Some of the highest profile blue chip tech stocks appear to be under increasing pressure, and adjusting expectations accordingly. Pundits blaming CEOs or marketing teams are missing the mark. As chroniclers or observers of the triumphs and tragedies in the tech industry pundits sometimes miss the internal churning, burning gear works within companies and categories that create outcomes, and instead prefer to focus on a single personality or department.
Hence, Dvorak takes a swipe at Cisco marketing:
“That said, I have seen a marketing genius come into companies like this one and blow it out. Look for that to happen once Chambers is ousted — and yes, he is on his way to being ousted.”
It is a very difficult process -especially for the most powerful and established tech companies- to adjust to market disruptions. In addition to technology challenges (including backward compatibility and new form factors) companies must often resolve layers of business case conflicts (channel, margin, competing products) and arbitrate paths that balance risk and opportunity with the need for ongoing, steady revenue performance. Yes, that is a marketing challenge in many respects, but it isn’t the same kind of challenge as selecting how many qualities a toothpaste must have, or whether Aunt Jemima needs a fashion makeover or even negotiating for an end cap at Fry’s.
For the entrenched market leaders there are hundreds of decisions that have to be made correctly to maintain leadership, especially through periods of massive disruption, and very few companies have ever done it well. The halls of Silicon Valley are filled with the ghosts of previously powerful companies that once generated billions in equity only to be disrupted into oblivion by nimbler, more focused or simply luckier competition.
For a more reasoned and admirable critique of Cisco’s challenges, read InformationWeek’s coverage of a recent Gartner report.
As much fun as it is to watch a major vendor defend untenable positions, the main point is that while reliability and performance got Cisco to the top of the heap (the fans were so strong in the original AGS routers that they held the faceplate on even when the screws were removed), those attributes are no longer so important. Merchant silicon is so good that two electrical engineers and a kid with a soldering iron can make a pretty reliable wire-speed 10-Gbps Ethernet switch with redundant power supplies and fans. What’s not so easy to do is support emerging technologies like virtualization with a flexible and powerful management architecture. That takes some engineering, and standards work.
– Art Wittmann, InformationWeek, May 2011
The Challenges for the Likes of Cisco, Microsoft and HP
As companies grow they add layers of teams, often of similarly-thinking people “bonused” on short term outcomes. Over time, innovation rattles the marketplace and one team’s innovation advantage can turn into another team’s disadvantage; visionaries can become bumpkins or even pariahs threatening a thriving status quo on the brink of collapse. Witness the flight of executives from the likes of Microsoft and Cisco, etc. to companies like Arista Networks, Palo Alto Networks, or even VMware, etc.
The innovator flight and/or isolation problem endemic to most large enterprises is more common than most writers or pundits recognize, so the press is filled with calls for (what is often) cosmetic resignations that won’t change dynamics without excruciating internal disruption, which carries with it the risk of disappointing Wall Street.
Let’s face it, most elected officials are not empowered to address these tough dynamics, even with public mandates, so we often see approval drop-offs after elections. The problem cannot be easily fixed.
I’ve spent almost half of my career in large enterprises and have witnessed layers of executives subtlety defend dying yet lucrative status quos while internally and externally paying lip service to change. The ongoing decisions which occur within very large companies are often made in favor of those producing the largest revenue numbers, versus those with the most promising (yet uncertain or even threatening) innovations. Sometimes the results of a bad decision aren’t felt until years later, when it is very late in the game and the executive has retired or has changed careers.
The Innovation Challenge
When innovation (like virtualization) happens, it can quickly tilt the once stable balance of power between the powerful and the innovative in the market, often in unpredictable ways or at unpredictable times. A channel, for example, which is key to the success of a hardware appliance can be an albatross for the launch of a downloadable, online purchasable virtual appliance; unless it or the install is complicated enough to need personalized support from a trusted partner.
Companies like Zscaler can leverage the cloud and then threaten high profile appliance-based anti-spam and URL-filtering products requiring a level of manual intervention that was a source of power in the marketplace mere months before. VMware has similarly established a bustling ecosystem of small virtualization startups -some of whom have raised very little if any venture capital- who are upending established value chains of players with once long term customer relationships (now circumvented by an emerging market of virtualization and server-centric partners).
Skype has been on an amazing ride and is expanding from consumer into enterprise, disrupting massive hardware-centric infrastructures supported by legions of telecom experts; this just after a ShoreTel IPO turned the legacy PBX market on its head. My 8 year old daughter recently set up a Skype conference call between family in Europe and San Jose: “Dad, I just pressed a few buttons,” she explained when I asked in amazement how she could set up a conference call.
How many telecom equipment companies have navigated the rapids of VoIP communications only to survive and today watch Skype software establish an even more potent threat? Then Microsoft buys Skype and becomes a formidable threat to service providers.
This problem isn’t unique to the tech industry, although it is more prevalent in markets where products can be born and die within months instead of decades.
The US auto industry’s success in the 50s and 60s led to a similar kind of bureaucratic complacency, to such an extent that obsolescence (intentionally or not) became a strategy for producing better short term results. People had to buy more cars during their lifetime because they didn’t last very long.
So we had our choice of color across a range of service-intensive gas hogs. When energy costs rose and the Japanese automakers entered the market with cars designed for longer term use with higher energy efficiency, they threatened some of the world’s largest and most successful auto manufacturers.
Implications for ITs New Frontier and the Future Economy: the Data Center
An old guard receiving a steady stream of bonuses for delivering quarterly numbers is the least excited about embracing a technology or solution that ultimately leads to the irrelevance of previous investments. The real estate-centric wholesale data center space is no exception. Like Detroit, they have grown quickly on the teat of an insatiable market willing to simply settle for space and power, like the car buyers of old.
Like Detroit the data center builders are the architects of our emerging economy and are putting into place critical factors of production that could lead to competitive advantage for companies and community tax bases. The implications of technology and innovation are simply staggering. Yet the industry has been a laggard.
For many years data centers haven’t been built to last, but rather to encourage customers to buy even more (inflexible and moderately efficient space/pre-engineered modules). Energy consumption and efficiency was an afterthought, forcing some of the largest potential buyers into building their own.
Yet as we see electricity becoming more strategic to IT, these highly successful, transaction-centric players are at a minimum increasingly exposed to the trials and tribulations of post 1970s Detroit. See How to Build a Modern Datacenter, which also features my employer Vantage Data centers, for mentions of Google and Facebook innovations done outside of the purview of the wholesale data center industry.
There is more to the challenge. When Detroit introduces a new model there is commonly only one year of previous inventory exposed to cannibalization risk. With the wholesale players innovation can churn less innovative data centers into obsolete data centers… accelerating obsolescence of an entire portfolio of “good enough for the nineties” data centers. Bottom line: The balance of the portfolio (innovative versus aged cookie cutter) impacts the company’s market capitalization.
Yes, some companies (and bureaucracies) have substantial short term disincentives to innovate.
The technology industry has always been ruthless to companies who fail to adjust to new market realities. As industries become more dependent upon IT innovation (as we enter the Era of Mass Computing) you can expect indignant pundits to be the first to blame the CEO, when in fact they will be simply skimming the surface of a dynamic that is likely to be a part of the greater challenge: growth and innovation depending on those who benefit all too much from the fruits of tired status quos.
Cisco, HP and Microsoft still have some of the top minds in IT in their ranks. The CEO challenge is to find them and empower them so that they can minimize the negative impact of tech disruption while maximizing the upside. That, of course, is much more difficult than it sounds. They are further challenged with showing all of us how to create a better future while we enjoy the comforts and/or trials of previous decisions.