Of Lies and Lost Opportunities

This week was marked by the usual combination of good fundamentals and hype and hysteria in the media and markets.  The Irish debt crisis, which is objectively solved at this point, has been the source of rumors that have whipsawed stocks and created a new set of reasons for individuals to avoid the markets.  But underneath, companies at the retail level are doing better and forecasting a stronger season, and research firms report that nearly 90% of shoppers still have buying to do.

In advertising, online debate continues to focus on the topic of “click-through rates” or CTRs, which have replaced the simple ad appearances as the desired metric.  The problem is that like anything else it’s possible to game CTRs and even when they’re not gamed, they don’t tell the whole story.  Our research here has shown that “trajectory” is the big issue; Microsoft recently validated that by working toward a “path-based” set of conversion metrics that track from a sale back through the sites/pages that led to it.  The greater level of refinement here is both good and bad.  The good side is that the changes could make online ad performance tracking more credible.  The bad side is that it’s demonstrating how non-credible it is at the moment.  Advertisers tell me that they believe there are no credible studies proving the effectiveness of online advertising beyond conjecture.  That doesn’t mean it’s not effective, but that we can’t identify why it is, and therefore focus on making the “why” work better.

The biggest area of interest for advertising online continues to be video, and there are some interesting trends there too.  Hulu decided to go out of “beta” and lower its base price, which some think is a bad sign but which many network operators are happy to see.  What I’m hearing is that people won’t pay too much of a premium for what is still a best-efforts experience, and the less they pay the more prioritization of delivery might earn.  Not only that, lower retail prices mean that OTT players have less incentive to be in the market, but network operators have much lower ROI targets and can play there comfortably.  Google TV is also apparently laying an egg, much to the surprise of armchair statisticians who have interpreted the drop in cable customers as people “cutting the cord”.

The data shows that 350-odd thousand people were “dropping cable”, but that whole statistical assumption is flawed.  First, there is no tracking of individuals or households here; what gets reported is the net of adds and drops.  Second, there are always people dropping cable because they move, die, consolidate households with another, etc.  That brings up “third”, which is that the thing that impacts all subscription TV is net new households.  Any time there’s an economic crisis, what happens is that fewer new households are formed because graduates and new workers either stay at home with their parents or join to create a group home.  This cuts down on the add part of the equation, and that means fewer customers.  In short, there is nothing we could say about the “cutting the cord” paradigm given the current data, and the experience of Hulu and Google suggests that cord-cutting isn’t a factor.

Staying in the video space, the Senate passed a measure that would allow the Justice department to get a warrant to cut off the domain decoding for pirate websites, and it might also allow them to force ISPs to “disconnect” the routing.  Neither measure would be truly effective in my view, and while I’m a supporter of enforcing copyright law I’m not sure this is the right way to go about it given the risk that it’s not going to work.

Speaking of not working, Australia’s NBN seems to be trapped in the political world.  A vote yesterday on forcing the government to submit the NBN business plan to the Productivity Commission for review failed by only one vote.  While there’s every indication that the public likes the idea of super-fast broadband, there’s an increasing sentiment that the NBN planning is a charade, with too much of the assumptions being hidden for there to be any confidence that NBN will work.  NBN recently named Cisco as the winner for its data centers, something that surprised those who thought the NBN CEO would steer the win somehow more toward is Alcatel-Lucent alma mater.

If things sound sleazy here, don’t be surprised, because according to Harris poll data, people distrust advertising by an overwhelming margin, and other data says they distrust product reviews submitted on retail sites, social network privacy protection, and of course politicians.  What we’re seeing, I think, is a general sense among consumers and also enterprises that they are being duped by everyone.  That makes it much harder to buy things that are perceived as risk-generating, either because of cost or because they push the buyer into an unfamiliar cost/benefit trade.  As I’ve noted regularly, we’re seeing enterprises simply stalled on projects that would raise their IT-to-revenue commitments, because they can’t get any validation of the benefit case.  All of their vendors, they tell me, are either saying nothing useful or are saying things the enterprise believes are objectively lies.  All of this is eroding the influence score that various influence conduits exercise on buyers, with the effect that the total amount of positive influence available at best barely reaches the level needed to induce a decision.  You tell me how that makes sense, dear equipment vendors!

