Month: May 2011

A recent research report on cloud computing says that SMB buyers prefer to get their cloud applications from a single provider rather than to mix and match.  That’s not surprising given that for over a decade, SMBs have cited difficulties in sustaining strong technology talent as being among their top three tech problems.  But it also shows that “the cloud” means different things to different people.

In my own research, SMBs have consistently said that a “cloud service” is any SaaS offering, meaning that they equate the term to “hosted”.  Interestingly, while 100% of enterprises know what “IaaS” and “PaaS” mean, only 31% of SMBs do, and almost a quarter of those who say they’re interested in or consuming SaaS ask to have the term defined before answering.

If you strip out the “hosted” applications of the cloud, SMBs currently spend less than 3% of their IT dollars on cloud services, bordering on statistical insignificance.  If all hosted services are considered, the number is about 6% for mid-sized businesses and about 11% for small businesses, the latter being higher primarily because of hosted web presence, email, and backup.

There’s a moral here.  All the surveys about the cloud success or the cloud explosion are dodging a hard reality, which is that it’s not the number of companies who use cloud services but the percentage of IT budget moving to the cloud that matters.  “Cloud penetration is doubling” just means that twice as many people are trying the cloud, not that the cloud’s role in IT is increasing that rapidly.  Further, since most of these surveys target SMBs more than enterprises, the results are biased first by the differences in the SMB space and second by the lack of understanding on the part of SMBs of what “cloud computing” really is.

Among cloud players, IBM and Microsoft get the highest marks on practical cloud strategies, and the second-highest go to the common-carrier cloud services, even though AT&T’s cloud offerings are still developing and Verizon’s (via Terremark) are only recently branded by the carrier.  The reason is that enterprises see any outsourcing as a risk, IT outsourcing as a conspicuous risk, and outsourcing of any critical applications or data as a risk bordering on unacceptable.  They demand both a trusted partner and a credible strategy for risk management.  Right now, both the big vendors we’ve named offer both, and the carriers are trusted in terms of financial stability, professionalism, and quality of infrastructure.  Where vendors have the edge is in the planning of a cloud-ready IT commitment.  I think that the latter is more important than most people realize; simple IaaS cloudsourcing doesn’t address enterprise needs except in development and pilot testing.  Anything other than IaaS requires significant SOA-like integration, something IBM and Microsoft realize and others either don’t realize or don’t address.

The assertion that the Sony PlayStation network hack was hosted on Amazon’s EC2 isn’t raising all that many hackles among the cloud promoters, but it has demonstrated to enterprises yet again the concept of “collective risk”.  A single company, particularly one with a low public profile and little customer credit data on file, has relatively little risk of being targeted by hackers.  A cloud hosting a thousand or ten thousand or a million companies is a much more attractive target.  Sony gets attacked because they’re big, but would Mom’s Pizza be at risk?  Not as a stand-alone, but it might well be part of a larger risk pool if their cloud host is attacked.  Thus, moving to the cloud could raise risks of hacking.  Not only that, if the cloud is hosting the hackers, might they not be able to hack others on the cloud more easily, exploiting interprocess issues or opportunities for denial of service?  Hacking is an ROI- or publicity-driven process, after all.

Some of the earliest cloud successes (in total-revenue terms) are likely to be the kind of services that AT&T’s offering for Windows support.  These services don’t ask customers to outsource data or their critical applications, only to outsource support, and cloud resources are applied not to run customer apps but to improve support economies of scale and thus improve both pricing and profits.  This illustrates why I believe that service provider cloud computing and service provider service-layer intelligence are likely to converge on the same architecture.  It’s only logical to assume that a provider who successfully sells a support service would be successful in selling cloud services, if the tie between the two was clear.  It’s also better for economies of scale if IT functionality (whether the providers’ own apps used in customer support and services or the customers’ apps hosted in a provider cloud) uses common servers/software and common support tools.

