Everything Old is Even Older

The rumor that AOL and some private equity firms have been in talks with Yahoo regarding an acquisition seems to be most rooted in the WSJ, but some insiders tell us that it’s true.  They also say there are still some significant points of dispute on the proposed deal, and that the odds against success are still better than even.

 At one level, something like this is inevitable.  AOL and Yahoo are both brands past their prime, victims of change (in the first case) and competition and complacency (in the second).  We think that’s the big issue here; we’ve got a marriage of inconvenience, a union being proposed where neither party brings really strong assets to the table.  AOL died in all but the real sense when broadband replaced dial-up, and Yahoo is dying not only from Google but now from the fact that more users are abandoning search in favor of social networks.

 The big revolution online is yet to come.  Just as we didn’t want to be informed by the Internet when there was an entertainment alternative, so we don’t want to be social only while sitting in front of our computer.  Appliances like iPhones and iPads are now driving the bus for the Internet’s future.  Applications not only anonymize information, they anonymize the Net itself.  You push a button and you get your answer; magic might as easily deliver it as search.  We’re mashing social networks to increasingly look like SMS.  In the drive to socially connect, we’re pulling everything that could be differentiable out of the process of being online.

 Social networking and apps are their own worst enemies; they’re creating a world where there’s no room for billboards, and they’re funded by the expectations of those who want those billboards in everyone’s line of sight.  This conflict will self-limit the whole social network process, and so invalidate anyone’s deal for Facebook.  It will also reshape the market so thoroughly that older brands have no meaning, making the Yahoo/AOL alliance kind of like ignoring the lifeboat as the Titanic goes down and grabbing onto another drowning victim instead.  All these guys need to examine the future more carefully, because the present is becoming the past.

Sorry, Microsoft

Microsoft has launched its Phone 7 initiative, and from what’s been revealed so far and how operators have reacted in conversations with us, the new mobile strategy is fatally flawed.  In fact, unless Microsoft makes truly radical changes or has some literally unprecedented success, it’s probably the end of Microsoft in the mobile space.

 With Phone 7, operators have only limited ability to create their own services or their own “brand” with the handsets they have to subsidize.  Microsoft justifies this with the notion that the user experience is seamless everywhere, but that’s not what operators want—they want an experience that differentiates them.  Even Apple was smart enough to realize that they couldn’t tell operators that they were “partnering” without providing some sort of unique service-to-phone tie.  Alcatel-Lucent recognized that a seamless experience had to start with a mobile operator ecosystem largely because without it there would be great resistance to any kind of roaming data plan, or any cross-operator feature set.  They thus established their Open API program as a federation.

 Federation is what Microsoft needs to be looking at; the operators want to build a global ecosystem of national or even regional players.  Microsoft had a chance to bring something tangible to the table in that space, something broader and more powerful than even Alcatel-Lucent proposed.  Instead, they’ve extended their past CSF strategies into their present mobile offering, and compromised it fatally.

Is Facebook Showing Us Something with Groups?

With its new implementation of Groups, Facebook has revamped its way of mapping relationships into something multi-dimensional instead of the classical “star” configuration.  At least they’ve offered the option of doing that; whether users will bother is another matter.  What’s more interesting to us is the drivers to make the change in the first place, and what it says about social behavior online, and the services that might be based on it.

There’s always a certain number of people on social networks who measure themselves by the number of “friends” they have.  On business-based LinkedIn, for example, there are whole groups of users who do nothing but race to establish tens of thousands of contacts.  The problem with this approach is that it tosses out the whole notion of a relationship in a social sense.  Studies show that people don’t have that many real “friends” or “contacts”.  About 80% of the average person’s social interactions take place in a group of less than 100 people.  In real life as in cyberspace, we have to balance how many such relationships we create against the difficulty of sustaining them.

Social communications has to reflect the value we place on each individual, but social networks have to build community mass.  We can’t use the latter principle to establish frameworks to support the former; social communications has to be personal.  Will you ask your whole community of Facebook friends for advice on a car?  Perhaps you’d ask the question but you know that a) most wouldn’t respond and b) you wouldn’t weigh the responses equally.  How we watch television, or buy cars, or plan projects may all involve social interactions and thus appear to map to social networks, but it’s not a simple direct matter of building a flat community that centers on each of us.  Groups “friend” other groups, they have fuzzy boundaries, they interact through filters.  In short, they’re not Facebook groups, even now, and we’re entering a time when the difference between real social groups and online groups will matter a lot to us.

Wireline social networks are free and relatively controllable, but that’s not true for mobile.  Constant tweets or status updates are a lot more distracting because I’m living when I’m mobile and I’m sitting when I’m on wireline broadband.  Mobile broadband is going to change our notion of groups and friends from our current Facebook simplicity because it’s going to force us to decide between living our own lives and paying with airtime and distractions for how others want us to think they’re living theirs.  If you want to look for a truth that Microsoft could exploit to get into the mobile market, look there.

Will Cisco’s Ume Break Networks, Policies, or Both?

Cisco released its expected home videoconference solution with the somewhat cutsey name of Umi, which to make things worse is supposed to have a horizontal accent line over the “U” to indicate a “you” pronunciation.  Whatever the spelling and character set, it’s potentially a significant product.  Umi brings HD videoconferencing to the home TV, and while it doesn’t have some of the social/chat features that Cisco promised, it could still be a game-changer in a number of ways.

Free Internet video calling is already available from a number of sources in PC-PC form, but Umi promises a friendlier form, from the living room and on a big screen.  If adoption is what Cisco hopes, it could popularize video calling and generate a ton of new traffic.  For a router vendor who already has a big market share, organic growth of that sort is a good thing—maybe.

