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.

Rebellion or Revolution?

We’re continuing to see parallels between the world overall and the world of technology; between global economic issues and tech issues.  It’s so logical (the parts conform, after all, to the Model of the Whole) that you have to wonder if it’s an accident!

Egypt is proving that online social network services can build a rebellion, but not necessarily create an alternative to what’s being rebelled against.  Governments, and even more so societies, are complex systems that arise either through the clever planning of a small group of very knowledgeable people or through a protracted period of trial and error that can generate disastrous missteps.

Telecommunications policy, and broadband policy in particular, are impacted by the same dichotomy.  We have successfully torn down the “old” model of public networking but we’ve not yet created something that can provably replace it.  The challenges of today are rooted back as far as the Modified Final Judgment in the early ‘80s that launched global privatization of telecom.  From that moment to this, we’ve taken each step largely based on public outcry over the effects of the last rather than studied assessment of the likely consequences.

The FCC now says that Universal Service is Universal Broadband, for example.  If broadband is shifting its application to delivery of online video, isn’t that the same as saying that everybody should get free cable or satellite, or have their services subsidized?  The FCC says that the Internet is an open conduit for information, where everyone should have an equal chance to deliver their products/services to consumers.  Is it then something like spectrum, whose use we regulate in the public good?  You get the picture here.  Taken in isolation, these decisions or steps are logical, but we’re creating new definitions by default, by rejecting old ones without replacing them.  What entitles a “service” to be judged “universal”?  What is a “neutral” or “open” Internet?

Congress is likely to get a shot at privacy with legislation due to be introduced that would set standards for tracking.  Congress already has a bill that says that under no conditions can content providers be asked to pay for handling of traffic.  Maybe Billy Joel had the right idea:

They will tell you, you can’t sleep alone in a strange place

Then they’ll tell you, you can’t sleep with somebody else

Ah, but sooner or later you sleep in your own space

Either way it’s okay to wake up with yourself.

We’re closing off economic doors everywhere, and yet economics are the foundation of all markets.  Everybody in a commercial framework has to make money, and so some set of people have to pay it.  Otherwise, the market wakes up eventually as an empty definition; a bazaar with neither sellers nor buyers because it has no currency of exchange.

The success of the iPhone, of Android, and the growing success of tablets is an indicator of revolution that’s as clear and as convulsive as could be represented by demonstrators in an Egyptian square.  But it’s also a revolution, a rebellion, and not a replacement.  Creating a new way to consume information doesn’t create a new information market, only new demand.  There has to be a New Supply too.  The question in telecom, as in Egypt, is whether the forces of change act faster than the forces of reconstruction.  Anarchy is the default form of government, and also the default state of a market.  It’s not typically the desired state for either one.

Are we seeing the failure of the “social” or “crowdsource” model here on a geopolitical and market scale?  I wonder.  Ask a million people a question and you’ll likely get a consensus, but not necessarily the right answer.  Is a true popular democracy, or a true consumeristic market, doomed to fail because it is incapable of creating a functional system for its own operation?  I wonder that too.

Alcatel-Lucent Hits Half a Home Run

Cost matters, and nowhere is that more true than in telecom, and in mobile broadband in particular.  Operators are trying to manage what’s clearly a decisive shift of their own revenue/profit potential from wireline to mobile, and to manage the cost of creating and sustaining customers and ARPU.  One of the key elements in this shift is the feedback loop created by ubiquitous mobile broadband, a rich inventory of new appliances like smartphones and tablets, and human behavior.  With different tools, we do things differently, and planners are discovering that in mobile broadband one difference is the way cell planning has to take place.  Alcatel-Lucent announced a revolution in cell technology with lightRadio, a completely new way of looking at mobile radio networks that’s tuned to the real-world changes in broadband consumption that tablets now drive.

The basic notion of lightRadio is to make cellular antennas more “populist”; something you can stick on a wall or a light post or a traffic signal or even a billboard.  The ability to deploy the antennas to ad hoc sites is created in no small part by their superior economics, but also by their significantly smaller size.  The combination means that it’s possible to stick a dozen cells in a small downtown area where it might have been difficult to get five in the past.  That means more than double the potential RAN bandwidth available to customers, and at significantly less than double the cost.

