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Business changes in networking are often more significant than technical changes even though networking is ostensibly a tech market area, and that’s the case this AM in my view.  NSN has announced a major refocusing/restructuring that will cut about 17,000 jobs worldwide and concentrate company efforts on mobile broadband.  Obviously this is a big deal for NSN, and obviously it’s at least in part due to the company’s efforts to show a profit for its parents.  But there’s more to it, I think.  Is “mobile broadband” the anointed space, profit-wise, for vendors?

Probably.  In order for the “network of the future” to last into the future it has to show a profit, a return on investment at least on par with the operators’ current internal rate of return.  There are a number of notions on how this might happen, but my personal view is that it has to come through enhanced creation of service features hosted on IT devices and partnering with network equipment to form a service layer.  This partnership could happen for both wireline and wireless, though.  What makes the future of services more tied to mobile broadband than to fixed?  There are two answers.

First, you can’t make service-layer changes without making an investment, and the investment is easier to make where the services in place are still earning a decent profit on their own.  In mobile that’s still the case, but not so in wireline.  Operators who try to push wireline service-layer functionality today have to fight OTT competitors as well; there are plenty of OTT service-layer tools out there in the form of cloud elements and APIs from players like Google.

Second, wireless broadband is an always-with-you thing, and that makes it a force to transform consumer behavior to become broadband-centric and broadband-supported.  Life, in a sense, can become a reflection of an online reality because online activity and relationships can drive real-world behavioral changes.  This framework is fertile ground for the creation of valuable “service features” that would be much harder to socialize to buyers in fixed-line service frameworks.  There, the fact that the user is in a place, often the home, tends to fossilize behavior around past models.  Mobility means freedom, flexibility, opportunity.

For NSN, the key question is whether they see this connection and are prepared to exploit it.  The broadband Internet creates the same downward pressure on connection prices and the same risk of OTT disintermediation in the long term, regardless of whether we’re mobile or not.  Mobile will have more time to respond, more opportunities to exploit, but you can’t be a bit-pusher in mobile any more than in wireline.  The usage cap trend might even mean that bit-pushing will be less feasible as a vendor strategy in mobile over time.  Users don’t like to pay for stuff like capacity; they pay for features and experiences and not the delivery vehicles.  NSN has to be a feature giant to be a mobile broadband giant, in short.

For the rest of the vendors the NSN move should be a warning signal.  Alcatel-Lucent, for example, has a strong mobile broadband and also service-layer kit to exploit, but it also has a ton of other stuff whose future is far more problematic.  Should it think about shedding some of the big iron of the lower layers to focus on places were profit can be made for operators, and so then also for vendors?  How about players like Cisco and Juniper, neither of which really have much of a mobile broadband story?  Can they create service-layer value that is sufficient to give them a place in the evolution of mobile services when they can’t really play in the RAN, the critical part of mobile broadband infrastructure?  I think that we’re facing some major competitive changes in 2012, either because players get smart and proactive, or because they don’t and get sidelined.

 

HP reported its quarter, and while the company’s revenue-line beat of estimates buoyed its stock after hours, we think that the results were at least as troubling as they were gratifying for HP, or at least they should have been.

Whitman’s decision not to spin out the PC business was a major risk factor for HP because the company’s position in that market was clearly going to be impacted by the earlier decision to leave it.  To make matters worse, HP’s tablet strategy (always problematic given WebOS’ limited opportunity to gain versus iOS and Android) was contaminated by its decision to exit that market, presumably also reversed.  Then there’s the hard drive supply problem, which could increase the unit cost of PCs and drive even more users to tablets in the near term, creating a market shift HP is especially vulnerable to given the points I just made.

The big problem for HP, though, may be its failure to bring its service and network strategies to fruition.  Logically, HP needs to create a vision of data center evolution that’s based on a strong symbiosis between computing, software, and networking simply because they have all those elements in house.  Services could be the glue that binds these elements into a cohesive strategy.  Absent a vision of data center unity, though, services have nothing on which to build and HP cedes its largest benefit.  In our just-completed fall strategy surveys, HP continued to lose influence in the data center, where it clearly needed to gain it (Cisco gained there, which is reason enough for HP to worry).