Speaking of Amazon, early responses from my spring enterprise survey suggest that the EC2 problem they had didn’t impact enterprise cloud planning much.  That’s because enterprises were not, in the main, considering EC2 as the host for their critical applications.  What the survey shows among SMBs is that those with clouds in their eyes, the early adopters, took the process in stride while those who were on the fence were more likely to be hardened against cloud usage.  In short, it increased the skepticism among those still considering the cloud, which may (if the feeling persists) impact the sales cycle for cloud services.

That’s a good issue to close on.  We tend to forget that a market normally classifies as either being push or pull, meaning sales-driven or demand-driven.  There are some number of buyers who will go out into the marketplace (meaning the Web, in most cases) and look for cloud providers.  That’s not likely to be how mission-critical apps are handled, though.  For that, you need a sales effort to create a sense of personal accountability—my salesperson will look out for me.  The larger players like AT&T, IBM, Microsoft, and Verizon have a sales force that can hug and cuddle wary buyers, and that is more likely than anything to propel them to the top of the cloud heap.

 

Google’s developer conference has generated a flood of news, and that’s a bit of news itself.  There was a time when big announcements were linked to industry events like trade shows, but the new trend to link them to developer meetings shows a new dynamic in the industry.  Actually, it shows a revalidation of an old one.  The PC, in 1982, wasn’t an objective competitor to Apple’s line but it was an open platform that encouraged developers and even hardware add-ons at a time when Apple was at best reluctant in that space (CIMI was an integrator at the time, and we could not join Apple’s developer program).

The second major thrust in the Google stream after Android was Chrome OS and the “realization” of its thin-client promise.  I put that term in quotes because the release of Chromebooks did instantiate a Chrome OS promise but it may not have fulfilled it.  The Chromebook has the features that were expected, meaning that it’s a thin client that integrates tightly with Google’s Docs, it provides a client for desktop virtualization (Citrix demoed this) for access to Windows apps, and you can even buy it on a license program, almost like a set-top box, bundled with the Google business services.  So what’s not to like.

The price.  There were speculations that Google might offer Chromebooks for a small annual increment over Docs, which would make it a compelling deal.  They didn’t; a Chromebook/software package would cost a business about $350 per year.  If you bought the Chromebook outright the price would be over $400, which is more than low-end Windows laptops and almost twice the price of some netbooks.

The value proposition here is vastly complicated by the price, of course.  If a Windows laptop costs less than a Chromebook, then how long will it take for the Chromebook to pay back?  Obviously in capital cost terms it never will.  Yes you can argue that you save more on the Google replacement for Office, but the problem is that you can run that replacement on a Windows laptop too.  The same goes for thin-client apps.  And if you need Windows virtualization you need Windows, and if you have a Windows laptop instead of a Chromebook you have it already.

The Chromebook launch, in my humble view, is a fiasco for Google.  They’ve taken a promising notion, a cloud client, and created a market entry strategy that most companies won’t be willing to adopt, which means they’ll have to fight their way back into consideration at some later date—or fail.

Larry Page needs to take some inspiration from Steve Jobs.  Not only would Apple never have done a launch that lacked a compelling early value proposition, they would probably never have done this sort of deal to start off with.  Why has Apple, who aspired to enterprise success for literally decades, have failed to grab onto the Thin Client Brass Ring, other that it wasn’t a brass ring?  The problem is that hardware and software costs are declining.  If you can build a netbook for less than a Chromebook including hard drive and a Windows license, then you’re charging too much for the Chromebook, you’re trying to pad your profit margins.  Apple knows that you never want to get into a business that’s commoditized from the first.  Sure, there are always price wars, but not at market entry!  At least not for companies that need higher margins.  Google’s Android model, where somebody else has to make and sell the box, is also the Chrome OS model, and the failing here is clear.  Manufacturers of PCs have nothing to gain by pricing Chromebooks aggressively and reducing their own profits.

But whether Chrome OS succeeds or fails in the long run, it’s clear that what it will do is crystallize the thin-cloud-client picture.  There are benefits to pulling complexity off the desktop, just as there are benefits to substituting tablets for laptops in the consumer space.  If what you want from the computer you use is simply an online onramp, then strip off the junk that’s not essential to that mission and create a cheap device that’s a cloud dependent.  If that proposition is valid, which tablet sales show it is, then cloud services are literally the way of the future.  All of networking will collapse into hosting services in some way.  All network operators will become cloud providers, or they’ll sink into financial ruin.  All equipment vendors will become cloud equipment providers, or they’ll follow that same path.

