Month: April 2012

Top news today is the announcement that Microsoft will invest in a new Barnes & Noble subsidiary for the Nook and ebooks.  This is a strange one, I think, for the obvious reason that the Nook is an Android device, and the only concession that’s obvious for Microsoft is one for a reader for Windows 8.  Given that there’s a reader for both iOS and Windows 7 it’s hard to see how anyone at Microsoft would have thought that Windows 8 would not have been supported.

It seems at least possible to me that Microsoft and B&N might be thinking of creating a line of e-readers based on Win 8 and not just an app.  Amazon’s Kindle Fire now accounts for more than half of all Android tablet sales, and it’s pretty likely that B&N is not going to gain any ground against its non-storefront rival.  Microsoft is likely starting to get a bit concerned about Amazon as the company turns more to digital properties that collide with Microsoft’s online interest.  Microsoft and B&N may also be looking at a cloud alliance to counter Amazon’s.  In short, this could be the start of something big.

Speaking of digital content, we’re continuing to get data that shows that mobility and broadband are combining to alter behavior, and marketing, and market practices.  This is important for a number of reasons, one being that anything that alters fundamental human behavior creates new risks and opportunities, and another being that near-term advertising trends in mobile might have a major impact on video.

My personal theory has always been that when people use mobile devices on broadband networks, they do things very different from what they do at home.  One of the recent indicators of that is the fact that the kind of video consumed on mobile devices is very different; more YouTube and clips and less TV replays and movies.  When tablets are considered, we find that tablets tend to be used on WiFi more than on 3G/4G, and when they’re on WiFi they are used more like laptops or desktops in terms of video consumption—TV and longer features.  Even when used on cellular networks, laptops are more likely to be used to view longer material.  But maybe one of the big factors is that gaming is increasingly a factor on mobile devices, and that’s even showing up in mobile ads.  Video ads served inside game apps are already responsible for almost half of total videos served to mobile devices, and those videos account for 40% of total video ads served.

The big question this raises in the near term is whether it means that people might be moving away from streaming to home in favor of mobile streaming, but I think most people realize this is unlikely.  What I think is really happening is much simpler; people are exercising entertainment-on-the-road choices they never had before.  It’s nice to have something to do while you’re waiting at the Laundromat, but you probably won’t make extra trips there just to do those things.  Mobile activity online is a combination of filling in idle time with new entertainment choices and exercising new information options that are appropriate to someone out on a mission instead of at home contemplating.

A more pertinent issue is that of mobile bandwidth use.  If video ads in games and in other apps are going to overtake wireline video ads in the near future, as many say they will, then are we seeing a time when in-app mobile video ads will be one of the bigger factors sucking down the remaining usage a broadband user has per month?  Can we expect users and regulators to allow in-app bandwidth for advertising to draw down the quotas?  If not, can we expect telcos to make in-app usage free and subsidize mobile ads they don’t get revenue on?  You can see the dilemma here.

 

Amazon reported its quarter and gave the Street a big upside surprise (refreshing in the tech space this quarter).  Since the company doesn’t break its numbers down as completely as I’d like I can’t dig too much into their details, but there are some things worth looking at.

Number one is Kindle Fire and ebooks.  Amazon made it clear that digital content was driving a LOT of growth for the company, which vindicates its strategy for seeding the market with a low-cost high-feature reader (Fire) and then reaping the profit on the sale of books to that device.  Or movies, or whatever.  It’s making it pretty obvious that the way Amazon intends to swamp rival Barnes & Noble isn’t by out-tecching them, but by making the retail book business into a giant albatross.  There’s already pressure from B&N investors to spin out the Nook and ebook business, which is pretty much a prescription for letting books sink while ebooks thrive.  Not that much can be done about that.

The potential risk Amazon faces here is that ebook success may be embodied in the Kindle Fire but it’s not the cause.  People are getting accustomed to living through an electronic agent (multiple agents in most cases) and so they’re now very comfortable with the idea of displacing “real” books with ebooks.  Two years ago in our first surveys on the topic, I found that only about a quarter of people said they “preferred” ebooks but half said they believed ebooks were the way of the future.  In the last survey, almost two-thirds said they preferred ebooks and almost everyone thought they were the drop-dead winner in the long run.  That acceptance is the risk, though.  People who want the convenience of living through an appliance are going to want something very general-purpose.  Amazon has thrown down the gauntlet to the Apple and tablet players; they have to make Fire a good enough tablet or they’re just creating the feature shopping list for their future competitors.

