With Brocade’s cut in guidance on its earnings call, the company joined what seemed a parade of network equipment vendors who’ve called the future of network spending into question. Most Wall Street analysts have suggested that Ethernet is coming under pressure and that corporate IT spending is likely to be weak. Both are likely true, but I think the Street is (as usual) content to catalog symptoms rather than address problems.
In the enterprise space, our spring survey found that enterprises were still generally holding their capital plans but were slow-rolling project spending. A part of the reason was concern over economic conditions, which was a visible issue even before the harsh political face-off that’s virtually killed market confidence this summer. Another part was some concern over their cloud plans, concern that arose from getting more insight into cost and benefit as they got deeper into the topic. Both these issues appear to have grown over the summer, and I expect our fall survey to show that.
Data center modernization is the only real driver of network change in today’s market. Nobody has demonstrated any direct productivity gains out of network change, despite Cisco’s attempts to make telepresence the water-carrier for network expansion. The problem is that virtualization as a driver for data center modernization appeared to have tapered off even this spring. It’s not that people weren’t doing it anymore, but rather that the network change part was largely baked and they were back-filling into pre-existing plans. Cloud computing was the big driver remaining, and the cloud has proved more complex than enterprises had expected.
In the service provider space, I’m seeing the result of five years of declining revenue per bit. But the thing that’s really hitting now is a more subtle structural issue. Content, which everyone knows means “video” is the driver of traffic in both wireline and wireless, to the point that you could almost neglect other growth sources in planning. But content isn’t “Internet” traffic as most would know it. More and more content is served out of metro cache points, and so it’s the metro capacity that’s consumed. Metro means Ethernet, and the growth of Ethernet to support content delivery has been the driver in a shift for operators from IP-dominated planning and spending to capital planning that’s Ethernet-dominated. That process at first tended to focus on more premium players and products because early metro/aggregation Ethernet was an expansion on the previous business-focused Ethernet services infrastructure. In most metro areas today, according to our operators, the impetus for Ethernet growth is consumer video, and that’s the worst service in terms of ROI. Thus, price pressure on Ethernet is inevitable.