The “maybe” here is that it’s very possible that a strong showing for video calling in any form could push operators over the edge into metered usage pricing, which would be a bad thing for router vendors, Internet users, and frankly just about everyone.  There are many who believe that it’s inevitable (we’re among them) but extravagant video growth would certainly hasten the day, and in particular it could push a pricing change as early as 2011 for some markets, particularly the cable MSOs.  Because these guys have constrained upstream capacity, applications like video calling that source as much as they sink, bit-wise, are particularly challenging.  It could also polarize the current public policy debates on net neutrality, mixing billing/cost issues with neutral carriage issues.  It could be a destructive mix, and we’re likely to see the impact sooner rather than later.

More Color on Alcatel-Lucent’s Strategy

Alcatel-Lucent had an invitation event for industry analysts yesterday, and since the group was small relative to normal events there was a good opportunity for discussion and engagement.  The goal was to give us an idea of where Alcatel-Lucent was going in the near term and in a more strategic sense, and I think they accomplished the goal overall.

It’s clear that Alcatel-Lucent is still having a bit of an identity crisis—several, in fact.  They’re still apologizing for the aftermath of the merger, which looks to be finally accomplished in fact and not just in name.  They’re also having a bit of a confidence crisis, even though their articulation is strong and their strategic credibility numbers lead the network equipment vendor space by a pretty decent margin.  They’ve been battered a bit by Wall Street and by the internecine struggles of the past, and they kind of need a hug .

In a tangible sense, the big news out of the event was that Alcatel-Lucent has a much broader capability set in Open API than was first apparent.  Yes, the program is linked to applications and developers and the smartphone universe, but it’s really more than that.  Open API is a federation engine that absorbs multiple APIs, orchestrates unions, and exposes the results.  It could be used to federate CDNs (which is something Alcatel-Lucent says it’s working on, though they didn’t say if the Open API was part of the work), cloud computing, and even multiprovider service provisioning of the type that TMF/IPSF has been involved in.  How far they’ll take this capability probably depends on operator traction, but watch the space for some action later this year as a possible signal.

It’s also clear that they’re betting heavily on LTE and still doubling down on IMS, which is logical given their LTE focus.  I still think there are a few too many IMS references; yes, we know they have it, that operators will leverage it if they deploy it.  We need to know what else they will have in the way of enablers for their Open API to expose.

The Alcatel-Lucent challenge, in fact, is to try to rise above legacy,  including IMS, without turning their back on it.  Part of the secret of Alcatel-Lucent’s high strategic credibility is their broad engagement.  They can’t sustain their whole portfolio forever, but they need to exploit the parts of it that continue to involve them in the broad strategic sweep of the service provider space.  At the same time, they have to stop making every application look like IMS in a brown paper bag, or every benefit come down to offering QoS.  The future is built on the past, and present, but that doesn’t mean the three march in lockstep.

What Verizon’s Datacenter Spending Portends

Verizon said it would be making a major investment in data centers for, among other things, cloud computing.  The result will be an addition of space for over 5 thousand servers and an expansion to about 200 data centers worldwide, including sites in Australia and the UK.  While “the cloud” gets a lot of play on this deal, it’s really more about enhanced services and a shift in their 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 it’s being driven today 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 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, and 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 datacenters 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.

HP’s New CEO: Best Available but Not Perfect

HP picked former SAP CEO Leo Apotheker as its new CEO, a move that surprised many in the industry but that doesn’t particularly surprise us.  The criticism of Apotheker stems largely from the fact that his tenure at SAP was hardly stellar; the company lost market share to Oracle throughout and he was unable to stem the tide.  But truth be told, the problems at SAP were more related to the conservatism of SAP’s marketing processes and board, something that Apotheker had little chance of changing.

 This is a software age in IT, and also an age where software and hardware form a one-stop ecosystem.  Who should HP have picked?  A hardware guy from within?  That’s bad on two counts, given companies’ tendency for internecine warfare and given that hardware isn’t where it’s at.  Who has succeeded against Oracle?  Nobody.  Apply both those truths and you have no candidates at all.  Apotheker actually understands the role of software well, and understands the relationship between software and all of the competitive hardware platforms.  He’s the best choice they had, in our view, but he’s also a good choice.

 He’s not a perfect choice.  The missing skill is networking, the understanding of which is critical to position the hardware/software ecosystem for virtualization in the data center and beyond it, in the cloud.  We think that networking is the card that HP will need to play against Oracle and against IBM as well.  True, Apotheker has no evil preconceptions in the space, but he doesn’t have the broad grasp of the current market issues, or at least hasn’t demonstrated that grasp.  Given that Cisco’s entry into the datacenter IT space has already started to force competitors like IBM to give more thought to a networking mission, and given that HP has networking products already, exploiting networking is not only essential, it’s something that has to be done in the short term.  Can Apotheker do that?  We don’t know at this point, and if he can’t do it or find someone to delegate it to, then HP will face some challenges.

Net Neutrality–Again?

Rep. Waxman, the House sponsor of an attempt to pass legislation to direct the FCC’s decisions on net neutrality, has withdrawn the bill for lack of support.  This ends, at least for the moment, another of Congress’ attempts to create telecom policy through explicit legislation.  It’s not the first time bills have been dropped; since 1996 virtually every attempt to change policy has died without coming to a vote.

I still believe that Title II classification with reasonable wholesale rates (the Canadian model, for example) is workable, and in fact might be more logical given the range of services that are likely to migrate to IP without being part of the Internet.  IPTV and carrier voice, as well as enterprise services, fit that model.  The FCC has to weave a complicated ruling to protect both the Internet and the business model for IP-converged services.  Title II is the best way to do that.

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