The Amazon challenge inevitably leads to the cloud.  OK, I’m sure you’re tired (at one level at least) hearing that the cloud changes everything, but the good news is that’s not what I’m saying.  The notion of always-on broadband and personal appliances is what changes everything.  The cloud is being pulled along by that force, just like ebooks are.  EC2 is an interesting offering.  IaaS, the prime product, is the lowest-margin service, the one with the least prospect breadth, and the hardest to sell to SMBs.  However, it’s the most versatile, and an online retailer isn’t generating high margins anywhere so Amazon can tolerate that.  Further, given EC2 as a resource, Amazon can draw on it to make its own processes elastic and also to create new online services.  The big question, one that we can’t answer, is whether Amazon sees the future opportunity (and risk) that generalized cloud-to-appliance services represent and will leverage EC2 to address it.  Apple has Siri now, AT&T says they’ll have “Watson”, and you can BET that Amazon is working on a personal agent.  Such agents, as I’ve said, can control the scope of a user’s information searching, and thus create what’s effectively a digital supermarket in which every Kindle user would shop and live.  It could be big, very big.  Big enough to give Apple some grief if Apple doesn’t get its own cloud service moving.

All of this is why I’m frustrated by network equipment vendors.  Here’s an area that’s spawning big-time investment from giant firms and somehow the network guys think that their own customers (whose networks are making the connections and carrying the traffic) aren’t interested in participating.  For Alcatel-Lucent and Ericsson and Juniper and NSN, all of whom have serious problems in cloud positioning, the same forces that are pushing Apple and Amazon are pushing the network buyers away from traditional boxes.  Why then rely on them?  Today, UBS said that they believe Cisco is gaining market share in networking.  Yes, that’s easy given that Cisco is the only major network equipment vendor who hasn’t reported.  It’s also likely true; my surveys of strategic influence have shown Cisco gaining ground since its rude awakening.  They also said that their surveys found “no surveyed CIOs actually plan to deploy either the general purpose top of rack or the more complete QFabric solution in 2012.”  Could it be because fabrics are most valuable in a cloud data center and Juniper has no cloud strategy?  Cisco has servers, all of the pieces of the cloud ecosystem.  Yes, they could (and likely will) do a better job of articulating the cloud reality, but the shortfall won’t matter with all their competitors’ heads in the sand.

 

Alcatel-Lucent reported their first quarter yesterday, and there was a lot of red ink in play.  The company’s equipment revenues fell below a critical threshold for the first time in years.  Particularly troubling was the fact that wireless lost almost 30% y/y and almost 12% q/q.  The only semi-bright spot was IP routing, that lost q/q but gained nearly 30% y/y.

As a broad player in telecom equipment, Alcatel-Lucent has a special need for an integrated message that maximizes product pull-through.  Any camel that can get a body part into a buyer’s tent needs to make room for the herd.  Making that work means establishing a cohesive systemic vision of networking, and then driving that vision into carrier planning.  On the surface, Alcatel-Lucent has an unparalleled opportunity for both.  Their strategic influence in our surveys has consistently been the highest of all the vendors (though it’s been slipping steadily) and their notion of the High-Leverage Network is conceptually the strategic glue they need.  But it’s not been working.

The biggest problem Alcatel-Lucent has is that its individual product groups have never reconciled to the merger.  None of these camels want ANYONE in their tent.  The relentless self-focus in the product areas means that nobody minds the store overall except someone at a very high level.  In briefings, I’ve always been struck by the insight that top management has showed and the pace at which that insight evaporated as you dived down to product detail.  Horizontal integration is something this company needed from the moment of the merger, and even today it’s just not there.  Sales is left to cobble together strategies from non-cooperative products.

The second problem is positioning and strategy.  Yes, I love HLN conceptually, but I’ve spent years trying to unravel just what the heck is inside it.  I was able to publish a description of the Alcatel-Lucent service-layer strategy for the first time only about six months ago, and HLN has been around for years.  There’s still no in-depth picture on their website, even today.  Given that, how does a salesperson convert what’s essentially a strategic vision into a series of sellable products?  Especially if all the product guys are manning the barricades against each other as much as against competitors.

Google has finally introduced “Google Drive”, an online storage and collaboration resource.  If you look at this offering you see something that has to be frustrating to the network operators, and that’s the fact that there is absolutely nothing here that the operator couldn’t have done, and likely done both cheaper and with higher profit margins.  So why didn’t they?  The challenge for the operators is that they’re just like Alcatel-Lucent.  They have silos, their people don’t talk to each other horizontally but instead fight turf wars.  There’s only recently been movement toward cross-silo integration with executive-level teams, and these teams are finding they have no one to engage with in the vendor community.

Like Alcatel-Lucent, network operators are broad players and so have stuff that’s old and at best a cash and loyalty generator and at worst an albatross.  They also have opportunities that could dazzle the markets.  How do you get those two harmonized in a single business?  A systemic approach is essential, which is why the lack of one from Alcatel-Lucent is so sad.  There is no vendor whose offerings I could as easily position to buyers as the solution to their long-term monetization problems (Cisco would be second).   Yet even in wireless where capex is highest, Alcatel-Lucent is falling behind expectations.  It’s easy to say that China is late or China is driving pricing down or CDMA is transitioning.  None of that’s a surprise.  What’s a surprise is that with the problems of the buyers so acute, Alcatel-Lucent is joining most of the other sellers and sticking their head in the sand.

