The Good, the Bad

It’s not uncommon to find a combination of good and bad news in the tech space, and we’ve got that today.  For example, on the bad side, HP’s numbers.  On the good, Juniper’s new QFabric.

HP announced disappointing results, a contrast not only to Street expectations but to competitor Dell’s recent numbers.  The problem, says the company, is softness in the consumer PC sector and the fact that HP doesn’t sell much to businesses relative to their total PC sales.  The real issue, I think, is the company’s management agony and a nearly total loss of focus on business.

I was particularly unmoved by the CEO’s promise to get something going with cloud computing.  Where has he been, anyway?  This is no time to start laying out your cloud strategy; competitors have been doing that for over a year.  HP’s decision to buy Palm is another point of future challenges; they’re not sustaining their momentum in their core markets, so how do they expect to take on Android and Apple in the tablet and smartphone space?  This is a company that’s been on a roll for years, and it’s now at serious risk to lose credibility and market share.  They have perhaps two quarters now to turn things around, after which they’re probably going to risk permanent damage.

The cloud also figures in the Juniper announcement.  The company has been talking about their “Stratus” project for several years, and they’ve finally started delivering on the new data center fabric officially called QFabric, with the nodal element, the QFX3500.  The details and the roadmap are impressive, and it’s very possible that Juniper has something here that will change the game, change some minds, and produce significant competitor angst.  We’ll cover this in detail in our March Netwatcher, but let me summarize here.

The QFabric architecture consists of three elements, the primary of which are the nodes.  These are essentially line cards in a basic case, designed to be linked to each other as an entry strategy or for full QFabric configurations linked back to the interconnect box.  The links are made with multi-homed fiber and the result is a semi-mesh of the nodes that has a large cross-sectional bandwidth.  The nodes learn the configuration and connectivity and use this to propagate a forwarding table both at Level 2 and 3, and this table then creates the full forwarding path decision so that no matter what route is taken from source to destination within the mesh, there are no further forwarding decisions needed.  The configuration has a current maximum capacity of 40 Tbps and it’s fully non-blocking, lossless, has microsecond-level delay, and negligible jitter.

The QFabric can be partitioned into virtual networks, and can host services that are created by attaching engines that perform the service processing.  Security is an obvious example of a service.  Services are created by routing data paths through the appropriate engine(s) on the way to the destination.  A director device creates a black-box virtual device abstraction for the management plane and to the outside world so the structure is opaque and opex and configuration complexity are reduced.

While it’s not possible to sustain microsecond-scale latency over WAN distances, you can connect QFabric paths with a decent-performing IP/MPLS connection and thus extend the fabric beyond a single data center.  This means that a cloud computing offering (either to support a service, a private cloud, or an operator IT application/feature hosting platform) could in theory be created and maintained as a single QFabric.  The whole process is operationally linked vertically to the Junos Space cloud feature and management platform, and you can also use Space to create applications and service features that become services of a QFabric cloud.

What’s interesting about this beyond the obvious in-data-center benefits of cost and footprint is the notion that QFabric might become the architecture for private, public, and hybrid clouds.  So far, nobody has really articulated how you’d build a service provider cloud, for example, and with the WAN extensions QFabric could be just that.  The capability could generate some really valuable cloud, content, and mobile engagement for Juniper and thus could pre-empt plans by competitors like Cisco to get a lead in defining how a provider cloud would look.  Since QFabric is also likely to be a compelling migration option for companies with two years or less of undepreciated data center switch assets,  and at least a consideration for companies with three or even four years remaining, it could boost Juniper’s market share and credibility in the critical data center networking space.  Which, obviously, neither Cisco nor HP would like.  Both these arch-rivals have their own quarterly performance issues to work through, and Cisco named a COO (Gary Moore) to help them streamline their operations processes.  There may be a window for Juniper to put the hurt on both companies while they’re distracted.

Do We Need a Plea for Sanity Here?

Amazon has further complicated the already-complex world of streaming online video by announcing their own service, which is included in the free-shipping Prime membership.  The service currently includes about 5,000 items (movies and TV).  Obviously this isn’t good news for Netflix or even Apple, but it’s also a new step in the growing challenge faced by network operators.  I commented on that in detail yesterday, so we won’t reprise that topic so soon!

