Month: November 2011

Microsoft’s Xbox will now feature the ability to stream 26 FiOS channels and access (presumably the same network) content on VoD.  The step isn’t a technological revolution because AT&T’s U-verse has been a streaming IP video service from the first (and it’s also available on Xbox, but in the same form; FiOS for Xbox is channel-limited for now).  It may be at least a step in a kind of service revolution, though.  The operators themselves are mixed on this topic.

Streaming content is often seen as a problem for “the Internet” but most streaming content is never really on the Internet at all.  Popular content, even many YouTube videos, is cached near the access edge and often rides only a short distance to the user.  Globally, operators tell us that “commercial-grade” content travels on the average only 11 miles from point of storage to point of delivery and that all of that distance is beyond the Internet peering point.  CDNs, in short, control content traffic and not the Internet.  The explosion in video content doesn’t really drive up “Internet” traffic, it drives up access network traffic.

So where’s the beef?  Operators who don’t have a viable financial scenario under which to deploy FTTH are concerned that access congestion could truly kill their infrastructure.  If you push glass to the edge you have a relatively unfettered upgrade path because fiber capacity is formidable.  If you have copper, the problem is that you run up against hard technical limits.  A third of operators say they can’t support IPTV on at least 50% of their plant.

There’s also a question of neutrality policy that concerns operators when they look at streaming video.  By buffering you can make any IP path deliver content, but the buffering delay quickly turns off consumers.  Getting someone to wait even a full minute for video to start is a challenge, and even ten minutes of buffering (which no one would wait for) on a 60 minute show can produce stutters in the stream if there are significant variations in the traffic congestion along the path.  Thus, video should in theory have some sort of priority.  While neutrality rules don’t necessarily rule out video priority, they do leave questions on how it could be paid for and whether priority paths for video could be “gamed” for use in other applications.

Interestingly, operators weren’t that worried about the classic issues of video revenue per bit on streaming services; they see more of a problem with “non-commercial” video like YouTube that can pull video further through their infrastructure and thus create more capacity problems in more places.  The alternative for them is to cache more video, and for customer-loaded material it’s hard to do that except reactively.  Mobile video creates issues for them because often it’s stored and streamed in a form that can’t be displayed on the device anyway (it’s down-sampled, in effect) but that still uses up the full repertoire of bandwidth along the path.  That means transcoding, and when access or downstream points get congested it means adaptive transcoding.  You’re getting the picture here.

So why is Verizon doing this, and why has AT&T already done it?  Answer; because they can.  AT&T’s situation is easy; U-verse is already IPTV.  Verizon’s situation is relatively easy too; FiOS has the capacity.  More to the point, the incremental cost of supporting streaming to Xbox or something else isn’t high enough to invalidate an access business model that meets ROI goals.  Add channelized TV to broadband in a sensible way and you can still make money where customer densities are reasonably high.  The moral is that every market is different, and announcements of services in Japan or Germany or even the US Northeast don’t mean that everyone will eventually see these services.

On that matter, we’re looking at the enormous FCC “Connect America” order now, the replacement for the old Universal Service rules with an excursion into intercarrier compensation.  We’ll be blogging on this for our TMT Advisor premium blog when we’re done.

Wall Street is speculating on Huawei’s future in enterprise networking as the company prepares to make what everyone (including Huawei) says will be a major push there.  In some ways, the move is a validation of the thesis that service provider networking is not a growth market; constraints on transport ROI are simply too great to allow for explosive growth there even if some service-layer enhancements to revenue could be found.  One operator responding to our fall survey said “Sure we could use cloud or other service profits to subsidize transport, but why would we?  We’d just be helping competitors ride for less.”

Enterprise networking isn’t any more immune to bit commoditization than service provider networking is, but for a company with no enterprise exposure at all it’s a new market area with a new set of opportunities.  Huawei knows that the enterprise market is, if anything, more price-sensitive than the service provider market.  It’s recent strategy of using price leadership to gain an entrée and then demonstrating insight to lock down the deal fits very well with enterprise buyers.