There are even a few rumors now that HP may be looking to pull an IBM and leave the networking business instead of the PC business, creating a formal partnership with Cisco that could even involve the “sale” of its network assets/customers.  For HP, this sort of thing would be either a total disaster or nearly so; Cisco is perhaps the only serious rival to HP and IBM for hardware dominance of the new network-integrated data center and Cisco would be empowered by such a move on HP’s part.

 

 

We’ve got an interesting juxtaposition of supply and demand issues in video, a reflection of the tension that’s inherent in the Internet or OTT or streaming video model, whatever you’d like to call it.  Just what kind of video future the Web has will likely play out based on how these forces interact, and how regulators and vendors confront the problems and opportunities.

Google is creating a buzz (perhaps I should say “re-buzz”) on Google TV with a launch of a Honeycomb version of the Android platform.  The initial Google TV didn’t turn too many heads, and the current version isn’t really out yet so it’s too soon to tell what will happen.  What’s for-sure happening is that Google is making another stab at getting itself a place in the world of television.  The question is whether there’s anything it can really hope to do.

The Google TV concept has been viewed as both an example of cord-cutting and as proof that everything streaming doesn’t have to be that.  My personal view is that Google’s view is simply that it wants to mediate the video experience with video search.  That such a move might make “cords” collateral damage is to Google just one of those things you accept in time of (commercial) war.  But whether Google is gunning for cable and network alike matters less than whether those parties believe that their own models are at risk, and they clearly do.  That’s why they blocked feeds of their web streaming to Google TV, and are likely to continue to do so.

The other issue with Google TV is the whole streaming thing, which creates traffic increases that don’t produce compensatory revenue gains for operators.  The OTT video model has prompted operators to take increasingly far-reaching measures to manage their profits in the face of the onslaught of video traffic.  Some are aimed at monetizing video rights that the operator has or can obtain, and some at managing the traffic impact.

Content delivery is the hottest issue in networking in an operator-strategic sense; it’s been rated number one since we started doing surveys on monetization priorities.  The consistency of the target has belied a considerable amount of variability in the approach and the specific priorities and methodologies.  Interestingly one thing has not only stayed constant in the midst of turmoil, but actually strengthened.  That’s the commitment by operators to the view that the heart of their content strategy is a CDN.

Content delivery networks are not as old as the Internet, but they’re pretty darn old, and because of that everyone thinks they know all about them.  That’s even true of network operators, who have gone into content delivery in the classic “groping the elephant” methodology.  Some grab for peering-point cost optimization and they see an Akamai-like model of peering-point caching.  Some, particularly mobile operators, are worried about transport costs for video and so they’re looking at pushing flow-through caching out to the edges.  Some are actively monetizing content based on rights they’ve acquired, including through channelized TV service they may offer.  The point is that there’s a host of different perspectives on content profit.

As diverse as operator starting points may be, they all think they will end up in the same place, which is “everywhere”.  We’ve not surveyed an operator who believes that they’ll have anything other than a broad commitment to every single profit-enhancing approach, whether cost- or revenue-driven.  A major reason for that is that operators believe that there’s an enormous battle taking place above them, among appliance giants like Apple, portal players like Netflix or Hulu, the studios and TV networks, and even (increasingly) the consumer electronics and TV companies.  This battle-in-the-skies picture creates a market that shifts directions dramatically as various consumer fads driven by various players ebb and flow.

Verivue, who happens to be the only independent CDN player I ever see in operator deals, has announced a new transparent caching feature to their OneVantage CDN.  With the addition of transparent caching, OneVantage can now support every model of CDN deployment that an operator is likely to be considering, and more important every model they’re ever likely to need to consider.  For operators facing market chaos, it’s comforting to know that the thing you believe to be at the center of your content profit strategy is going to stay on-point through all the market shifts.

