In August of 2010, I posted the following entry on this blog:
The entry spoke of the maturation of the telecom industry and the impact that maturation has on technology providers like Nortel, Alcatel-Lucent, and Cisco. In that entry, I wrote:
The Telecom industry, and product companies serving that industry, find themselves smack in the middle of a “services chasm” market as described in “Bridging the Services Chasm.” In this type of market, traditional product revenues and margins have slowed as the market has matured. Product companies in the market must decide if they will change their revenue stream by diversifying into new service lines (we call that a change mix strategy), or stay focused on being a product provider and seek new product markets to pursue (we call that a change market strategy).
The Telecom industry, and this recent prediction of revenue trends, is a perfect example to help illustrate the dynamics that play out in maturing markets. Historically, telecom equipment providers such as Lucent, Alcatel, and Nortel, have all been very product-centric companies, with the vast majority of their revenues coming from actual product sales. However, the folks at Heavy Reading are predicting a dramatic shift in revenue mix for “leading” telecom providers from products to services.
When markets mature and companies enter the services chasm, there is one type of company that is at extreme risk of failing: The Product Provider. These are companies that receive a majority of their revenues from product transactions and have a small percentage of revenues coming from services. This imbalance makes it very difficult for them to adjust to the type of shift in revenue mix predicted for the telecom industry.
Today, I read an editoral by Bob Evans in InformationWeek. The title: Cisco Zapped by Destructive Power of Innovation. In the article, Mr. Evans reports the following insights on Cisco’s current challenges:
“Sales of Cisco’s largest switching platorm slowed at the end of 2010 as the product rapidly became uncompetitive from a price and functionality perspective.”
“Cisco did finally migrate customers to its not new product lines, but at much lower margin. Ouch!”
Cisco, perhaps one of the strongest hard core “product providers” left in enterprise IT, is now facing the relentless march toward the services chasm. Find a new hot product market with better product margins, or change mix and expand service capabilities. This is the challenging choice all product companies eventually face. Even companies as well managed and execution oriented as Cisco.