Economic Recap: December 10th

The economic situation worldwide continues to become more clear and more stable, though it’s sometimes hard to glean that out of the media processes.  Yes, there are still issues aplenty, but under all the swoops and swings of financial news and even financial markets, there is a clear sense that we’re trying to manage a recovery now and not trying to prevent another slump.  Volatility is a price we’re going to pay here, but it’s not a bad price overall.

The recovery-management process has created what are essentially two polar extremes in terms of global economy.  One, epitomized by China, is trying to manage a growth explosion that threatens to destabilize not only the economy but even the political system.  The other, epitomized by the EU and in particular the UK, is trying to control the cost in public debt that stimulation policies have created.  The US is somewhat the man in the middle here, for a lot of reasons.  Because the US is the largest global economy and by far the largest consumer market, everyone sees it as a potential ladder for their own growth.  Because of the size of the US economy, government has been prepared to risk a higher debt level than the Eurozone, and recovery here creates a shadow of the inflation issues of China.  In the middle again.

But US trade numbers this week were very favorable.  That’s clearly not because imports have sagged; the consumer economy in the US is recovering.  Exports to China and other emerging markets (Mexico, for example) were stronger.  This demonstrates that the world isn’t acting as a brake on US growth, at least with current trade and currency balances.  It is clearly acting as a brake on employment growth; US companies still tend to offshore jobs to reduce labor costs.

The challenge of the here and now, in truth, is more political than economic.  Look under both our poles and the US middle ground and you see economic processes that are polarizing the population or threatening to.  China has to effectively bribe farmers to stay on the farm.  In the US, financial prosperity for business comes at the price of decades of essential zero-growth incomes for most workers.  In Europe, populations threaten disorder in response to austerity measures that are seen as “populist” in societies that aren’t used to having no wealth to redistribute.

The current Bush Tax Cut fight is an example of this political tension, but of course it will ultimately pass, with perhaps the sacrifice of an estate tax break that we think was likely put in the deal to be sacrificed in the first place.  The good news is that the bill will net to a positive economic impact for 2011, likely raising GDP by at least a quarter-point and perhaps a half.  But the bad news is that it won’t really “create jobs” of any quality.  The fundamental problem of labor as a cost in a business with a profit goal has not been solved, nor has technology (for the first time in fifty years) offered the prospects of a solution.  We are restructuring the nature of employment, and that will of course exacerbate the political polarization.

The issues between China and many of the West, especially the US, also loom as an example of polarization.  Success at the economic level is stressing China, creating a risk of internal strife.  For political reasons, it’s convenient for the west to fan that a bit, and the combination of the North Korea crisis and the Nobel Peace Prize debates are creating more tension with China than usual.  That seems to be polarizing political opinion within China, hardening the hard-line elements.  While we don’t think this is much more than a lot of song and dance on both sides, it does raise the risk of a slip that would create more economic pressure and uncertainty, and so at the moment it probably represents the greatest threat to world economic recovery.

In Europe, Ireland is struggling with austerity measures, and other countries like Spain and Portugal realize the cost of succumbing to the bond raiders.  The EU has been signaling that it will intervene more effectively, making attempts to attack sovereign debt or national banking more risky.  That process may not yet be over, but financial industry moderates realize that pushing too far will rekindle a demand for regulations that would be truly effective, and thus curtail the industry’s free-market piracy.  That would be good, but another fallen sovereign financial pillar is a high price to pay.  Some regulatory sanity is in order, but money talks in politics and we probably have to see much worse to do much better.

Our Annual Technology Forecast issue of our technology journal Netwatcher is coming out this month as usual, and we’ll be looking at the world economy and technology markets in depth there.  This issue will run over 25,000 words, making it the most thorough appraisal of the new technology year that’s likely to be provided anywhere, by anyone.  More economic details, including forecasts for growth, will be provided there.