Startup players are typically going to take a new slant on things, and the basic architecture of OneVantage is very different, which is why something like transparent caching can be added so easily.  It’s a software-based CDN that can be hosted on pretty much any commercial server and support any storage system from memory through flash to rotating media.  The software logic is virtualization-ready, meaning that it’s cloud-ready, and the components are organized through a Verivue-developed scripting workflow language that makes modification and customization easy.

Verivue’s addition of transparent caching is noteworthy in itself because they’re arguably the first player to have a CDN model that spreads across all the various revenue and cost management options that operators see themselves exercising.  What’s probably more noteworthy in the long run is that the things that make it possible to extend the CDN model like this can also support further extension, and that’s darn sure going to be needed as the complicated multi-stakeholder world of streaming video churns and heaves as it evolves.

Well, it’s official; HP is not going to spin out its PC operations.  Some (most, on the Street) are hailing the move as a reversal of a crazy notion of the now-gone Leo Apotheker, but as I’ve noted in earlier blogs, I’m not so sure.  I do believe that the tablet won’t sweep the PC from the market, and the latest quarterly numbers seem to demonstrate that.  However, there seems little question that the margins are going to sink even more, and that PCs will have to be a part of a larger consumer electronics ecosystem.  That’s what I’d like to focus on now.

HP’s TouchPad tablet was also a casualty of the PC-spinout decision, and in the context of getting rid of PCs keeping tablets was arguably a bad move.  But keeping PCs and ditching tablets?  It’s hard to see how HP could possibly sustain that kind of decision, so I think it’s obvious that HP is now going to be a flagship player in Microsoft’s Windows 8 play.  In fact, I would expect to see the two companies strutting around and hinting coyly about what’s to come.  Yes, it means trashing the WebOS stuff that HP also paid for, but hey that was Leo and this is Meg, right?

Another company with more than its share of problems is apparently going back on the block.  The Street rumor is that Brocade is looking for a buyer, a private equity firm.  Some of my sources say that the company would have liked for IBM to buy them (heck, I’d like IBM to by ME; listening, Armonk?) but that there’s too much in their portfolio IBM isn’t interested in.  There are also some rumors that the company was shopped to Oracle, who is said to be looking for a network vendor.

The problem Brocade has is that the Foundry acquisition never gelled.  In survey after survey of enterprises, the company’s strategic influence was in the single digits.  In the preliminary results from our current survey (incomplete at this point) four out of five buyers said they didn’t know if Brocade had a cloud strategy at all.  Given that cloud computing is a big driver of data center change (more on that in December!) a lack of cloud position for a data-center network vendor is the kiss of death.

Moving on to the network operators, Verizon is launching its managed monitoring service across pretty much all broadband US markets, including those where it has no footprint at all.  This is an illustration of yet another benefit of “service layer” or “cloud services” in a revenue sense.  An operator can add new customers without building out expensive loops to them, and if the managed services offerings are symbiotic with their mobile services (as Verizon’s are to a degree at least) then there’s pull from monitoring to other traditional services, not to mention pull to other cloud services.  Imagine service ARPU growth from non-network customers!

The “service layer”, meaning software frameworks that create application platforms, may now be a factor in the enterprise space too.  The advent of OpenFlow switching threatens to create a commodity switch architecture that could become a standard for the data center even if neutrality rules make it unlikely it will grow beyond that into the Internet.  Now Facebook’s Open Compute Project is going to have its own (Facebook-sponsored) foundation to promote open standards for the data center.  That would, among other things, put pressure on HP and other providers of servers, but it would also play to some real user changes in the cloud.

I’m telling you now that even based on preliminary results, the enterprise survey underway here is showing some truly radical shifts in cloud thinking.  I noted as long as a year ago that buyers who were actually involved in cloud projects underwent a transformation of viewpoint as hype gave way to reality.  Now we’re seeing the mass of buyers who have been transformed growing large enough to create cooperative communities of interest and to push their visions out to the sellers.  As a result, it’s very possible (even likely) that the whole conception of “the cloud” is going to change.  That could be really good news for someone like Brocade or HP who are trying to get into the cloudlight a bit late.  Or it could be really bad news if they don’t pick up on the trend.