Apple’s problems with its subscription policy may be headed for clarification, but if so it’s not taking a giant step as yet.  An email attributed to Steve Jobs said that the policy of requiring subscription services (something that requires periodic payment, according to the app store policy statement) work only through Apple and pay 30% isn’t for software services but for publications.  The problem is that’s not what the policies say, nor how Apple appears to be interpreting them.  The company has been taking growing heat from developers now that a few additional apps have been tossed, including some that would appear to fit within Jobs’ description of a software service.  Obviously they’ll have to do something to prevent developer defections, because some publications say there could be tens of thousands of apps already in the store that will be impacted by the new policies.

The underlying reality here is that everyone in the online game has to make money these days.  Apple has brand awareness and coolness, and they’ve spent a lot of money and R&D to develop and maintain that.  They want a return on their investment.  So do app developers, and publishers of content, and portal sites and network operators.  For over a decade we’ve been in an age where Internet eyeballs and customers were their own currency, but now we’re seeing a wave of demand for monetization.  A good part of that, in my view, comes from the death of the “buy up startups to help the VC industry” mindset of the ‘90s and even into this decade.  More and more startups have to go public to cash out their investors, and that means showing a profit, and the demand is particularly great for online dot-com players.  Fifteen years ago, virtually no startups who managed a successful exit were profitable; the companies who bought them were getting technology or image.

Infonetics released its latest numbers on the carrier switch/router market, and they show Alcatel-Lucent has taken second place (after Cisco, still the clear leader), overtaking Juniper.  The only reason we can gather for this shift from our survey data (which doesn’t include questions on market share) is that Alcatel-Lucent has sustained higher credibility in the wireless space as well as in access, optics, and the service layer.  They can then pull through their network-layer assets.  I noted when Cisco’s earnings came out this quarter that Cisco apparently was not leveraging its service-to-network opportunities well so far, and that may hamper Cisco’s turning around its share losses versus Alcatel-Lucent unless Cisco can address the issue.  Of course, Alcatel-Lucent probably won’t stand still either.

The issue of cybersecurity and the “kill switch” on the Internet continues to raise blood pressure on both sides.  Reworking of the cybersecurity bill to pull the explicit notion of a kill switch isn’t satisfying some who think any restrictions on the Internet constitute a control of free speech.  The problem is that there are legitimate cybersecurity issues, and criminals or terrorists attacking critical websites could create situations where the government had to intervene in some way.  The challenge is to create a framework that permits intervention but doesn’t open the door for the mechanism to be used to censor free speech.  Normal judicial review may not be enough because the process could take too long—too long to get a warrant to act, and too long to appeal an unreasonable application of the authority.  Logically, I think this should be an FCC issue because that agency is the federal expert on communications, but so far there doesn’t seem to be much movement on either side to support a compromise.  It may be that the best strategy would be to do nothing and let the government convince ISPs to act voluntarily, if only because that seems the likely outcome if no specific approach can be agreed on by all parties.  The debate is getting more polarized and ridiculous every day.

We now have an Institute for Civility in Government; maybe we need to expand its scope.

More Kinds of Shifting Sands

Apple, already facing an anti-trust review or two, is now getting growing push-back from app providers over the subscription-sharing rule.  Apple wants a cut of every subscription, meaning that they want apps that sell something to sell only through Apple’s store and not directly to the consumer.  If dissent spreads here, it could be a worse problem for Apple than government scrutiny.  From the very first days, Apple has fostered a closed ecosystem model to the greatest extent it could, bucking a general industry trend toward opening software and systems to third-party exploitation.  Google, of course, announced its own program for an Android store that’s considerably more financially friendly to publishers and streaming audio/video apps, which only puts more pressure on Apple.

The rumors of a lower-priced iPhone and even iPad are further indications that Apple is worried about competition from Android.  Just as the PC-compatibles shunted Apple aside in the desktop wars of the 1980s, Android-based devices are threatening to diminish Apple’s market share and marginalize it with developers—those who aren’t already upset by Apple’s store policies.  But Apple loses in any price war even if they win, because they’re always seen as a player who sustains higher margins.  With Jobs’ health now clearly a problem, the difficulties could be harder for Apple to work through.

Meanwhile, the smartphone and tablet wars are putting pressure on mobile providers, and in particular creating competitive drive to migrate to LTE.  Operators tell us that their LTE migration strategies have been advanced “over a year”, and this is creating its own set of issues because the faster move means that a lot of users will either have to be driven to change out their phones or there will be a considerable number of older 3G devices still in service when 4G rolls in.

