Tablets and smartphones aren’t in HP’s future either. HP is dumping the whole WebOS effort and all of the devices that came with it. The move is in some ways more dramatic than the decision to spin out PCs because it’s a retreat from the client business completely, a sharp turn toward the center of the action that would seem to be irreversible. Are they abandoning the client world to Asia or to Apple, or both.

To round out the move, HP will (buy a British software specialist, Autonomy, which has strong credentials in database searching and business, as well as some expertise in content management. The price for the software company seems high to Wall Street; it’s probably one reason why HP’s shares have been off in pre-market. It’s the price and not the concept. HP has been buying software companies for some time as a part of a transformation that started with the hiring of former SAP CEO Apotheker. Most IT players at this point realize that software is the key to establishing a direct connection to the users’ business case, and HP is proving its commitment to that approach. But remember that HP is still a broad-based data center player, and a giant in enterprise computing.

Is the PC an endangered consumer species? If so, what about the enterprise?

So is the PC now chopped liver? There’s no denying the declining interest in the PC as the primary consumer appliance. That’s something that even Microsoft realizes, apparently. Its Windows 8 is obviously a transition product, something that would let it run the same basic OS across any suitable appliance. The announcement that Windows 8 will have its own app store seems to confirm a trend that’s been developing in the consumer market for several years. Driven largely by Apple, we’re seeing a transformation of “computing” into “appliancing,” a shift from designing personal computers as small computers to designing them as information portals. It’s not, at least not yet, as much about replacing the PC as about doing something the PC was never really needed for to begin with. The consumer wants entertainment, period. When PC games and PC browsers were their only conduit to that goal, they bought them. With game consoles, tablets and smartphones increasingly becoming the user’s window on the world, the PC is old news for consumers. Can the enterprise be far behind?

HP’s move puts pressure on the vendor pack

The HP move will certainly put pressure on a lot of players. To start off with, that means that Dell might find it necessary to do its own cut-and-run move. Their decision to get into networking with Force10 and their creation of a cloud-and-virtualization focus on the data center seems like it might be laying the groundwork. I think the loss of the PC would help Dell’s overall financials and also help the company focus on the data center, where it’s been showing most of its strength. In any event, it may have little choice at this point.

IBM, of course, shed its PC business by selling it to Lenovo. As a pure play on enterprise computing, it’s had its ups and downs, but there is no question that IBM is still the big tech success story. IBM proved that making big moves to cut your losses is as important as making moves to cement gains. With IBM now seeing giant HP aiming at IBM’s turf without being encumbered by PC baggage, what does IBM do? Networking? HP has networking products; rival Dell just picked up a line. Does IBM follow suit, and if it does who does it pick up?

Before we go there, let’s look at an important point about enterprise networking.  The only part of it that’s strategic is data center networking, and data center networking is about (you guessed it) the DATA CENTER, which is where servers and software and IBM and HP and Oracle and Dell all live. If “computer companies” are going to say that “computer” doesn’t include PCs then they’re focused totally on the data center, and unlikely to ignore the fact that the data center network is a big part of that picture. Networking first collapses into data center networking and unimportant branch junk, and then data center networking collapses into the server/storage technology plans of the buyer. That’s surely how the IT guys see it.

Two players (IBM and Oracle) might see themselves becoming a full-service data center companies and lack the network piece. Probably four network vendors might be acquisition targets—Brocade, Extreme, F5 and Juniper. Only two players max from this group could be acquired. If enterprise networking commoditizes and gets subducted, as the current moves suggest it will, then the rest of these, and other non-target players like Cisco, have to make it on their own. In the new market, is that possible? Who might be forced to find out?

Cisco might be feeling good; it seems to have accidentally occupied the space that everyone else wants to converge on. With servers, networking and a reduced consumer exposure, Cisco is a bit ahead of HP in terms of a transformation out of the business space, in a way. But Cisco isn’t an IT player no matter what it wants to believe—at least not yet.  Its understanding of IT is short of what’s needed to compete with the big boys, and Cisco has nothing in software, despite continued efforts. In fact, Cisco may find itself under a bit more pressure as HP steps up the “we-do-all-the-data-center” story at the sales level.

Interestingly, the financial analysts aren’t seeing anyone decisively winning that battle—at least, not right away. I agree, but the reason why is more important than the factoid itself. You can’t fix an outcome; what is, is. But in theory, at least, you could mitigate a cause.