 

The Street is busy handicapping the networking space, and what they’re finding is interesting in part because it demonstrates that stock potential and company sales and influence aren’t always congruent.  Sometimes they are, though.

One recent Street favorite is Cisco, whose sudden fall from financial grace shook both investors and company management.  The result was a period of loss of focus that was visible all the way down to the sales teams, and that made Cisco take a big dip in strategic credibility.  The view now is that Cisco has gotten its act together and is ready to move forward, which is half-true.

Yes, at the sales level, I’m seeing much stronger account work being done and deals being closed.  Cisco is recovering some of its strategic credibility, and so in that regard you could argue that they’re making up the losses.  They also have that golden ring of incumbency that lets them leverage their current relationships to create more ARPU.  But there’s still no real progress at the strategy level.  Here, I think the challenge for Cisco is that they’re so much a company of personalities that they need everything that’s important to be run by a PERSON, a specific individual who becomes the face of articulation, the face of strategy, the face that customers and everyone else trusts.  It’s been very hard for Cisco to create a face for its diverse activities.  Chambers is a tough guy to share a bed with and internecine battles among his subordinates are legendary too.  Not since Charlie Giancarlo left has Cisco had a credible technology face, and even he would be challenged by the adjacencies that Cisco now has to juggle.

F5 is another player who has catapulted to Street fame, largely by turning in a banner quarter.  The big asset these guys have is a relentless focus on the data center at a time when in networking terms only the data center matters.  They’ve ridden their position to a billion dollar annual sales run rate, and many on the Street think that they could be the “next Cisco”.  Again, half true.

The primacy of the data center in networking has been a reality for two years now, and surprisingly the mainstream switch/router vendors are yet to really catch the range of the trend.  I think the big issue is that they’re traffic-centric rather than project-centric in their approach.  Scratch a Cisco or Juniper guy and bits stream out.  The F5 guys have been, in contrast, very much focused on riding the conceptual waves that are driving data center change.  The company is better known for its cloud strategy among enterprises than either Cisco or Juniper, for example.  Their application-oriented networking story resonates, period, where competitors’ sound like an infomercial.

The challenge is that sleeping giants sometimes wake up.  Cisco’s growing battle with Juniper over data center switching could hone either or both vendors’ strategies to better match the market, and if that happens the loser could well be F5 even though they’d be only collateral damage.  The other issue is that billions in sales starts to make you look like a threat, and so far neither of the big enterprise data center players have bothered much with F5 counterpunching.  They might learn now, and product breadth gives both Cisco and Juniper a potentially more compelling story if the companies can get out of the silo and back in the fields.

Speaking of fields, the Sony-Ericsson buyout by Sony is supposed to get both parties back onto their home turf, letting Sony build an entertainment empire to compete with Apple and Samsung and potentially MMI/Google while Ericsson focuses on wireless.  The Street is liking both sides of this deal, something that’s a bit rare in the M&A game, and again the optimism they are feeling is based on half-truths.

The truth is that this is almost certainly good for Sony because it lets them drive their mobile device strategy in synchrony with the rest of their entertainment portfolio, which is perhaps the only one in the market broad enough to rival Apple.  Sony has content editing and creation tools, games, TV, you name it.  It makes sense to visualize these things as prongs in a coordinated market attack, but if one of them is a spear you’re sharing with someone else the process of spearing competitive hot dogs is complicated.

 

 

Amazon’s quarter disappointed almost everyone, and the fact that there were so many different views about just what was disappointing makes it all the more challenging to analyze.  Many said the profit picture was the problem; Amazon’s margins have been thin historically and the Street wanted proof that they’d fatten up.  They didn’t get it.  Some in the Street said that their revenue was light; they could have forgiven smaller margins if revenues were up.  Probably the combination was the real problem; weak revenue guidance for the holidays combined with a clear indication that build-out in EC2 and the cost of the Kindle Fire would be a problem for the bottom line.