The question in my mind now is how much further Alcatel-Lucent might take their mobile revolution theme.  Managing the RAN cost-effectiveness is critical for the mobile broadband space, but all cost management strategies eventually fail and all vendors who rely on them become commodities, or worse.  For Alcatel-Lucent the question is whether they can link the disparate elements of their Application Enablement story to the lightRadio picture, and thus capture the mobility/behavior symbiosis for their customers.  If they’re going to do that, they’ll need to move quickly; monetization strategies at the service layer will be reaching a critical point of transition from planning to execute in the second half of this year, and there’s little time to wire the RFIs and RFPs in your favor.

Paths to a New Content Paradigm?

There are some new indications that the momentum of the web is shifting more decisively toward content, but not in the simplistic “content is king” sense.  What’s happening is a combination of fairly complicated and interrelated shifts, and these are gradually changing the way the online business model works.  How that will impact the online market players is yet to be seen.

One obvious shift is the increased interest of portal players in having their own content, something that we can fairly say is extended into the TV space by the recently approved Comcast/NBCU deal.  Ads have to live in something that consumers want in order to be pulled into view, and so all ad sponsorship (and pretty much all of the online world) has to have that magnetic content.  It used to be that you could act as a portal by simply aggregating everyone else’s material, a move that played to early desire by practically every business and content producer to get a web presence.  AOL’s decision to buy the Huffington Post (a growing liberal media site) reflects the reality that most of the content sites are now looking at monetization on their own.  That means that portal/aggregator sites have less to work with—unless they start becoming producers.

What’s interesting about both the Comcast and AOL decision is that the choice is one of buying professional content and not going with the “crowdsource” trend that’s obviously cheaper.  Google’s challenge in monetizing YouTube is likely the reason, and the fact that crowdsourced portals would start to look a lot like social networks.  Ben there, done that.

Yahoo is the poster child for the other shift—we’re seeing the “semantic web” not as an Internet trend but as an aggregator trend.  Think “semantic portal”.  The notion is to combine search and context with portals and targeting to produce relevant content for consumers.  The relevance factor makes the portal more attractive, and presumably would therefore help Yahoo monetize its higher overall scores at serving content to consumers (they beat Google slightly in unique visitors, for example, in comScore results).  That might let Yahoo pay more for content and dodge the pay-wall trend.

What all this means, of course, is that the bloom is off the rose.  We’re past the growing-up phase of the online world and into the hard business middle-age.  I’ve noted the issues of maturity as they apply to the ISPs in the last couple of posts, and the new trends show that maturity is upon even the OTT players.  The question is how much of the online revolution is a fad.  Here in the US, where alternative channels of information dissemination are the richest in the world, we have the lowest online penetration and the least interest in getting online among those not there already.  Does that mean that we’re already seeing an opt-out effect?  It doesn’t seem so, but it does appear that we’re seeing the lack of universal opting in.  That could be a result of a lack of “fad sensitivity” among a segment of the population.  If so, the effect could spread as having your own personal website or being on Facebook or Twitter, or even playing with a smartphone at a party, ceases to be cool.  Not only do we have to worry about re-inventing the Internet as a network, we have to re-invent the coolness model every year or so, because the requirements to achieve the cool state shift rapidly.  Good thing I gave up years ago!

The Field of Dreams Becomes a City of Patio Gardens

One of the issues that now face the networking market is the fate of Nokia, the once-giant smartphone and networking company that has seemed to stumble in every market race for the last couple of years.  There have been all manner of analyses of why this has happened, but they’ve all (in my opinion at least) missed the most critical point because they’ve focused on symptoms of the decline and not causes.  The cause of Nokia’s problem is its culture.

Tech companies in general, and companies that tend to sell to large conservative buyers in particular, become accustomed to serving a market that’s supply-driven.  The buyer sets the goals based on formal (and protracted) planning processes and the seller fills orders.  There’s a nice horizon out there, clearly visible, and everyone can see the path to it.  The Bell System rules; build it and they will come.

Not any more.  What the Internet did in networking was to produce universal data connectivity; IP dialtone.  That opened the way for people to work to deliver stuff without the protracted planning and capitalization issues that would face somebody who had to create the connectivity in the first place.  Forget fields of dreams, plant a garden.  It made data networking consumeristic, and you can see that today in every aspect of networking from appliances to the deep core—or at least the smart players can see it.  Nokia, and again IMHO, other Euro-equipment giants, had the most invested culturally in the supply-side mindset.  Thus, they’re the least adaptable to the new demand-side world.  Nokia may be among the most challenged, but they’re far from the only ones in that mode.  With the exception of Cisco, every single network equipment vendor on the planet is stuck in supply-side quicksand.