Another dimension of Google’s developer conference also impacts the computing space, though.  Android is a Linux variant.  One of the major problems Linux has had is a lack of good desktop software and another is lack of reasonable support.  Android, especially given Google broadening vision of the devices it runs on, could become a kind of next-gen Linux distro, competing with SUSE and Ubuntu and the rest.  With Google behind it, with a broad population of devices supporting it, Android could capture more interest as a desktop and laptop OS.  My surveys and modeling show that if you could make LibreOffice run truly equivalent to Microsoft Office, and if you had good video and photo editing software on Linux, you’d end up with something that could make users abandon Apple and Microsoft.

That’s what I think is the craziest thing about the Chrome OS picture.  Why would Google push a computer replacement by a thin client as they expand the value of their premier OS as a platform for computing?  If Google wants to hurt Apple and Microsoft, pair Google Docs up with LibreOffice, launch Android as a PC operating system, port Picasa and some video tools, and then offer it to hardware vendors.  You can’t win in PCs and eliminate them at the same time, Larry!

Cisco reported its results, which the Street has described as those of a “company in transition”.  I disagree; they’re the results of a market in transition and a company not yet transitioning.  The signs of the conditions that have dumped Cisco’s stock and fortunes have been clearly visible for over four years, and alarmingly visible for two.  You can’t hope your way out of market change, you have to do something proactive.

Financial analyst comments on the Cisco situation had some common themes.  It’s clear, they say, that profit margins are collapsing under competitive pressure.  It’s clear, they say, that Cisco can’t be a “growth company” any more.  It’s clear that major cost-cutting is in order.  Some say it’s clear that to obtain shareholder value, Cisco needs to split up.  None of this clarity is clear to me, frankly.

“Competitive pressure” is an effect and not a cause.  Price differentiation comes out of the absence of feature differentiation.  For years now router and switching vendors have pushed more and more arcane bit-pushing tricks as “differentiators” when none of the buyers believed or even understood the points.  All this time, buyers have cried for substantive strategies to lead them through the transitions of networking—and didn’t get them.  Cisco more than its competitors relied on sales pressure and incumbency.  That won’t work when all the buyer wants is the lowest price for a hamburger.  If you want the buyer to get off the hamburger kick, you need to have a strategy driver to push.

A “growth company” is a company who can draw on new benefits to justify higher spending on the buyers’ part.  That’s what fuels growth.  Creating more traffic isn’t creating more benefit.  Enterprises don’t get measured by Wall Street by how many bits they push, but by what their bottom line looks like.  Cisco probably has a glimmering of this particular truth now, but they’ve been worse than most at finding the real value in networking.  It’s not a divine right, or mandate.  It’s a business tool, or a business, for Cisco’s buyers—for the market.

Cost-cutting?  Cisco may as well lie down, put a rose in its collective chest, and await the inevitable.  Just as some economic problems demand you spend your way out of them, so do some market problems.  Cisco is absolutely right in its determination to broaden its TAM.  What they’re wrong about is how to go about that broadening.  You can’t just say “I’m a networking icon, so I’m an icon through and through.”  Fix the growth-company business case problem for your buyers.  It’s as simple as that, and transport/connection networking is only a tool in improving productivity for enterprises or selling services for operators.  There’s an application or service layer involved.  Cisco took a huge stride toward service/application relevance with UCS, and they need to staff the hell out of it and spend like a sailor to make it work.

Which is why breaking up is a bad strategy.  Cisco dismembered is a bunch of mediocre business units that are as long on aspirations and as short on execution as Cisco as a unit has been, but that lack the ability to cross-fund and cross-sell.  You might get a bubble of stock growth fueled by speculation, but no value growth, and then the whole thing will collapse.

