New Brooms?

The shape of the networking industry has long been determined by forces on the outside in what could be called the “on-net” space, and two powerful players there are undergoing management transitions.  Apple is losing (at least temporarily, though we hear management expects Jobs’ departure to be permanent) its charismatic CEO and Google is switching its politically connected “professional” CEO in favor of founder Page.  How much these changes will impact the companies involved, and the industry, will surely be the focus of much discussion but we’ve got to weigh in with our own views since both Apple and Google are truly seminal forces.

Apple has, more than any other company, transformed the relationship between users and networks—by transforming the instruments that connect the two.  Anyone who has worked with, or inside, Apple knows how much Jobs has shaped the company and how much his vision of the future has dominated Apple’s planning.  But his style has made it difficult for Apple to do any succession planning despite the state of Jobs’ health, and many inside Apple have suggested to me that charisma and determination have more often slipped into intransigence in recent years.  Apple’s vendetta against Adobe’s Flash, for example, have put the company into a position of supporting HTML5 when it’s clear that HTML5 is a benefit to the browser-based Google model of the future more than to the Apple app-based model.  In fact, the iPad/Phone incumbency is rendered meaningless if all portable apps are nothing more than URLs into an HTML5 world.

In the case of Google things are a lot more complicated.  Eric Schmidt isn’t a charismatic figure, and he’s generally seen by people in the Valley as a bit of a stuffed shirt, a businessman and not a real tech guy.  Brought in to add some “maturity” to a management team that investors tended not to trust, Schmidt championed a number of things outside the normal range of an online search giant—most conspicuously stuff like cloud computing and enterprise services.  He’s seen as having let social networking languish, losing the space to Facebook.  Some say he didn’t back Google Wave properly (others say he promoted it too much).  In any case, he’s now being replaced by one of the “infant” founders and there’s a lot of talk that this is going to prevent Google from “going Yahoo”.

It won’t, because Schmidt isn’t the problem.  Google is now a public company, a company that has to make money for its shareholders either through stock appreciation or through dividends.  I’ve said for years that there’s a fundamental problem with an ad-revenue model—the total value of all advertising can grow only at the pace of GDP, and gaining market share to show strong growth invites (as Google has already seen) regulatory scrutiny.   Google really needs to transform itself, and it’s not clear that Page is the guy to do that.

Enter Cisco Videoscape

Cisco took what could be a giant step for itself at CES with its new video ecosystem.  Called Videoscape, it combines in-home tools and software to centralize the mediation and management of video relationships, creating what’s probably the most architected video service layer available to network operators today.  Since Cisco was already doing well in the early content monetization project trials, Videoscape could be a real winner for the company.

But despite the positives, Videoscape still has some issues in my view.  Paramount is that Cisco is developing a content strategy in the absence of an overall service-layer strategy, or at least is creating the latter by simply assembling pieces instead of creating an architecture.  Most of the stuff in the Videoscape Conductor (the back-end) could easily be helpful in other missions, but it’s not clear how they’d be applied outside the video context.  There’s also a very strong push for video sharing and uploading, which generates traffic for operators and has essentially no potential for monetization.  That makes the product a bit of a risk in itself, but it also shows that Cisco may pursue its own aspirations (which are to generate so much consumer video traffic that operators are essentially forced to buy tons of Big Iron to carry it) more than support the operators’ business cases.

In the net, though, Videoscape is a strong achievement for Cisco because it plays to their strength—breadth in the video market.  The net effect of deployment could be a kind of “TV Everywhere”, and with Comcast pushing that very thing already, the timing couldn’t be better.

Economics and Networks

There’s more good economic news this morning; ADP’s private payrolls report gained the largest number of jobs in its history, which strongly suggests that hiring may be coming back.  You may recall that our forecast for unemployment for 2011 was considerably more optimistic than the official one, and I’m hopeful that the ADP data is validating that optimism.  Employment is the biggest barrier to a resumption of normal economic growth.

Qualcomm is buying Atheros, a chipmaker whose product line is more directed at smart appliances, including smartphones and tablets, in yet another validation of the consumer electronics craze.  The move comes as both AMD and Intel announce their own successor chip families, and the former seems directly aimed at the low-end market, including tablets.  Intel clearly has aspirations in smart devices too, and has been promoting its own Linux-based OS to gain some developer credibility.  With CES launching today we’ll certainly be hearing more about tablets, and while it’s obvious that not all of those announced will be market leaders, recall that the laptop market has plenty of active players.