Cisco’s not the darling of many financial analysts these days, so it may seem odd to hold them up as a model of facing the future.  But often facing the future means accepting short-term lumps to achieve longer-term rewards.  Cisco is trying to be the networking company of the Age of Network Consumerism.  They’re not always doing it right, of course, but they’re picking their way on their own into a new world, and you can never reach the destination without braving the journey.

In the next two years, every player in the market will be forced to make that same journey.  Some, like Nokia, are clearly falling short in their early efforts and creating challenges for themselves that it’s increasingly unlikely they’ll overcome.  The longer you delay the first step, the further the canoe has slipped from the bank and the harder it will be to step off.  Bigger players are also institutionally less able to support change; there are too many layers of high-inertia humans to be driven into new behavioral models.  Other smaller companies will figure out what to do and will command some of the key transitional issues between the supply and demand visions of the network.  These early positions will then lead them to the future.  There are perhaps a half-dozen such positions in all of the networking market, and right now virtually all of them are unoccupied.  What Nokia needs to do is to identify them, occupy them, and rebuild itself.  But that’s also what every other networking player has to do, or the industry five years from now won’t contain many familiar faces.

In 2000 nobody believed me when I said at a conference that the IXCs were doomed, and yet within five years they had been bought by local exchange carriers their management first considered as the weak sisters of the markets.  Names like MCI that had rung through the markets disappeared.  Don’t think it can’t happen in the equipment space.  Those who refuse to read history are doomed to repeat it.

Verizon and Time Warner have both bought assets in the cloud computing space.  Sure, those assets will be used to create cloud services to enterprises and SMBs, and also to host SaaS services to SMBs and consumers.  But from day one, operators told me that they wanted cloud architectures for their service layer to service both customers and their own feature-hosting needs.  PaaS is not only a service to enterprises, it’s the foundation of the intelligent network of the future.  The question is only whose PaaS it will be, and it’s clear from the cloud deals just done and the AT&T Foundry that the operators are ready to go it alone, without standards or equipment partners.  If they do, then a lot of those key transitional issues will be commoditized at the equipment level, and the future will contain more examples of failure in the equipment space than it will of success.

Slices of Online Future

News Corp has finally launched it’s iPad-paper, The Daily, but it’s obviously way too soon to know whether the experiment in a newspaper that’s neither printed nor online, but instead is appliance-targeted, will work.  The price is lower than that of print news to be sure, but at $40 a year it’s still more than the largely free online news.  Our model says that this might work on a small scale for the iPad market where it could offer a novelty value to a population segment that arguably values novelty more than most, but that it’s not going to work as a broader model.

The notion of online-targeted content seems likely to be a hostage to the battle over neutrality and over usage pricing of bandwidth.  Verizon indicated this week that it would start constraining the usage of the top 5% of its mobile customers to insure that customers overall were serviced adequately, and this comes on the heels of Canadian changes to usage caps and a PR campaign by some EU telcos on making OTT video providers pay.  How this will all end is hard to say, largely because the topic gets no truly valid coverage.  Everything written seems to be a polished advocacy of someone’s commercial perspective, or just a diatribe against paying anything for anything.

Carriers are interested in profits from network-related but not transport/connection-related applications and services, and NSN recently published a commissioned study showing that operators would be natural partners in security and privacy services.  That’s true; in fact, operators are natural partners in most applications of technology and facility management and marketing.  The challenge for operators is less whether there are markets to be had than whether those markets can be addressed profitably.  For decades, perhaps a century or more, they’ve focused on how to create symbiotic infrastructures from diverse equipment types to preserve capital equipment and so to reduce costs and improve profits.  Those techniques have not spread to the IT equipment that’s increasingly the key element in new services, and so they’ve been looking for the IT equivalent of the old “Advanced Intelligent Network” architecture of the PSTN.  Most now believe that cloud technology, virtualization, and SOA are all integral to that NGN architecture for IT but most also believe that vendors either aren’t presenting a cohesive strategy or aren’t presenting a complete one.  For three years, that’s been their complaint, and it’s now possible that they’ll take on the problem themselves by looking at cloud services and extrapolating their own feature infrastructure based on how cloud computing in general and platform-as-a-service in particular solve IT problems for enterprises.