The final comment here is that the Street is dissing Cisco by comparing its year/year growth with competitors like Alcatel-Lucent and Juniper.  That would be fair if either of those guys were doing anything better at the market strategy level, but they aren’t.  Like Cisco, both companies have shown they see the Elephant, the “Life Fabric” we’re creating now with ubiquitous broadband.  Both have launched initiatives that address little teeny network pieces of that, but neither has taken ownership of the movement of the market that’s creating those pieces.  Both have the same chance Cisco had, both are making the same mistakes, and unless they change both will suffer the same fate—only likely much faster.  Did you see how long it took for Cisco to change from market darling to goat?  You ain’t seen nothing yet, as the song goes.

 

The big takeaway from Interop so far has been the battle for the data center, which is no surprise given that particular item has been on top of my surveys for both enterprises and service providers for eighteen months or more.  Interestingly, the financial analysts aren’t seeing anyone decisively winning that battle—at least not right away.  I agree, but the reason why that’s the case is more important than the factoid itself.  You can’t fix an outcome; what is, is.  In theory at least, you could mitigate a cause.

Data center networks are migrating because data centers are, and the drivers of the IT side of the migration are obviously most likely to be giant server and/or software companies.  If you want a buyer to approve an eye-popping cost, and if you want to keep most of the money that’s changing hands, you’ll tend to exalt the benefits of your own gear or software and underplay the other component requirements—the ones you can’t fill on your own.  Why is IBM doing OEM deals for network gear and not making the stuff itself?  Because it wants to lance any objection boils at the network level, but focus on the IT side.

In the service provider space—both network operators and OTT giants—we’re seeing a drive to create a cloud without much vendor support from either the IT or the network giants.  This is in sharp contrast to past practices in the industry, where vendors presented a Fuller-Brush-Man-like inventory of stuff that represented the operators’ only choices, and thus drove network evolution.  The buyer is out of control; today in the operator space and eventually everywhere that consumes data centers.  That’s going to create a whole new tech industry.

Google is likely an example of all of this.  At the developer conference, they introduced what might be (note the qualifier “might”) the most revolutionary thing in Android since the first notion of an Android smartphone.  Android@home is an attempt to make Android king of a little-known but highly important market space, that of “embedded control”.  A device that has computer technology support for its own functions but doesn’t provide a GUI through which the general power of computing can be exercised has historically been called an “embedded control device”.  There are arcane EC-OSs, and there have been for years, and there have even been attempts to make a general-purpose OS like Windows or Linux into an EC-OS.  None have had much success, because nobody has really promoted the notion.  Google aims to change that, creating an Android-inhabited universe in the home where a grid of intelligence manages the environment, fills our needs, etc.  If you believe in a smart home, you believe in a pervasive EC-OS.  Google wants you to believe in Android as one.

There is no question whatsoever that Apple sees something similar, and is moving perhaps with less public fanfare toward that same goal.  Google’s move may flush out Apple’s own intentions, which I believe include the linking of an iOS home network with an Apple-provided cloud-hosted set of services.  That’s surely Google’s direction.  The two companies are envisioning “the cloud” in a more dramatic way, as a kind of “Life Fabric” that surrounds us through wireless connectivity and that hosts smart agent devices that each cooperate to play a role in how we work, play, and live.

 

 

 

Skype and Microsoft?  Well, apparently it’s more than just a possibility.  There have been rumors swirling around a buyer for Skype for a week or more, but they’ve been just rumors.  The possible deal with Microsoft is a lot more than that—Microsoft confirmed it at about 8 AM today.  So now, the question is “why?”  From what’s been said, the big reason appears to be the creation of a communications ecosystem built to envelope Microsoft’s gaming and mobile products, and I think it’s clear that it would be extended to Microsoft desktop products as well, and could even offer an attractive reason for hardware vendors to offer a Microsoft-based tablet.

Skype is two things; a community that already includes tens of millions of active users worldwide, and a technology that can create a “behavior-centric” communications framework around any activity that’s persistently interesting to users and that has a social dimension.  Gaming is surely such an activity, and so is unified communication and collaboration for the enterprise.  I think it’s clear that Microsoft is aiming at this, but I also think it’s clear that Phone 7 and Microsoft’s smartphone fate is tied up with this deal as well…and that’s complicated.