Feet and Horizons

Juniper added to its content portfolio today, acquiring the intellectual property of a video delivery firm called Blackwave.  This is a smaller deal by recent Juniper standards, but it’s potentially critically important.  Network operators are getting more sophisticated and demanding in their content plans, moving just from optimizing traffic to demanding reasonable monetization strategies.  Anyone who actually owns/hosts video has both a caching issue and an issue with delivery storage and stream management.  Players like the MSOs have much more of the latter, as do any telcos with VoD plans.  Thus, Blackwave rounds out Juniper’s content repertoire, adding the second dimension to video and potentially making them a premier player in the content monetization plans now emerging.

The question with all of this good stuff remains; can Juniper create a whole from the sum of the parts?  Contrasting their approach with that of competitors, Juniper takes a bottom-up path toward strategic issues and that risks getting to the goal long after it’s been claimed by someone else.  Competitors take the top down, claiming high ground but often failing to deliver on time.  The best approach, of course, is to have everything needed when it’s needed, but nobody seems to have grokked that one as yet.  The recent flood of M&A from Juniper are an opportunity to do something truly revolutionary, but you can’t have a revolution nobody knows about.  The Silent Majority may as well be a minority.

There’s been a recent flap about a report that China rerouted a bunch of US traffic through China, capturing and potentially (so they say) examining both government and corporate information.  China denies the story, and the real issue here in my view is the lack of any discipline in the way the Internet operates as a global network.  There’s always been an issue with route advertising in IP networks; someone can advertise a route falsely and thus capture traffic.  Making the Internet into a “real” global public network means making it relatively immune to this kind of hijacking, and whether the China allegations are true or not, there is potential for harm because of either accidents or malice, and both have surely happened before.  BGP security and management of domains isn’t an easy process, but we certainly have the components to make the Internet more bulletproof, and it’s time we tried to do that.  A key requirement is some overall enforcement of reasonable practices, though, and the only way that will happen is if the ISPs themselves say they won’t peer with anyone who doesn’t follow the rules, nor accept routes/traffic from or through them.

AT&T is moving to HSPA+, faster than 3G but slower in terms of potential than 4G.  Like T-Mobile, they may advertise their move as 4G and spawn the usual market debate on what that really means and whether AT&T is being deceitful.  Truth be told, all marketing these days is deceit, and our surveys show clearly that people don’t understand what xG means anyway.  This reinforces a point the FCC’s broadband inquiries have made; we need some objective way to measure broadband and thus to compare offerings.  Verizon’s early comments on 4G services suggest they’d launch at a lower speed than AT&T’s HSPA+ (now the rumor is that Verizon will upspeed 4G before launch), and that would mean that “old” wireless could be faster than “the latest”.

Whatever the name we give to higher-speed wireless broadband, it’s clear that it’s going to change how we use broadband services.  I’ve been analyzing how people’s behavior and their communications tools interact, and it’s a kind of feedback process rather than a simple linear progression.  Tools have always guided human processes; you don’t connect boards the same way once the hammer and nails have been invented.  But human processes drive the development of tools because their adoption can’t be too much of a behavioral leap of faith.  The big opportunity for the network of the future is the exploitation of this feedback process, the development of an ecosystem that can support the evolution of social behavior and ubiquitous broadband as they feed on each other to establish a new norm.

That’s what’s missing, in my view, in the announcements by vendors in the space—in this week and in weeks past.  Collaboration or wireless or content or 4G or any other technology or approach is relevant not for what it can do at this instant, or what it might be able to do in some indefinite future, but in how it navigates the path between those points.  Facebooks’ Zuckerberg, who I don’t think is possessed by any dazzling set of insights in most of his interviews, did say recently that Facebook’s value was to build businesses around the social graph, the chart that maps behavioral links.  I think he’s half right.  Business practices and social behavior will transform our tools and be transformed in return.  If Facebook could be the incubator for the evolution, it has a great future.  But it’s hard for things to make money in the present and prepare for the future because the people in the company are always blinded by their next paycheck or quarterly report.  The world has a lot of potholes to fall into, and if you never take your eyes off your feet it’s going to be hard to avoid them as you move into the future.