Underneath this is the fact that Amazon has been a challenge for the Street.  They’re the drop-dead winner of the online retail game.  They’re the largest single provider of cloud computing today.  They now have what is arguably the second-best tablet and the Android leader.  But they’ve never really generated the profit that would normally be demanded of any company, and in terms of stock performance they’ve outrun even Apple this year.  The Street clearly thinks they have momentum (“Mo”, which is key in the way traders make decisions) and yet….

The big question here may be the cloud.  Amazon’s cloud lead, as I’ve noted before, is somewhat illusory.  We are a quarter of one percent into the cloud market at this point, and the horse that’s ahead one step out of the starting gate doesn’t gain much from the lead in statistical/historical terms.  The real challenge is that IaaS is a pure cost-substitution play, which means that it is always going to be under the worst price pressure, always generate the lowest profit.  The telcos, whose internal rate of return is low, have a natural advantage in this sort of service, and they’re coming into the market now.  We are going to see more pressure on EC2.  Tablets are consumer products, whose margins NEVER grow over time, and so there’s pressure there.  That’s the issue for investors, and for us in the market.  Consumerism is cheapism, not profit.  IaaS is cheapism, not profit.  Amazon, like Apple, has to look higher in the clouds, and deeper into cloud/tablet relationship, if it wants to keep flying.

Juniper announced that their OpenFlow implementation will be available in source-code form to Junos SDK developers.  Juniper, like some other big router/switch vendors, has supported OpenFlow at least at the demonstration level, though none have been in a rush to productize it.  That’s in part due to the fact that it’s open-source, I think.  What Juniper has done here is to make their source code available to developers who could use it to extend basic router/switch functionality and create OpenFlow services/networks alongside (more properly, within) existing router/switch networks.

Juniper’s approach is interesting because it leverages something they’ve always been able to do.  Their router/switch code has always made the forwarding table addressable to applications, and in fact they’ve had partners extend basic router functionality using that capability (in the video space, for example).  What they’ve done is to use that capability to implement the OpenSwitch part of the picture in their Route Engine, and then link that implementation (via the OpenFlow protocol) to a Controller application that runs in Junos Space.

To me, the big question is where Juniper will go with this.  I believe that OpenFlow is valuable primarily as a “cloud” or “interior” technology, meaning one that is used to manage traffic inside a service black box.  Neutrality issues will likely deter operators from broadly using the protocol because those issues act against grades of service on the Internet.  Inside a cloud or CDN, though, you can do what you like.  Given that Juniper has products like QFabric and the PTX that would benefit from being integrated into a higher-level vision of cloud data centers and service black boxes, I’d like to see them push their OpenFlow approach explicitly in these areas.  Since this release is focused on partner relationships, they may be letting partners do that, which might not be optimal for Juniper’s own interests.

 

 

Netflix is still smarting from its abortive attempt to raise prices and change its business model by splitting its mail-DVD and streaming activities, or so says the Street pundits.  I’m not totally convinced.  Yes, I believe that these things did in fact increase customer dissatisfaction and churn, and yes that’s responsible for their larger-than-expected loss.  That’s not the question, though.  Announcing something unpopular as an alternative to accepting death isn’t a hard choice.  I don’t think that Netflix had, or has, any option here.

We are too used to thinking that everything should be free online, or if not free at least working its way in that direction.  Naturally everyone’s upset at a price hike.  The challenge is that as a public company, Netflix is expected to create shareholder value, which means increasing profits over time.  Their licensing costs have nowhere to go but up.  Their distribution costs have nowhere to go but up.  Their total addressable market is certain to plateau and there’s increased competition from other players, from Apple and Amazon to Hulu and the networks and even studios themselves.  So faced with rising costs and shrinking margins instead of growing ones, they do what they have to do.  Better face the demons now than later, when they’re going to be even more terrible than they are today.

