provider near you.

Yes, alternative service providers will take up (and are taking up) the slack. They’ll be content, for now, with bandwidth-related profit margins less than those the big players would find attractive. But they’ll also be looking to buy and run infrastructure at lower prices and costs than did incumbent service providers, who, as Nolle says, are increasingly turning their attention to new revenue-generating services and away from “less profitable bits.”

This phenomenon has significant implications for consumers of bandwidth, for service providers who purvey that bandwidth, for network-equipment vendors that provide gear to help service providers deliver bandwidth, and for market analysts and investors trying to understand a world they thought they knew.

Microsoft Loses Patience with China

It wasn’t too long ago that Microsoft’s Craig Mundie, the company’s chief research and strategy officer, offered a public lecture to Google on how it should have been more patient and flexible in its dealings with China.

Mundie’s commentary was condescending, patronizing, self-serving — and an utterly obsequious ploy by Microsoft to curry favor with Chinese authorities. Rather than chortle at Google’s apparent misfortune, Microsoft should have kept its counsel and stuck to its coding.

Now we learn that Microsoft’s own patience with China is wearing thin. Earlier today in Singapore, Microsoft CEO Steve Ballmer said China’s weak enforcement of copyright laws has hurt his company’s revenues and compelled it to focus on other markets in Asia.

An Associated Press (AP) report containing Ballmer’s remarks also noted that China — destined to become the world’s biggest computer market this year when it overtakes the U.S. — accounts for 15 to 20 percent of global PC sales, but just one (as in 1) percent of Microsoft revenue.

Said Ballmer:

“Intellectual property protection in China is not just lower than other places, it’s very low, very, very low. We see better opportunities in countries like India and Indonesia than China because the intellectual property protection is quite a bit better.”

When Ballmer returns to head office, he might want to share that insight with Mundie.

Explaining Cisco’s Slowing Pace of Acquisitions

In terms of making acquisitions of venture-backed companies, Cisco led all other industry behemoths during the lachrymose decade known as the “oughts.”

According to a post at the Wall Street Journal’s Venture Capital Dispatch, quoting figures compiled by Dow Jones’ VentureSource, Cisco acquired 48 venture-backed companies from 2000 through 2009. Also reaching the medal podium for acquisitions were IBM, which closed 35 such transactions, and Microsoft, which consummated 30 deals.

In recent years, particularly the last two, Cisco’s acquisitive pace has slackened considerably. The networking giant made only two purchases of VC-backed startups in both 2008 and 2009. This past year, in fact, Cisco wasn’t among the foremost acquirers of VC-backed companies. Instead, Oracle finished at the head of the 2009 table, with five deals; EMC bought four companies to rank second.

You might wonder, as did I: Why is Cisco slowing down? I think several factors are at play.

For one thing, there aren’t as many compelling VC-based startup companies entering Cisco’s ecosystem as there were a few years ago. In general, VC backing for early-stage IT startups has fallen off the charts, and the same holds for startup companies in networking and many of the “market adjacencies” of most interest to Cisco. The lake has been fished, and nobody is restocking it with healthy specimens.

Related to that first point is the fact that the IT industry, including the networking segment, has matured. It’s moved into a slower-growth stage, replete with consolidation and fewer leading players. In its core markets, Cisco runs the numbers and often concludes that the right business decision involves building rather than buying. That wasn’t always the case, as amateur historians of networking’s heyday will tell you.

The slow growth, maturation, and consolidation in Cisco’s legacy markets of enterprise and carrier switching and routing have driven it toward a major diversification effort, with some of the forays into new spaces seeming more adjacent than others. Some of these new markets will bring Cisco back into acquisitive fervor, but it hasn’t happened yet, perhaps because Cisco hasn’t fully committed to some of them. (An area where I think you’ll see Cisco eventually make some interesting purchases is smart-grid technologies.)

Cisco’s acquisition juggernaut has slowed for another reason, too. If you examine the composition and distribution of Cisco’s vast cash reserves, you’ll discover — as I have discussed previously — that most of the money is located overseas. If that foreign cash were repatriated, Cisco would have to pay taxes on it. With the US government refusing to relent on that point, Cisco has chosen to leave the money overseas. As a result, that cash cannot be used for domestic acquisitions. If Cisco wishes to use those funds, rather than stock, to consummate deals, it must identify, pursue, and execute transactions in foreign markets.

