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Our second day of “Big Earnings” week has brought some more interesting developments, from which I hope to draw some interesting conclusions.  We have ups and downs, as usual, and that’s pretty much what I had expected to see this quarter.  The “secular” or broad market trends are really not driving the bus here; it’s how well companies do to position themselves for success.

Apple turned in something very rare, a miss.  The problem here, I think, is in fact somewhat ecosystemic.  Tablets and iPhones aren’t back-to-school gifts, they’re holiday gifts.  The 4S, as expected, did likely overhang iPhone sales for the prior quarter and its timing meant it didn’t contribute revenue on its own.  The timing of the quarter is unfortunate for Apple; Cook isn’t off to a good start.

There may be a deeper point, though.  Intel also reported, and its numbers were considerably better than expected.  A big reason was that the company has done very well in emerging markets, and that would suggest that personal computers are still strong in those markets.  I know from my survey work that tablets are still a novelty in most emerging markets, which suggests that the new economies are not skipping over the PC to get to the tablet.  That could mean that there is a real risk for Apple that its flagship profit-generators aren’t going to catch on globally quickly enough to compensate for saturation in the US market.

Juniper, the first of the network equipment kingpins to report, disappointed at least most of the Street analysts, though their stock price had apparently already factored in the results.  Juniper’s problems, they said, were due to overall economic conditions that had slowed service-provider projects and also some enterprise projects.  The result is that some deals are going to be pushed into 2012, where the company hopes they’ll fatten up the first quarter.

The general view of Juniper on the Street is that they’re now dependent on their new products, particularly QFabric, for their future.  I hope that’s not true because I don’t think that data center fabrics alone can pull any company through.  As I said yesterday in my blog on the Cisco/Juniper “Fabric Flap”, the real story here is that any transformation in the data center is being driven by something other than the network.  You need to have a strong hold on that “enabler” if you want to win, and Juniper doesn’t have that yet.  I wrote extensively about their QFabric positioning in Netwatcher when it was launched.  What I said is still true, and Juniper (and the Street) need to read it again.

Another issue for Juniper is a need for “industry marketing”.  They acknowledged on their call that their enterprise business was focused in two verticals; public sector and financial.  Well, guys, those are probably the two most problematic of all verticals!  The fact that Juniper is strong in two verticals that are not particularly the champs of IT spending overall suggests that they could probably do a heck of a lot better in other verticals if they had similarly dedicated marketing/sales activities.  Hint, hint!

Alcatel-Lucent, rival to both Cisco and Juniper, has announced the sale of its call center unit, as rumored.  This will give the company a welcome cash infusion that may help to offset exceptional charges in areas like pensions.  Alcatel-Lucent kept its enterprise networking, so far, and that may be due to any number of factors, one of which of course is that they’re saving that particular deal for a rainy day.  The other pole of probabilities is that they realize they need a data center, cloud, and virtualization position and it would probably be easier to get that with a set of products that are dual-targeted to enterprise and provider, since that what their competitors do.

 

 

Cisco announced that it would support OpenFlow, the protocol that’s sometimes seen as the pathway to an open-source router market that could kill Cisco off.  The move only demonstrates how useless it is to read stuff these days!  In a neutrality-driven world with no settlement for QoS among ISPs and no regulatory basis for creating premium for-pay Internet services, there’s precious little to be gained by a protocol that lets software control the network’s forwarding tables.  Such gain as there is would be best accommodated inside a current router framework, not in a replacement to one.  I have an exploration of OpenFlow in the October Netwatcher, so if you’re interested you might want to check it out (if you subscribe!)

The most significant thing about OpenFlow is the notion of a “Software-Defined Network”, meaning a layer of service/network control that’s explicitly software and explicitly hosted above the devices.  I think this is a technology-level driver toward an independent service layer, something that’s mandatory for top-down reasons as well.  Cisco’s support of SDNs may mean that Cisco will rejuvenate its own service-layer plans, since it rarely supports populizing standards except in the context of a larger proprietary envelope to supply Cisco differentiation.

Alcatel-Lucent had an interesting announcement too, a Bluetooth-based application called the Intelligent Travel Time System (ITTS) that gathers traffic information from the RF that various car and phone gadgets emit and provides information on the management of vehicle flow and a framework for optimizing the way that traffic lights and other stuff works.  This is an example of what I’ve called “the Network Knows” applications; things that can become feeders into services that can then be sold.  The same concept is being reviewed, I’m told, by Google and Apple, who would propose to use their handset data to feed it rather than Bluetooth.

