Tensions, Plans, and Stories

The nuclear situation in Japan is now starting to rattle markets that were previously prepared to shrug off the disaster in the context of global economic recovery.  At this point, I still believe that the issue is short-selling by hedge funds rather than any indication that the disaster will impact global economics in the longer term.  The human side of this picture is awful, but the economic side is manageable.  The challenge is that speculators are trying to profit from uncertainty by driving shares down, hoping to make money as fearful investors sell to protect profits, and then again as prices rise.

In the Middle East, our problem is that we have international bickering creating uncertainty.  There’s no question that virtually everyone would like to see Libya change governments (Russia, China, and some authoritarian states are the exception).  Even the Arab League wants Khadafy to go.  However, absent actual military action like a no-fly zone, it seems likely that the rebels will lose, and while diplomats argue over whether to establish such a zone, the situation in Libya may be moving past the point where the decision will even matter.  At the same time, we have more tension in Yemen and now in Bahrain, and all of that seems to put oil at risk.  The problem is that oil prices are actually falling now, supposedly because of the impact of Japan’s crisis on domestic oil consumption.  Is that the reason, or are speculators simply moving out of oil and into stocks?

In the tech world, HP’s CEO is promising a more cloud-engaged HP, which seems a smart move given that it’s clear that cloud computing will in some way be the driver of virtually all data-center-centralized IT consumed in the next five years.  I’m not suggesting everything migrates to public clouds with Google hosting banking applications or something; what’s going to happen is a gradual hybridization of private and public cloud architectures.  That means any company with server aspirations had better get on board, and HP has had a good set of tools and no blueprints.  Of course, the same can be said for most network vendors, and even about Oracle.  Microsoft and IBM get top marks for having a cloud strategy from both enterprises and service providers; Cisco still wins among the network vendors.

XO is getting into the cloud services business too, hardly the first carrier to do that, and it says it will be focusing on the SMB space.  That’s a much more ticklish proposition than most are willing to admit.  My surveys do show that SMBs are likely to cloudsource a larger portion of their total IT spending, but the problems are first that their total IT spending is smaller than that of large enterprises and second that the cost of sales and support for SMB customers is much higher.  My model says that companies like XO can sell services to their current base, but that it will be difficult for them to expand beyond that.  With a relatively small target audience, it’s then a question of whether XO can gain enough economy of scale to be an effective cloud player.  Their situation is reflective of the cloud market overall; you either are a big player or you’re an inefficient and therefore marginal player.

A new report is suggesting that the problem with piracy of copyrighted material is created by the greed of the producers, whose high prices encourage piracy.  I’m not really convinced here, I have to say.  Yes, it’s true that you could reduce piracy by reducing the incentive to pirate by lowering the price of the real goods.  That’s not the question, though.  You could reduce auto theft by giving cars away, too.  The issue here is creating the largest possible value from the economic ecosystem, setting the price that produces the optimum revenue flow.  As long as pirates can make a profit at a given price, and as long as they’re largely unconcerned about being caught, we’re going to have piracy.  The notion that it’s the fault of the producers doesn’t pass the sniff test.

In fairness, the study is suggesting that high local prices in third-world locations is creating a piracy incentive, and that may then be getting redirected at pushing copies even to markets where prices are lower.  OK, that I can buy to a degree, but even here the problem is that we already have created pirates, and they’re thriving in many countries.  Changing local pricing isn’t going to put them out of business internationally, or likely even locally, at this point.  But it might do nothing at all; most third-world countries aren’t consuming Rolex or Gucci knock-offs locally and never did, so how the real thing might have been priced isn’t relevant.

In the ongoing usage-pricing debate, the question now that AT&T has made its move is whether the cable competitors will go along.  Comcast does have a usage cap but it’s set much higher than AT&T’s DSL cap (at the same level as the U-verse cap; 250 GBps per month), and other operators have experimented with (and withdrawn) usage-price plans in the past.  Recent studies show that cable has a higher EBITDA than even OTT players as a group, but of course most of the profit comes from TV and not broadband.  Furthermore, the cable companies have little incentive to push broadband usage when most of the usage they’d be pursuing is video that threatens their TV business.  There’s surely going to be a push for regulators to kill the concept of caps and incremental billing, but even the current neutrality order wouldn’t forbid that and it’s very unlikely in my view that Congress would order the industry to fix prices or pricing policies; they’d kill investment.  Republicans would never agree anyway.


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