We had our official end of IPv4 this week as well as an IPv6-promoting event, but neither of these facts really changes much.  The exhaustion of IPv4 space is hardly a surprise, and the real problem in coping with it has been known for ages—the consumer.  There are literally hundreds of millions of devices out there that won’t work with IPv6 addresses, won’t assign them, or both.  As long as that base exists, the best you can hope for is dual-stack IPv6, and if you can’t eliminate the use of IPv4 addresses anywhere then you aren’t coping with exhaustion by adding IPv6 to the mix, not to be euphonic.  What should have been done is that all wireless hubs and routers and STBs and everything else that either performed NAT or DHCP should have been mandated to support dual-stack long ago.  Websites and users could then have gradually migrated from dual-stack to IPv6.  Now we have a consumer support issue to deal with at every level.

The telcos have an opportunity here, if you believe in the support-as-a-service concept I just noted.  There’s nobody as able to address the migration, there’s no time better than now to take the lead in supporting it.  Step up, guys, and you might make a name for yourself, not to mention a profit.

Google, Ads, and Kill Switches

There’s a mixed bag of news for Google to confront their new CEO, and it’s mixed in multiple dimensions.  Android and the basic business of search are showing a combination of positive and negative signs, and confusion is never a good thing.

On the Android side, there’s excitement over the new Honeycomb version for tablets, and also an indication that Android is gaining at least numerical shipment ascendency.  It’s passed Symbian as the most popular phone OS, and there are projections that Android tablets will pass iPads soon too.  So it seems all good for Android, except that Google hasn’t been able to monetize Android like Apple has monetized its smartphone and tablet platform iOS.  A big part of that is the ruthless discipline Apple has enforced on apps.  Apple kicked some Sony apps off because they let you buy ebooks around iTunes, and that suggests that Amazon and Barnes & Noble may also be in for problems.  Android has a more fragmented store framework to begin with, and Google has less control and gets less direct money.  Thus, success in a market sense doesn’t necessarily translate to something Google can bank.

In the search area, the problem is the competition from Facebook and Twitter.  Advertisers have run the numbers a bunch of ways, and what they’re finding is a mixed bag.  On the one hand, it’s clear that search ads get more conversions, meaning that people click on them and act on the results more often.  That’s likely because people search for products they want to buy, creating a direct link.  But social-network ads get more “impressions” meaning that they’re presented to a lot more people.  That means that even with very low conversion rates, they might still outperform search.  At the very minimum, this kind of mixed news could mean that some ad dollars will flee search for social networking, and if the return is indeed better then it might never come back.

The tide of operators looking at monetizing Internet traffic is a more unambiguous negative for Google.  All week, EU operators have been saying that it’s not tolerable for them to invest in additional capacity to support the business goals of OTT players when they don’t get any of the money.  In Europe, the focus seems to be on creating an OTT-pays-for-peering model that would provide the access ISPs some revenue.  Here in the US, that option seems foreclosed by the FCC’s neutrality order, but just in case there’s proposed legislation that would absolutely close that choice of payment off.  If that happens here, it’s likely we’d see what’s already happening in Canada, which is a sharp reduction in the per-month bandwidth allotment and a corresponding increase in what at least some users would then pay for Internet access.

For years, I’ve pointed out that the Internet usage model and business model had a fatal parasitic flaw.  OTT giants could develop because they exploited bandwidth that was incrementally free, and thus present the market with a kind of no-cost (or lower-cost) business model while network operators faced a no-revenue model.  If that sort of thing is carried far enough, it’s a fatal disease.  I think Google under Schmidt realized that they needed a constructive accommodation with the access ISPs, and that’s what prompted the Verizon/Google discussions on “neutrality”.  Whether Page sees the same need isn’t known.

The situation in Egypt is another policy thorn.  Can the government cut off Internet service?  In the US, as a practical matter, the answer is that it could providing that the big access ISPs honored a government request.  There’d be no legal compulsion at the moment for them to do that, but I think that if a good case was made they’d likely comply.  But the Administration is looking for enhanced cybersecurity, and some of the measures that could be taken might codify an obligation to shut down the Internet or a part of it on request.  The Internet community, of course, is inalterably opposed to this sort of thing, but I suspect that at least a slight majority of the population would accept or even welcome the idea.  Where we’ll strike the balance here remains to be seen.

Bits Don’t Rule and We Don’t Rule Them

FCC has filed a response to two provider lawsuits on net neutrality (one by Verizon), saying that because the order has not yet been published in the Federal Registry it’s not technically in effect and cannot yet be challenged in court.  That seems a rather lame move, but as I noted last week the current filings are in the DC Court of Appeals, which the operators believe would be likely to find in their favor given their ruling in the Comcast case.  That’s why they filed early to start with, and why the FCC is now hoping to slow things down.  If cases can be filed in multiple appeals courts there could be a lottery to decide which will hear the matter, and that might favor the FCC.

