Lots of interesting and potentially pivotal happenings in tech, and perhaps the most interesting thing is that the real meanings of all of these happenings are more important than the surface topics!
AT&T wants to buy T-Mobile, which is no surprise given that DT has been looking for years at selling its US property and that AT&T wants to own the world in the mobile space. What is a surprise is that Verizon seems resigned to the deal getting regulatory approval, which suggests it’s not actively lobbying against it. So why would Verizon consent (or at least acquiesce) to its biggest competitor getting even bigger? That’s one of those below-the-surface points; two, in fact.
One guess at the biggest reason is that T-Mobile and Sprint are the two players most likely to consider pushing the FCC to create reasonable, open, broadband roaming requirements. All the smaller cellular operators would like that, but only two have deep enough pockets to fund a campaign, and clearly T-Mobile is one of them. Remember that the appeals of FCC orders on unbundling were funded by the IXCs until the RBOCs bought them? The same dynamic could be at work here.
As a related point, healthy competition is key to regulators in the US wireless market. It may be that Verizon reasons neither Sprint nor T-Mobile can make an effective go of competing. Problems with the financial position of the second-tier players could then spur regulators to act. Obviously T-Mobile’s stability and endurance wouldn’t be in question if AT&T bought them. Could Sprint then capitalize on the new dynamic? Would a cable company, or even Verizon, buy them? Could the FCC accept a duopoly instead of its cherished notion of three key players?
Or could Verizon just be bluffing? That’s the second point here. By asserting they think the deal could go through, Verizon might hope to marshal public policy groups’ opposition to the deal. Regulators are certainly uneasy about this kind of consolidation.
Which brings both issues to the same point; competition. There’s a fundamental problem here in that telecom is very expensive and has a relatively low rate of return on investment. That makes it an industry that isn’t naturally competitive. To demand that there be three or four major competitors isn’t realistic if that number can’t be sustained by the available revenues or by the trends in return on infrastructure. The FCC may now have to face reality; multiple parallel wireless networks are always going to be more costly than one single network, or two.
For the equipment vendors, this should be a stark warning. The investment in wireless or wireline infrastructure depends on making a profit on that investment, not on the “traffic demands” of the network. Consolidation is a signal that ROIs are falling, that network equipment sales will likely be impacted by the ROI trends, and that differentiation is moving elsewhere.
Which brings us to Cisco. The company has been a major disappointment to Wall Street for years now, and there’s been ongoing grumbling about a breakup of Cisco or drastic changes in style and management. That now may be coming to a head as CEO Chambers promises a make-over, admitting that the company’s “execution” has fallen short. Interesting comment, given that any failure can be said to be an execution problem. What will happen to Cisco will depend on how it defines “execution”.
Make no mistake about it; Cisco cannot go back to being a switch/router company. Price per bit trends make it clear that telecom switching, routing, and access equipment is going to be under tremendous price pressure, creating a market that not only Cisco can’t win in, likely nobody really can. To say that Cisco should divest its consumer division and get back to basics is to say that it should lay down with a rose on its chest and await the inevitable. Chambers has the germ of the right idea with “adjacencies”. The problem lies in the way that notion is acted upon.
Two developments in the market reflect the fact that there’s something more than moving bits going on; Alcatel-Lucent has announced an OpenTouch middleware package for UC/UCC and Verivue has announced a new content delivery framework. UC/UCC isn’t a big market-maker in the telecom space and certainly won’t make Alcatel-Lucent rich, but the fact that Alcatel-Lucent thinks UC middleware is important may mean it realizes (finally) that middleware overall is important. Yes, I know that its Open API program and developer stuff seems to demonstrate a middleware commitment, but the problem is that the underlying platform for developing service-layer assets is only implied by that activity and not revealed. Maybe now they’ll reveal it.
Verivue’s announcement is more directly aimed at the service layer. CDNs are increasingly important not because they’re a good business (Wall Street is increasingly down on all the independent CDN players) but because some CDN elements are essential in an ISP content monetization strategy. What makes Verivue interesting to me is that their CDN platform is based on virtualization, which makes it cloud-compatible. Service providers and ISPs of all types tell me that their content monetization strategies have to be based on cloud technology, component re-use, and a higher-level understanding of how content distribution fits as a part of a general service-layer architecture. Verivue can answer those questions, I think. However, the cloud element of their capability isn’t the keystone of their positioning. That likely reflects the “Cisco problem”; nobody wants to be strategic when that means embarking on a longer selling cycle.
Consolidation in the vendor space is inevitable, for the same reasons that it’s happening already in the carrier space. Unless vendors step up to the reality that systemic, strategic, complicated changes are needed to create a new revenue model for operators, their fate is sealed at all levels.
In economic news, Portugal and possibly Poland are the latest to join the group of nations in Europe with sovereign debt problems. Portugal has requested EU help, and many now think Poland will have to do the same. The EU has raised its funds rate slightly, and now there may be some concern that the recovery in Europe may be impacted by debt and Euro issues. Add that to the expected near-term weakness in Japan and you have what might seem a problem in the world economy. But here in the US we see improved retail sales and jobless claims, and more general optimism. Certainly the US has the market mass to buck some headwinds elsewhere, but I do think current Street optimism should be tempered just a bit.
Long-term, the economic recovery depends not on spending or funding or exchange rates. It depends on not having another financial-industry scam-fest. For all the talk about reform, we’ve made less progress there than needed, and my major worry continues to be the impact of financial excess on world economies. Let’s hope I’m not right to be worried.