Distributor Downturns Could Be More Than Macroeconomic Factors

Avnet’s 1Q13 earnings release for the September-end quarter does not auger well for IT spending.  The Technology Solutions group that sells servers, storage, networking and related products to end users and to computer resellers saw revenue drop 15% year-over-year to $2.2B and miss the low end of the expected revenue range by a couple hundred million.  EMEA dropped the furthest at 18%, followed by the Americas at 16% and Asia at 6%.  (Read TBR Analyst Krista Macomber’s take on the announcement here.)

In the call Avnet representatives indicated the drop was fairly even across all industries.  Avnet also noted that some technology segments were up, such as virtualization, storage, networking and security.

That pretty much, as Avnet indicated, leaves servers in the tank.

Avnet went on to talk about seasonality and delayed orders near the end of September.  They talked of a negative book-to-bill in the quarter that had climbed back into the positive (or above “1”) in the first three weeks of this quarter.

I have to wonder if such talk is just whistling past the graveyard, however.

As I wrote here about distributors, there’s a fundamental shift going on in the way commercial customers acquire and manage IT that seriously calls into question the core distributor value proposition.  Listen to any analyst relations pitch at a major IT vendor these days, and you hear very similar variations on the select few themes of  cloud, mobility, big data (analytics) and security.   

The soon-to-be released TBR 2012 Cloud Professional Services Study offers some data points suggesting shifts in IT procurement patterns have considerably more to do with the cratering of core iron such as servers than the inability of European and American politicians to get off the dime and solve their structural deficit problems. 

Yes, weak macroeconomic factors play a role, but it looks to be more pervasive than that.  Consider the following:

1. Cloud utilization rises.  IT departments move out of the proof of concept phase, deciding cloud has a role in their IT departments by a 2:1 margin.
2. Backward compatibility to their legacy applications which they want to migrate over to the cloud represents their biggest concern.
3.  There’s a huge jump in consideration of all “as-a-Service” offerings, with IaaS consideration/evaluation in the mid 80s.

Put that all together and you can expect a big jump in cloud adoption.  It puts the server rapidly over into commodity status and into the land of “build your own” for the large IaaS vendors.

Now consider these points:

1. Meg Whitman has entered the public confessional booth and acknowledged HP’s challenges will take several years to correct.  The hardware-centric giant has some big hurdles ahead of it.
2. IBM’s System and Technology Segment reported a 13% drop in revenue, with their high end System Z dropping 20% (and admittedly due for a technology refresh).
3.  In the call, Avnet officials talked about their revenue performance being in line with their major suppliers indicating the shortfall came more from macro factors than any self-inflicted missteps in the market place.

There’s been rumblings of the so-called “paradigm shift” in IT procurement patterns for quite some time.  The reseller channel has been struggling, with analysts expecting there to be considerable fall out within the channel as the need for the base hardware delivery, integration, maintenance, and support services wanes.  ISVs have a much better shot at migrating over to MSP status than do VARs, as the challenge will be in software tech support rather than in hardware "break/fix" maintenance and repair.

At least to the external world, the Avnet executives did not seem alarmed.  But adding up the recent results from the likes of IBM and HP, coupled with the recent TBR research into cloud adoption, and it looks to be the start of another cyclical transformation in this utterly fascinating industry that is going to wreak havoc on reseller enterprises.

Random Thoughts on The Silver Anniversary of Black Monday

The upper left panel of The Wall Street Journal made mention of the 25^th anniversary of Black Monday, October 19^th, 1987 when the Dow dropped 508 points to lose 22.6% of its value.  A comparable drop today, per the Journal, would be over 3,000 points.

I instantly recalled several key things.  Personally I recall my ex-wife, then newly pregnant with our first child and understandably exhausted all the time, calling me from her job as a supervisor in the telephone brokerage group at Fidelity Investments.  I recall our parents, children of the depression, and their reactions.

And I recall my mentor/boss at the time who about a decade later appeared on the cover of BusinessWeek telling me now was a great time to pick up Ford and GE stock as it was ridiculously low priced.  Now was not the time to sell, he told me.  It was a little like “camping in a rainstorm.”  Just stay inside the tent, hope to stay dry, and wait for the weather to clear.