Ads, Videos, and Local Search/Services

An interesting bit of research from the ad industry opens some potential issues for the future of video advertising online.  The data shows that pre-roll ads for video do quite well, and in fact exceed the expectations of the advertisers in terms of performance.  In fact, research says that people today will generally watch a pre-roll ad.  That sure sounds like good news, but it’s in fact troubling given some other data.

One advertiser told me that mid-roll ads (embedded in the content) were five times as likely to cause a user to abort delivery if they occurred in the first 20% of the content.  No matter where they occurred other than the beginning, they were four times less likely to be viewed.  Post-roll ads were skipped by over 70% of the viewers.  If you rolled two ads before the content, the second ad tripled the chance of viewers abandoning the content, and with three or more the odds of abandonment went up by over six times.  Similarly, multiple mid-roll ads increased the abandonment risk (by a slightly smaller ratio).

You can see the challenge here, I suspect.  You can really only have one pre-roll ad or you risk disengagement.  That tends to make ad sponsorship of longer experiences more difficult.  The only good news is that where TV shows were the content being viewed, users tolerated mid-roll ads better, though they continued to disengage on multiple pre-rolls and though mid-roll success was sharply lower.  But if only one ad per content experience is allowed, and if that ad likely has to be short or you risk disconnecting the viewer, then the yield on that ad would have to be truly astronomical.

The other interesting stat is that a third of advertisers liked online advertising because the targeting reduced their costs, and a further 50% said that one of the values of online targeting was to “control costs”.  That sure sounds like people trying to spend less online, not more.  But it’s not the end.  Social network integration with advertising and even more directly with local advertising and retail are threatening to impact the longer-term future for in-video ads.  Google and Facebook are engaged in the Great Ad War, with both striving to link friend recommendations with local search and LBS (Google leads there at the moment with the recommendation engine in Google Places).

Mobile/local advertising in any form is a big deal because what makes it valuable is that the mobile user is typically out trying to buy something when they encounter it.  That makes them a much hotter target for ads, but it also makes them a target for a more direct fulfillment.  Step one might be “show a shoe ad to someone walking past a shoe store”, and step 2 might be “offer the person in the shoe store a better deal on the shoe they’re trying on”.  Step 3 is then “Let the person try on a shoe and then simply shop for the right size, style, and color online”.  Local services, in short, could actually tap money out of online advertising by converting interest to purchase without ad intermediaries.

A Tablet Tale

AMD joined the MeeGo Alliance, a group started by Nokia and Intel to promote Linux for tablets, netbooks, smartphones, and “embedded” devices like car navigation and entertainment systems.  Since Android is already in these spaces and already Linux-based, it’s pretty clear that the alliance is aimed at countering Google, but it’s less clear why so many different kinds of players want to do that.  The answer may be less in a single motive than in a host of different, sector-specific, ones.

Intel and AMD have a lot to gain by promoting general-purpose processors as the basis for smart appliances, and even more to gain by encouraging an application ecosystem for appliances that could be up-sold into laptop and even desktop computers.  Neither company makes any processor chips that aren’t “x86” in architecture, and Google’s Android efforts have been much broader than that, embracing pretty much any credible chip for the appliance market.  Breaking the x86 dominance of software would hurt both Intel and AMD.

Nokia’s interest here pre-dates its decision to pull Symbian back into Nokia as a development project, but it’s still likely that Nokia is hedging its bets a bit, hoping that a broader Linux-based ecosystem (the Linux Foundation hosts the MeeGo activity) would counter Google’s Android dominance, something that’s already threatening the smartphone space and that could be exacerbated if Android tablets really catch on.  In fact, Android could become in effect the successful non-server version of Linux, which pretty much everyone in the Linux community would like very much not to see.

In a final item, Juniper acquired Trapeze Networks from Belden, a move that’s been expected by Wall Street for some time.  Trapeze is an industrial-grade wireless LAN provider whose offerings can be targeted at the enterprise (which is how Juniper positions them in their press release) or at the now-expanding hospitality-Fi or hotspot market.