 

We had a couple of interesting earnings reports yesterday, both of which offer perhaps some color into an element of tech.  Obviously Apple was the big one, but Juniper also reported.  The first gives us our consumer-appliance view, and the latter two some color on the network equipment space.  Both, I think, offer some specific cloud insight and some general tech insight.

Apple’s shares had been down yesterday, and they took a big jump after hours when the company reported a 94% profit increase, largely on iPhone sales.  The euphoria isn’t surprising; the Street loves a winner.  There were still some disquieting signals in my view.  Mac shipments were light versus estimates, iPhone and iPod shipments were in line, and only the iPad beat on the shipment side.

Is the iPad cannibalizing Apple’s own systems?  The portable systems were the drag on the Mac; desktops actually beat expectations slightly.  OK, Apple doesn’t need to be a big winner everywhere, but it has been trying to get its software platforms aligned to insure that the Apple brand becomes a developer ecosystem.  With Microsoft getting ready to launch Windows 8 late this year, I’m sure Apple would have liked to have seen a strong pull-through from iPhone and iPads to Macs.  Maybe it’s too early, but it still has to be worrisome.

If you look at numbers alone, what it looks like in unit-ship terms is the classic product wave.  One comes out, booms, flags, and another comes out.  That is NOT what Apple needs because you can’t keep pulling rabbits out of the hat in the consumer space time after time.  They need the whole to develop around the parts, and I think that’s a cloud story for them.  I said from the first that iCloud disappointed me.  Apple has taken a tiny step in a market it needs to be a giant in.  Google is in the cloud; even Microsoft (no great innovative force these days) is in the cloud.  Why is Apple, the thought leader, trailing here?  They need to be asking that.

iCloud as a sync host among Apple platforms is pedestrian; it’s not worthy of the best marketing company in the world.  You can’t win in appliances without winning in the cloud, Apple.  All that interior capability and horsepower will let competitors drive down device complexity and pricing and create a service model where your margins will shred.  If you want to stop this, you have to get out in front and make the cloud a concept leader in the new age of services.

So now we move to Juniper, who gave the market a couple of surprises yesterday.  First, somehow its numbers came out a bit before 3:30 PM EST, well before the close of the market.  Second, they beat on revenues, which sent the stock from trading down over two percent to trading up as much as ten percent with some nice swings between, which got them noticed on the RealTick list of unusual trade patterns for the day.  The shares were finally halted.  Look deeper, though and you find that revenue was down both sequentially and year over year and profits were also down, and guidance for the second quarter was below estimates.  Competitor Ericsson, who also announced, had doubled their profit.

High drama with respect to financial disclosures isn’t any fun, and it overshadowed the fact that Juniper did a bit of a restructuring of reporting to mirror its organizational shift. The general thrust seemed to be to get the products a bit more aligned with the class of buyer, and to split out software to further the company’s emphasis on that space.  The alignment thing seems smart but I’m not sure about the software decision, or maybe I’m not sure about the software commitment.

Juniper had the best chance in all of network equipment to create a truly stunning software vision.  They had a Junos brand that offered a cohesive platform for network connectivity.  All they needed to do was to build a service/application layer on top of it, one that could empower content, mobile/behavioral apps, and the cloud, and things were gold.  About two and a half years ago they seemed to promise that with their announcement of a Java platform to overlay the network, called Junos Space.  Well, the operative qualifier here was “seemed do” because Space became a little operations overlay, and there’s nothing in the Juniper roadmap to build the service layer.  In fact, they appear to be hoping partners will build on top of Junos to do that, and such a move surrenders strategic influence to others.

Wishing they were a software company doesn’t make it so for Juniper.  Ford might want to be an oil company too, but having oil in every engine and an engine in every car doesn’t make that happen.  Being a software company in the network space means having a strong software vision that goes beyond the embedded stuff that’s in every piece of network equipment.  Having a software business unit isn’t even a prerequisite for success, it’s the software framework that is.  That framework is something Juniper has been walking away from for two years now.

On the Juniper call they talked about QFabric and PTX and the future.  Without a cloud strategy, QFabric has too limited a market to be of any value to Juniper, and the PTX is only a way to cannibalize core router sales.  Without a software strategy, there’s no cloud strategy for Juniper.  You can’t vertically integrate applications with hardware without the applications, and you can’t really have applications without a true software framework to run them in.  Stand on that great chip technology today, Juniper, and look up through your boxes toward the sky, the cloud, the money.  Nothing there.