In the aftermath, it came out technology had played a role.  Computerized trading that fed on itself exacerbated the problem.  It was a lesson learned on the ways in which technology automation increased the velocity of commerce.  We’ve seen it in all sorts of ways.  Inventory turns represents one.  The talk of the collapse of the middle class represents another.  We have fewer middle class jobs as technology automation renders moot the need for the labor.  Fewer middle managers need to aggregate computerized reports when we have real time dashboards and predictive analytics.  In one technology company where I have provided consulting and market research services for decades, the number of individuals employed in market analysis functions dropped from 160 to 40 while the company revenue climbed.

 

Recently the cratering of the housing market can be linked to the notions of derivatives and tranches undoubtedly concocted with leading edge technology driving the calculations and equations.  

The next big thing right now radically altering commerce consists of analytics, best represented by IBM Watson.  And IBM Watson follows a very traditional migratory path for expensive, leading edge products.  It started in government and then moved to financial and medical markets.  Government can pay exorbitant sums for the leading edge technology in the interests of national security: I.E.  The “protection of the commons” in the aggregate.  As it becomes commercialized, it migrates down through to areas with critical time value components.  And that, to paraphrase the old Jack Benny line, boils down to “Your Money or Your Life” or the financial and medical markets.

Today the technology industry aims its labor stripping weaponry directly at itself through disruptors such as mobility, cloud and big data that will radically transform the commercial landscape of the technology industry in ways not yet fully fathomed.  Watch earnings announcements of the broad based suppliers such as HP and IBM (as well as some current titans such as Microsoft and Intel).  HP remains too dependent on iron right now, but has means to shift and will have some rough quarters as Meg Whitman finally acknowledged publicly.

IBM has a history of shedding iron and seems well ahead of the curve strategically compared to HP.  It has exited PBXs, typewriters, printers, and PCs.  Lou Gerstner pivoted the company into software and services.  Its road map is clear.  With IBM it is entirely conceivable we will see revenue stay flat for several years while profits climb due to shifting out of product revenue streams with commodity gross margins into value added services built largely around automated delivery mechanisms.  

Labor free services or utility computing, if you will, which will undoubtedly be pervasive on the 50^th anniversary of Black Monday.

And begs the question as to what we humans will be doing with ourselves to make a buck. 

With any luck I will have my faculties and sufficient retirement funds to be able to view it from the sidelines and not as some surly Wal*Mart greeter.

HP’s challenge: PCs and Printers don’t do much for Mobility, Cloud, and Big Data

I have followed HP since the late 1980s and found them an impressive operation.  The last few years have been confusing, indeed, and their current market position has been troubling.  There’s a confluence of market disruptors at play in the technology industry which sits poised for another one of its massive shake outs and upheavals.

Iron-centric vendors will be the most at risk which does not auger well for HP.  We will see the economic downdraft first in the channel, where a number of small business entities competing in the VAR space will be snuffed out as they struggle to transition over to a Managed Service Provider (MSP) business model.  It’s a function of lessening one’s reliance on hardware profits and making it up on subscription-based software and services provisioned out over the cloud.  There’s a cash-flow drain in the transition with which undercapitalized small businesses will struggle. 

Move up the food chain and the pressure on hardware revenue and profits will begin impacting big name vendors.  I will not be at all surprised to see, for example, IBM show a period of flat or even slightly declining revenue performance while maintaining its operating line.  I say this given the solid way in which this company has transitioned from hardware to software and services that goes back decades. 

HP has not been as nimble.  The profits gleaned from printer supplies certainly have kept that company afloat for quite some time, but now the pressures appear too great.  Meg Whitman essentially came out and admitted as much the other day.  Consider the challenges it faces:

·         1. It lacks a solid mobility offering

Mobility means smart phones and tablets in lieu of PCs, and HP has neither at the moment.  It will come out with a Windows Tablet and will be “betting on 8” (Windows8) almost as much as Microsoft.

