Those who follow my blog know that I’m always talking about the problem of the business case for tech spending. I don’t think many tech vendors are happy with their revenue growth. Could it be that tech has a problem? Almost everyone I talk with would agree. But could it be that tech has a “Boeing problem?” That’s one that’s harder to answer, partly because not everyone would realize what it meant, and in part because once you find out, you realize just how complicated the issues are, and how far beyond tech they may extend.
Boeing, according to a lot of my contacts, is a victim of earnings myopia. Regulators worldwide tried to reign in the stock markets with stuff like Sarbanes-Oxley, trying to focus stock ratings on objective factors more than on hype. I don’t think that really worked at all, but it did force corporations to focus their earnings calls on the near term, mostly the current quarter and current year. If you miss an estimate on such a call, your stock drops. If you beat, it goes up, and up is better than drop. Boeing is like everyone else in this regard, but the speculation is that quarter-think induced the company to do things like keep staffing levels down, reduce R&D investment, and so forth. That, say my contacts, has resulted in raising risks.
Tech was actually the source of the bubble that brought about SOX, as it’s popularly known. In the late 1990s, it was common for tech companies to jiggle the way they allocated costs because the Street valued earnings more in one product area than the other, so you’d want that area to have fewer costs posted to raise earnings there. SOX stopped that, but the remedy here may have inadvertently created its own new disease, that myopia I mentioned.
Tech has changed our lives enormously, and the reason it’s been able to do that is that it was strongly linked with advancement, with the future, with change. All that stuff is the antithesis of quarter-think. In fact, one of the things we’re seeing now is tech companies deliberately planning not to advance technologies that could overhang current-quarter and -year sales. Tech used to bet on revolution, but now it doesn’t even like evolution. Same-old is good, maybe better, and maybe even best of all.
We can see this in the numbers. Business tech spending growth used to run in sine-wave-like cycles, peaking when new tech paradigms exposed new business cases and drove up spending faster than GDP growth. We haven’t had a cycle in this century. In 1990, of 278 enterprises I surveyed, 211 said that their network budgets directed at new applications, meaning their new spending, were larger than the budgets to sustain current applications. In 2023, of 328 enterprises, only 68 said that, and 122 said that new-project budgets were “significantly” smaller than sustaining budgets, and smaller in 2023 than in 2022. And over 280 of the enterprises said their primary tech planning focus was cost reduction.
So are enterprise buyers creating this tech conservatism? No, because enterprises have always made a critical point in my discussions with them. It is not their mission to plan for technology adoption, but to plan for product procurement. A technology that can’t yet be purchased is just a science fiction story, and that’s why it’s useless to survey companies about their adoption of something like 6G. The problem is that they expect the future to come about because their vendors, the providers of the stuff they build data centers and networks from, have successfully faced it and created products that support it. No products, no procurements, no new business cases. And the last of the three is particularly critical, because it means that enterprises expect vendors to guide them in the optimum application of the new stuff.
I had some other interesting numbers just this month, from 93 enterprises, on whether there were truly new tech missions out there, missions that could create a significant uptick in spending. Of that group, 77 said there were, which is about 80%. I had comments from 43 vendor sales/marketing people, and of that group 25 believed there were new missions for tech. In a group of 35 product planning people, only 8 said they were investing in development of new missions with new business cases. What this proves to me, or at least suggests strongly, is that buyers are still hoping for tech revolutions. Vendor sales/marketing types were at least narrowly favoring that outcome too, but the product planners’ eyes were firmly set on their feet. Only a small number of these made any comments on the “why” of their view, but all of those that did indicated that what they saw as “evolutionary” product plans were the ones that got approved. One company’s expert told me that they had a small group looking ahead at big changes, but that the group’s goal was more defensive than offensive; identify revolutionary threats.
Startups have often kept the tech incumbents looking forward, but the startup space has faced its own Boeing challenge. I’ve worked with a lot of venture capitalists, and they’ve always been looking at the “exit strategy”, meaning how they’d get back their investment plus a nice return. Taking a company public used to be the main approach, and I worked with a lot of startups that went public. When that happens, it usually means they’ve made a real business out of their activity, earning revenue. It’s more common these days for a startup to be sold to another player, and this has unforeseen negative impacts.
The first is that there are a lot of reasons why a company would buy a startup, and not all of them are related to actually going forward with the business the startup was launched to create. Getting good PR is a powerful driver. Killing a competitive risk is another. Filling a hole Wall Street might see in your portfolio is a third. None of these are likely to drive the identification and fulfillment of new business cases.
The more insidious truth is that when an incumbent buys a startup, the startup becomes the incumbent. It inherits the defensive mindset, the focus on the next quarter, the Boeing-like thinking. Some of the best network technology I’ve ever seen has been bought and left to languish. Some because the buyer had a perhaps-cynical reason for the deal, but some just because the buyer was still the same company with the same mindset as they were before the deal.
It’s not as much fun to work with startups as it used to be. The VCs are having a harder time too, because you can only take superficiality so far. You can’t sustain a vibrant industry when all the players are scrabbling over a smaller pile of cash, where there’s no differentiation and no progress, where the most positive thing is a hype wave. We’ve rewarded the wrong behavior. This isn’t good for tech, but can we change it? I think that may be happening already, slowly, through two different mechanisms.
First, M&A. We’re seeing more M&A involving giant companies with relatively orthogonal businesses. Broadcom and VMware, HPE and Juniper, are examples. I think these deals are motivated by more than simple business economy of scale, which when it happens usually involves two companies in similar markets. I think they’re an attempt to create a new symbiosis to address new market conditions. Bringing together the separate company elements requires some consolidated vision of a market where the combination is an advantage. The more such deals we see, the more players are looking to find this sort of vision. The problem here is that regulators are already (in the EU) looking at expanding anti-trust policies to consider whether the creation of ecosystems is anti-competitive. In the US, the laws don’t support this sort of expansion. How different regulatory policies on ecosystem creation via M&A might impact innovation is hard to say at this point.
Second, innovation driven by desperation. Apple has ridden for decades on the vision of Steve Jobs and his ability to define new spaces. All of those historical visions have slipped into the commonplace, and so Apple needs new ones. Same with Meta, and with Google. Of the three, I think Apple has taken the biggest step, with its new AR/VR technology. The PC transformed software because it created a personal platform for it to run on, and that spurred masses of players to work hard to exploit it. This is a rare example of where a supply change brings about a market shift, a replication of what IBM did when it released its PC. The risk here is that Apple, unlike IBM with the PC, isn’t likely to offer an open architecture, and that could stifle the explosion in third-party support. However, if they were to decide to be more proprietary, they’d almost surely spawn an open competitor, with the same positive exploitation effect in the end.
So we have two ways forward, which is better than one, or none. But neither of them is a sure thing. I don’t think the odds of both failing to deliver are high, but it’s not a slam dunk. We need to take innovation, and its role in advancing tech, and the mechanism where change drives a cyclical uptick in benefits and thus in spending, seriously. We really need it.