There is a question raised by Netflix, though, and that question is whether there can be successful “portal sites” at all.  If consumers want to pay less every year and studios or networks with content want more revenue themselves, then the guy in the middle is going to be squeezed.  Ultimately you have to shorten the distribution chain, and since most of the content ends up cached in a CDN anyway, why not distribute directly if you’re a network or studio?  After all, it’s their brand, their content.  Which is why content is king, of course.

That operators are looking for ways to create revenue with lower traffic is getting clearer every day as they move into more advanced services.  That has implications on where capex goes, shifting from network to data center.  Yesterday, Bell Canada announced the selection of Juniper’s QFabric as the connection heart of a managed service hosting data center, which means as the heart of a cloud.  I’ve always said that fabric technology in the data center was a perfect match to cloud infrastructure, which is of course essential if you’re going to host managed services or any other kind of software-feature element in network services.  Not to mention cloud services.

Data centers aren’t automatically fabric consumers.  First, you need to have a lot of scale in order to drive the number of layers in a switch hierarchy up to the point where fabric benefits would offset the cost of modernization.  Second, you need a lot of horizontal traffic, between servers or between servers and storage, or you don’t need the high-performance connectivity that fabric provides.

Cloud services in demand an efficient resource pool, which in turn demands a lot of horizontal traffic.  Cloud services are based on economy of scale, which demands a lot of scale.  Application-specific servers or even VMs that are statically assigned to servers tend to generate mostly vertical traffic, and they also don’t demand highly connective storage resources.  As a result, storage can stay on dedicated SANs and switch hierarchies don’t hurt much.  But if you add in a cloud dimension you add in a need for flexible assignment of applications and components to storage, and you generate more of both inter-process and storage traffic.  Same with big SOA-driven applications, which is why some verticals built around a behemoth mission-critical software core are fabric prospects despite their smaller data center footprint.

Some on the Street have been saying that it’s the ramp of QFabric that’s going to turn Juniper’s trajectory upward again, but the challenge for Juniper is quantity.  Carrier clouds are nice wins, but there are only so many carriers.  Juniper either has to make QFabric valuable beyond the cloud or prove that everyone will build one.  Everyone won’t build one, which means looking beyond the clouds in an era where the cloud is just such a facile justification for change that it’s hard to resist.  The BC deal is a good start to be sure, but QFabric needs to be fleshed out, made part of a broader architecture, to link it to opportunities on the largest possible scale.

 

Some’s up, some’s down, I guess.  That seems to be true with regard to tech signals this morning, anyway.  Oracle is buying a CRM cloud player, RightNow, and the Street is reporting issues with hardware sales, both in the service provider and enterprise spaces.

The RightNow buy is interesting in a couple of dimensions.  First, it shows that Oracle really wants a presence, a major retail-level presence, in the cloud.  The company has been a provider of all sorts of interesting cloud tools and it made a recent push for the cloud in OpenWorld, but this deal is a here-and-now move with a big investment behind it.  Second, the move shows that CRM may be a very critical app for the evolution of cloud relationships with users.

We’re kind of past the early hype days of the cloud, and Oracle likely now realizes that players like Microsoft and IBM have a more established position in the PaaS and SaaS models of the cloud, where I think all the indicators say the real action will be.  Part of the problem with being a tool player only is that you have no play in potential service revenues, but the real problem is that you have no tools to transition users or operators into installing your tools.  You need to be a cloud player if you’re a cloud infrastructure player.

Salesforce may be the target of the second motive, or just “collateral damage”.  CRM is an application that lends itself to SaaS because it’s largely contained; it doesn’t impact the big mission-critical core apps.  That makes it easy to consume, and that means that Salesforce gets a lot of early adopter opportunity.  You could see that in their numbers this quarter.  So this early lead could be a long-term problem for Oracle if Salesforce starts branching out into more and more stuff—which it has.  I don’t think Oracle thinks that cloud CRM in itself will keep the lights on, but they do likely think that it’s a camel’s nose that they don’t want someone else sticking under an Oracle customer’s tent.