·         2. Servers face similar threats

HP has been a major player in the server space which also faces competition from IaaS provisioners content to string together racks of generic server boards on low cost, usage-based pricing plans to end customers.  Server demand will not evaporate, to be sure, but neither will it serve as a growth engine to pull a company the size of HP out of the doldrums.

·         3. Cloud, Software and Services drive competitive differentiation

HP simply lacks a fair amount of scale here.  HP made a big bet here, however, picking up Autonomy for $10B and having EDS as a services arm, but this is not where its market reputation lies

For years HP had a well-earned reputation as the maker of very well engineered and reliable technology products.  They were viewed as a diverse manufacturer of piece parts or components with less robust marketing or business-specific knowledge to offer the way IBM can and does with its industry marketing/“Smarter X” orientation.  So HP’s reputation was one for reliable products.

End customers do not want to consider product anymore.  They simply want data access seamlessly provisioned to them.  Yes, they will have on premise hardware as necessary, but the network will increasingly be the computer and what iron located where will process and store company data will increasingly be deemed immaterial to the end customer.  Customers will simply care less about the iron in the utility computing model just as electric customers today do not care about where the electricity they consume gets generated.

And that represents HP’s greatest threat.  That which has been the source of their excellent reputation simply matters less to end customers than it has in the past.  Other vendors have narrowed the performance/reliability gap on the one hand, and customers want less and less of the product under their control on the other.  

Less competitive differentiation and less customer importance.  Ouch.

I personally cannot help but root for Hewlett Packard in these turbulent times.  I first started tracking them as they were late shifting from 16 bit to 32 bit minicomputer architectures.  The external market forces at play today make the necessary transition over to software and services by HP for more daunting a challenge for the company.

Why the Patent Wars Matter

I was dozing off to sleep when the news had its mindless snippet after the sports at 11:25 PM. The come on was how barbeques would never be the same again.  Engineers at MIT have developed a coating that allows ketchup and honey and other things to flow easily out of a bottle.  Liquiglide.  Patents pending.

I laid there rooting for these guys, thinking I would rather hear of them making it big than Facebook CEO Mark Zuckerberg.  I knew of a guy made independently wealthy by coming up with the two-barred paper snap packet for salt. Or what of the guys who thought up trivial pursuit over their weekly pizza meals where they asked each other questions? (And hence why the game board and player tokens are shaped like a pizza.)

Now think of Facebook.  Stolen idea? It’s certainly an idea Zuckerberg discussed while under the employ of the Winklevosses seeking to get their own social site up and running as the movie The Social Network attests. Was the equity distribution fair and reasonable between Zuckerberg and the Winklevosses who got 1.2 million shares and $20 million in cash after protracted legal battles with him?  Zuckerberg is worth $19B, give or take a billion here and there.

And disruptive technological forces do nothing if not quicken our time to intelligence.  Cloud means scale no longer serves as a barrier to entry.  You do not need capital to build out a datacenter to analyze information.  You can subscribe to a cloud service and get going in your garage in no time flat.  Big business sheds datacenters and moves IT spend from CAPEX to OPEX.  Pharmaceutical companies now partner more with competitors to spread risk. 

IT as a Service quickens the pace at which people can innovate off, or build upon, other people’s ideas in the marketplace.  (See this blog that touches upon product lifecycles from the social media lens if interested.)  In technology we talk of product rev levels and coined marketing phrases like “Web 2.0.”  In short, we have improvement upon what came before it.   

So, for example, a lot of the baseline for smartphones came from RIM.  They pioneered the market.  Like most trailblazers, as my mentor would joke, the second to market usually finds the pioneer face down on the trail with an arrow in their back as the second to market passes them by. The second to market sometimes has the time to bury the pioneer, and other times the second to market just keeps on going up the trail.  Either way, the second to market stops to pick through the pioneer’s belongings before moving on.

Now consider RIM who pioneered the smartphone market and looks like a dead man walking at the moment with upheaval in upper management and intimations in analyst calls that they have put the for sale sign on the front lawn of their corporate headquarters.  RIM has a lot of patents.  A lot of IP that can be protected and monetized.  And IP’s rising economic value as we become a services economy makes it more attractive to protect litigiously.  We generate knowledge, and we can more quickly come to discover knowledge through analytics with a leveled playing field between big and small economic concerns as computing becomes as vital and low cost a utility consumed by commerce as simple electric current.