Both these spaces are important because of the tablet explosion.  Enterprises are somewhat interested in using smartphones as a way of getting communication with the “corridor warriors” and even off company premises, but they’re more interested in tablets (the 7-inch form factor is preferred) for that mission.  We also noted earlier that tablets with WiFi are cheaper and more accessible to consumers, and that they’d likely promote hotspot/hospitality-Fi applications.  In both cases, having technology that’s capable of delivering WiFi as an architected service component and not just as a local convenience is critical.

The Juniper decision to focus on the enterprise side with this deal, I think, underplays the value to Juniper and to the market.  The integration of Trapeze with Juniper’s service-layer assets make it a realistic element in not only enterprise-based service automation but also carrier-grade content delivery to tablets, and that’s a mission that crosses product and business unit boundaries.  Hopefully the execution will integrate the elements that make the deal a strong one, because the Trapeze buy puts Juniper competitors on notice and raises the risk someone will do a similar announcement with more spectacle and steal the market’s interest.

Economic View: November 15th

Last week was difficult for the stock market, partly because of the normal tendency for Wall Street to sell off to take profits as the earnings season closes and upside surprises are less likely, but also because of Cisco’s cautious comments.  This week the big question will be numbers, and there are already interpretation issues emerging.

Retail sales climbed more than expected and inventories rose more than expected as well, and this suggests that the holiday season may be shaping up better than economists had forecast.  If that’s the case then we might well see continued reductions in unemployment; remember that last week employment rose as retail jobs were created.  But the NY manufacturing index fell rather sharply, which could mean that US manufacturing at least is still lagging inventory and retail processes.  Many consumer goods are now produced overseas, of course, so that’s very possible.

On the international front, the situation with sovereign debt in Europe is raising its head again, with Ireland said to be on the verge of needing a bail-out (some say discussions are already underway but Ireland insists it doesn’t need one) and Greece rebelling against austerity by electing more socialists.  A weak Euro would normally hurt the US export trade, but with the QE measures of the Fed it could also take some heat off the US by lowering the Euro as QE lowers the dollar.  It also makes the EU house look less orderly, making it harder for countries like Germany (who is leading the EU battle against shoring up other countries’ debt) to criticize.

The stock market worldwide is much less reliable as an indicator of the overall state of the global economy since retail investors have tended to flee the market in the face of the flash crash and volatility.  That means that things are whipsawed by hedge funds that are trading rather than investing; moving in and out on small trends and not reflecting larger economic-level ones.  That may also be a factor in understanding why previous the Greek debt crisis sunk stocks in the spring and the market is now reacting to the Irish debt problem with apparent unconcern.

I think the good news here is that the world economy is recovering.  The bad news is first that the recovery is still fragile and subject to reversal based on sectional policy differences, and that the root cause of the problem—asset bubbles—hasn’t been dealt with anywhere in the world, much less here where the last couple started.  That’s our bad, and one I hope doesn’t bite us again in a year or so.

Weekly Recap: November 12th

It’s been a challenging week in a number of ways, not the least being the shock that was generated by Cisco’s cautious comments on their quarterly call.  That was enough to cause a route in the stock market and raise concerns about the state of technology.  As we indicated at the time, there’s good reason to be worried.  The era of high margins and growth rates depended on a continued renewal of the benefit case for tech investment, and since 2002 we’ve apparently lost the key to unlocking the next wave.

We finished our carrier survey this week (the number of operators is smaller than the number of enterprises and so it’s easier to get things in and tabulated), and we’ve found some sense of caution there as well.  Operators increased their level of concern about most of their topics, and reduced it for none.  Normally that means increased anxiety about the business model, and it can lead to spending conservatism.  We don’t see clear signs of that yet, but the trend is a bit troubling.

One of the reasons for carrier angst is the uncertainty surrounding net neutrality, particularly in the US, and also concerns about consumer privacy issues and their impact.  In the net neutrality case, the FCC inquiry brought out the usual madness on both sides of the issue, and this sort of thing always raises the most FUD and generates the least insights.  The comments are now closed, and what we hear is that the FCC is NOT going to propose a need to extend net neutrality principles to “managed” or “special” non-Internet IP services.  The bigger question is whether the FCC will propose its “third way” of regulation, declaring broadband a telecommunications service and then forbearing from applying many of the Title II rules, as it may do under Section 706 of the Act.  Operators fear that applying Title II would inevitably lead to regulation without forbearance, which could reduce their margins and accelerate disintermediation.