Speaking of M&A, Dell has purchased a security company (SecureWorks) to buttress its enterprise services position.  What’s not clear yet is whether Dell will be applying the technology to the standard data center framework or focusing it more on private clouds.  My research says that enterprises are very concerned about the way that private cloud computing and hybrid clouds would impact security, and while this isn’t as large a market at this point as the managed security services market, MSSP is a security outsource strategy that might in the long run reduce the revenue Dell could hope to obtain from the acquisition.

Some financial analysts are posting positive comments about both the LightSquared “wholesale LTE” model and the vendors who are involved in it.  The basic idea of LightSquared is to provide a wholesale wireless network with national coverage, a host to MVNO relationships with players who want a wireless presence but don’t want to run a network themselves.  The idea has some appeal in that there are certainly companies (cable companies come to mind) who are likely to fit the customer model, but there are also challenges.  In fact, there are three.  First, wholesale profits are lower than retail, and the industry is already squeezed.  Second, the MVNO model has been tried by operators, including for cable MSOs, and hasn’t exactly sung.  Third, it’s far from clear that a satellite network hybrid will be technically successful and that terrestrial coverage will be ample where it’s needed most.

So here’s how I see it.  LightSquared has marginal financial options at best, and there are a lot of factors that say “best” won’t happen.  Thus, I’m not inclined to give the deal much credibility, or to assume that it will drive any benefit to vendors.

Reading the CES Tea-Leaves

The kick-off of the Consumer Electronics Show this year may be more meaningful for tech than usual because it’s a barometer of some critical market dynamics.  Tablets are set to take the hot seat at the show, even though (as usual) Apple isn’t attending.

The big question in my view is less whether we’ll see a zillion tablets than whether we’ll see tablets focusing on both a smaller (7 or 8-inch) form factor and WiFi-only connectivity.  The tablet as a satellite of a 3G/4G mobile service plan isn’t going to transform the market because the cost will be too high for most users.  Sure they might end up with value, but why take a risk?  On the other hand, an “uncoupled” WiFi tablet that’s affordable becomes the instant device of choice in hotspots, particularly hospitality sites.

Most users (83% according to my model) plan to use tablets primarily at home, at work, or in a setting that’s likely to have WiFi.  An even larger percentage would prefer WiFi access to a wireless subscription tie-in.  Tablets and WiFi would have a major impact on the ebook space, creating a device that could become a universal reader, devaluing the incumbency of both Amazon and Barnes & Noble, and making Google and even Apple happy by validating a more general model of device.  Google, who’s trying to get its own book program going, might be particularly gleeful, and of course as the Android backer they have some influence on market direction.

At least a couple of the tablets at CES will surely be WiFi; Vizio already says it will launch an 8-inch Android tablet with WiFi only.  If we see a lot of this sort of thing, it means that the appliance vendors are looking to drive the market.  If not, then it means that they’re not prepared to step on the older partnership with the wireless carriers, which in turn means they’re not fully confident about the tablet future.

CES this week will start the drive toward the next stage of the media/network relationship.  The more pressure created by new tablets and new integrated TV delivery systems, the greater the pressure on ecosystemic tuning and market consolidation.  It won’t revolutionize viewing, but it could revolutionize the industry that delivers it.

The New Year, the New Ad?

The new year is always a time of perceived change, though of course the simple transition between two calendar dates doesn’t drive change itself.  Rather than talk about the coming year in general (which I’ve done in our Annual Technology Forecast issue for Netwatcher in any event), I’ll focus here on the immediate “changes” the industry is dealing with.

The comment over the holidays that Facebook has overtaken Google in popularity is a potentially seismic shift, but not for the reasons that have been suggested.  Yes, this is “bad” for Google, and yes, it shows the “power” of social networking.  But the real problem is that it may show that our use of the Internet is getting harder to monetize.  Somebody searching for “HDTV” is very likely to be thinking of buying one, and thus there’s value in selling ads to them.  Somebody chatting on Facebook is another matter altogether.