Effectively, because of its cash allocation and the increasing reluctance of prospective takeover candidates to accept stock in lieu of hard cash, Cisco is geographically constrained in making deals over a certain size. Given Cisco’s tax strategies and the growing internationalization of its business, the ratio of foreign-to-domestic cash reserves isn’t likely to change markedly. Cisco will spin more cash through quarter-to-quarter operations, but most of it will land in the foreign pool.

At least in the near term, for the reasons adduced above, I don’t foresee Cisco returning to its acquisitive frenzies of the late 90s or the early to mid oughts, when it took advantage of the dot-com implosion to consolidate power through strategic acquisitions. Cisco remains a big, old dog, but it is being forced to learn some new tricks.

Valley IPOs Likely to Remain Few and Far Between

Not many companies based in Silicon Valley have gone public in recent years, and we shouldn’t expect the pattern to change. The trend is your friend, except when it isn’t.

In 2009, as reported by the Wall Street Journal, eight venture-capital-backed companies went public, according to research compiled by VentureSource. In 2008, only seven venture-backed companies reached the public markets.

Interestingly, though, only two of the companies that went public in 2009 were based in Silicon Valley. Those firms were online-reservations company OpenTable Inc. and Fortinet, the Internet-security specialist.

Talk percolates about the prospect of a few Valley-based IPOs materializing in 2010, but we’re more likely to see a trickle of activity, not a tsunami.

There are many reasons for the sustained torpor, and most of them have been discussed extensively here and elsewhere. Among the factors are the generally inhospitable macroeconomic conditions; the slow-growth maturity of the IT industry with which Silicon Valley is closely identified; the unappetizing prospects for big-money exits; the relative paucity of new venture-backed upstarts; and a structural realignment that is shifting money to emerging global markets and nascent industries outside the scope of the Valley’s traditional wheelhouse.

Does that mean the Valley is dead? No, it doesn’t. But it does mean that it, like the rest of the world, will have to adapt to changing circumstances and a new reality. As the late Warren Zevon intoned in a song with an expletive-laced title that I can’t cite in polite company, “The stuff (euphemism in effect) that used to work, won’t work now.”

Oh, Happy New Year!

Diverging Prospects for RIM and Palm

Research In Motion (RIM) and Palm both reported their latest quarterly results yesterday. RIM produced third-quarter results and guidance that were better than what the market expected; Palm disappointed.

As the smartphone market becomes more fiercely contested, these sets of results were analyzed for more than their immediate trading utility. Analysts and pundits carefully scrutinized them for clues as to how each vendor is faring in its bid for long-term prosperity in the smartphone market.

On that score, too, RIM emerged the better of the two. Not all the questions about RIM have been answered, but the company has a coherent strategy, ample resources, a credible brand, strong carrier relationships, and a track record of proving its detractors wrong. Palm doesn’t rate nearly as well on those counts.

As for RIM’s latest quarterly results, as reported by Dow Jones, revenue rose 11% to $3.92 billion, surpassing the company’s guidance of $3.60 billion to $3.85 billion as well as the Thomson Reuters estimate of $3.78 billion.

The company said it added about 4.4 million net new BlackBerry subscriber accounts in the third quarter, bringing the total BlackBerry subscriber account base to about 36 million at quarter-end.

Looking immediately ahead, RIM is forecasting fourth-quarter revenue of $4.2 billion to $4.4 billion and gross margin of roughly 43.5%, resulting in net earnings of $1.23 to $1.31 a share, all outpacing expectations of market watchers.

Unfortunately, where RIM is surging, Palm is treading water. Sales of its new smartphones, the Pre and the Pixi, are already starting to decline. Palm said it shipped a total of 783,000 smartphones during its fiscal second quarter, a drop of 5% from 823,000 smartphone units during the first fiscal quarter. (Palm’s year-to-year comparisons are irrelevant, with its smartphone overhaul occurring this year.)

Another area where RIM is doing well and Palm is not involves market coverage. RIM is pushing forward in China and everywhere else besides, whereas Palm is not. Breaking its dependence on North America, RIM reported that 37 percent of revenue is derived from overseas and approximately 35 percent of the BlackBerry subscriber base is now located outside North America.