One impact this has had is increased interest among providers in using packet-mode infrastructure to backhaul circuit-switched connections.  Running a single fast feed to a 4G tower is bad enough, but doubling it up with TDM backhaul for circuit-mode voice is truly bad news.  Extreme Networks did a mobile backhaul announcement that focused on synchronous backhaul and integration of packet-sync traffic with TDM, and now Juniper has snapped up the IP of a startup with synchronous packet backhaul capability.

Another issue created by pushing 4G into the fast lane is the change in the dynamics of the metro network created by all the mobile backhaul paths.  A typical metro area (LATA) in the US today would have an average of about 200 central offices.  There would likely be ten to twenty times that many mobile cells (in addition to the femto and WiFi sites).  How will all these new locations impact the metro mission?  And given that 4G will almost certainly drive packet-mode voice (VoLTE), could there be pressure to migrate wireline users to VoIP?  Operations clearly has to contend with this.

Wireline broadband has its own issues.  It is very clear that video streaming services are growing, partly in response to the tablet opportunity, and this creates special problems for broadband operators, most of whom see video services in the form of channelized TV as a big revenue opportunity.  So now they’re faced with having OTT streaming services using the operator’s own lowest-profit Internet service to compete with channelized video that’s supposed to be that operator’s highest-profit service!

The debate here, crystallized in the Comcast/Level 3 dispute, was recently punted by the FCC even though no formal complaint has yet been filed.  But not only may Level 3 file such a complaint, Netflix is making noises that it might do the same.  Cable MSOs are particularly sensitive to OTT video competition because of the fear that cord-cutting will catch on.  They’re similarly concerned that HD and 3D services, when streamed, will create even more traffic and pose major congestion issues unless the cable companies build out more.  Remember, their cable spans are shared-capacity, so they may have to make more radical changes to scavenge bandwidth for online services.  And they want somebody to pay.

In the cloud space, Huawei has pulled its offer to acquire 3Leaf’s virtualization property, after a US government panel recommended against the deal.  The Chinese government expressed regret that the company had taken the step, though I think it’s unlikely they were really surprised by the move.  What’s likely to happen now is that Huawei will shop for software intellectual property and other assets outside the US, which may be harder in terms of finding candidates but easier in terms of getting the deal approved.  Remember, though, that there’s a lot of virtualization and cloud assets out there in open-source form, and Huawei would be free to exploit these as long as they complied with the license restrictions.

AT&T is continuing to push its notion of the cloud as being a natural extension of the network, enhancing its cloud computing offering.  One of the new features is tighter binding with AT&T VPNs, creating a “virtual private cloud”.  This is also a model Verizon seems to favor.  It seems to me that this would naturally create interest in cloud infrastructure as both a customer service framework and as a platform for carrier IT and feature hosting, but hey we’ve ignored similar evidence of symbiosis for a long time!

In the economic/geopolitical space, the situation in the Middle East (particular in Libya) remains very tense, and it’s far from clear whether the “democratic” movements will really result in any meaningful shift toward democratic government.  The US exchanges are closed for a holiday, but international exchanges have taken a hit and US stock futures are down.  Oil prices are rising too, and the situation could worsen if anything truly bad happens.  But I think the major US economic risk is still the shift away from a manufacturing economy to a service economy, which can’t produce growth in wealth large enough to satisfy people’s desire for upward mobility and can’t generate taxes enough to bail out revenue-strapped states.  Will this derail our recovery?  Not likely, but we have to watch the domestic developments as closely as the international ones.

More Regulatory Flap

Well, we’ve got the usual regulatory flap as we end this week, with the same players and the same issues.  Republicans in Congress are looking for a way to derail the FCC’s neutrality order, and the strategies range from a disapproval vote (which only buys some time) to pulling funding for the measure (a cop-out that has no chance of passing and getting by a veto).  It’s hard to say how much of this is politics, how much is lobbying, and how much is posturing to get on the “right” side of an issue the courts are likely to throw out eventually.

The FCC, meanwhile, has said explicitly that its neutrality order doesn’t cover the dispute between Comcast and Level 3, and this statement could be good or bad depending on your slant on the neutrality order’s legality.  Presuming that the FCC could craft something that passed legal muster, it would make sense for it to cover the critical issues in the industry rather than let them blunder on some random path.  The question of Internet settlement is one of the most critical of all, and so I’d have liked the FCC to have taken some strong steps there.  However, you can’t take a strong step from an order without legal foundation, and given the questions on the neutrality order it may be best that the FCC doesn’t intend to intervene in key issues based on its authority.