Huawei’s entry into the enterprise space is going to pull at least 15% market share out of the current-vendor pie.  The Street is speculating that Cisco would suffer the most based on the logical if somewhat simplistic presumption that the guy with the largest market share has the most to lose.  Yes, but that party also likely has the greatest account control.  Our surveys suggest that price-based competition is initially most successful when it’s aimed at buyers who are somewhat strategically adrift, meaning that they are not being influenced by a vendor plan for network advance that makes sense.  Heck, says the price leader, nobody really understands this stuff so why pay so much for it?  We think that the players that could be most at risk are those with limited scope and strategic influence, which would suggest that HP and Juniper might have a bigger problem in the near term.  HP is already reeling from loss of influence arising out of confusion over its long-term direction.

 

The retail holiday season got off to a good start in the US according to all reports, with significant gains over last year and a particular focus on consumer electronics.  One hot space is the tablet market, where Apple cut iPad prices and where Android devices continue to gain overall market share.  A new group of tablets based on Nvidia’s Tegra 3 quad-core technology is expected shortly, and of course the new Android 4 (“Ice Cream Sandwich” or ICS) is also expected to begin rolling out, though likely not in time for this season.

Tablets aren’t the cause of the network operators’ angst this holiday season, but in our just-completed survey of operators we found that 4 out of 5 said that they believed that tablets would be their greatest future challenge.  The reason is simple; the devices have a large enough screen to be credible platforms for entertainment video.  While tablets are primarily WiFi devices and most operators believe they’ll stay that way, they still are expected to increase overall streaming traffic.  This traffic is more likely to come in through hotspots, making it a problem for the wireline network rather than for mobile backhaul.

What’s perplexing perhaps about tablets is that they don’t appear to figure as much in what I’ve been calling the “mobile/behavioral transformation” as smartphones.  The reason is that while smartphone users report their devices are with them an average of 82% of their waking hours, tablets are with their users only 28% of the time.  Smartphones are turned on for effectively 100% of the time they’re with their owners, while tablets are on only a little more than a fifth of the time.  All this means that tablets can’t be used for instant gratification; they can’t be wired into our lives as intimately simply because they’re not “handy”, meaning available.  The fact that tablet trends are decisively shifting to the larger 9/10-inch form factor is only exacerbating that issue; you can’t walk around holding one easily.

The reason all of this is creating operator hassle is that the two premier revolutionary appliances are really hitting different parts of the network and generating different risk/opportunity balances.  Operators feel they are somewhat in control in the smartphone space; nearly all phones are sold under carrier service contracts of some sort.  In the tablet space, four out of five are sold retail over the counter and WiFi, as we’ve said, dominates.  The problem is that virtually every tablet buyer is a smartphone owner, and companies like Apple are already working to strengthen the symbiosis between the device classes.  How then do operators create integrated stuff?  It probably gets back to the service layer, but how?  I had a recent illustration of the issues with the use of Verizon’s FiOS apps for Android; I can’t control my TV with an Android tablet because Verizon wants the device’s “phone number” to register it.

The tablet/smartphone dichotomy may be one of the reasons why operators told us that they were “rethinking” their mobile service and even content strategy.  In the most recent survey we found that nearly all Tier One operators now believed that they needed an integrated service-layer approach, which is only a slight change, but this time nearly all also said that they believed that mobile, content, and cloud had to advance more in parallel.  In the past, most operators said they were prioritizing content monetization; that’s no longer true.

Operators also said they were refocusing their capex, much as some Wall Street firms had suggested, on revenue enhancement and cost management.  That doesn’t tell the story fully, though.  Cost management strategies, like improving mobile backhaul efficiency, are the focus of the operations budget planning process and revenue enhancement is the focus of the board-level monetization-team projects.  In short, we’re seeing operator procurement split more affirmatively in terms of sustaining transport/connection structure on the one hand, and enhancing “services” beyond connectivity on the other.  Vendors are finding this split hard to deal with at the sales level, in part because they can’t always get access to the monetization teams and in part because they’re simply not used to selling products in support of a mission beyond moving bits.  We did see some noticeable changes in vendor influence, and those will be included in our December Netwatcher issue as well as provided in hour-long presentations on a consulting-call basis to our clients.

 

 

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.