Areas RIM is targeting for future growth include small- and mid-size businesses and China, where RIM has been building key partnerships lately. For example, a week after reaching a deal with China Mobile, RIM announced a similar partnership with China Telecom. Before that, RIM had inked a distribution partnership with China’s largest IT services provider, Digital China Holdings Ltd.

RIM is looking at doing more than selling its products in China. Said RIM co-CEO Jim Balsillie:

“To further support our efforts in China, RIM is also exploring opportunities to manufacture and conduct R & D activities in the region.”

Such a move would make sense. China is a burgeoning market, and RIM will have to commit to it, not only in terms of providing product localization, but also with regard to doing valuable R & D there. Perhaps, like McAfee in the security-software space, RIM will establish a wholly owned subsidiary in China.

While international expansion was a key contributor to the company’s success in the third quarter, RIM also is helping its cause with a more diversified product portfolio and gains in consumer patronage. Even though its installed base remains strongly represented by business customers, RIM said 80 percent of its new subscribers in the third quarter were non-corporate customers.

That’s all good news for RIM, but I still think the company will need to overhaul the look and feel of its BlackBerry software if it has aspirations of continued consumer gains amid intensifying smartphone competition.

The smartphone market is growing briskly, but it will consolidate. At that point, the leaders will reap the largest rewards, with the laggards failing or getting acquired, sometimes cheaply. That’s why maintaining and gaining share are so important, and why RIM’s latest solid results and bullish guidance are encouraging signs for the company.

Meanwhile, again, Palm isn’t looking so good. One can downplay Palm’s disappointing quarter by arguing that the company remains a work in progress and that it will have occasional stumbles as it goes all in as a smartphone player. Some apologists, with arguable justification, also will point to Palm’s early dependence on Sprint for sales of its webOS-based Pre and Pixi models. Nonetheless, Palm is losing momentum, doesn’t have the resources of its larger rivals, and the competition it faces in the space will only intensify.

Palm had an early chance to carve out a growing niche for itself, but its window of opportunity is closing rapidly. While RIM has gained ground and positioned itself well for the future by expanding in markets outside North America with a diversified product portfolio, Palm is something of a one-trick pony, still focused primarily on North America with a narrow product line and an overwhelming dependence on getting and keeping the favor of fickle consumer who are bombarded by the heavier and slicker brand advertising of Palm rivals such as Apple, the Google Android mafia (Motorola and Verizon with Droid, for example), RIM, HTC, Nokia, and others.

It’s too early to perform last rites – how many times has RIM proved doomsayers wrong? – but Palm’s prospects are dimming.

New figures from AdMob, measuring worldwide smartphone Internet traffic, demonstrate how quickly the market might be consolidating. With traffic attributable to the iPhone and Google Android-based handsets dominating and on the rise, respectively, everybody else is struggling to hold market share.

RIM is positioning itself for future growth in China and other foreign markets, while maintaining its hold on its sizable installed base of enterprise-messaging customers, means it is likely to stay the course, though it’s anybody’s guess how the situation might look three years from now.

RIM has the resources to play a game of attribution, however. Palm doesn’t. Unlike RIM, Palm doesn’t have the luxury of a lucrative, money-spinning installed base of corporate mobile-email customers. It doesn’t have option to reinvent itself one more time.

If Palm’s smartphone unit shipments continue to slip sequentially from quarter to quarter, it won’t remain in the race much longer. Time isn’t on Palm’s side.

Lurid Bribery Case Doesn’t Reflect Poorly on Gartner

It’s a headline nobody at Gartner wants to see. Thankfully, the underlying story isn’t nearly as distressing.

The well-known consultancy and IT market-research concern probably is mortified that a news story posted on the Network World website — and covered elsewhere, too — offers the lurid headline, “Former Gartner manager gets jail for accepting bribes.” If you’re a company in Gartner’s business, you don’t ever want your name to appear in the same sentence as the words “jail” and “bribes.”

What’s important to note, however, is that the manager in question wasn’t involved in consulting or research activities. Instead, he was responsible for the purchase of multimedia services and equipment.

Moreover, an earlier press release from the United States Attorney Southern District of New York, makes clear that Gartner was a victim of the bribery scheme. It’s an unseemly and unfortunate tale, replete with attention-grabbing headlines, but it doesn’t and shouldn’t reflect negatively on Gartner’s credibility and repute as a purveyor of advisory services and market research.