Many of you who have read my stuff through the years know that I’ve been a strong supporter of explicit Internet settlement, to the point of being a co-author of an RFC on the topic in the mid-90s.  I believe that any business ecosystem that can’t settle payments according to proportional involvement of parties will eventually fail.  In particular, premium handing and services are hard to imagine in a bill-and-keep space, unless everything is “on-us”.  Thus, lack of settlement is one of the biggest issues to address if you really want an “open” Internet.  The FCC is saying that the market can decide, but of course that will work only if Congress doesn’t get in the way, and in any case the market hasn’t decided up to now.

Lessons in Video and Voice

Comcast’s numbers, which included broadband subscriber gains that far outstripped the estimates of analysts.  Basic cable subscription losses were less than expected, but still there was a loss.  The data suggests that the media blitz on “cord-cutting” was largely hype, which is what my model had showed.

TV viewing is definitely undergoing changes, and some of these are exacerbated by the increased availability of online material.  But the big problem is a growing dissatisfaction of viewers with “network TV” and defection to cable channels for an alternative.  This defection works for a time, but the material on cable isn’t inexhaustible and some of it isn’t much better from the viewer perspective than network TV.  The same can be said for online content via Netflix or Hulu or whatever; the pool of material is only so large and the subset that will appeal to a given viewer is even more limited.

Live sporting events continue to garner large audiences; better penetration of the viewer base than in the past, in fact.  That shows that it’s what you want to watch and not how you want to watch it that matters most.  Comcast’s NBCU deal, in this context, is critical.  What the company needs to do now is to create a different model of content, something tuned to the way that consumers have already voted (with their remotes).  They don’t want star power, or series TV that quickly grows stale, or successions of follow-on shows or re-makes.  They want stuff that’s entertaining, and some summer-season successes in cable show that can be achieved with low-budget production.  On their earnings call, their management suggested that it recognizes the cable-channel properties may be the secret value to this deal.  I think Comcast has an opportunity now to churn out dozens of new shows for what one big network series might have cost them, and by doing that collect a larger audience and greater loyalty to the channel model.  They can then focus on how to exploit their growing content inventory online, through multi-screen.

AT&T may be looking at its own video marriage, but rather than buying a network it may be buying a satellite company.  Rumors of a deal to acquire DISH have restarted, and there are certainly things that recommend the deal.  AT&T doesn’t have the economic demographics that Verizon does, and can’t easily deploy fiber to the home for a large chunk of its population (in fact, it’s behind even on fiber to cell sites).  U-verse, based on the slotting of DSL bandwidth for multi-channel delivery, is pressured by the demands of HDTV (and possibly 3DTV) and by cable company competition offering higher broadband speeds.  In theory, a strong satellite position could be a big help, and while AT&T has offered that in a resale deal, buying DISH would give them control and all of the revenues.  There’s also speculation that AT&T might want the spectrum space DISH controls.

In the telco space, MWC seemed to bring out support for VoLTE; both AT&T and Verizon indicated they’d be making the Big Move, though over a period of two to three years.  There are still open questions on how LTE networks will support voice, how they’ll support roaming and premium services, and how much or little IMS and more traditional interconnect concepts will drive the process.  But presuming that the migration happens on schedule and that operators continue to push hard with phones, it’s not unreasonable to think that by 2015 we’d be seeing some pressure on wireline voice.  Will this create that final push to FMC and IP infrastructure everywhere?

Sure, but probably not all that quickly.  The problem is that the great majority of households retain PSTN voice services.  Operators tell me that they don’t believe that they’d have reached 80% penetration of LTE handsets before 2016 or even later in some areas.  They believe that regulators would be distressed by plans to force upgrades either in wireline or wireless unless the operator could essentially create PSTN at the home dmarc and sustain compatibility with current in-home and in-business phones.  They’re worried about lifeline, about powering phones, and about 911 services.  But most of all they’re of the view that recapitalizing voice services when voice ARPU has nowhere to go but down is a bad move.  So they aren’t in a rush to change their strategy for wireline.

What VoLTE does show is that migration to VoIP and the resulting changes in infrastructure are most likely to come about because of some business initiative that creates new revenue.  Transformation is a proactive process, driven by opportunities to make money or requirements to make it on something different.  Because LTE is 4G, 4G is the future of wireless broadband, and wireless broadband is the future of mobile, operators are moving to VoLTE.  The “future” in all these cases is seen as being revenue-positive.  It remains to be seen how fast IP voice will penetrate the rest of the TDM world.