The privacy stuff is potentially a major issue for the OTT guys.  The Administration in the US is promising to appoint someone as a watchdog for consumer privacy, and the EU is also looking at a sweeping policy on privacy.  We appear to be moving closer to an opt-in process, something that advertisers and portal players know is likely to result in fewer than 20% of consumers opting in, versus only about 8% opting out where that choice is available.  But even without changes here, the privacy gaffes of the social network players like Facebook have made people more wary.  We’re told that record numbers of Facebook users have changed their profiles to reduce their exposure of personal information.

Most of the major market moves won’t happen until early next year because nobody wants to overhang the current holiday buying period.  By Q2, though, it may be a good idea to hold on to your hats.

Verizon’s REALLY “Everywhere” Video

Verizon is taking “TV Everywhere” to more places, or at least taking it places under more conditions.  Their new FiOS Flex View is a kind of Netflix-like approach to content except that instead of streaming it you download it subject to DRM, with 30 days to watch the material.  The fact that the video is downloaded means that users can view it even when there’s no Internet access available, or when connection quality is very poor.  For most users, the Verizon Media Manager is the portal to organizing Flex View content on mobile devices.

Obviously, this is another of the growing number of ways in which operators are looking to monetize content interest.  Like TV Everywhere, which is essentially a notion of “subscription equals rights”, Flex View is a view of content that says that rights mean rights wherever it can be delivered and viewed.  That empowers firms who can both offer content on a syndicated or subscription basis and also deliver it and maintain DRM credibility.

One interesting thing about the Flex View model is that it seems to disconnect the user from the network, at least as a requirement for viewing content.  That’s consistent with other Verizon moves, one of which being the iPad with WiFi and a 3G hub partner device.  Flex View could make Verizon’s content strategy less consumptive of 3G bandwidth (4G eventually) and also promote a model of use of migratory devices where permanent connectivity isn’t critical.  This doesn’t mean that Verizon is de-emphasizing the mobile network, but it could mean that it’s trying to uncouple content leadership from dependence on that network, and also reduce the risk that content success could come only by destructive down-pricing of mobile capacity.

More on Verizon’s Wi-Pad

Verizon has started to advertise its iPad deal, and it’s a bit more complicated than the rumors had suggested.  What the big telco is doing is bundling an iPad with a mobile WiFi hub, a gadget that links to a 3G service and then creates a mini-hotspot to which WiFi devices can then attach.  This finesses the exclusivity AT&T has for the original iPad, and it’s very similar to strategies used by other carriers in the world to end run Apple’s restrictions.

What makes the deal confusing or complicated is that the data plan that comes with the iPad bundle has a much smaller charge for incremental gigabytes over the base plan than other mobile broadband plans from Verizon.  Most pundits expect that Verizon will be normalizing the pricing over time, but it’s also possible that Verizon intends to promote the use of wireless trans-connectors to link smart WiFi devices to 3G/4G networks instead of relying on specific 3G/4G receivers.  Such a move would have some interesting consequences.

First, it would promote customers’ use of multiple devices through a single data connection and on a single data plan.  We’re told that many of Verizon’s iPad prospects are also laptop users and that many also have smartphones.  You can see down the line a value in having one 3G/4G device and a set of WiFi slaves.

Second, the trans-connect model would facilitate 3G/4G offload with WiFi and provide in-home use of smart devices using the existing home wireless network, rather than perhaps requiring femtocell deployment.  This could be especially valuable if Verizon intends to offer special services to FiOS customers, who already have FiOS-linked wireless hubs in home.

Third, the model could reduce the issues associated with migrating smart devices to 4G by making it necessary only to migrate the trans-connect hub and not the devices.  It’s also probably easier to make a high-quality 3G/4G/WiFi hub than to stick all those RFs into one phone or tablet.

All of this makes sense for non-phone devices, but if Verizon were really serious about the hub approach it would also be logical for them to think about releasing a hub-linked smartphone.  That would also play into rumored plans for a WiFi-based FiOS-linked VoIP service that have been floating around.