Circling Chrome

Google’s let the industry have its first look at Chrome OS, which it sees as being the framework for a “cloud client” device and a platform that combines a Google desktop position with one in the smartphone space (Android) and a service-side position (Google’s cloud services) to create a new and complete (yes, and completely Google) solution for future computing and communication.  I don’t think Google has grandiose visions of owning the computing/networking world, but I do think that they’re thinking through the process of ecosystemic computing more seriously and effectively than most.  The launch of Chrome OS commercially may be delayed, but some of the impacts may be visible even before the launch.

If you look at Chrome OS and Chrome (the browser on which the OS is based) what you see is a reflection of the fundamental truth that cloud computing is not a ceding of computing to the cloud, but a rebalancing of computing activity between the cloud and the client.  In effective cloud computing, the process-intense tasks of information editing and display should be pushed outward to the client to reduce the impact of these tasks on central resources and to insure that the network connection to the client doesn’t become congested with a lot of unnecessary display-oriented babble.

A good example comes from a Google demonstration of the WebGL 3D rendering framework.  If you want to show sharks swimming you can either send pixel-by-pixel information on the successive positions, compressed information on the same thing, or objects that can be locally rendered.  The latter will be better than any of the former choices from a cloud performance perspective.

I think it’s clear that Google is thinking, but what’s not so clear is whether they can actually achieve their goals of creating cloud dominance, and if they do whether they can monetize their success there.  I pointed out yesterday that some of Google’s recent ventures, like Nexus S and Editions, seemed to be a bit less than half-baked in terms of maturity of the business plan.  Chrome OS has been around conceptually for a long time, and so has Google’s cloud aspirations, and that the two were related is no secret.  But it’s how they might relate in a business sense that’s hard to see.  Does Google think they can sell ads to enterprises that display during their work-day applications?  Seems doubtful.  Does Google then think that Chrome OS and their cloud approach is a consumer solution to computing?  If so, they why make such a fuss about things like replacing Microsoft’s Exchange or SharePoint?

Whether Google makes a success of Chrome OS or not, though, they’re going to show us some things about computing in the future.  The network isn’t going to be the computer, I think, but it’s going to be one of the computers, a new kind of partner in a much fuzzier relationship between users and computational tools.  In that new relationship, there will also be a lot more to worry about in terms of how each piece integrates with the other pieces, and likely more functional segregation of tasks than administrative segregation.  The GUI-versus-application thing is an example.  A cloud application, like all applications, will have a network subsystem, an application subsystem, and a database subsystem that serve the user appliance.  Some smarts will reside in all of these places, and those smarts will be marshaled in some coordinated way to serve the mission.  We’re creating a future that blends SOA principles with principles of GUI design, database design, device design, security, and connectivity.  It’s the creation and sustaining of that complex web of stuff that forms the opportunity for the future, and also its challenges.

But there’s more!  Part of the Google Chrome OS preview was a comment that at least the prototype netbooks that will be deployed in the extensive pre-release test will be equipped with Verizon wireless services.  Google and Verizon, once seemingly irreconcilable enemies, are showing increased coziness.  Their net neutrality proposal, which was hated and criticized by everyone including FCC Chairman Genachowski, looks a heck of a lot like what’s likely to emerge from the FCC’s December 21st public hearing on the topic.  It’s all about ecosystems, again.

A pride of lions that eats all its prey species quickly dies off too.  Google knows that as the OTT giant de jure, it can’t afford to let the problems of disintermediation become critical enough for operators like Verizon to reduce network investment or impose usage pricing with tiers that result in what are effectively taxes on new applications.  When I survey users about pricing sensitivity, the results are probably unsurprising at one level.  They want unlimited-usage pricing the most.  They want low-threshold usage pricing the least.  In between, what they’d prefer as an alternative to the latter is application-specific pricing, meaning that they’d like to see any premium charge for usage bundled into the charge (which they or advertisers pay) associated with the application or experience.  That way they don’t have to worry about a secret price being added to the visible price and called due later on with their monthly bill.  So it may well be that Google recognizes that the Comcast/Level 3 deal, whatever the rights and wrongs of how it should be characterized might be, is still the right industry answer.  Charge for what the user wants, all at once.  That means having the content provider collect and settle with the access provider.

What about Genachowski’s kiss blown at usage pricing, then?  It may be that he’s simply waving a troll at the kids, creating a threat that makes a spindly carrot look more appetizing.