First, there is no easy way to establish the commercial goals of a Facebook comment.  Not only is it hard to interpret whether a reference to “HDTV” is soliciting buying advice versus talking about moving furniture around, it’s certainly an intrusion if Facebook started scanning our text for ad opportunities.  Thus, it’s very likely that social-network advertising will be more like banner ads, which are less visible, less clicked, and less valuable.  We’re shifting users to a place where fewer ad dollars are likely to follow.

Second, social networking is the framework for viral campaigns, not for direct ad sales.  If you want to leverage Facebook or Twitter or whatever, you have to start buzz and then let social networks propagate it.  That could generate more clever YouTube commercials but it’s not likely to generate direct ad sales.

Third, it’s an indication that in an effort to find the Next Great Thing, we’ve left the “great” category completely, at least insofar as creating and sustaining the Internet ecosystem is concerned.  You can argue that search provides a value to the Internet overall, a value of organizing and finding stuff in the vast repository of Internet data.  You can argue it promotes education.  It’s hard to make either argument about social networking.  I’m not saying people don’t like it, or that it is culturally revolutionary, only that it’s not moving the Internet to a better place in terms of sustainability.

For Google, you can argue that social networking is something that you can lose in by missing out on it, or lose by capitalizing on it.  If Google contributes to a social-network war that adds further to the time spent on social networks instead of on searches, then Google is contributing to a shift of focus away from profitable search ads toward less profitable display ads, and moving away from its own strength.  Would it be better to sit this out and let nature take its course?  Remember that Second Life was a craze a while ago, and most have forgotten it completely.  Not to mention MySpace.  Twitter is used by less than 10% of the online population, according to a recent study.

But if you sit out social networking as a Google, you ignore the insidious truth here, which is that the “growth of the Internet” is growth in increasingly non-commercializable areas.  We are likely seeing the inevitable plateau in online ad revenue approaching.  It’s not that ad revenues won’t grow, but that they’ll not explode in new areas where people can make a ton of money, and that means VCs and growth companies like Google will have to look elsewhere to make a killing.

Neutrality Order Text Released

I had a chance to review the full text of the FCC’s Net Neutrality Order (10-201 if you’re into the FCC’s numbering system) and there were no real surprises in the material versus the commentary that was provided in the public meeting.  I’m still concerned that the FCC hasn’t created a solid legal foundation for the order, which means that it would be at risk in an appeal.  There are plenty on both sides who say they might appeal the matter, but in truth it does take some financial resources to fund an appeal process if you’re earnest about getting results.  The FCC, as I’ve noted in the past, is holding open the docket on reclassifying broadband under Title II, perhaps to threaten the ISPs (who have the deep pockets to appeal).

Another tactic that the text might reveal is the Commission’s declaring that a lot of the key issues like what constitutes traffic management are to be addressed on a case-by-case basis rather than through meticulous details in the order.  That means that anyone who wants to dispute something will either have to file for a declaratory ruling or wait to get zapped by the FCC and then make their case—to the FCC or on appeal.

One thing that does seem clear from the text of the order is the policy of the FCC on pay-for-priority systems.  What I gather is that such systems would be fine with the FCC if they were initiated by the consumer, but not if they were sold to content providers like Google.   What seems to be shaping up here is that if the consumer has a choice to pay for priority handling and that choice is explicit, then it’s probably OK for the content provider to collect the money and pay on the user’s behalf.

The issue of content-provider-pays is a bit murkier.  As I noted above, the provider could probably act as a payment agent or intermediary.  The FCC also stopped short of saying that there were no conditions under which a provider could pay.  That suggests to me that they might allow the content provider to “pay” for premium handling in a bundled content service.  The key point here seems to be that if the consumer isn’t paying anything for content (free Hulu versus paid Hulu or Netflix) then the prioritization would clearly be paid by the content provider and would clearly be linked with “Internet content” as opposed to being a “specialized service”.

This is the area where appeals to the order seem the most likely.  An ISP that has no specific content strategy could well offer streaming video players an opportunity to obtain special handling for premium service, as well as offering the consumer subscription premium options.  If competitors with their own channelized TV offerings didn’t like this (which they likely would not) then they might file an appeal to the FCC.  Or the ISP who wanted to do the prioritizing might apply for a declaratory ruling.  In either case, if the FCC doesn’t go along with the operator on the issue, there’s always the Court of Appeals–and there the uncertainties begin.

Week in Review: December 23rd

At CES, Microsoft will confront a demon that’s been haunting it from the early ‘90s, and how it does that will likely have a major impact on the future of the company and of Windows and its ecosystem.  The demon is the GUI.

