Economic and Policy Status, November 29th

The holiday season opened a bit stronger than last year, with retail stores reporting higher traffic and somewhat better sales and online retailers reporting sharply improved results.  It’s too early to say how this will translate into seasonal gains because shopping behavior (like a lot of consumer behavior) has been altered by the downturn and the slow recovery.  People want to believe, but they’re still not sure they’re out of the woods, and there’s always some story that fans the flames of uncertainty.

One such something is the EU economy.  Ireland won its debt relief, not that there was much doubt about that happening, but it hasn’t entirely settled the markets.  We seem to have fallen back into the Eurozone debt morass, though it’s likely that the dire pronouncements of the end of the EU are radically overblown.  The real underlying problems are an equal measure of three factors, though, and any of them could at least hurt the pace of recovery.

The first factor is the inherent lack of political cohesion to match the EU’s economic cohesion.  When things are good, the union works—but everything works when things are good.  When there’s a crisis, it tends to hit the “southern” zone of the EU harder than the main industrial center.  Those economies want to respond with stimulation just like everyone else, but they can easily overdo it and risk creating default at the bank or sovereign level.  Then the rest of the EU has to bail them out.

Factor number two is that the EU’s lack of political cohesion kept them from responding as aggressively to the downturn as the US did.  Make no mistake; without the massive stimulus and rescue process here we’d be staring at 1929 revisited at this point with an exit only a decade down the road.  It’s not great now, but it would have been a lot worse, and for Europe they hedged a bit too much and so didn’t push their own recovery strongly enough.  Probably they hoped the US would pull them out with renewed demand, which a lower Euro has helped generate.  That, of course, threatens to pull the recovery down for the US and other countries who are in less trouble.

Factor three is that the financial markets are still maverick, and in this case they’re pressuring the debt of the second-tier EU players like Greece, Ireland, Portugal, and Spain.  The first three are the least stable but the three together don’t make enough of the total Eurozone GDP to create a crisis.  Spain, on the other hand, is about 12% of that GDP, and if it were to sink into a problem state it could threaten Italy.  Speculators have been taking advantage of the fact that the EU isn’t taking decisive action (action that could leave them holding the bag, in fact) and bidding up things like credit default swaps (remember them?).  Spain has recently said that it blames speculators betting against Spain for the majority of their problem.

The big problem is that the EU’s will to do something here isn’t credible; speculators are free to bet against individual countries perceived as weak.  If the EU takes strong steps suddenly, the result would be a major financial hit for speculators, and some I’ve talked with believe that the pressure on Greece, then Ireland, and now Portugal, or perhaps Spain, or even Italy, is a tactic by speculators to raise the ante and to try to create a problem beyond what the EU is prepared to solve, thus crushing the union itself.  Such a move pits the industry against governments, and that may be an over-reaching that would finally bring some order to the markets.  It’s sad that speculation could work against countries, force peoples to change their lives and risk their futures.  Sad, but it’s also the way things are now.

Governments can solve problems, and sometimes cause them, and sometimes a bit of both.  Australia, who I’ve been watching as an indicator of the extreme end of pro-consumer telecom regulation, has passed the bill that will split Telstra and create a telco that’s now more reliant on what I’ve been calling the “service layer” than any other in the world.  The NBN that will now provide broadband access may creep further into infrastructure, and so Telstra at this point would do well to firm up its higher-layer assets and prepare for being a kind of new breed of OTT player, one with the low internal rate of return expectations and capital base of a public utility.  That could be a truly formidable competitive position providing that Telstra can shed the inertia of a telco along with the access assets.

I’ve argued for years that breaking up the regulated monopolies that were the telcos was a mistake; competition isn’t created by deregulation unless regulation suppressed it, and in the telco world the fall of the CLEC wave is pretty positive evidence that VCs and private equity don’t want to fund competitive telecommunication; the return is too low.  Thus, getting Telstra out of the access business isn’t going to make Australia’s network more competitive, it’s just going to change dominance from Telstra to NBN.  But that may not be bad, even for Telstra and its shareholders, if the company can shake off the old model and embrace the opportunities of the new.  If they do, it’s a half-step to making Australia a poster child for the way telecom will be done worldwide.

Enterprise Budgets and Streaming Video?

No, they’re not related, but both are providing some news this short work week here in the US!

HP’s numbers seem to illustrate a point I’ve been making about the IT spending plans of enterprises.  Storage was their big product star, gaining about 25% where other product areas gained less than 10% in sales.  The reason that’s interesting is that storage is the component of IT spending where the most money comes from departmental rather than project budgets.  Orderly growth of company information drives storage demand, and so it’s immune to project slowdowns of the type we’re seeing elsewhere.  It’s also true that HP’s revenues are more biased toward departmental budget spending than other vendors because of their focus on areas like laptops, desktops, and printing that are also more “refresh” than strategic in terms of budgeting.