Two companies, two cloud risks.  I’m not trying to say that the cloud Rules All. What’s happening is that the combination of cloud principles and ubiquitous broadband is CHANGING ALL.  The revenues in the new age may not be astronomical compared to the current one (though I think they could well be) but for sure the stuff that earns them is going to be very different, which means the players could be different—winners and losers.  I’m watching every player to see what camp they seem determined to join.  If you’re a buyer or an investor, you should be too.

 

The latest casualty of the earnings season is Netflix, whose numbers actually beat the Street’s estimates but who offered subscriber data and guidance that scared the stream-touched among the investment community.  There should have been no surprise here and the fact that the stock got punished for the expected means that people still refuse to understand the video dynamic.

People don’t want to pay for stuff, except where it makes them cool and attractive.  They try to get entertained for as little as possible, which is why cable companies have tended to lose subscribers to both satellite and telco competitors with lower prices.  Subscribers to pretty much all of the services cluster around the low-end offerings, not at the pricy top.  Given all of this, it should be obvious that most people aren’t going to pay for video if they can get it incrementally free.

Viewers in record numbers are finding the main networks don’t offer enough.  That pushes them to off-channel viewing more and more, and the more you view off-channels the more likely it is that you’ve seen the stuff before.  Production of material isn’t keeping up with incremental non-network demand.  It’s not that people want to cut the cord, but that they want another cord alongside that can deliver more viewing options.  The prime demographic for this is the young adult, from 20 to 30.  Netflix was a success because it filled the need of this age group.

“This age group” is the key here.  Penetration of Netflix beyond that key demographic is limited.  The younger types aren’t usually at home enough to view a complete show and would rather spend on other forms of entertainment.  The older types are first generally less online-literate and second tolerant and even interested in a broader range of material.  Netflix went into Latin America within the last year, proving that they needed new populations to pluck their key demographic from.  That’s also proof that exploiting a new demographic here is more difficult and expensive than entering a whole new country, or countries.

All of this is rooted in the fact that production of good network programming is tapering off.  Part of that is because the networks, like everyone else, are being pressured by the Street to turn in higher profits every quarter in a market that can create new eyeballs only by creating new humans.  Another part is that “marketing” in the broad sense is focusing differently because of the mobile broadband revolution.

The goal of marketing is to get somebody to buy something not by sticking the product into the person’s hands (sales) but by stimulating interest and a purchase decision.  A mobile user, out on the streets where the shops are, is clearly in a different phase of susceptibility than one at rest on a sofa in a robe.  Online advertising, directed at stationary/sedentary users, isn’t much different from commercials on TV, which is in large part why online ads have been in the net cannibalistic; they help reduce cost through targeting but don’t impact the purchase process differently.  Mobile ads, at least potentially, could revolutionize how we market.  It’s likely less about pure advertising than it is about personalized programs that start by generating a vague hunger and end with the buyer rushing into the fast food joint.  And it’s stealing marketing budgets from the networks, and from producing the shows.

The Netflix model isn’t going to work any better in the long run than the network-broadcast model.  The right answer here is TV Everywhere because it can coordinate content through the same marketing chain that mobile broadband supports, because mobile broadband can deliver it.  A common platform can link an ad in a show to a later follow-up coupon or offer when the person is near the point of sales execution, or even induce them to rise, change out of the robe, and go out into the real world.  Multi-screen, screen-switching, and mobile-based ad campaign-targeting are all possible.  Netflix can’t do them.  Thus, things aren’t likely to get better for these guys.

Mobile services are the engines of profit for the network operators, as both Verizon’s and AT&T’s results show.  Both providers have been taking the easy way out in mobile growth stimulation, which means relying on the coolness of Apple instead of doing something on their own.  AT&T now says that they’re going to launch their own Siri-like service, Watson, to be an agent in the cloud.  This is a development I’m sure you all know I’ve been talking about for some time, and it’s important not only because it would offer a framework for the operator to create its own mobile-campaign marketing plans but also because it would be the first step in transforming the Internet into “cloudnet”.  Mobile and content together are a powerful market driver; content alone (as Netflix is showing us) is a different facet of an aging market space.

 

We’re in earnings season now and so we’ll likely have company results to comment on for a couple more weeks.  Monday is a good day to consider the broader trends that were crowded out last week by news, particularly news of a financial nature, so that’s what I’ll do today.

One thing that’s developing at a systemic level is signs that the wireless service market is transforming.  I blogged earlier this year that the consensus of Street estimates and my own survey/modeling activity was that the ARPU growth rate in wireless would go negative some time toward the end of 2012.  There’s now information to suggest that the postpay wireless space, whose performance has been driven largely by smartphone contracts, is topping out and that even prepay may be nearing capacity.  At one level this is certainly no surprise; at some point every market saturates and thereafter grows only as fast as its demographic base.  The problem for networking is that it’s coming at a very bad time.