Grappling with Next-Gen Mobile Services

A couple of talks at MWC may be signs of important future trends in mobile and online.  AT&T CEO Stephenson said that the difficulties in moving content between devices, was hampering mobile content opportunity.  He also commented that AT&T believed that apps should run across devices, not be linked to a single gadget.  While at least the second of these could be a sour-grapes reaction to Apple’s App Store concept, no longer an AT&T private lake, it does seem likely that Stephenson is on to something regarding content portability.

Google’s outgoing CEO Eric Schmidt also spoke, and his often-disconnected talk did showcase something important; online mobile services are reshaping our lives in ways nobody predicted.  If you add this to Stephenson’s talk, you get a picture of an industry that’s grappling with a combination of enormous opportunity and influence and enormous structural change.

We can find out what friends are doing almost in real time, so at least for a time we do.  We can grab video clips to laugh over, check the weather, and so forth.  But all of this is like a new TV show in a way; the first couple episodes are fresh and exciting, then the writers just run out of ideas.  What Stephenson is worried about is that a focus on mobile social indulgence is going to cover up the need to establish something real and useful at the core of the mobile revolution, particularly in content.

My research has long shown that the majority of online content consumption takes place when and where traditional content can’t be consumed, meaning that it tends to be incremental to rather than to replace the old forms.  It also suggests (though this is a hard point to survey or model) that a decent piece of the consumption is either linked to youth behavior that passes with age, or to novelty.  But there’s no question that a smart multi-screen strategy would go a long way to creating a truly useful and enduring model because people often have to skip out on something, move during a showing, etc.

Deeper into Stephenson’s talk you find the app reference, and if you think about it there’s a linkage here.  Apps that are truly compelling need to be fully pervasive.  We know that the reduction in price of consumer electronics is going to breed a multiplication of devices, and so we need to ask whether we can become dependent on future apps without having those apps available to us when we think we need them.  What Schmidt is suggesting is that mobility and online services will change our behavior, and that’s most likely to be true when we can learn to depend on the combination.  Every time we don’t have access, every time we have to stop and start, every annoying glitch, makes dependency harder to establish.

In many ways, what both Stephenson and Schmidt are suggesting is that we need more network-centric services for mobility, which is ironic given that for voice service that’s what we’ve had from the first.  The broadband revolution in the mobile world bypassed the network operators almost totally.  They jumped on smartphones to pull through higher ARPU and let the appliance vendors and their stores add non-voice (and now even voice) features.  That could have been a fatal step, and still could be.

Handset players, especially those like RIM and now Microsoft/Nokia, seem to be courting operators to dodge the problems of feature disconnect by partnering with them.  That, of course, only limits the number of people stealing from you in the perception of the operator.  Somehow they’ve got to be a part of the picture, and they’ve been so far unable to wrestle the initiative from the handset players.

More from MWC

As MWC unfolds, we’re starting to get a clearer picture of the thrust of the event and also some feedback from operators on their specific take-aways.  The picture isn’t simple, but it’s interesting!

Microsoft has said more about its Phone 7 plans, no doubt to take some pressure off new partner Nokia.  The new software will have multi-tasking and perhaps most interestingly a link to Microsoft Live and the SkyDrive cloud service.  The question with these latter two capabilities is less whether they’d be there (they’re clearly accessible via IE, and IE9 is a coming feature for Phone 7) but whether they’d be more integrated with Phone 7 or simply browser-accessible.  If, for example, Phone 7 used SkyDrive as an extension to local storage it might be a big thing.  If it doesn’t, then Microsoft is putting itself at competitive risk by suggesting that kind of integration would be a good idea.

At MWC, both Microsoft and Nokia are playing to carriers, and the sense of the message is that “We understand developers”.  The problem is that it’s not necessarily true that phone development success translates to operator success.  If there are no features in the network, only in the phone, then the operator isn’t doing anything but pushing bits and we’ve reinvented disintermediation.  A cloud angle might help, but only if Microsoft doesn’t try to steal the feature hosting for itself.

Apple seems likely to be heading in that same direction.  The WSJ reports they’re planning to drop the fixed fee for MobileMe, and I’m hearing that they have a plan to make the basic service free and to then incorporate basic “locker” storage for iTunes and App Store items, as well as to make storage online available seamlessly as an extension of the iOS device storage and to offer cloud services/features as a kind of “URL Store” like Android/Google proposes for Chrome.  How much you can trust rumor is always difficult, but it seems pretty likely that we’re going to see some major developments this year, though probably not revealed during the rest of the show.