Right now the Alcatel-Lucent concept is orthogonal to “networking” as we’d know it except that obviously sensors have to be connected.  In the future, this kind of input could be used to help people make restaurant choices as well as to pick routes, and even change the bias of LBS by creating a traffic context into which to insert ads or suggestions (“Tired of waiting in traffic?  Try our metro!”)

Cisco is also firing back at Juniper’s QFabric with a new module for Nexus and claims that they can support twice the data center connection density of QFabric.  This is one of those “how-many-angels-can-dance-on-the-head-of-a-pin” arguments in my view; most enterprises won’t be able to justify a transition to a fabric, and those who do will not likely scale outside the capacity of either company’s products.  The thing that neither Cisco nor Juniper has focused on is the context of a fabric deployment.  What verticals are likely to deploy?  What drivers create the opportunity, and what other things are needed to support the business cases?  There are answers to these questions that neither player seems to care to get into.  It’s easier to shadow-box than to be substantive, which is sad because only substance can sell.

OpenFlow is in fact a decent counterpoint to fabric data centers because it could be used to extend orderly-path behavior over an enterprise WAN, between data centers to create clouds, etc.  Both OpenFlow/SDN and fabrics are likely to be embedded in application performance management or service-layer contexts.  Either could be linked with the OTN moves that both Cisco and Juniper have already announced.  So why atomize all this ecosystemic stuff?  I despair of logic in this industry sometimes!

This week is where economics and tech meet, a week where there are a host of earnings reports for tech companies who are either bellwethers for the market or who are of special interest at the moment because of recent earnings trends.  Our fall survey data is far from complete at this point so we have only a sense of what’s happened, but it suggests that there is neither a rising tide lifting all boats nor a market collapse.  Instead, some companies are likely to surprise to the upside, and others unpleasantly.

Apple is a company everyone will be watching because of the loss of Steve Jobs and the semi-disappointing 4S launch, but of course neither will be reflected in the quarter’s results.  Instead they would likely color guidance, which is what the Street will be looking for.  Unit trends on both the iPhone and iPad will be looked at to see how much the new iPhone overhung the older models and what, if any, changes in momentum the iPad is experiencing.  The Kindle Fire was, in our view, too late to be reflected much in the numbers, so don’t expect to see much in the way of indicators of how it will impact iPads in the long term.

IBM is another company whose results are always important; it’s the single most relevant tech stock, and any strength or weakness it shows becomes the effective baseline against which other companies will be measured.  What I’m looking at in IBM’s tea leaves is their WebSphere stuff, their SOA/cloud middleware platform.  I think that there are some early signs that enterprises are seeing the cloud much MUCH more in SOA terms as they evolve their cloud projects and get a range on the cost/benefits.  If that’s the case, we can expect other players in the cloud space (including Amazon) to start thinking more platform and less IaaS.

Intel’s numbers will be a measure of how the PC versus tablets versus smartphones might fare during the holiday period, because most vendors will have stockpiled critical components like the CPU for fall and holiday manufacturing.  We know that PCs lagged their seasonal values, suggesting that buyers either substituted tablets or deferred purchasing until the holiday season.  We won’t get a convincing indicator of which it was here from Intel because they don’t have a strong tablet presence, but we should see whether retailers placed any bets on the PC space.

Microsoft will offer another read of the PC space in its report, and also perhaps offer a view of how the company’s overall business and online services spaces are doing.  Microsoft has arguably a lead in the PaaS cloud, but the company hasn’t exploited it as well as I think it could have.  We may get a sense of how Phone 7 is doing, but again I suspect it’s a bit too early for anything definitive.  Microsoft’s guidance will surely set the tone for PCs in the holiday period, though.

AT&T and Verizon report only a day apart this week, and everyone will be watching for their mobile and TV numbers as well as their loss of legacy lines.  There is definitely a trend toward dropping wireline voice in favor of something, or a combination of things, not only for cost but for convenience.  Most of the young-adult market, the critical 22-35 age group, are now using wireless phones exclusively.  Many older users would like to but are stuck with two numbers that a host of friends remember or are afraid of 911 issues.  A major line loss would show that there’s a risk that the operators will lose voice revenues faster than something else can tick up, but I doubt that’s going to be happening because of this inertia.