Global carrier sentiment about additional network buildout shows that future growth in spending would have to be tied to more direct proof of return on capital invested.  Operators realize that return is easier to prove either up top of the service stack, where services live (on the revenue side) and OTTs compete, or down at the bottom where capacity is created (a cost-side assessment).  The operator drive toward optical core networking as an alternative to hierarchical routing is an example of latter; a drive to create bits at lower cost because lower is where price-per-bit is heading.  Mobile has historically been a sweet spot in a graying picture because ROI has been higher, so having ARPU plateau now is bad news.  The idea that the smartphone revolution is going to stop driving more expensive plans is worse news.

The cost-drive portion of the shift in mobile spending should have framed the Open Networking Summit last week, but it didn’t.  Software-defined networks (SDNs) and OpenFlow show great promise, but they have scalability limits that mean the technology has to be carefully matched to application requirements.  The problem is that there’s no indication ONS is taking up the question of whether the special issues of wireless backhaul, for example, create a viable OpenFlow application.  I think they do; at least the traffic plumbing of backhaul that’s now seen as Evolved Packet Core might be re-framed in OpenFlow terms.  Is there a discussion here?  Not that I’ve heard.

ONS turned out some interesting stories, but so far only one of them has been “revolutionary”.  Google says it’s using OpenFlow on 100% of its internal backbone, and this should shout “OpenFlow is a Cloud Strategy!” to anyone with ears.  So far it hasn’t seemed to have done that.  In fact, I think that the stories out of the event show that getting associated with SDNs may be a higher priority than doing something actually useful.  In short, we may be pursuing “softwashing” with as much determination as we’ve pursued cloudwashing.

Most of the SDN announcements being made, most of the demos being done, relate to the “support” of OpenFlow on switches or routers.  I’m also seeing early attempts to map something like MPLS or GRE tunnels to “software” and call the result an SDN.  That’s not the path to SDN or OpenFlow success, it’s a defense against OpenFlow.  I think OpenFlow and SDN principles simplify networking, creating the notion that what’s allowed to connect is what’s supposed to connect.  A simple, explicit, model.  To add OpenFlow to a device that already supports universal connectivity isn’t going to cut it.

The optical space is important, maybe critical, to OpenFlow because it could bypass the standards and vendor inertia, as I’ve blogged before.  The cloud space is also critical because it could link the SDN/OpenFlow concept of explicit connectivity to several models that would be aware of the explicit connection requirements.  Get these right, get these linked, and you have OpenFlow success.  Otherwise you’re just softwashing.

Who’s at least appearing to lead in OpenFlow and Optics?  Not optical vendors, but Ericsson.  They have substantive work being exhibited at the Summit, not just “I-too-do-OpenFlow” junk.  They’ve presented a dozen good papers on OpenFlow/SDN topics, including some ideas on linking OpenFlow into IP networks.  Ericsson, after all, has a lot to gain if I’m right about the future “cloudnet” looking like a bunch of BRASs surrounding a cloud-and-SDN core.

But Ericsson has nothing to position it in the cloud space, at least nothing I’ve been able to find.  They joined OpenStack just a couple months ago, though, and in one sense it’s early for them to have a mature approach that combines OpenFlow, optics, and the cloud.  On the other hand, they didn’t surely could have joined earlier (it’s not like they could have missed the need for a carrier cloud strategy), and the OpenFlow-to-cloud linkage is needed now regardless of what excuses might justify delay.

The cloud and OpenFlow also impact security, another issue that’s getting washed in the coverage of the topics.  It’s very true that businesses want to see a unified security model for the cloud, as recent reports say.  It’s also true that if you presume that (first) the cloud’s services are still being determined by market dynamic and (second) that OpenFlow will impact the cloud and security both as a collection and separately, you can see that there’s a lot of room for discussion.  In an OpenFlow network, connection permission is explicit like a whitelist, which means that the processes that determine how the OpenFlow controller decides to permit them are the things that need to be secure.  In the cloud, addressing and security could be fairly linked to the overall DevOps process, which as I’ve said can also be linked to OpenFlow…you get the picture.

I think that SDNs and OpenFlow are revolutionary, that they’ll be the de facto strategy within the cloud and the data center.  Properly supported, I think OpenFlow is the solution to metro and backhaul, the EPC, and the OTN.  I also think that there needs to be some insightful dialog on all the issues I’ve noted here, and likely more, to realize all of this good stuff.  I wish we’d here more about that and less softwashing.

 

Microsoft reported its earnings, and other than some weakness in entertainment, the numbers beat the estimates.  The PC-software giant showed strength in business sales overall (where market growth was more than double the consumer space) and of course its Windows franchise still works (though not as well as before) even in the consumer laptop space.  There’s nothing good happening in phones or tablets, but we all expected that—or should have.  If we forgot for the moment the tablet space, it would seem that Microsoft’s franchise was humming along.

We can’t forget tablets, though.  The bad news is that IMHO it’s impossible for Microsoft to wrestle out a traditional win in tablets without winning in phones, and it’s impossible for them to win in phones.  The good news is that their numbers are advertising the path toward a non-traditional win in tablets that might even help them in the phone space.