Moving on, the dynamic between mobility and behavior is something I’ve talked about for years now.  Tablets, as I’ve noted, change that dynamic because the specific features of the tablet play to a specific set of applications.  That’s particularly true if you consider the previous appliance set consisted of mobile phones (including smartphones) at one end and wireless laptops or netbooks on the other.  Nobody (meaning no significant market quantity of people) keys stuff into laptops while mobile, and nobody (same qualifier) watches feature films on smartphones.  Tablets can do feature films and also can be used as a realistic input device for enterprise applications—the device may not be ideal for either but it’s much more serviceable than the alternative.

What the tablet explosion does to operators is to stress their mobile infrastructure planning.  A simple example illustrates the issues.  If we presume that the ideal tablet is iPad-sized, then it’s clearly a device that would be used primarily while stationary—the “migratory user” model rather than the mobile user.  If we presume that a smaller 7-inch size is ideal, then the device could be used in a much larger set of locations and by users who were moving about more often.  These two presumptions would empower WiFi or femtocells on in the first case, but less so in the second.  I like Alcatel-Lucent’s lightRadio in large part because it addresses (embraces, even) this uncertainty.  But it’s also true that operators lose any ability to decide on WiFi versus femtos if tablet vendors offer low-cost WiFi models; consumers jump on them and WiFi wins.  But tablet-only issues also count; should tablet players try to differentiate their platform (as HTC seems to be doing) or rely on a standard Android like Honeycomb to get the most developer support and avoid fragmentation?

This uncertainty spills over into both infrastructure and services.  Nobody will buy tablets to make a voice call, so what’s the mission of voice on tablets?  Is it likely people will want phones and tablets because there will be times when they want only calling or simple data apps, and others where they want to sit and consume video or collaborate?  Will they be more interested in basic entertainment or enterprise-related apps?  Is social networking a driver, and if so how do tablets facilitate social network use versus smartphones?

Operators think that vendors are starting to see the operators’ side of the issue, but they’re not yet convinced that vendor strategies align fully with their own.  Thus, they’re still looking for somebody to help them face up to the increased tension in the mobile space, and they’re not finding it at MWC, or likely elsewhere, in the near term.

Early Look: MWC

As Mobile World Congress opens this year, it’s already clear that we’re going to see a battle of relevance as much as one of technology.  Network equipment vendors divide roughly into two groups; those who have wireless 4G assets and those who don’t.  The former group has a direct link to wireless projects and investment, which means that they can pull through backhaul and metro gear in larger projects.  The latter group is hoping to make their network-layer products relevant in a world driven increasingly by mobile and radio technology.  Cisco and Juniper have already announced products that are aimed at creating a mobile-accommodating backhaul and metro infrastructure, and at improving the management of the experience.

Arguing over which of these vendors has the best “box x” or “box y” is an exercise in futility.  The one area where they may differ in a tangible way is what we call the “service layer”, the software and “networkware” tools that reside above the normal transit/connection assets.  While Cisco is clearly widening its pool of assets at the service layer, they’re not yet integrating them into a single structure.  Juniper’s Junos ecosystem does that, which makes it a bit easier to position the assets as symbiotic.  Symbiosis among service elements is critical in assuring an end-to-end experience.  It’s hard for me to believe that Cisco doesn’t plan something more ecosystemic at the service layer, but on the other hand they’ve had plenty of inspiration from competitors (including Juniper but also Alcatel-Lucent) and they’ve not made the move yet.

The big question for both Cisco and Juniper is whether Alcatel-Lucent has finally got something going for itself.  The lightRadio announcement is a strong one, and while both Cisco and Juniper have either developed or acquired products that can be used in hotspot deployment, they’re not able to address the RAN itself.  Ericsson and NSN can, but they don’t have a strong switching/routing portfolio.  Alcatel-Lucent also has an increasingly cohesive service-layer strategy, and were they to get that story to gel convincingly they’d make it a lot harder for any of their competitors to tell their own service-layer story, no matter how far along that story might be.  He who sings first, wins.