Juniper’s numbers this week will be perhaps an indicator of the health of more traditional network spending, and also an indicator of the company’s own health.  Juniper’s carrier numbers are a pretty good reflection of the attitude of operators in investing in “capacity” versus “service” since Juniper offers little in the way of service-building tools.  In our spring survey, the company lost significant strategic credibility in the IP layer, its core competence.  I’m going to be looking to see if any of that loss is reflected in the numbers this quarter.

 

Google’s numbers for the quarter were very good, beating estimates and highlighting its mobile ad performance, but the company was short on details of how the earnings were derived.  My personal view is that Google is doing well with search and still working things out elsewhere.  Sure mobile is doing well, but it’s likely that the primary driver is mobile search.  Display, the good old secondary, is also likely expanding.  YouTube, Android?  Not much contribution in my view.

There’s a Street rumor circulating that Google may have an interest in CDN giant/pioneer Akamai.  I’m not sure how I feel about that one, presuming that it’s true (Google says it is not).  I can see some symbiosis there because Google already deploys server/cache technology inside some carrier networks to make YouTube work better, but the CDN business per se is definitely sinking and operators are likely to sink it faster as they deploy their own planned content monetization strategies, all of which include CDNs.  It’s not that CDNs are bad (which is why I used the “per se” qualifier just now) but that traditional content-provider driven, Internet-transit-avoiding, CDNs are bad in most developed markets.  There are other far more important missions for CDNs, and that’s why I believe that the term “CDN” here may be getting loaded with too much legacy baggage.  What we’re really talking about these days is “CMNs”; Content Monetization Networks.  They’re CDNs with about seven functional elements added to address TV Everywhere, QoE management, stream-switching, personalization, and the like.

Speaking of content, AT&T and Verizon have beaten the cable companies in customer satisfaction according to the latest JD Powers survey.  Some consumers who look at this may wonder what universe JD is in; I get plenty of complaints about both these players.  I think the reality here is that the telcos are first of all more tolerant of low ROI and thus have invested a bit more in both the experience and customer care, and second that the cable companies have had such a historically terrible reputation for field service that people are complaining more about the  legacy than the current reality.

Another factor that may be settling in here is that back-office OSS/BSS stuff is much more mature at the carrier level than at the cableco level, and without long-standing operations practices you tend to lose both quality of response and consistency.  Ironically, the cable guys should have been able to do this better, having a fresh start and a modern perspective.  Apparently, not yet.

Telefonica isn’t resting on legacy for sure.  At a recent conference the company talked about the very kind of network-data-mining initiatives that I’ve been talking about in my “the Network Knows” presentation.  I’m seeing more vendor attention to the notion that knowledge in the network can become the framework for value-added services, especially in the mobile area, but at least some operators are tired of waiting for vendors to do something and ready to strike out on their own.  With Telefonica Digital, it’s clear that there’s a sense of urgency in addressing new services, because the OTT wars are almost certain to move the ball quickly.

 

 

Comcast’s ambitions attempt to create a network-view model at the earliest possible point in movie distribution, the same time a film is in theaters, has apparently been pulled back under a protest from studios.  The thought was to set the price high enough that people would have easily been able to get a better deal in the theater, but I’m told that the movie industry was very concerned that the erosion in theater viewing could hurt the box-office numbers so critical to public perception of the success of a new film.

All of this demonstrates the classical “channel conflict” problem with streaming video.  We tend to think that this is all about online, but of course it’s all about money, and nobody is going to upset their content monetization applecart, particularly the studios or networks who produce the stuff.  You have to be very mindful of any money-flow changes with a new model, and until you can demonstrate that the new does better than the old (the industry says by 10% or more) nobody will take the plunge.

Verizon has announced its home control and monitoring service is now available over its FiOS and DSL footprint.  The service is based on the home-control Z-Wave technology, and it pretty much covers the space with the current apparent exception of security monitoring.  The issue there may be simply that Verizon doesn’t have the kit technology to support that as yet, or it may be a matter of installation, since it appears that Verizon at least hopes that users will be able to plug in the modules and connect things on their own.