This is why patent lawsuits will proliferate. Technology both shifts the nature of commerce and quickens it pace.  It compresses product lifecycles.  It narrows exploitable competitive advantage gaps, so if you develop marketable innovations, you have to protect them from theft at the same time that you, as Steve Jobs preached, seek to develop your own products and services that will render them obsolete.

So, what are the market implications in addition to a spike in patent infringement cases and a higher valuation on patents in M&A analysis that leaves me convinced RIM will have value to someone based on their pioneering the smartphone market.

More “co-opetion” and joint ventures

Pfizer, for example, has made clear it will do more branded drug research in collaboration with others.  Joint research minimizes risk.  Pfizer likewise has moved to more mobile, collaborative approaches to clinical research to make more nimble and faster investment decisions against their development portfolio. 

Comcast, Time Warner Cable, Cablevision, Cox Communications, and Bright House Networks LLC have entered into an agreement for free Wi-Fi platform sharing to overcome geographic restrictions to their business operations to compete against telecom companies in the United States.

IBM states the cost of rolling out Watson requires joint ventures with customers to commercialize the technology by applicable industry segment.

Pushback on the notion of “vendor agnosticism” in the IT space. 

TBR research in the professional services space indicates this shift to be gaining rapid traction and swinging the pendulum away from vendor agnosticism, suggesting IBM to be poised for a resurgence in relevance while I personally wonder what we will be saying about Microsoft once it brings Windows8 to market.

CIOs do not want to be in the business of constructing computing engines or to be worrying about business data security on worker devices.  They want proven technologies and a trusted advisor.  In the past IT Decision Makers remained leery of established IT Provisioners being too wedded to one proprietary technology view.  But the velocity of commerce and the need for instantaneous technological innovation to maintain competitive advantage has the business market shifting away from that approach.  ITDMs want to be told by a trusted advisor what pieces work well together, and in the age of 99.9999% uptime demands, that also means knowing the companies work well together in the event of a system outage.

 

Brand Still Matters

Apple’s consumer cache and IBM’s resurgence rests on this.  Apple for the user experience and IBM for the security assurance that the pieces pitched to business IT performs as promised, deliver value to business, and will be supported and extended through continued research investments on a par with the $15B IBM spent on Watson for analytics innovation quickening business time-to-intelligence.

Patents protect drugs to allow firms to recoup the development costs in an industry where only 16% of research investments receive FDA approval.  It’s high stakes and unforgiving even before the consumerization of IT cranks up the RPMs on the velocity of commerce, and Pharma is but one example.

Technology Market Implications

Technology patents and intellectual property in our industry will rocket forward as critical business assets in our industry as it transforms from delivering products for business to assemble over to services quickening a business’ time-to-intelligence.

Scale drives a manufacturing economy; ideas drive a services economy; and our rapid transition into a services economy dictates taking all necessary measures to protect intellectual property.  Look at the fierce protection of music and film rights in the media and entertainment industry; it’s coming to our industry.

The next Mark Zuckerberg will have to pay more than $20M to make their $19B off someone else’s earlier idea, and the folks at MIT deserve their financial due for Liquiglide when it hits ketchup bottles and drives a big revenue spike for Heinz or one of its competitors.

Who Do You Trust, Facebook or GM?

If you are reading this, you know the details.  GM has come out and rained on the Facebook IPO Valuation Parade by saying they will stop advertising on Facebook, as GM does not see the value.  Not good.

Or is it?

GM?  Marketing genius?  Really? 

GM may be a lot of things, but a marketing juggernaut is not what comes to me top of mind for a firm who squandered their dominant market position through institutional arrogance, poor labor expense management, and some rather squirrely technology moves such as buying and spinning off EDS and sinking billions into automated Saturn plants.

Marketing juggernauts do not need government bail outs to survive. 