Most OSs can be visualized as a kernel and a shell, with the latter providing the human interface to the OS service set.  There are APIs in both the kernel and shell, and developers write software to these APIs.  Thus, the software is dependent on the features exposed by those APIs.  Since the shell/GUI APIs are specific to the GUI model the OS uses, the APIs depend on how the user-to-system interaction looks and works.  It’s all an ecosystem.

The challenge this poses is that Windows has always had a GUI designed for keyboard/mouse use.  Touch-screen versions of Windows offer some relief from this link, but everyone realizes that the Windows GUI doesn’t scale down well to smartphones or even tablets because the navigation is too display-intensive to work when the display is very limited in real estate.  The GUI also doesn’t include handy finger-features for navigation that tablet or phone users would demand.

Tablets are the biggest thing in computing, and as I noted in our Annual Technology Forecast this month, they’re the focus of the most significant technology issues and product sectors for the coming year.  But Windows 7 is Microsoft’s success story, the thing that pulled it back from a cliff that the earlier Vista release hung Microsoft on the edge of.  But Windows 7 isn’t compatible at the GUI level with tablets; the navigation doesn’t port.  That means the APIs don’t port, which means the programs don’t port.  So Microsoft has to either create a new OS for tablets with a tablet-specific GUI and let tablets then step on Windows 7 success, or they have to try to make a Windows 7 GUI compatible with tablets and risk losing the critical tablet market completely.

If they do the former, they’ll be following Apple’s lead with iOS versus OS/X but they’ll have no real software base to work with.  If they do the latter, they’ll be risking the future of Microsoft.  Clearly they have to do something closer to the first choice, but how?  The obvious approach would be to create a Win 7 kernel and a new GUI shell, and then come up with some new APIs that could map to either the older Windows GUI or to the newer tablet GUI.  I’ve heard some rumors that this might be the track they take, but Redmond is a pretty close-mouthed shop so we’ll probably not know for sure until CES.

Economic news remains largely on track.  The Eurozone debt crisis isn’t getting any worse; Greece passed austerity measures and Irish courts approved a bank bailout.  In the US, economic data has been pretty much in line with expectations; a slight upward revision in the last quarter’s GDP, a dip in durable goods orders, and a small dip in unemployment claims.  Consumer spending and income levels were up in November, and October’s number for spending growth was revised upward.

In the carrier world, we had an interesting counterpoint to the net neutrality flap in a major Skype outage this morning.  The reason this is interesting is that it reflects the truth that network infrastructure investment at all levels has to be economically justified.  Could Skype have created a more bulletproof server hierarchy?  Sure, but it’s hard to justify a lot of spending to make a free service bulletproof.  The telephone network has never had an outage of that scale in its history.  I’m not criticizing Skype here; I’m just pointing out that investment in infrastructure depends on some mechanism to generate a return, and where that mechanism is limited so is the investment.  That’s the issue the FCC has to balance in net neutrality.

The sad thing about the whole debate over net neutrality is that virtually none of the debaters have any notion of how the Internet works, how regulatory processes work, or how business works, nor do they want to.  This is all about publicity and rhetoric, which means that there’s no contribution to be expected from these discussions in advancing the real needs of the market.

Internet and broadband policies are complicated for sure, but that’s no excuse for having useless debates based on extreme-at-best and wrong-at-worst positions.  We can’t expect good public policy from bad public participation, and the latter is inevitable without some understanding of the issues.

In the technology space, our deep analysis of our fall survey results seems to indicate that enterprises find vendors broadly at fault with respect to providing strategic guidance on either technology or its application to specific productivity problems.  A comprehensive look at the collaboration space—one of the “hot buttons” for a lot of vendors—shows that enterprises are having problems getting solutions to fit their requirements even as they’re getting those requirements stated more clearly, though they think Cisco with Quad might be approaching it.  The challenge, enterprises say, is that Cisco doesn’t focus its Quad story on general collaboration and then fit telepresence in but tends instead to focus on the telepresence.

I think this complain should be the tagline for the last decade, an indication that vendors have let the NASDAQ crash and the bubble-related legislation induce them to pull in their activities and focus only on tactical sales issues.  If a strong strategic portfolio can’t be valued by investors because it might be a bubble, then why have one?  Companies are responsible to boost their stock prices.  But this year we’re entering a critical phase for tech, one that demands looking ahead in a rational way and not just looking as far as your wallet.