Technologically, this might be an interesting time to make a Skype-based play.  Mobile operators are transitioning rapidly to LTE, which is pure IP.  While there are ways to tunnel TDM voice over LTE networks, a quick migration of mobile users to LTE would mean that an all-IP calling community would develop quickly.  That would call into question the whole IMS voice evolution because without much interconnect between TDM and IP voice, a lot of IMS is redundant.  If you don’t believe that, reflect that Skype already inter-calls without IMS.  So might Microsoft put Skype voice on its handsets instead of conventional voice?

It would depend on the operators.  Voice services are clearly not going to be profitable in mobile any more than in wireline, but they do sustain some revenue from non-broadband customers and justify at least part of the investment in wireline copper loop.  They’re also still a big source of mobile revenue, if one that’s clearly in decline.

P2P voice is the cheapest way to offer voice services, which is why you can offer free Skype.  Given that universal broadband will create a universal framework for something Skype-like, it’s hard to justify spending bigger bucks to create another voice model.  Yes, the carriers have low IRR and can win a race to the bottom, but their horse in a future-voice race is more likely to be P2P-based than central-mediated and server-based.  Remember that signaling issues were what was supposed to have brought down Verizon’s LTE network.  Why create more of it?

Another interesting news item is that David Yen, Juniper’s QFabric engineering ace, is leaving Juniper for Cisco, where he’ll take over a new business unit built around the data center and including the UCS server lines and virtualization and the cloud.  This might, at one level, be an indication that Cisco is taking the data center and its strategic shifts more seriously, but I still have a problem believing that one person can be the catalyst to make a sales-driven company appreciate marketing and market strategy.  There’s still a lot of Cisco cotton wrapping Juniper-bred Yen, and even Juniper seriously underplayed QFabric at the strategy level.  Does David see that, and will he do something better for Cisco?  It’s a hard role to have to play now, because little time remains to position Cisco’s assets effectively.

The Microsoft/Skype thing also puts pressure on Google, who after all was one of the companies said to be in discussion with Skype.  Google Voice and Chat have been modestly successful, and Google now has to either concede the IP/UC space to Microsoft (fat chance!) or step up its own efforts here.  The problem is that monetizing that kind of effort will be difficult unless Google can really involve outside partners.  The timing of the Google developer event is thus problematic; it’s too soon for Google to have devised a strategy for Voice/Chat that would integrate with Android, and yet it’s now clear they’ll need one.

 

Today begins with more negative comments on Cisco, and it’s hard not to wonder at the way a company that was once a model of tech success (“I want to be the next Cisco”) is now seen as a model of a transition failure.  The idea of breaking Cisco up into pieces so that valuable parts can grow faster than “legacy” parts has been raised again on the Street (and in the media).  There’s a lot of questions on whether Cisco can recover its past glory.  That’s the wrong question, and if competitors for example keep asking about the past they’re going to be looking back on it from their own virtual retirements.

The challenge Cisco faces is embodied in (but, I hasten to point out, not caused by) the notion of “OpenFlow”.  This is a concept of switch and router control that definitively separates the forwarding and control planes of network devices, centralizing the latter.   The separation concept is far from new, and truth be told the notion of central network control arguably goes back to IBM’s SNA.  Thus, there’s nothing conceptually revolutionary about OpenFlow.  There may well be something commercially new, though, and even revolutionary.

Focus on the “Open” part here for a moment.  We’ve long had open-source software in networking, and the Berkeley Software Distribution (BSD) component of UNIX was the source of much of the networking software during the 80s and even early 90s.  That includes software running in “routers” or network nodes.  What OpenFlow is doing is making open-source fashionable again in networking, at a time when pushing bits as a differentiator is highly unfashionable.  I’ve cataloged the issues that have created the bit-pushing problem before, but those issues have created a largely unfocused angst up to now.  Two factors have changed that, and Cisco’s fall is the first.  Make no mistake, when the market incumbent is in trouble, the market is in trouble.