Facing Some Broadband Reality

The latest political wisdom, arising from the results of the mid-terms, is that net neutrality as an issue hurt those who supported it.  That combines with the Democratic loss to create a loss of momentum—at least according to popular wisdom.  Actually, net neutrality never had any momentum.  The Congress doesn’t like to intervene in telecom because problems there are too easily created and too hard to fix.  That’s why we have an FCC.  When there’s a problem with FCC authority, Congress is inclined to stand by and let them do their best, as I think they’ve intended here all along.  That the problem is getting more complicated by things like the Fox/Cablevision brouhaha is only making “becoming a tree” a more attractive option to our leaders on the Hill.  The FCC closed comments on this, and they’ll no doubt issue a Notice of Proposed Rulemaking at some point, but don’t expect magic.

One of the complications is illustrated in Australia, where the boundaries between the new NBN, a public access network intended to provide good broadband by bypassing the commercial process and the national carrier (Telstra), and Telstra.  NBN now wants to get into inter-city transport, creating a backhaul network that would link metro broadband customers to the Internet by hauling them between cities to get to a big on-ramp.  At one level it’s not a serious issue; that type of traffic is often not particularly profitable.  On the other hand, it illustrates that when politics gets involved in broadband, the normal political tendency to build one’s own empire rolls over into the broadband space.  Does NBN’s head (Quigley, formerly of Alcatel-Lucent) see himself as the czar of Australian broadband, and perhaps even of networking?  Minister of Networks?  Aside from the fact that this sort of thing would devalue the investment of millions of Australians who bought into Telstra’s privatization with the encouragement of the government, it raises the question of how far NBN will really go, and how much taxpayers will have to kick in.

Worldwide, the tension between consumers/voters who want everything for nothing and businesses who want something for everything isn’t going to be resolved through government ownership.  If transport/connection isn’t profitable we need to figure out how to achieve public policy goals within the framework of networking today, because dismantling that framework at this point is simply not possible.  If broadband was a good business, VCs would be fighting over the carcass as we speak.  Instead, they’ve long since gotten out of Dodge.  Think about it.

Economic Update

It’s time for our weekly financial summary.  The Fed’s move in QE2 is being criticized internationally, though we think the criticism right now is pro forma.  Countries with large trading surpluses with the US have been upset by the US move to effectively devalue its currency, and that includes Germany, Brazil, and of course China.  We noted earlier that QE was had the effect of manipulating exchange rates, though of course other countries could take steps to devalue their own currency to compensate, or initiate their own QE programs.

The pressure that will be brought to bear on the US at the G20 meeting isn’t really expected to cause it to reverse its decision, or probably even to discourage further similar moves.  It’s all part of a global trend to try to gain advantage through exchange rates—the “currency war” that the ECB has been concerned about.  Emerging markets with large trade surpluses want a strong dollar, meaning one that favors their imports in US markets.  US manufacturers would benefit from a weaker dollar, though consumers might like a strong dollar because it would lower the prices for popular foreign-built items.  The real lesson of the G20 protest is that we’re not out of the woods on broader currency battles yet.

In the US, jobless claims fell sharply, largely in the retail sector as companies hired to fill sales slots in anticipation of the holiday season.  It would be better to see manufacturing jobs, of course, but retail gains are a sign that companies expect a better holiday season than last year.  That could draw down the inventory levels that manufacturing gains in the early part of this year had built up, which would then encourage further manufacturing growth in 2011.

Things are a bit spottier in Europe, where the improvements in the Greek debt problem aren’t yet spreading to other at-risk countries like Ireland, Portugal, and Spain.  I think that the US believes the Eurozone should be doing more to boost its own economy; that it’s relying on stronger US imports (boosted by a strong dollar relative to the Euro) to drag the rest of the world up.  The debt problem illustrates the challenges in that approach, because the individual countries in the zone are still sovereign and independent with respect to their own budgets and financial policies, and too much public stimulation that creates debt will threaten the weaker members further.  Germany, who is one of those opposing US actions and depending on exports to the US, could surely do more to help its Euro partners but the decision would be politically impossible there, just as a decision to let the US economy stagnate would be indefensible here.

Every country, including the US, does pretty much what it thinks it has to in order to support its own interests.  The excesses this could create are mitigated largely by fears of starting a global trade/currency war.  What we have to look for now aren’t signs of business as usual, but signs that something new and bad might be happening.  So far, I don’t see it.