Data center networks are migrating because data centers are migrating, and the drivers of the IT side of the migration are obviously most likely to be giant server and/or software companies. If you want a buyer to approve an eye-popping cost, and if you want to keep most of the money that’s changing hands, you’ll tend to exalt the benefits of your own gear or software and underplay the other component requirements—the ones you can’t fill on your own. Why is IBM doing OEM deals for network gear and not making the stuff itself?  Because it wants to lance any objection boils at the network level, but focus on the IT side.

In the service provider space—both network operators and over-the-top (OTT) giants—we’re seeing a drive to create a cloud without much vendor support from either the IT or the network giants. This is in sharp contrast to past practices in the industry, where vendors presented a Fuller-Brush-Man-like inventory of stuff that represented the operators’ only choices, and thus drove network evolution. The buyer is out of control, both today in the operator space and, eventually, everywhere that consumes data centers. That’s going to create a whole new tech industry.

Google is likely an example of all of this. At the developer conference, it introduced what might be (note the qualifier—”might”) the most revolutionary thing in Android since the first notion of an Android smartphone.

Android@home is an attempt to make Android king of the little-known but highly important “embedded control” market space.  A device that has computer technology support for its own functions but doesn’t provide a GUI through which the general power of computing can be exercised has historically been called an “embedded control device.” There are arcane EC-OSs, and there have been for years, and there have even been attempts to make a general-purpose OS like Windows or Linux into an EC-OS. None have had much success, because nobody has really promoted the notion.

Google aims to change that, creating an Android-inhabited universe in the home where a grid of intelligence manages the environment, fills our needs, etc. If you believe in a smart home, you believe in a pervasive EC-OS.  Google wants you to believe in Android as one.

There is no question whatsoever that Apple sees something similar, and is moving perhaps with less public fanfare toward that same goal. Google’s move may flush out Apple’s own intentions, which I believe include the linking of an iOS home network with an Apple-provided, cloud-hosted set of services. That’s surely Google’s direction. The two companies are envisioning “the cloud” in a more dramatic way, as a kind of “life fabric” that surrounds us through wireless connectivity and that hosts smart agent devices that each cooperate to play a role in how we work, play and live.

PCs are not seeing the growth they once did, and that of course reduces the new-system licenses for Windows. Some of the slowing is due to tablet encroachment, but most is likely due to people just not upgrading as often. Windows 7 drove a spate of refreshes, but that’s over. I don’t think there’s much of significance in this particular data point.

What’s more interesting is that the server and Office portfolios did very well. The media has Linux running rampant in the data center, and cloud productivity tools kicking Office’s butt.

The truth is apparently not quite that dramatic. In fact, both Microsoft’s server sales and its Office sales were well ahead of IT spending trends overall. I’ve noted for quite some time that Google Docs isn’t equivalent to Office, and that’s for now enough to keep the Faithful in line, Office-wise.

I do have to admit surprise at the server numbers; 11% growth is twice the industry rate. I think a decent chunk of this is SMB spending; SMBs adopt Linux at half the rate of enterprises.

Image counts in every way and at every level of purchase decision-making. And Huawei is one vendor that knows that better than most. From the first, Huawei has been tarred with its association with China at multiple levels – first as a poster child for the “cheap Asian economics” story, but often behind the scenes as a sinister agent of communism.

Huawei’s failure to complete the intellectual property acquisition of 3Leaf Systems was apparently the last straw, and Huawei issued an unprecedented open letter to U.S. officials and in parallel to the U.S. market. “We’re not your enemy” was the sense of the letter, and while there’s no question the message is self-serving and inaccurate at the economic level, it’s true at the political level, in my view.

With China, there seems to be a combination of cultural and economic xenophobia that taints our perception of the country. Huawei knows that, and it’s asking us to re-examine our motives. Personally, I think everyone needs to go through that exercise, but whether you do yourself is your issue. Here, I want to focus on the industry import of the move.

Huawei definitely needs to succeed in the U.S. market. U.S. (and other major national) vendors would like Huawei to fail, because as a price leader, Huawei is destructive to their margins in the near term and their market share in the longer term. The open letter is a signal that Huawei is going to address the points of resistance to its success and that it intends to make a more aggressive move in the U.S. That has major implications/consequences in the market because the U.S. is a proving ground for so many networking innovations.