The second factor is the Open Networking Foundation.  This is a non-profit formed in March and sponsored by Deutsche Telekom, Facebook, Google, Microsoft, Verizon, and Yahoo.  Others have joined (including Cisco) since.  The goal of ONF is to promote what it calls “Software-Defined Networks”, and OpenFlow is the explicit example of such a network.  There’s going to be a fair blizzard of OpenFlow stuff at Interop, and that shows that there are commercial legs behind the idea.  That’s critical because to convert unfocused angst into commercial drive, you have to be able to buy something.

This is especially relevant now because Alcatel-Lucent, in contrast to Cisco, presented good numbers for the quarter.  They’re also gaining in strategic influence in my surveys; it looks like they’ll turn in their best performance of the last five years in the Spring 2011 sweep now underway.  The question is whether Alcatel-Lucent will try to (somewhat belatedly) value its own service-layer strategy and thus preempt some or all of the business value and technical momentum of ONF and OpenFlow.  They are not members of ONF either.  With the combination of a strong lightRadio-created RAN position and one of the two only semi-articulated service-layer strategies in the market (Application Enablement), they could be a player still.

So is this also the path for Cisco?  I doubt it, simply because Cisco has never been a strong supporter of standards because of their erosive impact on margins.  But it’s a dilemma for Cisco because it suggests (not yet proves) that there will be uncontrollable commoditization at the router/switching level.  Not supporting the instrument of change doesn’t undermine change, it undermines you.  On the other hand, you don’t want to push a market trend against your own interests.  Cisco is a member of ONF, but whether to try to adopt the idea or to try to manipulate it isn’t clear at this juncture.  Might OpenFlow be the path to Cisco’s future?  No.  But it might be something that shows Cisco that there is a different path to its resurgence than it might think.

 

Nielson is giving us some new data on video viewing habits, and there are a lot of interesting interpretations you can draw from it.  It’s particularly fascinating if you factor in some of the data I’ve collected on content use, and the results of my content consumption model.

At the high level, the Nielson study says that viewing is increasing slightly, fueled in part by expanded use of online material and in particular mobile video.  But there is a direct correlation between the amount of traditional TV viewed and the age of the viewer, something I’ve also noted in my own models.  The high-school-age crowd watches half the number of TV hours that seniors do.  It’s how this statistic interpreted that’s significant.

The classic view is that we’re a population being weaned away from TV by online viewing.  The reasoning is that as the population ages, the teen behavior moves up the ladder of age until everyone is watching half the TV.  It’s plausible on the surface, but if you look deeper at the numbers you see some issues.  In particular, if you look at the hours spent homebound for each population segment, you see that TV viewing is actually correlating nearly 100% with homebound time.  In short, people watch TV when they’re home, and as they age they’re home more.  Teens, who escape home with fervid determination to evade supervision, aren’t home to watch TV.  It’s as simple as that.

Another interesting fact is that time-shift viewing increases quickly with age up to middle age, then declines.  That shows that as people age, they reconnect with TV and develop a “show dependence” on favored material that they then record for later viewing.  This demonstrates that the habit of not watching is being broken; why record something you didn’t even know was on and never watched?

Youth is using mobile video more, because they’re more mobile.  The goal of “not-at-home” is a goal of avoidance; you have to tune your entertainment behavior away from place-dependence and thus toward mobility.  It’s also more likely you’ll do this as a viewer not yet committed to network TV, without many “favorite” shows.

Moving more to the enterprise side, Red Had it releasing a beta of its OpenShift cloud platform.  What’s interesting here is that OpenShift is a PaaS framework that’s designed to support development of cloud-enabled apps, not a virtual machine framework like an IaaS service would be.  This could be a way of dodging big incumbents like VMware, but it might also be a recognition that cloud computing based on cloud-enabled apps is far more efficient and performs better than cloud computing based on non-enabled apps, no matter what the framework of the cloud.

Microsoft and IBM preach a more cloud-enabled app story than most vendors, and they also preach more PaaS, hybrid cloud, and private cloud.  This month in Netwatcher we’ll take a more detailed look at the architecture issues here, and how enterprises are seeing their cloud plans developing.