Home control is a service application that a lot of operators have been talking about, and in essence it’s an extension of the remote light-switch stuff that’s used today in a lot of homes.  With Verizon’s tools, you can do all that you’d normally do with the in-home systems plus you can access the control center remotely to change status and settings.  The cost of this is about ten bucks a month but the hardware modules could run a two or three hundred dollars in addition if you go wild.  The monthly charge is about as much revenue as Verizon can earn from a wireline phone, and it’s a clear revenue-mining adventure for Verizon.

Microsoft is adding to its cloud position, promising an Azure-compatible distribution of the open-source data-distributed cloud architecture Hadoop.  This package, one I’ve blogged about before, is based on the notion that large data repositories of unstructured information are divided up among elements in a cloud, and when something has to be found the request is parceled out to where the data is or might be for operation.  Hadoop isn’t the answer to every enterprise’s prayer because it’s really mostly about unstructured data not about the normal enterprise repositories, but it’s a powerful way to process semi-textual stuff like documents or emails.  Oracle had a Hadoop tale to tell at OpenWorld, and it looks like this package will take off.

Cisco announced some virtual-desktop stuff, including a partnering with Citrix.  The most interesting thing was a virtual appliance designed to offload videoconference and potentially streaming applications from the normal central-hosted process.  In the new model the connection is signaled or coordinated via the host-system side of the VDE but the video session goes right to the virtual desktop appliance.  This is a demonstration that there are features on the client side that could promote a data-center-cloud vision of client/server partnership; HP should take note!

Neustar is planning to buy Targus, a company that’s specialized in location/ID services for VoIP and non-traditional voice technologies.  The move, I think, illustrates the value of any kind of location or identification information to services, and the value of building services from network-generated or network-related information.  Targus has been expanding what it can do gradually, and Neustar may have its own plans.

In a blog, Neustar management cite the obvious symbiosis; Targus provides a caller-ID service primarily and decodes that to customer name while Neustar has LNP facilities.  They’re right about the symbiosis, but the question is where they might go from here.  We’re moving to not only a notion of number portability and caller ID to one where we have multiple VoIP services with multiple user names for the same person, and messaging and video to boot.  Can they plan to create a communications identity service that ties the threads of all of this into a pretty ribbon.

 

HP is now “officially” reviewing its decision regarding the shedding of its PC unit, and I’ve got to admit that I’m not convinced here.  As I’ve blogged before, the PC market is commoditized very thoroughly and there are few indicators that it’s in any way symbiotic with the server and data center software spaces.  IBM, the poster-child for success in the tech business, shed their PC business long ago.  Why does HP believe it can justify retaining it now?  Especially given that they’ve discredited the whole line to a degree with their earlier decision to spin it out?

The only way HP can recover from this is to articulate some brilliant strategy that creates a cloud ecosystem that includes the PC, and I wonder whether it’s capable of something that radical, or even whether such a positioning could be articulated at all from the PC side.  Apple, who has their own set of announcements in the cloud space, would have the pizzazz to make a cloud appliance move, but that’s because they have differentiable brand power behind their appliances.  Google could do the same.  HP?  Come on!

The Apple iOS 5 and iCloud launch today, and while frankly neither are particularly revolutionary, they are still credible steps toward what might turn out to be a revolution.  The iCloud mission seems now to be one of creating “unity” among the iOS devices, meaning to create a virtual iOS umbrella that covers everything Apple and essentially makes iOS a virtual OS residing in part in every appliance and also in the cloud.  What Apple has not yet done, but that I’m confident it will do, is to realize the potential of that model with services beyond collective iOS chatting.

We could call what’s likely to emerge from the Apple/Google/Microsoft dynamic “social communications” but it’s also arguably the first step toward network-supported behavior modification, something that’s going to unite identity, LBS, demography, buying/shopping behavior, advertising and promotion, and a bunch of other things.  Why?  Because it creates a kind of parallel universe in (dare I use the cliché) cyberspace where our alter egos have electronic tools and systemic knowledge they share with the real us through our appliances.  That’s the end-game for everybody.