Internationally, we’re seeing some hardening of provider attitudes on neutrality and related issues.  In Canada they’re heading for usage pricing and much lower thresholds for incremental costs.  Telenor in Norway has indicated that the practice of having OTT content like YouTube simply pull capacity out at no charge must “stop”.  I think all of this is related to the same factor that caused Wall Street to downgrade Ciena today, and to Huawei’s record $28 billion earnings (it’s closing in on Ericsson’s top spot).  Return on bandwidth is plummeting still, and that means that operators are at risk for not being profitable at the transport/connection level.  If you’re a price leader, this is a good situation to be in, and Huawei is while Ciena is not.  Operators can’t rely on cost reduction alone, though.  They’ve got to somehow stem that process of commoditization, and that’s possible only if they can improve revenue per bit with some mechanism of per-bit pricing.

Neutrality rules, at least as some would write them, might foreclose the option that would actually be best for users; let the OTT players pay for delivery.  The other option, which is where Canada is tentatively headed, is to establish incremental pricing and usage tiers.  The “let’s go on as usual” choice doesn’t seem likely, or at least it isn’t likely to create a good outcome.  Network investment in infrastructure would likely start to decline sharply as early as 2012 without any relief, and no regulator can order operators to run an unprofitable business if those operators are public corporations.  Already, Eurozone carriers are looking to developing markets to invest because the ROI is higher than it is at home.

It’s higher outside connection/transport too.  Verizon bought Terramark, a leading enterprise-targeted cloud computing provider, and this shows that network operators in general and Verizon in particular are aware of the cloud computing opportunity.  It’s not that the cloud is the lowest apple or the biggest in financial terms, but that cloud infrastructure has so many possible revenue missions that it makes sense to get involved quickly, and effectively.  Terramark has a good customer base and reputation, and its VMware-virtualization slant on the cloud is quite harmonious with the enterprise interest in hybrid cloud computing rather than pure public services.  Network operators are also much more credible providers of backup and overflow-targeted cloud services than anyone except prime IT vendors, which makes this particular space a hot opportunity.

Lessons from the (Earnings) Season

LinkedIn, not consumer-directed sort-of-rival Facebook, is filing for an IPO.  The move may be a sign of confidence in the markets for early 2011, a sign of lessening confidence beyond the first half, or simply another indication the financial markets are eager to make a quick buck.  One interesting thing about the move is that one of our Wall Street friends calculated that the market capitalization (total stock value) of Google and Yahoo, when combined with the hypothetical value of LinkedIn and Facebook, would exceed the world’s ad revenues from all sources.  Go figure.

Staying with financials (it’s earnings season after all) Amazon shares dropped after the company reported 36% higher sales and 8% higher earnings but lower margins.  One must wonder how the Street believes that online retailers would be gaining sales versus other retail models without discounting, and how discounting could be equated with anything other than lower margins.

Bringing these two themes together we have the results of the commission impaneled to investigate the 2008 financial crisis; the report has lots of bad things to say about regulations and greed and other factors, but in my view it’s light on the real problem.  Wall Street wants to create wealth faster than the economy creates value.  Many of the stocks we’d see as being untainted by financial scams are still objectively priced above traditional market justifications of P/E multiple (which would be about 14 in the real world).  That says they’re being bid up, and being bid up simply means that somebody is promoting the notion that they’re going to keep going up despite fundamentals.  To me, that’s a bubble no matter how you try to disguise it.

Microsoft turned in an interesting quarter, with good numbers and good stock response coming not out of blazing success in its traditional spaces but from good Kinect reception by the market.  This clearly illustrates the dilemma even in fundamentals—the consumer is now the engine of technology rather than business, and that means that fads and not plans drive the markets.  Microsoft is being praised (through its stock) for coping with the changes, much as IBM has benefitted from its ability to reinvent itself periodically to cope with the transition from mainframes through minis to PCs, and from hardware differentiation to middleware.