Mobile appliances are windows on the world, two-way like real windows and dependent on linking the outside and the inside.  In truth they’re a conduit, and if you could get a real handle on what they were a conduit TO, you could make the window less of an issue.  The Microsoft opportunity in mobile devices hinges in it pulling together three things it’s doing reasonably well at—online portals, the cloud, and servers and the data center.

Picture a Microsoft developer ecosystem that was focused on cloud-hosted mobile app components that could be assembled through a browser (via Live) or in apps on any tablet or PC.  The apps would run in what I’ll call a “sub-GUI” layer, something like the Linux shell.  You could paste it on a server, on a desktop or laptop, on a phone or tablet, inside a TV, even on a watch or eyeglasses.  This sub-GUI is the application layer of the new Microsoft cloud.  Devices vary not on how they empower the user, which is always through a GUI by definition, but what role they can play in hosting components.  If you need a component that won’t run on your device, it loads in the cloud and sends you the result.  Services like Skype (which Microsoft barely mentioned on its earnings call) are then integrated services into this sub-GUI.  This is my view of the future of the cloud.  I think it’s also some in Microsoft’s view.

Not all, though.  And the problem is that to get to this point, Microsoft has to make a bunch of jealous and competitive unit executives chime at the same time.  There are logical steps the company should have taken from the first, but hasn’t taken at all.  There’s still time, but not much.  First-off, Microsoft’s vision of the cloud needs to be integrated into its server line.  Azure, as most cloud users know, is a platform different enough from Microsoft’s data center products that you need an adapter to create a hybrid cloud.  The two concepts have to be totally harmonized so applications can be hosted transparently anywhere.  Second, Windows 8 has to provide that same cloud-component-platform capability.  And finally, the GUI notion that’s implicit in Windows products across the board has to be made explicit to create the clear boundary that a new layer, our sub-GUI, would then occupy.  Can you do that, Microsoft?  If not, then you’re not going to have a chance in tablets and your current franchises will eventually be dissipated by cloud competition.

In the main, network players have been reporting hard times.  Riverbed and Extreme both missed and have both taken hits, and this isn’t a big surprise to me as readers know.  The problem is one of VALUE.  In the pre-Internet days we used networks to connect to people and that made the network the critical component.  What’s the critical component now?  It’s what the network can deliver.  IT guys like Microsoft are likely to do better in the world of the future than network guys, even though networks built and ARE the on-ramp here.  If you’re a network player you have two options; be Cisco or be Ericsson.  Cisco’s strategy is to get into the value layers and play there, leveraging its network base.  It’s a good idea.  Ericsson’s strategy is to exploit the commoditizing trend in the middle layers of networking where the cost is, combining software-defined network principles with optics and then buffing it all up with professional services.  That’s also a good idea.  All other ideas are bad ideas.

The thing we call “the cloud” is a transformation of information processing and storage that reflects the new network economy and the new power of appliances.  It’s going to generate a new IT model, so it’s fair to call this a cloud revolution, but it’s not going to replace data centers with hosting or any of the other high-flying nonsense you read about.  The flexibility of the process, the pushing of power to the point of experience, is what’s new, and what will generate the value that will drive spending.  If you can harness this, you’re an architect of the future.  If not, you’re a plumber with a plunger trying to keep the drains running.

 

We had a number of interesting earnings reports today, so let’s get to it!

Nokia’s numbers for the last quarter were awful, with smartphone sales falling sharply.  You can’t blame that completely on the Windows Phone decision, but it darn sure didn’t help and it’s not going to help them in 2012 either.  The question now is whether the new Windows “RT” configuration for a phone could succeed even if Microsoft manages to get it out before the holidays, which isn’t likely.

You have to wonder how anyone could believe that this was a good idea, either at Microsoft or Nokia.  The answer in part lies in the corporate culture, which tends to surround top people with others who are like-minded and thus propagates delusion.  It’s also partly due to the post-bubble mindset of SOX; you need quarterly numbers with earnings growth or your stock price can’t go up without a Federal investigation.  At any rate, these guys may not yet be as toast as RIM, but they’re darkening around the crust for sure.

Verizon reported slightly better than expected numbers, and its FiOS stuff was particularly interesting though it was wireless performance that boosted its image with the Street.  You can see how bad basic wireline service performs when you note that FiOS generated 63% of consumer-sector wireline revenue with less than 5.5 million users.  What this shows is that if you aren’t a linear TV provider you’re never going to be able to profit on wireline infrastructure.  Given that it’s exceptionally difficult and expensive to deploy video-capable infrastructure in anything but high-density areas, this suggests that most rural telecommunications programs are doomed to fail unless subsidies get steadily higher.

