Dell issued a contracted outlook for the rest of the year, which sent its shares down in after-market trading and also created concerns about tech spending overall. Dell did decently in the quarter; only its consumer segment really missed targets, but the company lowered its guidance, citing pretty much the same factors of government spending reductions and consumer/business confidence problems that every else has talked about. They also made some interesting comments about their Force10 deal, which we’ll get to in a minute.
The problem with confidence, according to our surveys, is in how it impacts PROJECT spending as opposed to “budgets”. Typically, major changes in enterprise IT policy are funded by projects that link spending and some business benefit—productivity, normally. The sustaining of the current infrastructure is “budget” or “department” spending. In bad times, budget spending is usually sustained more than project spending, so somebody who had hoped to gain market share is more likely to be impacted. Dell is still not a market-share leader in the server space, and it still has an exposure to the consumer market—though not as much as HP. If project spending is indeed under pressure, then I’d expect HP to underperform in outlook as well. If that’s the case, then it would tend to confirm that Cisco’s relative success in networking was due to the fact that as an incumbent it’s less dependent on new project dollars.
On the Force10 move, Dell indicated it was seeing data center networking as the hottest spot in the network space, which is surely consistent with my survey results. They also said that they were launching the Virtual Network Services Infrastructure (VNSI) to brand their data center network offerings and unify them with cloud and virtualization initiatives. We think this is very smart because it aligns with what enterprises are telling us, which is that they pay the most attention to vendors whose offerings align with their strategic priorities. So while Dell may have many of the short-term macro-economic challenges of all the other players, they may be positioning well for the tech changes to come.
Strategic alignment may be the factor behind today’s UBS report on router market share. In the report, Cisco and Juniper lost market share overall (Cisco by 1% and Juniper by 2%) while Alcatel-Lucent and Huawei gained. These results are pretty consistent with the changes in strategic influence we uncovered in our spring survey, where Juniper dipped significantly in influence in the IP layer of the network and was unable to leverage service-layer positioning to gain project traction.
Cisco’s loss was due to enterprise problems, which is also interesting. The power of the incumbent to drive spending is formidable, but if you go back to my comment earlier in this blog on project versus budget spending, you see that enterprises who pull money off the table are going to limit everyone’s upside.
There are new, real, benefits to be had for both enterprises and service providers, but vendors have been unable to grab them to drive higher investment in the network. If that continues, then strategies of key data center IT vendors like Dell, HP, and IBM will take more and more of the data center networking pie, and network equipment vendors across the board can expect pressure.
Moving to the wonderful world of content, the latest rumor on the Street is that LimeLight has been on the block and that both AT&T and Microsoft have declined to purchase the CDN player. Akamai, the leader in the CDN space, is widely seen as circling the drain. Level 3 and LimeLight are now said to be in discussion on a deal to combine their CDN operations in some way. How, you may wonder, does this square with the notion that the network operators are falling all over themselves to get into the CDN business?
Well, to start off with, network operators AREN’T eager to get into the CDN business. They’re TOTALLY interested, even committed, to using CDNs to optimize metro bandwidth usage, particularly in mobile backhaul, and to monetize content through paid subscription and advertising. The old sell-caching-to-content-owner CDN market is, for most, far less interesting.
Operators are deploying CDNs for their own missions and not to sell CDN services, in short. In fact, most network operators don’t want to be providers of CDN services except as an offshoot of having deployed CDN technology for another reason. In a third of cases, the operators say they may not offer a broader CDN service even if they actually deploy the technology internally for bandwidth optimization or content monetization. The CDN is the central, critical, piece of content monetization infrastructure. It’s the only feasible way to optimize metro bandwidth. The challenge for CDN suppliers is to move out of the traditional mission, to focus on the two things that really matter to the prospective buyers of CDNs today. This is truly critical technology, and it’s got to be sold strategically in today’s market, because the old-line CDN world is literally dying before our eyes.