Is Google Biting Off Too Much?

Google, master marketer, may be showing some signs of excessive spread.  The company has launched its long-awaited Google Editions and also the next generation of its Nexus phone, and while supporters are trying hard to find great things to say about both, it seems clear to me that neither is fully baked.

Google Editions is an online bookstore that supports online reading in a browser rather than through the traditional e-reading applications.  The platform has gotten early criticism for being amateurish, but I’d have to disagree; its navigation is different from that of Amazon or Barnes & Noble, but not worse.  The thing I find hard to figure is the sense of the offering; what’s Google trying to do here?

On one hand, it seems pretty clear that ebook readers are a threat to Google because they aren’t web-enabled and thus dodge Google’s incumbency.  If you buy an ebook from a Kindle or Nook or even from the company’s website through a browser, you’re dodging Google.  But realistically Google can’t be a part of everything, and that’s the rub here.  The experience for Editions is designed to be based around the browser.  Though you can download ebooks in ePub or PDF form, transfer them to readers (like Nook) that support that format (using Adobe’s free Digital Editions software, and even read them with some of the PC apps (Nook for PC, for example), the process of getting an Editions book on a reader is considerably more complex than the process of getting the same book from the reader’s online library.

In all, Editions looks like a store in search of a reader, which leads to the second item in the Google news—the next-gen Nexus.  This new phone isn’t being touted by Google as the re-invention of the smartphone market; in fact, the launch has been low-key.  The only really distinct thing about the new Nexus S is the fact that it’s equipped with near-field communications (NFC) for use in retail as a substitute for a credit card.  While the Nexus S will be available by the holidays (in Best Buy for example), and while it would support the Android application for Editions, it doesn’t seem to me that this is the justification for Editions.  You can get Android apps for Kindle and Nook books, after all.

It seems more likely that Google is preparing Editions to support Android tablets, but it’s hard to see how even that mission is served in any distinct way.  It’s not that Editions is bad or that the Nexus S isn’t capable, but that the effort of launching either of the two doesn’t seem to be aimed at a clear and valuable payoff.  Google might be spreading itself too thin.

Economic Reprise: December 6th

There continues to be a series of contrasts in the global recovery, and in several dimensions.  The fundamentals of consumption and production seem to be moving slowly positive worldwide, though the pace is slower in Europe.  In Asia, there’s more worry about things like inflation (China) or deflation (Japan), and in the US the big problem continues to be unemployment, which jumped to the surprise of many in the last week.  There are also some undercurrents that could exacerbate some of these larger trends, and I’ll focus on these today.

The sleeper issue in the US is the state of state/local budgets.  Reductions in tax collection have hit governments hard, and some (like California) also have political problems that make it much harder to create fiscal stability.  The result is that we’re looking at possible shortfalls significant enough to create an uptick in jobless claims in themselves, and at the very least we’d expect the public sector to generate relatively little in the way of new jobs in the near future.  In the Federal sector, we’re clearly headed for considerable pressure on both total employment and salaries, and that will have some negative impact on the job market overall.

In Europe, the issue is what some have called “bond vigilantism”, a decades-old concept that essentially says that bond investors will punish governments for policies they don’t like.  That’s what’s been happening in Europe, where weak EU economies are being pressured through high interest requirements and credit insurance rates.  Objectively neither Spain nor Portugal should have any sovereign debt or banking problems at this point, but both may end up with both problems because of bond speculation.

In Asia the big problem is the combination of inflation risk from economic growth and problems with an export-economy mindset.  Virtually all the Asian economies are export-driven and most have taken steps to stem internal growth to sustain labor cost benefits and to control the impact of industrialization.  Those steps have, in Japan, created an economy that’s taken frugality to a new level and has actually undermined the domestic economy.  As other countries in Asia catch up with Japan (China and even Korea) the result is an economy that may have neither internal nor external stimulation for growth.