The O2 subsidiary of Telefonica is getting into the game too, or at least getting into the IP-voice-for-free game, with its own Skype-like offering, called “O2 Connect”.  This is a WiFi-only service that appears to be working to capture O2 user free-call loyalty and prevent too much of a shift to an OTT voice offering.  T-Mobile, who launched a kind of cross-platform free-call service called “Bobsled” has expanded its offering to cover most of the PC and appliance space.  Of the two, despite the WiFi focus, I think O2 has the edge, not so much for features (what are free calling features anyway?) but because the O2 offering is an outgrowth of Telefonica Digital. That’s the new BU that’s been positioned to create cross-platform service-layer offerings.  Arguably this is the most advanced and aggressive position taken by a Euro telco, and I think it’s a pretty clear signal that things are going to heat up in the service layer, not only among the OTTs but even between the OTTs and the telcos.

One interesting slant to this is that O2 Connect is based on Jajah, a VoIP free-call service that Telefonica acquired.  This is yet another example of operators (in Europe in particular) going out and buying service-layer technology because vendors have dragged their feet in supporting the business models the operators need to have supported.  I noted a couple of months ago that I was starting to see active resentment of vendor attitudes crop up in large telcos, and there may be a real “vote with your feet” movement here, where operators decide to roll their own service layers.  We’ve had over 800 downloads on our ExperiaSphere Multi-Screen Video Application Note, for example; I doubt vendors have been responsible!  Operators need a service layer, and they’re going to get one, one way or the other.

 

A ComScore report shows that traditional PCs still account for over 93% of online traffic, with mobile phones at about 5% and tablets the rest.  Among the appliances, Apple’s iOS devices represent most of the web traffic.  I think this is an interesting data point when you consider the evolution of the Internet and Internet equipment.

First, it’s pretty clear that wireline is still where most bits are pushed, and I think equally clear that’s where most content is delivered.  People typically think “entertainment” when they’re at rest, and most often in their residence or a hotel room somewhere.  Mobile devices like iPads that are capable of being used in more places are still limited as entertainment portals because most of those “more places” aren’t considered suitable for entertainment by their users.  Yes, we’re going to see changes here, but it’s likely that for the next two or three years the traffic balances won’t be radically changed wireline versus wireless.

That leads to the second point.  Mobile broadband is a driver for equipment to the extent that it’s a supplement to metro/wireline.  That’s why companies with RAN positions and a good understanding of the mechanics of voice as it evolves from TDM to EPC/LTE have an almost insurmountable edge.  They have most of that incremental iron, and it’s hard for those who don’t to sell a story that’s differentiable.

Then to the third point.  Wireless is most “incremental” to those who don’t have any metro/wireline infrastructure at all.  Players like Sprint are forced to build a whole wireless aggregation network on raw capacity because they don’t have any facilities in place.  To get ubiquity, operators have to cover a bunch of territory where they don’t have facilities, no matter who they are.  That means a big capital burden for everyone, but likely a crippling one for those with no “home territory” to leverage for capacity.  That is likely why Sprint is said to be in cash trouble right now.

Which brings us to point four.  Mobile consolidation and rumored problems with Sprint’s financials are the result of low margins.  It’s easy to read a telco financial and think “Hey, these guys are raking in a ton of money” but forget that they faced astronomical first costs to get there and that they’re able to expense many of these only over a long period.  Their ROI is low, and that keeps others from wanting to be in the market.  It also limits the ability of even the big guys to invest.

The real value in mobile, then, isn’t bits any more than it was in wireline.  Both need a notion of higher-level services to supplement basic profits.  It’s like voice of old; you don’t make money on dialtone even though you need it to make money.  You make money on custom calling services, etc.  It’s those supplemental services that the OTT people are addressing more effectively.  It’s those services that the network operators, both wireline and wireless, have to play strongly in for them to sustain their profit and revenue growth, and thus their investment.  Apple’s iOS dominance in traffic and its recent iMessage service demonstrate that the mobile services space isn’t going to be based on bits, or on IMS, but on cooperative services between appliances and hosted logic.  Own those and you own the revenue growth of the industry.  And the best operators can hope for is one of the two—a draw.

 

 

 

I’ve been watching the Occupy Wall Street protests like everyone else, and like many at least I’ve noted that they are long in interest and short in details.  There’s a tendency for the media to attribute this to superficiality; hey these people have no agenda they’re just troublemakers.  I think it’s more than that.  People are angry about Wall Street but they aren’t specific about their complaints because the process is just too complicated for the average person to understand.

While I make no claim to be an expert on the Street, I’ve been involved with it for over a decade and have even been for a time a partner in a hedge fund.  So while I don’t claim to speak for the movement, I think I may understand a bit of the substance in their claims of greed and fraud.  I propose to share them here, and if you’re offended by semi-political comment, read no further!