Now this excoriation of the Gang That Couldn’t Shoot Straight does not necessarily mean Facebook will be the next Microsoft, Apple, or IBM.  The current explosion on social valuations certainly smells a lot like the internet bubble that burst at the turn of the century, but this IT industry transformation has greater legs than that one.

Consider the following when trying to decide if Facebook will be a flash in the pan or not.

Consumerization of IT

I know.  It’s a shop worn phrase, but it happens to be very real.  We as consumers and office workers live on the internet through multiple devices.  Our time on the internet will not abate.  Hence we see industry valuation shifting to those who dominate the device space.  To wit: Apple.

Therefore it stands to reasons spots consumers access with those devices such as eBay, Amazon, Facebook, etc will come along for the valuation ride.  Whether or not it will implode remains to be seen.  There will be an influx of entrants, a run up, and a consolidation.  Facebook has a leadership position.  Then again, so have firms like Apollo Computer and Borland.

Google

Google sits pitted in a three way dog fight for device dominance with Apple and with Microsoft.  Microsoft sat here before against IBM when IBM sought to take back the device space with its OS/2 operating system. That was a classic David and Goliath struggle with Microsoft in the role of David.  Now, however, Microsoft is the Goliath and Google is the David.

And Google concerns itself far more with advertising revenue streams than it does with software license revenue streams.  And, as such, Google wants to track as much of our personal activity as possible.

And there could be backlash on that over time akin to consumers pushing back against telemarketing calls.  We will undoubtedly self select into groups or communities.  We will then “trust” that community to determine what ad reach outs flow to us.  Facebook has potential to serve that function.  Google certainly gets this as well given Google Circles, for example.

Zynga

Divorced, I had a facebook page I ran for my daughter 3 years ago when she was 10.  She liked Farmville, so I was sucked into the thing to harvest her crops on nights she was with her mother, and my brain had to do something or I might have hung myself with my belt out of the boredom.  Likewise, I was too cheap to slap down my credit card to buy gas for the tractor that would have made the task easier for me.  

NFW.  Principal.

So I started looking at the underlying analytics of the game.  I ran the numbers.  I did the math on the crop yields, boring my daughter to tears in what I hoped would be a fun exercise to hone math skills.  (Instead, I just got called Rain Man by the little darling.)  I imagined the operations behind the imaginary rat bastards selling me the seeds and housing kits at ridiculous prices.  I thought of operational linkages.

And it became clear to me there was a business in this stuff as I wrote in a blog in July of 2010:

“Playing it [Farmville from Zynga] fascinated me, too, from a business perspective.  The underlying analytics kept me enthralled pondering the possible push marketing that could come from it.  I understand the nature of the market information and data gleaned from choices, preferences, friends, and where we went through Farmville on the internet.”

So Zynga is onto something.  What do they know that General Motors does not?

Impulse Commerce

Folks buy cars infrequently.  A big ticket item, they take a lot of time and care in making the acquisition.  So it could well be that GM has this one right for THEIR product set, but few consumer product sets cost as much as a new car.  A recent snippet flew across my tweet feed showing that retail purchases have dropped considerably given the impact of on-line commerce.  Consumers hammered Best Buy through demonstrating product at Best Buy bricks and mortar outposts and then racing home to buy on price over the internet.  We will buy more over time through the internet given age maps closely to technological familiarity, and so as time progresses so, too, will this purchase preference.  

Conclusion

GM needs this press more than Facebook will be hurt by it.  It is partly the hype but it is also partly the nature of an automobile purchase cycle versus less expensive items such as clothing, books, videos, travel destinations and the like.

Consumer preferences do change rapidly however, as Yahoo!, AOL, and Compuserve can attest.  Technology enablement greatly speeds up the velocity of commerce and means the rise and fall of corporate entities in this social space will be breathtakingly fast.  Facebook admits it is not a mobile company, lacking the ability to push ads in that format today.  The cash they're amassing will certainly be funneled into determining a way to make (or rapidly acquire) capabilities in that arena.  

That said, I seriously question what in GM’s track record positions it to be a trusted advisor on social media investment decisions. 

If you do trust GM’s business acumen, then I bet they have a Spring Hill Manufacturing Plant they may want to try to sell you.