A final issue here in the US is politics.  Anyone who reads history would have to realize that we’re in a period of political polarization that’s almost unparalleled since the pre-Civil-War era.  Fed Chairman Bernanke spoke over the weekend and among his comments was one that we were creating a society too polarized.  His view was that education was the polarizer—people with more had half the jobless rate of those with less—but I think the issue is more complicated.  Clearly the US could not absorb a large incremental population of highly educated job-seekers even if we had the system and funding to turn them out.  The real issue here is that we’ve created a society that’s bordering on masters and servants—a small producer economy largely focused in the financial and high-tech sector and a growing population of service-economy workers who really serve that first group and each other.  It’s the ultimate opposite of Asia; instead of creating so much manufacturing goods we have to sell offshore to get rid of them, we produce nothing but things we can’t sell offshore because they’re personal services.  We can’t mow the world’s lawn, after all.

The economic downturn we’re recovering from was caused by financial-industry excess, but under it is still a systemic problem with the creation of jobs and wealth.  We took the easy path, shifting with capitalistic fervor to a derivative-based financial growth strategy rather than trying to figure out how to build more and better stuff.  That both opened the door for the Asian economies and closed some doors here.  It’s time to open them again.

Oracle Plans, Government Dwaddles, and People Dumb Out

Oracle has rolled out a new high-end Sparc-based cluster server, a 16-core T3 version that seems to close off any debate on whether the company is serious about the hardware business.  In fact, our rumor mill and survey data show that Oracle may be ramping up for a major effort in 2011.  Software is the only place in tech where you can really build differentiation quickly and hope to sustain it for long enough to capitalize on your success.  We’ve already seen software taking a larger role in networking, and what we’re seeing with Oracle is a software company exploiting the engagement that differentiation can bring to move itself into becoming a mainstream, full-service, IT player.

The Oracle blitz would have a significant competitive impact.  Both IBM and HP, the incumbent giants, are relative lightweights in software relative to HP.  IBM lacks lacks any strong connection to the networking space.  Oracle’s server strategy focuses on database networking via appliances and through Infiniband, which is an alternative to the much-touted Ethernet-based data center networks.  That runs in opposition to the data center network strategies of not only IBM and HP, but also of Cicso, who is potentially impacted by a big move by Oracle into servers and data center networks for a bunch of reasons.

Then there’s SAP and of course Microsoft.  SAP unveiled a new real-time data analytics appliance, showing it’s going to shift more in the hardware direction, and there are rumors that it would be going even further in that direction, even as there are rumors that HP wants to do some serious software deals in 2011.  Microsoft might be left as the only relatively pure software play, except that there are also rumors Microsoft might be looking at the appliance game, not only for database products but also for collaboration and other middleware elements.  “Cloud-in-a-box” Azure-inspired technology is already sold by Microsoft partners, but Microsoft realizes that many of its hardware partners may end up being competitors if the appliance business really takes off.  Still, Microsoft get into any sort of hardware is a big risk to its current partnerships, and unless they see real stress cracks they’ll probably go slow.

There’s a curious fast/slow balance going on with regulations relating to the Internet.  The FCC’s December 21st meeting will be critical in setting out the details of what looks like a complete FCC reversal of perspective.  Genachowski’s stance on neutrality has historically been “pro-Internet”, favoring OTT players over the ISPs/telcos.  His statement regarding the forthcoming order is almost the opposite, admitting explicitly to the value of usage pricing and implicitly supporting multi-tiered services and “special” non-Internet-but-IP services as well.  Further, the order appears to have little chance of being upheld if it’s appealed, raising the question of whether there were private discussions among the players that secured a promise not to appeal.  But I’m also hearing that the vote on the 21st isn’t a sure thing at this point and the whole deal could fall apart at the last minute.

Other issues relating to lawful intercept and privacy are demonstrating that the Internet isn’t the PSTN.  The problem is that in the current IPv4-dominated online model, we don’t have permanent addresses for service access points or devices, and the transient nature of IP addresses makes it much harder to identify a specific online user to either apply intercept warrants or to record their tracking preferences.  Add to that the fact that many of the potential trackers are outside the reach of US law and you have some ugly potential.  We’re actually building a pretty good argument for mandating an Internet shift to IPv6, but it’s not at all clear that there’s anybody who could make the mandate stick other than the US government, and that agency is apparently unable to agree on even fundamental points of taxing and budgeting.