In the economy, futures have responded positively to the jobs report, which beat the estimates in number of jobs added.  Still, it does appear to me that job growth this spring has been slower than expected, no doubt pushed down by higher fuel prices.  The good news there is that commodities in general are retreating, which I think is due to speculators clearing their positions as they realize little more growth can be expected.  Gold and silver have also fallen, which suggests that even here we had a more speculative bubble than an arbitrage on the value of the dollar.  I think we’ll see some improvement over the summer.

 

There are conflicting reports on the progress of the mobile operators’ Isis project to provide mobile/NFC transaction processing in competition with credit cards.  Some of the media are saying that the initial link with Discovery for the actual transaction handling was an error in judgment, and the operators themselves admit that merchants say that Visa and MasterCard and even Amex are more likely to be presented by consumers.  Does this mean Apple and Google win in NFC?  Did the telcos screw up here, or is there something deeper going wrong, or perhaps is nothing wrong at all?  All of the above, sort of.

Visa and the other giants in the space have facilities to collect and clear the transactions made through credit cards, and this is a high-cash-flow, low-margin business that requires a lot of build-out and a lot of retail presence to get started with.  The telcos have neither, and Google and Apple likewise have none.  The perception of everyone (especially Apple and Google) is that they can’t become players in the transaction processing space—the return on capital is way too low.  Discovery was the one that wanted to deal in order to drive up their own usage.  But merchants and consumers wanted broader participation, and that means trying to do deals with virtually all the credit card processors.

AT&T is taking another tack in the service layer with a Groupon-like daily deals and LBS shopping alerts.  Like the Isis notion, this would provide the company with service-layer revenue to offset the cost of creating identity-and-transaction infrastructure.  There are also rumors that the telcos might sweep up some hosting companies the way they’ve swept up cloud providers.  I think that’s a reasonable guess, but not because they need the servers.  Telcos know that they can provide better IT economy of scale off future service-layer IT deployments than any cloud or hosting vendor could.  What they want is the customer base.  Whatever the return on server investment for hosting/cloud companies might be today, it’s high compared with a telco ROI.  Add to that the fact that the telcos could create the same hosting service at a lower base cost and you get a pretty nice profit picture.

The growing and more visible interest of telcos and cablecos in the service layer is creating some fear and uncertainty among the OTT players.  Netflix, whose delivery model adds to operator costs while competing with operator TV strategies, is saying that they don’t want to see the telcos hurt.  As well they shouldn’t, but it may be too late at this point.  With revenue per bit declining, there’s nowhere to go but up in a service sense, and that means more competing with OTTs.  It also means more spending on the service layer and less on the network, and more focus on integration of services with the network as a strategic differentiator in both services and networks, capex-wise.

We’re also seeing some indications that regulators are worried about the impact of Internet content on media diversity.  In Australia, regulators are asking for submissions on policy responses to media convergence.  The question is whether it’s possible to sustain local perspectives and minority viewpoints when everyone has access to a market model that includes giant pools of consumption like the US.  Would content producers in Australia start focusing on material that’s more international in nature because they can earn more?  What then happens to local content?  Can local TV stations run only local news, and if they try will advertising pay to keep the lights on?  Good questions.

There’s some bad economic news today, relating to employment.  After lackluster private-sector job growth reported yesterday, we now get the news that new claims for unemployment surged this week.  A weekly report isn’t definitive; we need to see the longer-term monthly numbers to get a true perspective.  Nevertheless, there’s a risk that employers are curtailing hiring again in order to promote profits when revenue growth is soft or non-existent.  That would likely erode the level of economic growth.  In Europe, a similar trend would hurt the financial stability of weaker economies with strong social programs, and that could put the Eurozone back into a state of tension over sovereign debt.  We’ll have to watch developments here carefully.

 

UBS released an Ethernet switching report today that confirms the trends that my surveys have shown for two years now—including the fact that it’s the data center network evolution that’s driving enterprise network equipment spending.  What my data has also shown is that enterprises are not likely to see a data center network evolution in a vacuum; they link it to an IT architecture migration to virtualization, cloud computing, or both.  That’s why there have been so many recent announcements of cloud IT support from network equipment vendors.