On the hardware front, we have news that floods in Thailand might impact HDD production, which might have an impact on availability of drives for both consumers and enterprises.  That could increase prices and reduce sales.  I’m not yet convinced we have a problem here because we don’t know the scope or duration of the production problems, nor how other manufacturing areas might step in to respond.  It looks like Western Digital may be the most impacted at this point.  Will this possibly hit enterprise IT spending systemically?  I don’t think so; those systems are the higher-margin deals and they’ll get prioritized in manufacturing.  Higher consumer prices are more likely, but I don’t think that will impact the market until early 2012, if it ever does.

The other hardware comment is that the Street is now saying that both AT&T and Verizon will be under-spending in Q4, with (no surprise) wireless less a problem than wireline.  Operators have to show a profit like every other public corporation, and there is increased pressure on ROI for infrastructure, particularly with wireline.  The quarterly reports from both AT&T and Verizon suggested that you can’t make wireline work unless you can deliver multi-channel TV because people won’t pay for premium broadband even if you can deliver it.  I think it’s pretty clear that operators are looking to shift more capex out of network equipment and into IT equipment, both to host “cloud services” and to host service features.  This is what network equipment vendors should have been working to avoid for the last four years, but they didn’t really start picking up on the shift until this year.  I’ve seen a LOT of progress among the equipment vendors in positioning their service-layer offerings, targeting not only content and mobile but also the cloud in general.  But “a lot” isn’t enough, because the momentum away from thinking of network vendors as service partners has become pretty strong.

 

 

UBS reports that there are some unusual shifts in telecom spending, and I agree if one defines “unusual” as being “atypical to past performance” rather than “without clear cause”.  What they’re seeing is a lower-than-usual ramp in capex in the fourth quarter, and a larger shift toward wireless investment.  Duh!  We have a lower ramp because revenue per bit continues to drop and ROI in incremental project investments is harder to prove.  Yes, it’s “deferred” the spend into 2012 but there’s no more guarantee it will be actioned then than there is/was in 4Q.  And the shift to wireless is because wireless is more profitable than wireline.  This isn’t the field of dreams, guys.  Revenue-wise, they may not be coming.

Verizon and AT&T have both reported, and in both cases you have results that fell short of estimates in new subscribers for mobile.  Verizon slightly beat estimates on revenues, and AT&T slightly missed.  Verizon’s profit leaped more than AT&T’s, and Verizon did better in market share on postpay cellular services, which is where everyone wants to be.  AT&T’s numbers got a bigger contribution from prepay and from Amazon’s Kindle subscriptions.  Both companies continue to lose wireline voice customers and both continue to outgain cable companies in TV subscribership.

So what’s happening here is that we’re seeing investment follow return, and that could be truly ominous because it’s clear that “return” here is being generated more by things like Verizon getting the iPhone than from anything operators are doing within their networks.  That, in turn, means that there is less differentiation for equipment.  What there is may be increasingly turning toward video delivery, not simply “streaming” or “OTT” video but TV Everywhere and some form of telco TV.

You can see this in vendor positioning, of course.  The old-line telco firms have been gaining ground over the last couple years on the new-age IP vendors simply because the former had done their duty in mobile voice and had an established position in RF and registration, meaning IMS.  These same firms took a lead in getting their video story straight.  If we look at the three Eurogiant telecom players, Alcatel-Lucent, Ericsson, and NSN, we see that they are all powerful mobile players and all have good video stories.  Hint, Hint!

Cisco took the hint apparently, and has purchased BNI Video, a startup who has been a leader in providing back-end service-layer technology for TV Everywhere.  I hope that Cisco is doing this for all the right reasons, which are that the step both validates its Videoscape position (which has been in doubt because of management shifts) and gives it the only explicit major-vendor positioning in TV Everywhere.  It’s not that the Eurothree can’t do it, but that they haven’t been as pushy on that angle of multi-screen.