Wireless performance was boosted by the iPhone, particularly the 4S, and Verizon’s low rate of churn suggests that when handsets are equal they can beat AT&T in terms of loyalty and perhaps eventually total customer base.  Data revenues and smartphone penetration both rose, and both of these numbers are indicators that infrastructure augmentation will be needed to keep up with traffic growth.  However, as we’ve pointed out before, wireless devices tend to push up capacity needs in cell count first, then backhaul, then metro.  In the main they don’t drive up core usage all that much, which isn’t good news for equipment vendors who get better margins there.

Speaking of equipment vendors, Plexus reported their numbers and they were decent except for the network component of their business.  Street analysts report that the component of Plexus’ sales related to telecom vendor Juniper declined by 35%  Q/Q, which would suggest either a general dip at Juniper or a shift in product mix.  Juniper reports next week, so we’ll know more then.  EMC beat estimates based on very strong storage sales, but their stock was down pre-market on what was seen as conservative guidance.  F5’s situation was similar; they beat the Street estimates but didn’t raise annual guidance as expected and took a quick hit after hours; they’ve recovered this morning.  It is always instructive to match F5 against vendors like Brocade, Cisco, and Juniper because F5 is essentially a pure play in the data center, where I think most of the real value is.  Unless these other guys gain traction relative to F5 it will be hard for them to succeed in the enterprise.

VMware’s numbers met expectations and the firm’s shares are up slightly pre-market.  I expect that VMware will benefit from the open-source cloud-stack disorder of the moment; its position is completely under its own control and it’s perceived as a steady course to follow for enterprises moving into virtualization and the cloud.  The question will be whether they can move out of pure IaaS into a broader cloud model, and that’s one I can’t answer based on the company’s current position.  Thus, I’d be cautious about the company in Q1 of 2013 unless they come up with a broader strategy between now and then.  The cloud is more than just hosting VMs on public servers.  Oracle’s increased rhetoric around SaaS is a pretty good indicator that the value of the “higher-layer” cloud services will be a major marketing point later this year.

We now have some of the major tech leaders reporting with IBM’s and Intel’s quarterly calls, but I still don’t have quite enough to make a definitive comment on how tech will do for the quarter.  I do think there are some interesting points in both the IBM and Intel reports, though, and they at least point to the direction of future growth, or weakness, in both the companies and the computer business.

IBM, in our surveys, has been the most trusted and influential tech company, but they’ve been losing strategic influence at a small but steady rate for a year now, and I expect they’ll continue that in the spring survey this year.  The problem for IBM is that their success has come from a PORTFOLIO STRATEGY, meaning that they’ve had the products companies needed and then the professional services needed to back those products up and reap additional revenue and margins in the process.  Over the last couple of years, hardware has become a problem for IBM because it’s too competitive everywhere but the mainframe area.  With loss of hardware influence, it loses portfolio value, which threatens its ability to drive decisions and exploit future opportunity.

The loss of sales-level decision influence also puts a lot more pressure on strategic marketing, and IBM has been significantly less successful in articulating its position in key areas like cloud computing than it has in selling the same positions.  When portfolio weakness erodes sales credibility, only marketing/positioning can get it back.  That’s not happening as well as it should, and so IBM has paid a price.  It will continue to pay,  I think, through at least a quarter or two.

The first hope of exit from the strategic doldrums is the Pure stuff.  In a sales/tactical sense, Pure is really about making commodity systems into mainframe ecosystems.  The whole idea of Pure is to package, which means to create (in my terms) a portfolio.  At the same time, Pure elevates sales positioning to the marketing level, at least potentially.  You can’t talk about specific customer needs in ads, but you can talk about Pure-market-target segment needs.  So the good news is that IBM may have its problems solved by the end of the year.  The big “if” is the marketing and positioning.  The developments in the cloud are moving fast, and IBM’s competitors are looking better at the cloud story than IBM is.

With Intel, the challenge the company faces is the result of missing a critical point a couple years back.  Once you empower the PC base, you’re threatened by lack of total addressable market growth to offset competition and commoditization.  You also have to expect that as PCs mature, you won’t see replacement as fast.  All the signs and signals say GO TO CONSUMER ELECTRONICS FOR YOUR FUTURE, but what Intel did was stay with Microsoft, whose lack of agility made it a poor bet.  Intel needed to build chips for smartphones and tablets based on the prevailing ARM architecture a long time ago, and it needed to get aligned with the rapid changes in that space.  Now it’s almost certainly too late for anything but catch-up.

The key to whether Intel can catch up in the consumer electronics chip space is now the cloud.  Servers run one end of the cloud, and consumer electronics the other.  If you can demonstrate that there are cloud-specific values in both spaces you can win in both based on a single strategy.  That strategy isn’t owned by Intel’s chip competitors no matter whose devices they’re inside at this point, because the cloud isn’t the convincing driver of either servers or appliances.  It will be.  The good news is that Intel has demonstrated it can ramp up a new chip family much faster than before, but that’s going to be helpful only if there’s something they can rush to market, cloud-wise, via this newly found speed.