The first truth of the situation is that we ARE in a class war, and we’ve been that way since the industrial revolution.  It’s an inevitable fact about our economy, and pretty much everyone else’s too.  Manufacturing or production or whatever you call it transforms things that aren’t particularly valuable or useful (raw materials) into things that are both valuable and useful.  That means that they offer a significant opportunity for PROFIT.

The giants of American industry, like Carnegie, Rockefeller, and Ford recognized that by contributing capital to build plants and facilities, they could turn dirt (or ore, at least) into gold, and they did.  Of course, they needed to have labor to do this, and the more that labor cost as a component of the production transformation, the lower the profit was.  Thus, capital and labor are natural adversaries, and since labor is a majority of voters, the battle is hard for capital to win, at least directly.  That’s why we’ve seen “offshoring” of jobs; labor costs are lower.

The second truth of our situation is that the desire to grow wealth is insatiable; call that “greed” or just a manifestation of the classic American goal of creating a better life as you will.  The point is that growing wealth by building plants and creating production is a long and risky process, and so “capital” decided to look for another route.  The strategy it’s been trying for probably nearly 100 years is the “bubble”.

Bubbles are situations where the monetary value of something escalates faster than the objective value.  You can create them in a lot of ways, but what they all come down to is what could be called LEVERAGE.  You get leverage by using borrowed money to buy stocks, which gave us the 1929 crash.  You get it by over-hyping tech to drive up the price/earnings ratio of shares beyond any reasonable value, which gave us the 1999 NASDAQ bubble/bust.  You also get it by playing financial derivatives.

Which brings us to Truth Three.  Derivatives are financial instruments that disconnect the stuff you invest in from the assets they represent, so that in some cases there’s no real “asset” at all.  When you buy “futures” you buy the right to buy or sell a stock at a given price, not the stock itself.  You pay less for the futures than for the stock, but the value of the futures moves with the value of the stock, and so you get an accelerated gain or loss.  When you buy a credit default swap, you buy insurance on a bond, a debt.  In the 2008 economic crash, CDSs were almost certainly written in enormous quantities, perhaps many times on debt that the buyer didn’t even own.  We also bundled mortgage debt into packages whose content was largely invisible.  So we created a house of cards on financial instruments that didn’t represent anything, and so whose value was whatever the markets cared to determine.

Derivatives are not easily regulated.  People who “sell a stock short” are supposed to be borrowing shares, selling them in the expectation the stock will go down, then buying them back to “cover”, pocketing the profit if the shares do fall.  That at least keeps short sales connected to the real shares, but for years now people have sold “naked shorts” meaning they’ve not bothered to borrow the shares at all.  How’s that for leverage!  We don’t really know how much of this happens because there’s no easy way to track it, and with some derivatives there’s no public exchange or records of trading.

Now, for the fourth truth.  The stock markets are largely driven by firms who specialize in stock trading, not by “investors”.  These firms use high-performance network connections to exchanges to buy and sell huge blocks of shares, and to buy and sell derivatives based on bundles of stock (just like we had them based on bundles of junk mortgages!).  What moves the stock market is the TRADES, so when stocks go up and down that reflects not the sentiment of those who OWN the shares but those who TRADE them.  High-frequency trading and derivatives can create massive movement in shares, like the “flash crash” earlier this year and the sudden upswing of stocks more recently.  All the volatility you see in the market is exacerbated by derivative trading, and it scares hell out of the average investor.

And guess what?  The “average investor” is forbidden by law to participate in a lot of this.  Unless you’re an “expert investor” under US securities laws, you can’t trade in most of these instruments and you can’t invest your money in funds that do.  So you sit with your 401k and watch the value fluctuate because of trades designed to create massive leverage-based profits for a group you’re not allowed to join.  Even the funds you invest in may be battered by the derivative trades, so you’re not safe anywhere.  You may have a problem being truly or optimally profitable because you’re in a system you’re not really ever PART of.

