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.

Tech Week: Broadband

Broadband continues to be in the news, both in terms of policy and in terms of business model.  The two, of course, should have some relation to each other, but it’s increasingly clear that’s not going to be the case in many world markets.  The US elections and the announcement by Clearwire that they’d be cutting staff illustrate the issue perfectly.

The loss of the House for the Democrats means that Republicans will now chair the House committee that oversees the FCC, and this has already stimulated predictions that net neutrality is dead in Congress.  Not true; it’s been dead in Congress all along.  We’ve never believed there was much of a chance that Congress would step up on the issue, and frankly we’d be just as happy they didn’t.  The reason we have a federal commission in charge of communications is that Congress isn’t likely to be able to address complex technology issues well.  We saw how complex issues here are with the Fox/Cablevision standoff.

Fox cut access to some of its websites for Cablevision customers, at least for a time, and also cut off its TV programming as the companies battled over how much Cablevision would pay for carriage rights.  The FCC admitted it had no authority to act here, even though most would say that non-neutral behavior by content providers has the same effect as by access providers.  That means that meaningful net neutrality rules would have to come from Congress, and they’d have to break totally new ground.  That alone would be likely to send Congress into a tizzy, and combine it with the combination of heavy industry lobbying revolving around wireless impacts and consumer desires to have everything both neutral and free, and you have a political minefield that there’s no current incentive to address.  The election, after all, is over.

The Clearwire dilemma shows that some attention is needed here, though.  Broadband services of any sort create a classical S-curve of cash flow, with “first cost” driving a provider far into the red as they build out infrastructure to credible levels and fund marketing campaigns.  The hope is that success will turn this around, but the problem in broadband is that even “success” looks a lot like failure when it’s time to add up the numbers.  There’s not much margin, and that means it takes a very long time to recover early costs.  Clearwire needs to go back to the well, and neutrality issues with wireless aren’t going to make it any easier to do that.

The decision by T-Mobile to tout its HSPA+ offering as “4G” is another indicator.  Most operators would agree that HSPA+ is a less costly transition than a full migration to LTE, and if one accepted the 3GPP definition of 4G none of the current LTE offerings could qualify either.  But a marketing slogan may help sales, and sales could help turn that S-curve of cost around quicker.  Wireline services are already less than marginal in terms of profit, and wireless could easily move into negative territory as well.  We may see wireless capex slip in 2011 and beyond if we don’t get clarity on this issue.

The Handwriting on the Tablet

One of the prime areas of focus for tech recently has been the tablet space.  Tablets are far from new, and in fact some of the “new” models are more like reprises of earlier tablets in that they’re little more than a keyboard-less notebook.  The iPad, of course, created an alternative vision of a tablet as a kind of over-fed smartphone, a device that’s all display and designed to be a conduit of information to the user with a relatively sparse capability to move data the other way.  Some see tablets as consumer devices, and some like the model of enterprise use.  The vendors are struggling with which model to support; ViewSonic expects to offer both 7-inch form and 10-inch form and both Android and Windows 7 (even dual-boot, so the rumor goes).

However the tablet goes, the big news will be the network and the impact of tablets on user behavior.  Movement to tablets on a large scale means movement to ubiquitous wireless, but we’ll need to look hard at just what “ubiquitous” means.  As I’ve noted, there’s an opportunity for hospitality-Fi networks to play an enormous role in future tablet networking.  I think wireless providers and equipment vendors realize that and are trying to figure out how to promote a truly compelling case for 3G/4G wireless versus WiFi.  The problem is that it’s going to be an uphill battle, because device vendors have everything to gain by pushing WiFi versions of their devices to get a larger near-term market share.

Behavior and mobility and devices all create an interdependence.  The consumer isn’t set on tablet use, wireless models, or behavioral patterns at this point.  That means that giving them support for a specific usage model can condition them to consume that model, whatever form that support may take.  An explosion in tablet competition could empower a host of competitors, create a hospitality-Fi wave, and erode the business model for 4G.  It could foster a different model for mobility that focuses on roaming data sessions between WiFi hotspots, independent of traditional mobility tools of the past, and of IMS.  It could even erode the operators’ positions in the service layer, because WiFi is traditionally an OTT framework tied to no operator in a technical sense.

Alcatel-Lucent, whose quarter showed some real promise for growth, seems to recognize that.  They announced a program with Eurozone provider KPN that demonstrates the exposure of provider network assets through Alcatel-Lucent’s Application Enablement and Open API program.  This is the first large-scale success of a provider API program to deliver premium network features up the stack to the service layer.  The application itself is still a bit simplistic, focusing again on QoS and bandwidth rather than on the more complex areas of identity, federation, CDNs, and application-service feature creation, but it’s a convincing demonstration that operators do have a path to monetize their underlying network assets either by offering high-level services that exploit them or by wholesaling them to somebody else.  This kind of capability may be critical if things like tablets and hospitality-Fi start to erode the traditional mobile opportunity.

What Now?

In some ways, we’ve witnessed a historic election.  The margin of victory in the House for Republicans hasn’t been seen since Roosevelt’s time, after all.  But in a very important way we saw nothing but business as usual.  For the last three elections, US voters have turned out the party in power.  We’re never happy with our leadership these days, and for good reason.  Congressional popularity has been traditionally below 25% and the public sees Congress as the most contemptible branch of government.  But we elected them, after all.

The question now is how this will play for the US economy and for tech.  Specific party politics toward technology are, in my view, a minimal factor in this election because Congress isn’t any more likely now to pass tech-specific legislation like net neutrality than before—likely, they’re less likely.  Tech will be swept along by the economic forces.

Where will those forces sweep us?  It’s too early to say because of the split within the Republican Party that the Tea Party activists represent.  We’ve had conservative groups grab headlines within the Republican ranks before; Gingrich’s over-reaching of conservative power in the ‘90s is a potential poster-child for what might happen now.  Will activists compromise to pass legislation or will both parties do their usual political showboating?

On the positive side, Republicans are often seen by businesses themselves as being pro-business, and thus it’s possible that business may be more willing to invest and expand under a Republican House, but the House doesn’t change even Congress much less government.  On the negative side, conservative activism on the budget could cripple any economic recovery.  Attempts to repeal health care and financial reform, both promised by at least some Tea Partiers, would create gridlock for no likely gain.  But mainstream Republican leadership knows that.  In short, we don’t know yet how this will fall.

The Fed today will likely announce steps for quantitative easing, the purchase of old assets with “new money” to boost the money supply.  The question is how they’ll do it, and whether it will work.  Ultimately consumers have to start believing again.  This election isn’t going to make that happen; it was a vote against something rather than a vote for it, and that’s been the case for the last three elections, as I’ve noted.  The moderate center of America doesn’t want left- or right-wing ideology, but the parties are controlled by ideologues.  We have no candidates of our own kind to vote for, and that’s plenty of reason to be in a funk, unemployment notwithstanding.

In December I expect I’ll be able to run the model on the economic and technology future and get some numbers; in the meantime it will be watchful waiting here at CIMI as with all of the rest of you.