A final point comes to us courtesy of Pew’s research, focusing on what people know about the world around them.  Not much, it turns out.  What’s frightening about the results isn’t even the somewhat-expected fact that people know nothing about government, geography, history, or current events (outside of sports and gossip).  They also know little about technology.  Only about a quarter know that Android is Google’s operating system, for example.  Here we sit amidst the greatest collection of readily accessible knowledge of all time, and we’re getting stupider.  That has significant consequences for political policy, but also for our ability to manage our own technology decisions.  I’ve noted a similar effect in our enterprise surveys.   This is important because it’s telling us that the buyers don’t understand what they need to.  A solution might be to educate them, but not only don’t vendors really want to do that, the buyers themselves don’t want it.  “I don’t want decision support; I want to be told what to do!” is the typical survey response.  Buyers want a trusted agent, a company they believe in and will bet on to lead them through technology issues they believe they’ll never fully grasp.  It may be that becoming such an agent will be the critical path to success in the coming year.

Usage Pricing: Is the FCC Wrong Again?

The FCC’s upcoming neutrality order, presuming that it goes forward, isn’t the only thing that the Commission has commented on that could change industry direction.  Chairman Genachowski has also indicated that:

Our work has also demonstrated the importance of business innovation to promote network investment and efficient use of networks, including measures to match price to cost such as usage-based pricing.

This comment seems to put the FCC behind the industry on the issue of broadband pricing rather than behind the consumer or the OTT players, a marked shift for Genachowski and one that’s raised comments inside the Beltway that he’s sold out to the big ISPs.  It’s not as bad as that, I think, but it’s unfortunate the comment was made because it doesn’t solve the problem.  The big thing the Internet needs is settlement and not just usage pricing.  Collecting more from your own customer in a pure bill-and-keep framework does wonders for your own bottom line, assuming they’ll pay, but it doesn’t help the ecosystem.  The big questions, which we can’t yet answer, is how the FCC might respond to the Comcast/Level 3 deal and whether Genachowski and his clan will continue to rain on the Google/Verizon proposal.  An open commercial framework that lets anyone who wants special treatment pay for it is better than a system that just lets consumers pay incrementally.

The whole issue of more money for access, whoever pays, isn’t going to resolve the issue of monetization either, but it might take some pressure off and that would be a bad thing, I believe.  Ultimately, usage pricing will curtail usage.  ISPs tell me that their intention, which they’ve conveyed to the FCC, would be to set usage tiers high and hit the 8% or so of users who are massive bandwidth consumers.  They’re also proposing to set download and upload tiers independently, which could be used to punish file-sharing without going to court to block access.  Whether this comes about as planned, it will certainly still make people think twice about how much capacity they consume, and that may make things like online video less popular.  The best approach is a framework for operators to monetize things, which means a service-layer approach.

Cisco has long been absent from this space, but today they’ve revealed that they’re buying a small network management firm called LineSider, a company who makes software that uses policies about user/service/resource relationships to manage the network.  The Cisco move may be a counter to service-layer announcements by rivals Alcatel-Lucent and Juniper, both of whom have been touting service-layer goodies for over a year.  Cisco gained a big credibility boost in the service layer just by having blade servers and a complete data center story, but they lost some of their edge in our fall survey for lack of a complete service-layer execution.  They may now be working on one, and if they are it’s likely to make that space much more competitive and interesting.  Cisco, unlike its rivals, is a marketing machine.

Did the FCC Boot it’s Net Neutrality Position?

The FCC has released some comments on the Order it will be presenting on net neutrality in its December 21st meeting (if it doesn’t postpone or change the agenda again!) and the position is disappointing.

At a high level, what the FCC proposes is to state again its original principles of neutrality and apply only transparency and openness as standards in the wireless space.  That’s not necessarily a bad position, but it does beg the questions that the Cablevision/Fox and Comcast/Level 3 disputes have raised.  The problem is that the FCC is not proposing to use Title II reclassification to establish jurisdiction here, but instead relying primarily on what’s called “Title I” but should more accurately be called “Section 706” jurisdiction.  That, in my view, may well be insufficient.