The first is that Huawei feels that it can compete here, even in a market that’s more driven by trends and coolness and where innovation counts most. Why? Either because Huawei thinks it’s innovative enough to play with the big guys, or because it thinks we’re slipping into commoditization—if you demand polar extremes. I think the truth is that Huawei thinks between the lines here.  Networking as a dynamic industry has lost its way for sure; we’re not driving the bus now in services and infrastructure as much as we are driving it in self-indulgence at the consumer level. But we’re still the proving ground. I think Huawei understands our fundamental shift of focus toward validating the demand side without any consideration of the supply. It sees an opportunity to offer a combination of a little more “transport innovation” and a lot better pricing, and it intends to exploit it.

That makes Huawei’s open letter a kind of counterpoint to the recent lightRadio announcement by Alcatel-Lucent and the QFabric announcement by Juniper. Huawei could have offered something in both these areas; it’s engaged in the markets. Other vendors took special steps to create special values. Huawei is betting those vendors will fail. Historically, it’s probably right because network equipment vendors have failed so tragically at articulating their value propositions that they’d almost just as well not to have bothered to innovate.

Our blatant consumerism hasn’t helped. Neither the lightRadio nor the QFabric announcements received any truly insightful coverage. Yes, the vendors needed to do better to position them, but you can’t reduce all of human history to a 350-word hastily composed “get-me-online-first” blog entry. You can reduce a market to one, or through it. The critical media intermediary between seller and buyer is pretty much gone. Huawei thinks feature validation will fail with the failure to understand the features, and they’re right.

The data center transformation is an IT transformation and not a networking one. Cisco gains credibility as a driver of the transformation because it fields server products, and we saw that in our strategic credibility survey results. But if we’re going to focus on the data center network, then we have to focus on Cisco’s ability to transform “credibility” into signed orders. Part of that is an ability to pull through networking with its UCS successes, and there I am not seeing the kind of traction Cisco needs to have. The good news for Cisco is that HP is booting it, and that our survey agrees with UBS’ in saying that Oracle is still an also-ran here. The bad news for Cisco is that QFabric could really transform not only Juniper’s position but also the issues driving the market, and that Oracle is certainly not going to finish 2011 in the same strategic data center doldrums it’s started the year in.

If Huawei’s right, then even a success in the data center is going to be less than a full success for Cisco because it will come at the expense of margins. If they’re wrong, it’s looking like somebody other than market leader Cisco will have to prove it.

Good question, and it’s not easy to answer it from the Juniper’s announcement, but I’d say that the differentiator is the chipset. Junos Express appears to be the same basic chip used in the recently announced QFabric data center switch. Thus, you could say that the PTX is a based on a low-latency MPLS switching architecture that’s more distributed than QFabric. Given what we perceive as a chipset link between the products, I’m creating a term to describe this: Express Domain. An “Express Domain” is a network domain that’s built using devices based on the Express chipset. A PTX network is an Express Domain in the WAN and QFabric is an Express Domain within a data center.

If you look at the PTX that way, then what Juniper is doing is creating an Express Domain linked by DWDM and running likely (at least initially) in parallel with other lambdas that still carry legacy TDM traffic. It becomes less about having an optical strategy than it is about creating a WAN-scale fabric with many of the deterministic features of QFabric. Over time, operators would find their TDM evolving away and would gradually migrate the residual to TDM-over-packet form, which would then make the core entirely an Express Domain. The migration would be facilitated by the fact that the latency within an Express Domain is lower (because packet handling can be deterministic, as it is with QFabric) and because the lower level of jitter would mean it’s easier to make TDM-over-packet technology work. Overall performance of the core would also improve. In short, we’d have something really good for none of the reasons that have been covered so far in the media.

This (if my interpretation is right) is a smart play for Juniper. It creates an MPLS-based virtual domain that can be mapped to anything from a global core to a data center. Recall that I noted in the QFabric announcement that Juniper had indicated that QFabrics could be interconnected via IP/MPLS. Clearly they could be connected with PTXs, and that would create a supercloud and not just a supercore.

What would make it truly revolutionary, of course, would be detailed articulation of cloud-hosting capability. I think that capability exists, but it’s not showing up at the right level of detail in the positioning so far. In any event, if you add PTX to QFabric in just the right way, you have a cloud—probably the best cloud you can build in today’s market.