It’s also clear from MWC that tablets are the pivotal product in the mobile space.  All the financial analysts have estimated iPad growth will beat that of the iPhone, and you can tell that everyone is frightened of an Apple market sweep by the fact that tablets are being rushed out for display with neither pricing nor availability noted.  A part of this is the fact that the tablet players are still looking at carrier deals and don’t want to spoil any negotiations, but another is the fact that Apple competitors are just not ready.  Android Honeycomb is the first tablet-sensitive version, WebOS is just emerging from its new HP parent, and nobody is even sure what form factor makes sense or how important the enterprise is versus the consumer.

Smartphones and tablets might become the next battleground between traditional players and the emerging China competitors.  ZTE is going to ramp smartphone production and is promising models under a hundred bucks.  I’ve also heard that both ZTE and Huawei are looking hard at the tablet space, both focusing on an Android model.  The story is that there won’t be a big push by either until late this year, but you never know.  The entry of either of these players could throw a big monkey-wrench into the market because both might be inclined to offer a very cheap WiFi-only model that would decouple tablets from carriers on a larger scale.  That could confound the strategies of the current giants, though some (like Apple) already have a pure WiFi capability.  The reason for vendors liking the carrier strategy is the subsidy, which gets the price down and increases acceptance.  If somebody does that without the subsidy, all bets are off.

Microsoft Invades Finland and Alcatel-Lucent Rises

“Half a loaf is better than none” is an old saw, but it sure seems to describe the newest mobile development—the Microsoft/Nokia pact.  The pact is being hailed and panned depending on perspectives, but maybe it deserves it because it’s not the whole solution for either party.  Both probably know that, and are gambling that taking this step will win them enough time to think of the right answer.  But that may be behind both companies now, and maybe forever.  Half a loaf may be no loaf at all.

For Nokia, the deal gives them a mobile platform that has a partner in the most critical smartphone market—the US.  It offers them developer cred, so to speak, and it acknowledges in a backhand way the fact that they need a marketing partnership to be cool (their homeland climate notwithstanding).  For Microsoft, it offers the promise of a much faster ramp on Phone 7 through a conduit with the largest provider, and a much-needed boost to 7’s credibility in an ever-more-competitive mobile OS space.  It sounds win-win, so why am I so down on it?

Well, to start off with, you have Nokia the marketing-deprived joining forces with Microsoft, whose own marketing (particularly in the phone space) has left a lot to be desired.  In its core businesses, Microsoft is losing market share and credibility against both the top mobile rivals.  They lost mobile share until Phone 7 came along, and it’s too early to say whether that will gain them anything.  Get every marketing type in Microsoft and Nokia in a room, and a couple Apple or Google guys would nail the doors shut in a minute.

Then we have the issue of “joint development”.  Where has either company had a major success with that?  In fact, neither Microsoft nor Nokia independently have been able to drive a product to market in a timely way, or address the evolving needs of the mobile space before somebody else tied them up.  Now we have the two trying to do it together, separated by miles of polar waste?  Sounds like an advert for Cisco’s telepresence.

But the big problem is the timing.  This is not an alliance of the agile, guys.  They are not going to hit the ground running.  Even spokespersons for the companies suggest that there’s a multi-year transition period to be faced.  At the end of that period, where will iOS, Android, and perhaps even WebOS be?  Will they suspend progress to give the Microsoft/Nokia alliance a fair shot?  Will people stop buying phones to see what the new collective comes up with?  Get real.  The fact that Nokia refuses to acknowledge any meaningful change of status for Symbian or MeeGo doesn’t help, nor does the broader commitment to Microsoft for Bing and ad brokering.  It makes Nokia a junior partner in their own deal, junior to a company that’s losing market share to mobile competitors too.

A final note; Alcatel-Lucent announced its earnings yesterday and the results were a sharp contrast with Cisco’s, sending Alcatel-Lucent’s stock up more than twice the percentage that Cisco’s fell.  The most impressive fact was that revenues increased in all geographies and product sectors.

If you couple this with Alcatel-Lucent’s lightRadio announcement, too late to impact the latest numbers, you wonder whether the company may not be finally getting it together.  Another implication is that if nobody is effectively linking service opportunities vertically through the network, then the guy with products in every part of the network has an edge.  For Cisco, that may be another reason to get serious about service-layer strategy.

Lessons from the Fall(s)

Cisco’s numbers were a big disappointment to investors, and they focused on two issues that are in fact the key ones for Cisco (and the market) at this point.  First, Cisco’s gross margins were off, and that’s likely due to discounting forced on Cisco by competition.  Second, Cisco suffered in the critical switching space, the place where most enterprise investments and the key data center investments would be likely made.  Even service providers today are more likely to buy switches or switch/router gateways than pure routers.  Thus, it seems likely that either the market is unexpectedly soft or that Cisco is losing share here.