Brocade has now jumped into the fray.  The company has always been strong in the data center, but more on the storage side.  Its Foundry acquisition gave it credentials in the enterprise WAN side of data center networking, and it has an OEM deal with IBM that’s offered it some new paths to market. Still, it’s fair to say that Brocade hasn’t kept up in this space, and more fair to say that it’s lost some opportunity to steal share from its arch-rival Cisco.  UBS also lowered its estimates on Cisco to reflect business-model transition, a fancy way of saying that management is distracted and things are in a state of flux.

Brocade’s strategy, which it calls the “Virtual Enterprise”, is built on an architecture that Brocade says is open and extensible, and is in turn called “CloudPlex”.  I have to admit that “Virtual Enterprise” based on “CloudPlex” seems like an attempt to link all the right buzzwords to an announcement, and that cynical view may be somewhat validated by the fact that the new stuff associated with CloudPlex isn’t yet available.  Unlike rival-for-Cisco-market-share-castoff Juniper, Brocade didn’t tie its new architecture to a single new product, or to any specific future one either.

Spinning an architecture in advance of having specific execution to support it isn’t necessarily bad, though.  My surveys have consistently said that enterprises and service providers alike need to understand the ecosystem that a vendor’s vision represents before they worry too much about boxes, speeds, and feeds.  The problem in this case is that the details on CloudPlex are sketchy themselves and it’s not at all clear just how the concept links virtualization to the cloud.  That’s particularly true when Brocade doesn’t supply virtualization/cloud software except through partnerships.  I think Brocade could tell a strong story here, but they’ve not done it yet.

On the economic front, earnings are generally sustaining the markets with the uncertainties following the bin Laden death weighing on risk-adverse traders.  The private-sector payroll data isn’t stellar but it’s also not a sign of a collapse, and SMB sentiment is the best it’s been for three years.  It may be that stocks have reached the level they need to be at given current risk and reward balance, and it will probably take some news to move things one way or the other.  I still see the fundamentals of tech spending holding steady, but that’s short of the mark for where they should be at this point in the recovery.  The productivity value proposition of tech needs bolstering, and that’s not happening at the pace that it could be.  As long as we keep tech benefit cases contained, it’s going to be hard to grow spending even at the rate of GDP.

 

Verizon’s Digital Media Services initiative has been somewhat of a yawn to the press but it’s of great interest to other operators and also to some vendors.  Verizon is now launching another program, called the Verizon Strategic Initiatives Council, and this one could be even more important.  Perhaps the most significant thing about it is that it brings into the open something that’s been happening behind the scenes at most of the larger network operators.

Light Reading is reporting that the early efforts of the council are focused on things like wellness, security, home monitoring, and smart home and energy management.  All that appears to be true, but these also seem to be the flagship applications that are expected to bring focus to a larger question, which is how to create “services” in an age where the network isn’t enough.  Dare I hope that this might bring some long-needed clarity and impetus to service-layer planning by vendors?  Hope, I guess.  Assurance is still another matter.

What’s so interesting about the Verizon move so far is that it’s being brought to market through a partnership, at least in its wellness manifestation.  Given that VDMS is also a partnership strategy, it sure looks like Verizon at least has decided that the wholesale-feature route is the way to go to market.  That would create an interesting new model of services, one that doesn’t pit the operators against the OTTs but rather creates a partnership in the feature area.  Telcos and cablecos might offer wholesale features in a growing variety of flavors, which OTTs would roll into an even-more-diverse set of retail offerings.  Of course, this is all predicated on other operators following Verizon’s lead—which I think they will.

In the broad global world, the death of bin Laden is clearly seen by the Street as a near-term risk factor, and we’ll probably see slippage in stocks for a day or so even if nothing concrete happens.  Whether the world is a safer place in the longer term is hard to say.  The growing political unrest in Arab countries probably undermines terrorism more than the death of any given leader of any movement; a political solution—even revolution—offers an alternative to terroristic reaction to conditions.  Many movements are killed when a charismatic leader dies, but there are many movements out there and we’ll have to see what emerges.