I’ll be in a period of reduced coverage during the holiday period for reason of the fact that there’s likely to be less news.  From CIMI Corporation, Happy Holidays!

Well, Neutrality is (sort of) Here!

The FCC’s neutrality vote went as expected, with commentary by various people involved in the process, including the Commissioners.  I found a lot that I agreed with, but I disagreed with at least some of what virtually everyone said.  It’s not a disappointing order, though I’m sure that most will characterize it that way.  The only thing that’s disappointing is that it doesn’t in my view address the issue of the FCC’s authority to act.  The loss of the previous neutrality doctrine was a result of the Court of Appeals having overturned that doctrine for lack of authority to act.  I don’t think the current order establishes a strong position, and certainly there will be no lack of players to appeal the order.

The FCC’s position is pretty much as expected based on prior comments by the Commissioners.  The FCC will require that wireline broadband services be subject to handling rules that are transparent, non-discriminatory in terms of sites, devices, and traffic types.  For mobile services, the transparency rules are in force but non-discrimination is weakened a bit to reflect the special nature of wireless.  For mobile, blocking of traffic that’s competitive with the ISP’s own service is prohibited, but other blocking for traffic management may be allowed if the need can be proved.  The “specialized services” that flow in parallel with the Internet will be reviewed, but nothing will bar either payment for priority or tiered pricing per se.

The jurisdiction issue here is going to seem trivial, but it’s really central.  The current move is based on Section 706 of the Telecom Act, which the FCC itself has never before said offered it any independent authority to make new broadband rules (the Court of Appeals pointed this out in the Comcast ruling).  Further, Section 706 applies explicitly to telecommunications services, and in 2005 the FCC said that Internet broadband was not such a service.  Commissioner Copps took the strong stance that a return to Title II regulation was the right approach.  I agree.  The FCC’s “third way” would have given the order absolute legal foundation and would not have subjected the Internet to being regulated like a telephone network.

But Copps also said that we needed wholesaling for competition, which I’m not sure is true, and that we needed equal regulation in mobile services, which I’m pretty well convinced is not true. The Republican Commissioners laid out objections that boil down to “no neutrality” or “let the kids play”.  “Nothing is broken in the Internet access market that needs fixing” is one of the comments.  I don’t agree with that either.  So what we had was a bunch of political comments about a decision that was likely about as strong as the realities of politics could have allowed it to be.  If we saw the rules enforced, they’d likely not hurt anything, would almost certainly prevent egregious behavior, and might even help.  I’m not sure they can be enforced, and that’s my problem.

It’s not clear they even need to be enforced.  One valid point raised by the opponents of the order was the fact that the FTC and DoJ anti-trust regulations would cover consumers against anti-competitive behavior by ISPs.  That’s likely true, and thus you could reasonably say that the FCC’s order could simply be another round in a long-standing battle between the FCC and FTC for control over the telco markets.

So the Democrats, with Copps speaking to the impassioned Internet supporters, say that much more regulation is needed to keep the evil ISPs from our door.  Baloney.  Two of the three Democratic Commissioners said they wanted even more neutrality control than the order provides, but went along with the deal because it was the best available.  The Republicans say that these rules will kill the Internet, kill investment, kill society (online at least) as we know it.  Baloney.  The FCC that gave us the four principles was led by Republican-appointed Commissioners.  Were they in favor of industry-killing then, and have now changed their minds?  A pox on all politicians, and sadly the FCC Commissioners are politicians despite the fact that they’re appointed and not elected.

Might the politicians in Congress now jump in?  Sure, and they might pass other legislation despite their record of not getting much done.  Both parties can block action of the other here, and the division of the Commissioners by party makes it pretty clear that both parties would block Congressional action they didn’t favor.  There are some who believe that the Congress will move to give the FCC specific authority to cover the order, mooting any appeals, but I don’t think that’s likely.  We’ll have to wait until a Court of Appeals rules here, if not the Supreme Court, before we’ll see any differences in broadband as a result of the order.

How different is the new broadband under the order, anyway?  Despite all the hype on both sides, it’s not very different at all.  Likely the biggest changes will be the drive toward more settlement and payment options, moving away both from the unlimited-usage pricing and the bill-and-keep models of the past.  But even these changes may be modest until some legal validation of the order is available.  Thus, don’t expect to see very much from this in the near term.

