Three Dislocations: Will They Meet?

When I started this blog, we were on the eve of Q1 earnings and I thought it was prudent to get out of the way of the market.   Before the long holiday weekend in the US, I wrote a quick note on 20 tech stocks.  I read a lot of the daily Wall Street dribble that comes out hyping this stock or that stock and this TAM versus that TAM and how big this market is going to be compared to that market.  Blah, blah….when I posted over the weekend that things are going to be different, it is because the drivers that are affecting the technology ecosystem (i.e. the network as all encompassing term) are coming from unusual places.

The technology industry used to be pretty straight forward.  Technology companies innovate and they bring their solution to market.  Customers whether enterprise or service provider or consumer had some input, but it was really more of a RFI/RFP process which a consumer of technology would request a proposal to solve a problem or build a service.  The following chart is something I created in 2006 to illustrate technology cycles and the companies taking advantage of those cycles (i.e. markets).  I am going to update this later, but for now I think that this chart helps illustrate my point that in the past, technology companies helped push the technology market cycles.

What I think is different today is that the drivers seem to be coming from inside the network; from the users, from the consumers – not from the traditional technology suppliers.  An example is Openflow, but Openflow is an element of the change I see.  I am not willing to call it a SeaChange event, but maybe in the future.  What I do know is that it appears that technology suppliers have lost some control of architecture and the technology decisions.  It seems that consumers of technology have more control of what is being developed for the network deployment.  To me the future looks much more driven by software control, virtualized I/O, meshed connections, SLAs, SSL and whole bunch more concepts that we could spend hours talking about in front of a white board.

By this time you are probably wondering what does this have to do with the market.  The first three paragraphs were intended to convey the point that I think many established technology companies have been living off the 2009 catch up spend from the 2008 collapse.  Spending stopped post LEH and it took about 4-5 months to restart.  When it did restart (~Feb 2009) it lifted all companies, but some companies had fundamentally flawed product cycles like NOK while others had fundamentally beneficial product cycles like APKT.  We are now 27 months into the catch up cycle and as comps have gotten tougher and the forces I have be writing about have started to affect the network ecosystem, companies are starting to realize that choices made a few years ago have put them into a difficult position.

Last week’s economic data was not a good.  I think that leading indicators are neutral at best, more likely negative for the remainder of 2011.  Forward GDP and industrial production numbers have been cut.  We are almost mid year so with the economy hitting a rough patch, an air pocket, a slow down…whatever Wall Street speak you want to call it, the real question is how are companies going to handle the next few quarters?  Stay the course?  Make a correction?  What changes will occur?

What I really see is three dislocations.  The first is what is going on in the network and the sources driving technology adoption; consumption and innovation are different from the past.  The second dislocation is the established technology companies and what they have to offer to a changing market.  Products and solutions are set.  Portfolios and value propositions do not change in 90 days.  The catch up spend is over so how are companies with product cycles turning negative going to react to a harder market?  It seems that what the technology market is doing is disconnected from what many of the established technology companies expected and third dislocation is what investors expect from prior two.  Dislocations create opportunities.

/wrk

* It is all about the network stupid, because it is all about compute. *

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