The system might also have cost you your job.  We have lost jobs in the US because capital is leaving, or trying to leave, the historical bargain with labor.  In part, it’s jumping onto the bandwagon of derivative-based growth in wealth.  A virtual financial instrument that’s not tied to reality doesn’t create products, and thus doesn’t create production.  In part, it’s simply moving labor to places with lower cost.  We offshore jobs because it creates more profit.  Free trade helps countries who have something to trade; to the extent that we become a service economy we become necessarily a net importer because we aren’t producing stuff here.  We may have cheaper goods here, but we have cheaper jobs, fewer jobs.  They weren’t stolen by China, they were given away by companies to boost profits by lowering labor costs.  And we’re creating fewer new jobs because we’re not investing in production, but in derivatives and “social networking” and things that generate a big return for capital but produce little or nothing in production, and so produce no good high-value manufacturing jobs.  Why are VCs not investing in the “next Cisco” or the “next Apple” but instead in the “next Facebook”?  Because it’s higher profit at lower risk.

So there’s my take.  Capital, meaning finance, meaning Wall Street, is optimizing its own profit at the expense of our economy overall.  Why do Fed numbers show that “wealth” is growing so much faster than GDP?  How can the country be worth more than it’s producing in total?  It’s the “virtual economy”.  Why is the wealth of the top tier increasing and that of the four lower quintiles of income changing by essentially nothing in real spending power over the last twenty years?  Because they’re not part of the system that’s winning.

Occupy Wall Street has in my view a reason for anger, whether the individuals in the movement understand the reasons or not.  They have a reason to be unhappy with both parties, because both parties are complicit in the problem; money finances campaigns and wins elections.  But if they don’t want to become the American version of “Arab Spring” that topples governments but can’t govern when they win, the movement will need to look at the root causes of the Wall Street problem and pressure politicians to take effective steps to fix them.  Otherwise, we’re going to have more bubbles and more uncertainty in the future.  That’s not good for anyone, even the Street.  Parasites that kill their host are not successful.

Netflix has abandoned its plan to separate the streaming and DVD businesses, something that shareholders and the Street (not to mention customers) are sure to be happy with.  I’m not sure that this was as bad an idea as it seemed, though.  The problem with all the streaming players, as I’ve noted in prior blogs, is content availability.  Netflix may have recognized that it has two very different businesses going here.  One is the business of supporting people who routinely rented movies for “movie nights”, and the other the people who just couldn’t find anything interesting on TV for a time-slot in a given evening.  For the former, you can dip a long way back into the long tail of content; the latter tend to want material they like, and typically they want it in a short-slot form factor to fit in the hour interval they can’t fill with channelized material.  Can the company juggle the two as a single offering?  We’ll see.

This week will mark the start of Apple’s iMessage service, which is arguably both an exploitation of Apple’s dominance in mobile and a direct threat to network operators.  iMessage lets any iOS 5 device send unlimited messages to any other iOS 5 device, and while the media hype that this eliminates a 20-cent-per-SMS windfall for carriers is nonsense (everybody who texts often has an unlimited plan), the Apple move COULD be an indication that Apple is indeed going to push cloud services to its customers that would gradually encroach on telco gravy trains.  Voice, for example, might come along.

Telcos may have mixed views of all of this.  If they’re required by law to allow third-party services that compete with their own (a US principle, and similarly we believe for Europe if regulatory trends are upheld) then it would seem logical that Apple and others would jump into the services space, not only for current services but for the emerging mobility/behavioral models as well.  But the big thing would be that if Apple keeps going this way it is in my view inevitable that it become an MVNO in every geography where that’s possible and profitable.  That would suck a lot of margin out of the mobile players.  A few Street pundits have told me that they believe AT&T’s T-Mobile aspirations are due in no small part to an MVNO fear; T-Mobile would be a very logical player to partner with since they have EU affiliations as well as US ones, and a deal with them could have real scope for Apple.

Google would certainly jump where Apple did.  While Google and Samsung delayed their launch of a new model, which is said to include the “Ice Cream Sandwich” version of Android that unifies the separated tablet and smartphone lines, it’s clear that they’re the most credible counter to Apple and also the flagship for Android, at least until Google’s MMI deal is done.  The EU approved that buy and we’re now waiting only on US DoJ, something that I hear will be coming eventually.

All of this comes at a time when operators are struggling with monetization and changing business models.  We’ve been as frustrated as they have with the snail’s pace response of equipment vendors to the operators’ goals, but we have noticed significant progress over the summer.  Alcatel-Lucent and NSN in particular have been tightening up their articulation and telling a service-layer story that has some substance, though their full details are still not on their website and there are still significant differences in how well the message is told among the various regions and even sales teams.  The question now is whether the operators can recoup their losses in the service layer.