Oracle Clouds, Neutrality-Eve, and NSN’s Vision of Three

We’re starting off what will likely (but you never know these days!) be a quiet week in the markets.  Top of the news is the announcement by Oracle that it will be supporting at least some of its PeopleSoft and JD Edwards applications on Amazon’s EC2.  This seems a reversal for the company, who had initially seemed to reject the cloud model, and I think it’s worth looking at it for some hidden truths.

First, the revenue impact of the decision isn’t significant on the face because Oracle will treat EC2 virtual machines just like customer virtual machines; same license terms and rules apply.  So what we’re seeing here is a model to accept infrastructure as a cloud service rather than to promote public cloud-based enterprise apps in SaaS form.  But why even do that?  I think that Oracle is realizing that the hybrid cloud is its path to enterprise prominence, and in particular a path leading past HP in a competitive sense.

Another factor is that Oracle’s database appliances are selling strongly.  These appliances provide DBMS-as-a-service, and thus could make it much more practical to have a cloud application access an on-premises database with reasonable performance.  Thus you could argue that the hybrid cloud model is perfect to socialize Oracle’s appliances in a market that already seems to be catching on to their value.

The FCC will be releasing its net neutrality order tomorrow, though it’s not fully baked at this point and might still be pulled from the agenda.  The order appears to be a curious mixture of logical application of neutrality and illogical legal foundation.  I’ve reviewed the Court of Appeals ruling in the Comcast case and it’s hard for me to see how this dodges the legal issues the court has already raised.  The only avenue forward would be for the FCC to now assert (and justify) the view that Section 706 of the Telecom act gave the FCC “new” powers to encourage broadband and not just a specific justification to exercise the powers it already had.  The FCC has taken the opposite position consistently.

Republicans in Congress are rattling their sabers, threatening to pass a bill that offers no funding for the FCC’s neutrality rules.  Apart from whether this is even legal, it’s pretty obvious that in the divisive political world of Washington it could never pass.  Similarly, it’s clear that neutrality legislation more aggressive than the FCC proposes (mandating no traffic management, no premium handling except for free, and full wireless regulation) wouldn’t pass either.  So whether either extreme is the right answer doesn’t matter.  What does is having a set of rules that will pass legal muster, and that’s where I’m concerned here.  The FCC’s “third way” was the right answer; it was clearly legal and it would have offered exactly what the situation needed.  Some of the Democratic Commissioners want it, and frankly I’d rather they held out.  I disagree that this order is better than no order—if it’s not enforceable then it is “no order”.

Economically, the EU sovereign debt problem is continuing to cloud things a bit, but even European stocks are up this morning and so are US futures.  I think that the only real question on the table has been whether Europe would let the EU sink rather than have the stronger countries guarantee the weaker ones.  That question appears to have been answered to the point where speculators aren’t quite as willing to play chicken.  The good news is that if the debt problem were to be put solidly at rest, Europe would likely start recovering faster.  That would be important because the bad news is that the austerity programs that would be demanded as a condition for loan guarantees to the weaker nations would certainly create social unrest, and possibly weaken the ties that bind them to the EU.  Would that hurt?  Truth be told, not much.  It’s doubtful that any of these nations could go it alone, and I think the voters there would draw back from the brink.  No question, though; better times would help a lot to ease tensions.

Alcatel-Lucent continues to showcase the developer side of its Application Enablement approach, including its Open API program that federates application services across multiple developers.  There is no question that the company has started to gain some traction in the market with this, but there is still a question in our mind regarding how quickly the program can adapt to market conditions.  The thing that made OTT players successful in the service layer is that they’ve dodged inertia.  They don’t worry about standards beyond blowing a casual kiss here and there, and thus they can expose features via APIs very quickly.  If you want for industry consensus on APIs, you’re putting yourself at the tail end of a multi-year process and then saying you’re running at market speed.  I’d like to see Alcatel-Lucent open up more regarding how it will create features in Application Enablement and how quickly it can expose them using RESTful APIs.

