What have we learned so far from earnings season? It’s always hard to interpret these quarterly events, particularly since they’re at least as much a hype-Wall-Street exercise as a report on the company’s activities. Still, you can often interpret some interesting things, particularly if you look at multiple players in the same space.
AT&T and Verizon both reported earnings that were a bit of a disappointment to the Street. Both companies are facing an inevitable plateau in the number of broadband mobile customers, and with it a plateau in their total addressable market (TAM). What both need is simple; more revenue. It’s clear to them now that there are no short-term cost management initiatives that they can depend on to improve profits. In part, that’s because they’ve totally failed in their support of service lifecycle automation technologies, and that’s partly due to the fact that they recognized the need too late. Two points seem to stand out in their earnings calls; 5G and video.
Both Verizon and AT&T need mobile broadband 5G to succeed quickly and massively. Both also need the Street to believe it will do so even faster and on a larger scale than is likely. Verizon used the term over 40 times in its earnings call, and AT&T 26 times. The difference in the rate the term was used reflects, I think, a difference in how the two operators see 5G opportunity.
Verizon is looking at 5G, at least in part, as both a solution to thin-density home broadband and IoT device networking. Yes, they want to be competitive in 5G services, but they don’t seem to be thinking that 5G smartphones will create a revenue boom for them. It’s important that they don’t lose market share in the 5G race, so they’ll push it to stay even in the next market generation. They are still hoping to see IoT devices connect via cellular service on a large scale; they mention IoT three times in their call and talk about the opportunity at least at some length.
AT&T seems to be seeing 5G as an opportunity to gain market share, and they’re thinking about it almost exclusively in the context of smartphones. They never mention IoT on their call, and they dismiss 5G mm-wave hybrids with FTTN as a near-term market opportunity; perhaps three or more years out, according to Stephenson. Their video position is clearly very defensive at this point; they suffered a massive customer loss on their combination of satellite and streaming video services.
The biggest factor separating the two operators is demand density, the revenue opportunity per square mile. Verizon’s territory is dense and rich, and so it can earn a higher return on broadband delivery. That means that Verizon can look at the 5G/FTTN combination and expect to profit from it, where for AT&T the equation is a lot more complicated. That’s why Stephenson is dismissive of the technology in the near term. However, AT&T needs to settle on a strategy, having purchased Time Warner.
A second factor is that while neither operator has really managed to gain a lot from virtualization and lifecycle automation, AT&T is still committed to it. Part of that is because AT&T’s ECOMP is the foundation of the current open-source ONAP project that represents the great (and last, and perhaps futile) hope of operators for a service automation framework. That, in turn, is likely motivated by the fact that AT&T has deeper financial issues than Verizon.
If 5G is the future for operators, vendors aren’t seeing green yet. Nokia and Ericsson have both expresses pessimism about the pace of 5G adoption. Apple says it doesn’t expect 5G handsets till 2020, and there’s a growing sense that 5G (like most everything in tech, let’s face it) has been overhyped. Operators like AT&T and Verizon are obviously trying to become less dependent on vendors, but without a realistic sense of where they need to go and how they need to get there, it’s not going to be easy for any of them.
Another interesting earnings-call pairing is that of Amazon and Microsoft. It would be silly for me to compare their retail stuff, so let’s focus instead on their public cloud services. They’re numbers one and two in the market hit parade for the cloud today, and they’re increasingly dependent on an important consideration in cloud computing, which is just exactly who you think is, and will be, buying it.
The brightest spot in Microsoft’s quarter was the cloud, with revenues there up 76%. What’s most interesting about Microsoft’s growth is that it’s largely due to success with enterprise hybrid cloud customers, rather than social-media or content startups. The enterprise space is potentially a trillion dollar market so it obviously has a lot of upside to be reaped. Microsoft’s competitors realize that, of course, and they’re targeting the hybrid space aggressively (if still not really effectively).
Amazon’s cloud was also its strongest segment; it contributed most of the company’s operating income. Sales of cloud services were up 45% and generally consistent with Amazon’s recent cloud growth numbers. Amazon is still the runaway winner in the cloud services space, a favorite of startups that can drive some big-revenue deals. However, these big-time Amazon customers are ad-driven, and the total global ad revenues available for all market segments, including the Internet, is far short of that trillion-dollar enterprise TAM.
Amazon, of course, has been working to expand its hybrid credentials, particularly in welding a closer relationship with VMware, who has their own challenges in the hybrid cloud age. This kind of deal is specialized, of course, but so is Microsoft’s own hybrid position—it links a Microsoft cloud to Microsoft services and premises software. The big question for Amazon in the hybrid market is whether VMware will/can push hybrid deals from the premises side. Microsoft, owning both sides, doesn’t have to worry about that.
Microsoft does have to worry about other developments, developments that while not favoring competitors directly, at least level the playing field a bit. If hybrid-cloud architecture is the way of the future for applications and platforms, then premises software overall will have to integrate with it. We already have, in the Kubernetes orchestration ecosystem, a lively community of open-source and commercial players building a hybrid and multi-cloud framework. That would, as it matures, remove some of the special sauce from the Microsoft story.
The IBM deal for Red Hat may be the defining point in the premises-side-hybrid-cloud story. To make the acquisition work, IBM has to move Red Hat out ahead of the defining enterprise trends, among which hybrid-cloud surely ranks at or near the top. Forget IBM’s own cloud aspirations; they only gild the move a bit from IBM’s own revenue and pride perspective. Red Hat has all the right tools, including OpenShift, which is moving quickly to frame the complete hybrid and multi-cloud technology picture.
A strong and open premises-side framework for hybrid cloud is not an automatic win for Amazon, of course, particularly since Google is trying very hard to escape from the third spot in public cloud. In the near term in particular, Amazon is going to lag Microsoft in growth because it can’t draw on as large a TAM. That means Amazon will have to work harder on new web service features, harder on hybrid integration from the cloud side onto the premises. They’re taking hybrid seriously now, but it’s probably going to take a couple quarters for them to erase Microsoft’s early advantage.
What’s the lesson learned from these two earnings-call pairings? To me, the big lesson is that the facts in both the markets represented by the pairs have been clear for years. There was always more to gain from operations automation than from capex savings for network operators, and yet we wasted years focusing on capex with NFV, and we’re still not on track to get opex automation right. There was never any enterprise cloud market other than hybrid cloud, and it was clear five years ago that the biggest pie in the cloud space was the cloud-native stuff, things that weren’t “moving to the cloud” but rather were waiting for the cloud to arrive. It has arrived, and now people are getting smart, but they could have been richer now had they been smarter earlier.