How this will go for vendors is hard to say, because ironically they’ve just now figured out that they needed a better content monetization story.  Apple is now demonstrating that the vendors need to support a mobility/behavioral story too, because operators will be assailed in that zone shortly.  In theory, for Cisco and Juniper at least, the cloud should be an easier tale to tell because they have data center assets to play on.  Huawei, who has recently announced its own enterprise push, can also harness enough hardware presence to be credible as a “cloud vendor”.  However, they’ve had those assets all along and have done a sad-to-awful job of positioning them.  Alcatel-Lucent and NSN will now have to scramble a bit to create a good cloud story, but they at least don’t have to scrabble over the rubble of previous bad positioning to get there.

 

 

There are signs that the networking industry is doing a bit more weaving and bobbing as it looks for a position that sustains revenue and profit growth.  One big item is the story that Sony is going to buy Ericsson out of their long-standing handset partnership.  The deal here, so the story goes, is that Sony wants to spread its technology across its whole line of appliances, from phones to game systems, and also to get considerably more aggressive in the market.  I’m told that Ericsson has not been excited about either of these points; conservatism has always been Ericsson’s weakness in my view.

Sony is right in this case.  Apple has demonstrated that the notion of a separate smartphone, tablet, and game system market is unlikely to prevail in the real world.  What’s really happening is that there’s an appliance market that shows (at the moment) three distinct faces.  Some users will accept them all, and others will gravitate to one of the group, depending on how they balance the various applications and issues.  The point is that it’s likely that all of these appliances will have a feature base in common, and that symbiosis among the devices will be important for players who want to keep multi-faceted buyers in the vendor’s product domain.

This is also reflective of what Apple needs to deal with now, in the world it created.  Things like televisions are clearly going to join the appliance ecosystem, and there will probably be other stuff that also joins, but the reality is that what’s going to matter more is the experience that can be delivered through all this stuff and not the exact boundary of the “stuff space”.  Apple TV isn’t important except as a member of the Apple Ecosystem, and fleshing out that ecosystem is a job for cloud-hosted features, something that Apple is yet to demonstrate it grasps.  But then neither has Google demonstrated that; only Amazon so far has any cloud reality, and even there it’s not completely clear that they have a strategy or whether they just stumbled into a couple of gold coins from a pirate horde.  Can they find the rest of the loot?  We’ll see.

Another indication of market turmoil is today’s UBS decision to lower their earnings forecasts for Alcatel-Lucent.  There is nothing in particular about the company’s products or strategy behind the move; it’s rooted in Alcatel-Lucent’s large exposure to the EU market and the debt crisis there, and also in issues of cost reduction that the company still confronts.  I’ve noted many times over the years that Alcatel-Lucent has a position of unique opportunity and risk, both derived from the common cause of their broad product line.  They’re in everything, everywhere, and so have unparalleled influence.  In the last year or so, though, they’ve fallen victim to the common network equipment vendor problem of weak articulation.  We’ve seen many examples of cases where the company has been unable to control an engagement that they are objectively the only player capable of supporting.  Why?  Because they have no clear marketing position, particularly on their website, and because you can’t expect a sales force to be a strategic marketing tool; they’re compensated to close deals.  In some cases, the sales team in carrier accounts can’t even recognize a service-layer opportunity.

Oracle is making its cloud strategy a bit clearer, but there are still plenty of places where the connection between offering and goal are a bit fuzzy.  Perhaps the most revealing is their Oracle Public Cloud announcement, an announcement of a social-network front-end to a cloud service bazaar that will include all of Oracle’s Fusion apps eventually.  The idea is that companies can use this front-end to provide teams and individuals a point of access that offers them cloud capabilities based on their identity, and thus allows both line departments and IT to buy elastic capacity.  The focus of the OPC is SaaS, yet another example of the fact that anyone really looking at profit in the cloud has to be looking at the place where the largest amount of user cost can be displaced.  SaaS also simplifies the notion of work backup and overflow, and since Oracle has championed the database appliance that can simplify data mobility and has embraced a Hadoop-friendly model for data distribution, you can argue that they’ve got the best cloud position in the market.  In fact I expect to see IBM working to refine their own strategy to insure they can fill the same role.