Section 706 says:

The Commission and each State commission with regulatory jurisdiction over telecommunications services shall encourage the deployment on a reasonable and timely basis of advanced telecommunications capability to all Americans (including, in particular, elementary and secondary schools and classrooms) by utilizing, in a manner consistent with the public interest, convenience, and necessity, price cap regulation, regulatory forbearance, measures that promote competition in the local telecommunications market, or other regulating methods that remove barriers to infrastructure investment.

You can see that first-off, it talks about “advanced telecommunications capability” here, and we’ve not classified broadband as telecommunications.  When this section was translated into amendments to the Communications Act of 1934, only the forbearance part was translated into Title I.

The second problem is that the FCC presented Section 706 authority to the Court of Appeals in the Comcast case, and the court rejected it.  While it’s possible that the court was saying that the FCC hadn’t laid the right foundation to use it (the court pointed out that the FCC has said consistently that Section 706 didn’t convey independent authority, only the obligation to use authority the FCC had explicitly from other sections), it’s also possible that the court would simply reject the order on the same basis.

The right way to go here is what the Republican minority wanted (probably more to be disagreeable than on principle, to be sure); classify broadband (not the Internet) as a Telecommunications Service and then forbear from the wholesaling regulations and other sections as needed.  The FCC clearly has the authority for this, but they seem unwilling to buck the flood of negative (and uninformed) PR on the topic.  I’d still hope that this might change as the meeting approaches, because we need some clarity here and this doesn’t seem likely to be the path to getting it.

Google Oversight

The EU has opened an anti-trust inquiry into Google, not the first time the search giant has been in trouble with the EU but perhaps potentially the most serious inquiry yet.  Google’s market share in search and its potential for abusing that position have always been a concern, and in the EU you have to add to that the normal backlash generated among regulators by local competitors.  The problem that’s alleged is that smaller firms see their sites downgraded in positioning.

My personal feeling here is that the positioning of search results is a travesty overall.  There are dozens of sites that do nothing but try to intercept searches, there are optimization strategies that force higher rankings, and of course then there’s “ad words” paid advertising.  In many cases these days, you can’t do a search and find a useful response in the first two or three pages.  But does that mean Google is guilty of something?  If it did, the same searches with Bing would generate something different, and they’re not much better there.  The problem with search is that it’s sponsored.  That means it serves the interest of someone other than the person doing the searching.  Even the EU complaint is silly at one level; companies complain their rankings aren’t higher, implying that the rankings should be.  Why is that?  There’s an honest way to do search, but we’d have to pay to search to get it, and that’s not likely to happen.

Google’s not making things easier for itself with some upcoming announcements.  On the speculative side there’s the rumor they want local coupon site Groupon, a move that is almost certain to raise concerns about the growing scope and power of Google.  Groupon is also a potential aid in a social-network bid by Google, since it would give a tangible reward target (coupons) around which social ecosystems could be built.  The other announcement, this one a sure thing, is the Google Editions launch that’s expected literally any moment.  That would take Google squarely into the ebook space.

There’s plenty of competition in the ebook market from the likes of Amazon and Barnes & Noble, but that has some in the regulatory world worried because it could mean that Google hopes to leverage its previous activities with scanning works that were no longer authoritatively copyrighted and also its search incumbency.  What Google says about the program is that it would give the smaller bookstores a stake in ebooks, something they don’t have now and that many say they want.  But how the process will work, exactly, isn’t known.  It’s doubtful that Google would be able to sell ebooks for third-party readers like Kindle and Nook, which would force it to rely on apps on devices like computers and tablets.

Tablets are expected to put a dent in PC sales next year, but whether Google could climb to ebook success on the tablet space alone is a tough one to predict, particularly given that Apple’s iPad is the top tablet and that Apple has its own ebook aspirations.  We’ve been hearing about a Google strategy to create a virtual newspaper that would compete with Murdoch’s iPad daily, but that would certainly create more tension with news organizations already concerned by Google’s delivery of their material in search results.