The larger storage growth seems to argue for an HP gain in market share, but it’s not totally clear that’s happening based on our enterprise surveys.  HP didn’t gain in strategic or product influence in the storage area, but they do appear to be benefitting from the account control they have in the small-enterprise-and-down space.  It looks like their sales force is doing a better job of selling storage, and thus gaining an advantage at a more tactical level.  However, we did note that the primary storage players like EMC lost a bit of strategic credibility, which suggests that the enterprise buyer is looking to more full-service players for advice.  Bad news for the specialists, if true.

Netflix announced a streaming-only service, about two years after they should have in my view.  The new service costs about eight bucks per month and provides access to about half the Netflix film library.  Comments from their CEO sound to me like he’s preparing stockholders and customers for a shift to an online model; pricing on the old mail-the-DVD service is going up too.  For the broader market, there are three interesting things about the new Netflix strategy.  First, it may presage a war between TV and movie content.  Second, it brings the focus on the question of whether ads play a part in premium streaming because Hulu’s premium service still shows ads and Netflix doesn’t.  Third, it opens the question of whether consumers, service providers, and content players like Netflix might not now unite to try to encourage deployment of premium handling options for Internet streaming.

The TV/movie and ad/pay dynamics are related, I think.  TV has always been ad-funded and consumers don’t expect to pay for premium TV experiences, but movies have always been for-pay and that’s what Netflix is known for.  The big question now is whether we might see studios and other content resources pushing to produce for-pay content in shorter formats to compete with ad-sponsored TV, and whether the increasing intrusion of advertising into viewing traditional channelized video will contaminate the user’s enjoyment of television to the point they’d either flee to online (where presumably ads would follow) or to a pure pay model.  The problem with the latter is that securing all the current TV content in pay form would cost users about three times as much as they currently pay for subscription TV services, and it’s far from clear whether a price of a third the current level would sustain Netflix’s interest, or anyone else’s on the producer/distributer side.

Economic and Ecosystem Recap

The seemingly never-ending Eurozone sovereign debt and bank stability issue moved a step closer to resolution, and at the same time a step further away.  That’s been the history of this issue from the first, and it continues to cause concern for the global economy.

Ireland, in the most trouble after Greece, accepted IMF and EU help over the weekend, and that news was heartening to those who feared a sovereign default, bank failures, or both.  But at the same time the move likely rewarded speculators who’d been pressuring Irish bonds all along, and that may induce them to try the same tactic with Portugal and Spain.  That risk, combined with the classic “sell-on-the-news” Wall Street mindset, has weakened markets a bit as of this (Monday, November 22) morning.

There’s also some indication that China may be looking at its own policies, and anything China does sends ripples across the rest of the world’s markets since China is the hottest economy right now.  China has been taking some steps to curb inflation, and it has now seemed to signal that it might allow the Yuan to rise against the dollar and thus against other world currencies.  That would make global imports to China cheaper, helping other economies.  Thus, the markets at least are likely going to be whipsawed by the dual issue of currency; a weak Euro based on bank/sovereign debt issues and a stronger Yuan based on China policy.

Consumer research has now indicated that the average family in the US will spend about $75 more for the holidays, which would be good news for the economy in general and retailers in particular.  But even that won’t restore the good old days; the last time that spending per family was at or below the current level was in 2002.  Still, positive movement is better than the alternative, and stronger retail sales for the holiday season is critical in running down inventory levels and sustaining manufacturing growth.  Stores have generally pulled out all the stops, with longer hours, Thanksgiving opening, free shipping for online sales, and early discounts.  The general view in the retail industry is that this is essential in building holiday momentum.  Some retail experts believe that the notion of having early-season pricing at list and discounting as you get closer (or beyond) Christmas is self-defeating, and our model suggests that inducing earlier bargain shopping will increase spending by customers.

In the regulatory world, the FCC is said to be working behind the scenes to lobby for legislation on net neutrality, but in the most recent public comments on the topic, one of the commissioners was quite clearly promoting the notion that the FCC should act to reclassify broadband as a telecommunications service.  Whether there’s interest in legislation may well be moot since Congress has had little success in passing telecom legislation since 1996, and since the topic has become more complicated with the dispute between Fox and Cablevision.

In telecom, there are reports that NSN might consider an IPO to provide an exit for its somewhat-in-disagreement partners as an alternative to a restoration of their pact or a complicated private equity deal.  We’re not sure how this would fare given NSN’s market position; it’s not that the company isn’t large but that it seems stuck in neutral at best with respect to growth and market share.  We think NSN could be a powerhouse based on its objective assets, but like many of the Euro-giant firms it seems to have a problem with positioning itself in the new telecom market.  It’s not an easy place to be these days for sure.

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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.