I think it’s the latter.  The problem Cisco has is the classic incumbent market leader problem.  They can’t accept organic sector growth, they can’t hope to gain market share, and so they have to look for adjacent opportunities.  The problem is that these are proving harder to grow quickly than Cisco had hoped, and in the meantime the lack of focus on core business sectors has created a greater risk of market share loss.  There are plenty of drivers for that outcome, too.

Switching, meaning Ethernet and lower-layer technology, is highly price-sensitive because it’s the largest category of network investment enterprises make.  It’s also hard to differentiate because, well, bits are bits.  Thus, while enterprises are eager to modernize their data centers, it’s proven difficult to demonstrate that switching features are relevant to that task.  The goal, after all, is IT modernization and switching doesn’t link well or even directly to IT features.  For service providers, switching is mostly about aggregation, which is also a hard application to differentiate.  There’s no clear link between switching and the service layer where the money is, because vendors (including or even especially Cisco) haven’t worked hard enough to create one.  Thus, going cheaper is a powerful motivation, and everyone is under pricing pressure.

This is bad for Cisco, of course, but it’s not a good sign for the market overall either.  Gaining market share against Cisco based on price is a kind of hollow victory; you only set the stage for commoditization and loss to Huawei or ZTE.  I hate to keep beating the same drum, but the problem is that without new revenue hooks to pull through infrastructure, operators can’t keep investing and they certainly can’t value small feature advantages over larger price advantages.  Industry: beware!

Nokia’s falling status and confidence continues, with leaked documents from CEO Elop suggesting that perhaps the MeeGo alliance isn’t going to perform and renewed rumors that Nokia will adopt Microsoft’s Phone 7 or Google’s Android, or maybe both.  The fact that this debate is happening at all, and in public, is evocative of the gulf between what Nokia needs to be as a 21st-century marketing machine and what it is—an old-line conservative in a market that no longer values either attribute.

The question at this point is whether any choice it might make could possibly matter.  Probably not, I think, not because of the confusion and loss of confidence that the current debate creates, but because the issue has even come up.  With a lead in the phone space, and with a smartphone OS that could have been a contender (so to speak), Nokia has passived itself into irrelevance.

We live in a consumer age, a time when there are both players eager to offer whatever the current fad might require and frameworks to facilitate the offering.  That kind of situation doesn’t create many opportunities for the guy who thinks that he can wait for a market opportunity to develop and then to support it with superior engineering or a known brand.

The question isn’t what Nokia is going to do (same as always—not much) as much as what some of the other entities in a similar situation will do.  Ericsson comes to mind, and NSN obviously.  Alcatel-Lucent, I think, has demonstrated with lightRadio that it’s capable of doing something compelling, but even that significant step needs service-layer buttressing.  Their announcement in a socially linked call center is another good sign, but it would have been better had this app been linked to a service-layer strategy for enterprises and operators and not just an atomic announcement.  Innovation is the process of authoring services for the masses these days, not pushing bits.  It would have helped Cisco, or NSN, or Ericsson, or Alcatel-Lucent, or Juniper in the current quarter.  Sooner or later somebody will figure this out.

Then there’s HP.  The company finally made an announcement of WebOS-based products derived from the Palm DNA, but the announcement was hardly earth-shaking.  A small Pre-like cellphone/smartphone and a 9-inch tablet were announced, but no pricing or release dates or carrier deals were firm.  Thus, the whole thing looks like a place-holder, initiated about six months after the time for place-holding was past.  HP needs to make something of WebOS and the Palm deal, and they need (more than Microsoft) to be successful in the appliance business.  They didn’t offer anything that would be truly compelling.

The nine-inch tablet is their biggest gamble, and hope.  It takes on the iPad more directly than most of the other tablets, which focus on the 7-inch form factor, but corporations tell me they like the smaller tablet and HP has a much tighter relationship with the enterprise than with the hip consumer.  The website positioning is clearly targeting the consumer too, so HP is doubling down and chasing Apple in its core market with a comparable product.  There are some interesting features; wireless keyboard and wireless integration with the HP phones, but whether they’ll sustain the product in a market that will be really hot by the time HP even gets a product in the field is another matter.

Maybe Nokia needs to team up with HP.