Alcatel-Lucent has a very strong CDN strategy in Velocix, and while I’ve not been able to confirm whether Velocix can be composed in Alcatel-Lucent’s Service Composition Framework, it is componentized and so I would infer that it can be.  NSN’s multi-screen video strategy is new and elegant, and Ericsson has done very well in content and multi-screen even though the company positions it badly.  Out in the world of CDNs, Verivue is likely the strongest independent product of all, and the most flexible in terms of integration with current infrastructure.  I also believe that since it’s scriptable it’s composable, though Verivue doesn’t talk much about composition or service-layer integration with the product.  You might wonder whether given this, Cisco was buying a Comcast incumbency with BNI as much as the company itself, which is what raises the question of just what Cisco will do with the product in a strategic sense.

One thing that IS unique about the BNI stuff is that they are a kind of mesh point between the channelized linear delivery world and the TV Everywhere world.  I noted in our ExperiaSphere Multi-Screen Video Application Note that there was a need to integrate multi-screen and screen-switching with linear delivery because users were program- rather than technology-focused in their viewing expectations.  It’s too early to see whether Cisco will be taking this story more to the front.  Cisco is feeling the pain here for sure.

From a total-market perspective the most important thing here is that the decline in revenue per bit has made IP infrastructure less strategic, and that’s what’s shifting the fortunes of the vendors.  Those who can play in services, meaning mobile and TV, do better than those who can’t and that is what’s putting on all the pressure to get a mobile position (Cisco’s NEC deal) and a TV-everywhere-multi-screen position (BNI).

 

 

We all know that POTS stands for “plain old telephone service”, so POTV should stand for plain old television, I think.  Where is it going?  Some interesting data on media consumption seems to validate the research and modeling I’ve done on the topic.  There’s a pervasive notion that OTT video is killing traditional channelized viewing, and while that’s an exciting thesis I have not been able to find any specific validation for it.  The best way to spot future trends is often in the subtle impacts they have in the present.  For example, a shift to dependence on OTT would be a shift away from scheduled viewing, and even if all a person’s programming were not available in OTT form you’d expect them to begin to utilize a DVR to pick up episodes for viewing as convenient.  So do they?

This latest report from Leichtman Research Group says that they don’t.  Even in households with DVRs (44% of US households have them) over 90% of all TV viewing is real-time channelized programming and not time-shifted by recording or exercising VoD.  This agrees almost totally with my model.  Thus, the current statistics don’t correlate with a massive behavioral shift.

There’s some other info in the report that might help understand what’s happening.  First, almost 80% of all Netflix viewing is on a TV, so the first thing we can see is that people are not happy with the substitution of PCs or tablets or smartphones for TVs in entertainment.  Second, 86% of Netflix users still subscribe to multi-channel TV service and 43% get premium channels, which is about the national average across the viewing households.  What these things tell me is that the penchant for youth to watch phones or PCs instead of TVs is in fact an attribute of the simple truth that they’re out of the home and avoiding supervision, and thus have no TV on hand to watch.  When people have TVs, when they are in the home, they watch TV.  And even the OTT-streaming aficionados use the service to supplement rather than to replace multi-channel TV.

I think this is yet another data point in the quest for truth on video.  Yes, young people behave differently than their elders (watch a couple YouTube videos if you want proof), but that’s YOUTH behavior and not an indication of a GENERATIONAL shift.  The youth, growing up and exposed to the same social pressures and family structures as other generations, behave more like their parents did in the past than like they did themselves.  Because they’re not youth any more.  We’ve always realized that grown-ups behave differently than kids in most areas; why would viewing TV be so different?

I think this validates an important point, and that is that entertainment television may be the thing that offers an access operator the greatest dependability in terms of ROI.  The Internet is eating voice.  The Internet’s bill-and-keep, all-you-can-eat, model is eating broadband profits and revenue growth.  Mobile is further from the top of the falls than wireline, but both are caught in the same currents.  TV isn’t caught there, it’s safely on the sidelines and able to generate a predictable ROI for years to come.  That means that if you are an access operator you had better have a TV strategy.