If Juniper exploits the Express Domain concept, then the PTX and QFabric combine to create something that’s top-line valuable to the service providers. Yes, there are benefits to convergence on packet optical core networks, but those benefits are based on cost alone, and cost management isn’t the major focus of operators right now—monetization is. You can’t drive down transport cost per bit enough for it to be a compelling benefit in overall service pricing, or enough to make low-level services like broadband Internet profitable enough.

Furthermore, achieving significant capex savings for the operator means achieving fewer total sales for the vendor. That’s the old “cost-management-vanishes-to-a-point” story. But you can do stuff at the service layer that was never possible before, drive up the top line, and sell more gear overall rather than less. Or so I think. We’ll be asking for clarification on these points, and in our March Netwatcher we’ll report on what we find.

While “the cloud” gets a lot of play in this deal, it’s really more about enhanced services and a shift in Verizon’s profit model from selling bits to selling experiences. A couple decades ago, new services meant new network equipment. These days, it means servers and software, and at the moment, it’s being driven by a rush to create a meaningful strategy for content delivery and monetization. While that’s the hottest issue in the market, it’s an example of the broader issue of generating revenue in an age where transport and connection matter a lot less.

The next generation of carrier “services” will be customer “experiences.” The foundation of experiences is software, running on a connected set of data centers — a cloud.  But media hype about the value of the cloud has been several miles wide and a lot less than an inch deep. Most operators would echo the Pacnet exec quoted in a recent article — he’s glad he’s not the only one working through the fog of the cloud.

For operators, in particular, the imprecision of “cloud” is a challenge because they want an architecture on which to build their infrastructure plans. They had that for networks, and now they need it for clouds. All those data centers need to be filled with gear, and how that will work and how it will make money are now the critical question for operators — and vendors.

But so far it’s a narrow return. IBM didn’t announce any deal to buy a broader-based provider like Brocade, Juniper, F5, or Extreme, all of whom make more general and larger Ethernet products. It didn’t make any attempt to acquire carrier-grade Ethernet switches either, although it might later.

IBM is an IT kingpin, perhaps the greatest IT player the world has ever known. IBM knows data center networks are important to the future of IT, and how important cloud networking is as well. It would clearly prefer to have a series of partnerships with benign network industry players and focus on their own expertise, but the problem is that competitors like HP, Cisco, and perhaps Oracle are threatening to widen the IT space to envelop at least some of networking.

IBM doesn’t want to be caught without an asset that suddenly becomes a competitive focus, so it moves. Once movement starts, it becomes hard to say how far it will go, how much of networking might become a target of IT acquisition.

Instead, operators have been building a bottom-up content strategy based on data center tools, servers, and server-side middleware. CMS tools like those of ExtendMedia are very close to being the binding point between the service layer and the data center, and thus Cisco has little more to do before it would have a complete solution.

For example, ExtendMedia manages metadata and asset distribution to CDNs, which is a very small step from the network itself. This could be huge for Cisco, which has already been winning early deals in the content space because of its Unified Computing System (UCS) approach. This is being portrayed as an IPTV strategy, but we think ExtendMedia’s platform could also be used to manage more traditional VoD assets, TV Everywhere, and even pure-play OTT media.

Called FabricPath, the Cisco approach is described as a superset of “TRILL,” an acronym for Transparent Interconnection of Lots of Links. This IETF standard is the route other data center switching players are taking. But since the standard isn’t ready yet, and Cisco believes that buyers would rather have a product right now and retrofit standards compliance if they need to.

Of course the Cisco FabricPath approach lets Cisco sell products immediately. We’re noting an increasing lack of interest in rigorous support for standards among enterprises, and that’s been a trend for most of last year in the service provider space. The concern everyone expresses is that the standards process isn’t keeping up with market needs.

We don’t doubt that expanding TAM will help a lot, but we’re not sure whether Cisco’s going to be able to get much contribution from the recovery. Our surveys still show buyers are likely to hold back on spending in the first half of 2010, and that over time, there will be considerable pricing pressure on Cisco from competition in the data center market.

All this suggests that Cisco will have to continue to bank on TAM growth, and eventually that means M&A and management diversion. We are particularly interested in what Cisco decides to do in the service layer, where competitors Juniper and Alcatel-Lucent have already launched strategies.