We’ll be starting to see key network equipment vendors reporting next week, and I’ll be looking for signs that these guys see their own problems in a “cloudy” light.  As I blogged before, you need revolutionary revenues to fund revolutionary capex.  If operators are going to spend enough to elevate even some boats, they will have to see a path to earning more from their spending.  Right now, the cloud is their greatest hope for near-term value, because it can be sold directly to enterprises in the form of IaaS and PaaS, to partners to create SaaS, and in SaaS form to consumers and SMBs.  Margins on the cloud, particularly for SaaS and PaaS, are higher than they are for broadband Internet access, so ROI is better.

There are two things you need to be a cloud giant.  First is a specific vision of what the cloud’s “service layer” would look like, as a stack and as an operations process set.  Second is a vision of SDN, OpenFlow, that ties the cloud flows back to network devices.  If you look at the vendors out there, we have Alcatel-Lucent who so far isn’t showing either of these things, Cisco who shows both, Ericsson who has OpenFlow without cloud, Juniper who has neither, and NSN who has neither.  While the cloud isn’t the only thing that could propel these vendors (content and mobile monetization still have a higher operator priority), I do think that all the signals show that the cloud is easier to turn from goal into project (look at the TeleSonera announcement on clouds and gaming) than the other two, and so in 2012 cloud success may be the only way to advance a network vendor’s cause.

 

Cisco, one of the vendors we’ve been watching on the path toward what we think is the critical symbiosis of the cloud and OpenFlow/SDN, has blogged (http://blogs.cisco.com/news/is-it-just-sdn/) about their view of the subject.  I’m happy they did, but I confess to being a little confused by what they said.  It seems that Cisco is arguing that OpenFlow and SDN, like other megatrends of the past, is perhaps a bit overhyped on its own, a topic that is more an element in a complex evolution than the driver of a radical revolution.  While I agree with that, I think you have to use the water clock analogy here to get the real impact of SDN.

In a water clock, water drips into a bucket.  For a while, nothing happens, but at some point the weight of the water is enough to overcome a resisting force and the mechanism moves, advancing the “clock” and dumping the water to start the process over again.  I think that advances in tech, particularly in the current age of complex market interplay at both the technology and business level, work like this.  You can see from Apple’s iPad that revolutions really do happen, and just because they build on something else (like the existence of wireless broadband in this case) doesn’t mean they’re less revolutionary.

Cisco is right that the SDN or OpenFlow or cloud revolution isn’t about only that thing.  They’re even right that things like SOA and DevOps are a part of the story; it’s more than SDN.  They’re right that a big element in SDN is making the flow of information between the controller and the controlled devices somehow bidirectional, so that state or intelligence can be extracted from the network.  But they may be implying something that’s less than right, which is that somehow SDN has to be made to work like routing or switching works today to be effective, valuable.  In fact, that would assure value could never be realized.

Network state in switching and routing is adaptively discovered, which is great if you’re in an age where it changes all the time, and where you intend to do something about it.  In reality, though, we’re building networks to be much less failure-prone, and traffic over the Internet is best-efforts.  So what we really need to have is a system whereby the individual switches in an OpenFlow world “tell” the controller what they see about network conditions on a regular basis.  Are the neighbors alive, accessible?  Are any trunks reporting congestion?  The rub here is that it’s easy to envision an OpenFlow device losing touch with the controller because of a problem.  It’s the classical “who watches the guards?” problem; you can’t report a problem because you’re having one.  It seems insurmountable, except that I’m not proposing that OpenFlow or SDN principles replace the Internet.  I think it’s a network for inside the cloud, something that can presume control telemetry reaches devices via another path, and that’s something that the blog doesn’t talk about.

I’m not picking on Cisco; they are presenting this week at the OpenFlow event and I actually think they have decent insight on the topic, better than any network vendor in big-picture terms, though Ericsson beats them in application of OpenFlow to optics.  As I pointed out before, Cisco’s Donabe project may be the best DevOps hope, and DevOps may be what gives the software in an SDN the intelligence it needs about application connectivity requirements.  I’m suggesting that Cisco is more right than they realize; we need to reconceptualize how we build networks because we’re reconceptualizing what a network is.  It’s not about communicating anymore; the Internet isn’t valuable for connection, but for services.  Connection only happens to be an element in how we create those services, and as our mechanism for service creation changes, so do connection requirements.  And technology.

And market.  Verizon is one of three Tier One operators that tell us they have OpenFlow projects underway at the lab level, and all of them say the cloud is a target.  All also say that OpenFlow is just a piece of the puzzle, just as Cisco’s blog said.  But the operators seem willing, determined even, to drive those pieces together, and that’s the one thing I’d have liked to have seen reflected in that Cisco blog.