In the broad economy, we seem to be seeing a continuation of the division between countries doing better and those doing not so well.  Debt issues cloud the Eurozone, Japan’s debt has now been downgraded, but China is coping with runaway growth and the US is showing signs of greater economic strength and improving employment.  GDP growth in the fourth quarter came in a bit under expectations (3.2% versus 3.5%) but consumer spending was up 4.4%, which bodes well for the coming year.  Interestingly, the US’s position is likely due to aggressive stimulus and rescue actions, and these are now under political pressure.  Presuming that the anti-debt posture of Washington these days is more than just theater, you’d have to wonder (as some economists are already wondering) whether we might not risk slipping back into stagnation by trying to cut debt too quickly and cutting programs too much.  Loss of confidence and jobs created by debt-reduction-induced economic declines would hurt the deficit more by increasing pressure on social programs and reducing tax collections, something the states are already finding out.  Hopefully the national planners will do so too.

Hulu’s New Business Model is Bad Industry Juju

AT&T’s report on earnings reinforced some structural changes in the industry that Verizon’s report had already suggested.  One basic truth is that mobile services are more profitable and more fertile areas for growth than wireline.  Another is that mobile service gains and ARPU both depend substantially on broadband and smartphones rather than on voice services.  Finally, both carriers’ numbers show that you can’t even support a wireline business model on voice any more, and you can’t support it on broadband Internet either.  You either make money with TV or you don’t make money on wireline.

That’s an interesting counterpoint to the reports by the WSJ that Hulu is looking at becoming a kind of online cable operator, offering a premium service only and requiring payment for the service.  This has resulted in some suggesting that maybe it’s time for the whole cable TV industry to be subsumed into a broadband delivery/Internet model.  But if TV is the only profitable wireline service, where does that lead?  We all know the answer to that one, but that doesn’t address the question of whether an attempted shift to a pay-TV model for Hulu, coming after the significant growth Netflix has enjoyed, couldn’t create some serious stabilization issues for ISPs.

Democrats, you will recall, have proposed legislation that would not only codify the FCC’s framework for net neutrality but apply its terms to wireless and explicitly bar any paid prioritization of traffic or “fast lane” other than that paid by the customer.  As I noted earlier, this kind of bill stands no chance with the Republican House so strongly against even the current neutrality rules, but it does show that the political winds are at least blowing somewhat in the direction of accentuating a kind of “Internet-must-carry” principle that could have major impact on future services.

Buried in the details of the AT&T report is the fact that the company has fallen far short of its target for fiber feeds to its cell sites—less than half its goal for 2010 was met.  Now let’s be serious here, gang, nobody doubts that AT&T understands how to deploy fiber; the problem isn’t one of skill or technology.  It’s ROI.  The financial industry has noted that there’s a surprise boost to vendors who offer inexpensive digital-over-copper to buttress AT&T’s tower bandwidth; clearly the fiber shortfall is cost-driven.

The ROI shortfall shouldn’t come as a surprise because it’s caused by the same forces that have marginalized wireline—bit commoditization.  Customers want more applications online, but they don’t want to pay more for the capacity to deliver them.  High-end services at 50 Mbps or more undersell unless there’s virtually no price premium for them.  4G isn’t something people want to pay for; they just want to get it.  The public doesn’t understand how the business model of online services depends on the simple launch point of being online with capacity to access the service, and nobody in the media is interested in offending them with the truth.

I’ve been told that with the current trends in both wireline and wireless, and with no additional revenue streams, broadband Internet would be an unprofitable service for US operators by 2013 and that mobile broadband would be unprofitable by 2015.  Carriers like Verizon and AT&T who are gaining customers in the traditional postpay market can only gain so much market share because there’s only so many customers.  The “Hulu model” of broadband TV would exacerbate the problem by driving up traffic in both wireless and wireline networks, and worse it would compete with the traditional video services of operators—services that are making wireline at least somewhat profitable and that aren’t contributing to wireless traffic growth.

But it gets worse.  Online ad revenue per user from a Hulu model would be about 4% of what TV commercials now bring on a per-user basis.  If we saw migration to an online model, we’d either lose 96% of the money available to fund content development or we’d have to presume that somehow advertisers would agree to pay 20 times or more as much for each online eyeball, which sure seems unlikely to me.

What this adds up to is simple; we’re heading for a usage-priced model of broadband foreverything and if regulators try to stem the tide they’ll simply drive the operators out of investing in infrastructure.  One way or the other, the Internet isn’t going to be the “over the air” of the future, with no marginal cost to deter usage.

Cable’s business model works not because of voice or broadband but because of TV.  Fiddling with that golden goose could cook a lot of the players in the industry—and the vendors who support them, and the viewers who depend on them.  We’re facing a major disruption here, and the question now is whether we can, as an industry, come up with some logical way to save the health of the system that the whole of the Internet depends on.