NSN’s CEO has recently suggested that the telecom sector will consolidate with only three major players remaining; Ericsson, Huawei, and NSN.  I think that vision of the future is a tad self-serving in terms of the players, but I think that it is very clear that somewhere around three players is what we could expect if the industry can’t find better feature differentiation.  If Alcatel-Lucent wants to make the cut here, they definitely need to make Application Enablement work, and it’s frustrating to me how close they are to that, and yet how far.  But it’s not atypical with service-layer strategies in the big vendor space.  Nobody has it right there.

One might ask where this consolidation would leave Cisco and Juniper, the other big players in the IP layer at least.  I think that’s another area where the NSN comments oversimplify.  We’re seeing, in operator trends toward “procurement zones” for buying, an attempt to create a market where a single giant with a full product line can’t dominate everything.  The operators would like innovation, particularly with respect to the service layer, and they can’t get it by having everything collapse into a single giant commoditized space.  But if the specialty guys like Cisco and Juniper can’t make a case in the service layer, then they can’t defend their narrower position in a commoditizing market.  Thus, we could see the NSN “vision of three” being right, even if the three turn out to be different from what NSN expects.

Economics and Profits

Even as economic conditions worldwide appear to be improving at the macro level, there are renewed pressures on the Eurozone sovereign debt issue, and concerns that managing a global shift from stimulus to the control of debt and inflation will be challenging.  Bond ratings for Ireland sunk and there may be further revisions in bond ratings for Greece, and even for Spain and Portugal.  Some financial experts think that the “edge countries” in the EU will all require support as sluggish economic growth and relatively expensive social programs create a gap that only borrowing and austerity can fill.

One proposal now gaining strength is the issuing of a Eurozone bond that would be used to fund a large rescue fund, essentially transferring the faith and credit of all the major (and more successful) EU economies to the debt of the weaker members.  This won’t mean that austerity programs won’t kick in where the funds are transferred, though, and as a result the measure will trade the tension of disparate debt ratings for a new tension in disparate quality of life, something labor in the impacted countries is already protesting.  But a debt crisis would produce a lifestyle crisis too, so the choice is the latter alone, or both.

In the US, we had a rare show of partisan cooperation with the passage of the tax bill, a bill that includes a Social Security payroll tax reduction of 2% for next year that is a form of stimulus and also an extension of unemployment benefits.  The general view is that this will keep the US economy on track in 2011, and that’s what our model says.  It probably adds about 0.2% to GDP growth for next year, and may reduce unemployment by a half-percent according to our own numbers.

Another significant event in Congress is the fact that the behemoth spending bill that was prepared to fund the government has been pulled in favor of interim funding because it cannot be passed over Republican opposition.  The problem here, at least on the surface, is that the bill contains billions for projects of questionable value, and likely millions in special earmarks that were a specific target of Tea Party activists who were elected to the next Congress.  Some kind of reform of the bloated federal budget process may be forthcoming, which couldn’t hurt.  It may also be a sign that Congress is going to work harder to be bi-partisan in 2011 and beyond.

Alcatel-Lucent may be looking to change video collaboration, announcing that Bell Labs and a Belgian research giant IBBT will collaborate on applications to “bring a new dimension to video communications”.  The scope of the work appears to include both stuff likely useful in the near term (like video content analysis and management of each user’s view of a conference relationship) to things like immersive panoramic experiences, ultra-high-def, and even 3D that we think may be simply going too far to be relevant to people who don’t want to be on camera when they’re feeling ugly.  Our research has long shown that a better and more socially linked collaborative dynamic would be highly valuable, and in fact might kick off a wave of productivity-based IT investment that would restart an industry stalled in underperformance relative to its glorious past.  The question is whether the research process will deal with the real and current market issues; the future of 3D telepresence is still a bit off, I think.

Oracle is clearly not off at all.  Their revenues were up 47% in large part on strong sales of Sun hardware.  Pipeline deals for the Exadata servers were about $2 billion.  Clearly Oracle is a Big Player now, and clearly they’re a special threat to HP, at whom Ellison took a shot during their call.  HP’s weakness is software in our view, which is Oracle’s strength, and there is a very good reason to believe that the special strength of Oracle in middleware is the secret sauce for the company’s diet of competitors in the data center.  IBM matches Oracle’s credentials here, but the company poses a threat to everyone else’s data center plans, including Cisco’s.  The Cisco comment raises the key point, one I’ve been raising with respect to Oracle for a year now.  What will they do in networking?  If they want to be a full-scale data center player, they need a network strategy.