We have some additional news on a couple of topics I’ve been blogging on, one of which could have a significant impact on the state of the networking market and the other which could be a signpost of progress in network technology evolution. A Court of Appeals has overturned the FCC’s neutrality order, and Juniper is under activist-investor pressure that will almost certainly impact how it trades simple financial measures against major strategic initiatives.
In the neutrality debate, what we got was what many (myself included) had speculated would happen. The FCC has considerable authority in regulating common-carrier providers, but much more limited authority in regulating the behavior of “information services”. The DC Court of Appeals problem with the neutrality order was less that the FCC had no authority to regulate than it was that the FCC had elected to classify ISPs and the Internet as information services, then attempted to apply common-carrier regulatory power.
The whole net neutrality thing is a discussion that has, en masse, long since left the path of reason to become almost-political in the trading of dire predictions and diatribes. It’s my view that there is virtually no chance that the ISPs would interfere with “lawful content” for reasons of market and media pressure. That doesn’t mean that porn or spam couldn’t be stopped, but Congress has the right to do whatever they like in those areas whatever the FCC does or thinks, because the FCC operates under the rules Congress sets, period. What’s really open to question here, the only thing that likely is, is the controversial who-pays-for-premium-handling thing.
Neutrality rules say that the consumer can pay for premium handling but not the provider, meaning that Netflix (for example) couldn’t pay to have video expedited. This rule was stupid from the first for a number of reasons. First, it’s saying that traffic policy depends on which side you’re looking from in the flow. Second, every content provider uses CDN for delivery of its most useful elements, which means that big companies already have an “advantage” because they can afford to pay for better QoE. What we did with this rule was to codify investment in something other than transport, which is bad public policy. A network moves traffic, and if you make it harder to do that or make traffic-moving less valuable, you hurt the business of networking.
The question is “What now?” The new FCC Chairman (Wheeler), who has no ties to the VC community that was favored by the old neutrality position (the prior Chairman, Genachowski, had such ties) had already suggested he didn’t see a problem with supplier-pays. The two Republican commissioners didn’t like the neutrality order, so if Wheeler doesn’t push to appeal the ruling, the order will die. Even if the FCC does appeal, I’ve never believed the order would stand legal review and I think the Appeals ruling will be upheld. So we may be done with the notion of consumer-pays in favor of anybody-pays.
This might lead to something truly revolutionary and truly good, which is settlement on the Internet. The bill-and-keep model has distorted the business of networking by making it virtually impossible to create end-to-end services that offer anything other than best-efforts connections. Without the neutrality order, ISPs could shift to a model that’s already in use in some places, which is a paid-peering framework where traffic volumes and QoS commitments determine peering cost. It would likely create a flow of revenue from content providers (mostly video, where QoS matters the most) to ISPs, and it could help to raise revenue per bit and encourage infrastructure investment. However…I don’t think that something like this will help enough at this point to reverse the trends away from “the network” and into “the service” meaning the computer-and-software structure that generates experiences. We could have, with enlightened policy, transformed the Internet five or ten years ago. We’ve already codified the other OTT-centric model with long-term investment, and so we’re never going to have what we might have had.
That’s a fair opening for the Juniper situation. Network equipment vendors today face (like it or not) profound business changes driven by the declining revenue per bit of their customers in the carrier space. Commoditization pressure and competition from Huawei have combined to drive down revenue and profit, and it’s not going to be halted by the overturning of the neutrality order. Slowed, perhaps, but not halted. So every network vendor faces two choices—be commoditized or find other market niches. Juniper has always had the most innovative technology at the network level, IMHO, so they were the obvious candidate to do something revolutionary there. But when they announced a new CEO last year, the Street immediately clamored for a financial-driven policy that would raise share price by cutting costs and reducing M&A. I said then that if Juniper took that route it would produce happy hedge funds for a year or so, and then fall into what could be an irreversible decline.
The activist hedge fund intervention that happened this week seems to me the final straw here. Juniper is being pressured to do what the Street wants, which at one level is just what they should be doing—a public company is responsible to its shareholders. However, there was a better way, and perhaps still is.
Elliott, the activist hedge fund, says that Juniper should have been more competitive with a player like Alcatel-Lucent in optics. Crap. Optical margins are low, and even if Juniper wanted to get into that space now the margins would be truly in the toilet by the time they established themselves. Alcatel-Lucent’s “Shift” strategy is arguably getting that company into the spaces that Elliott says Juniper should be getting out of. Juniper should have gotten into optics more a decade ago, when it made sense. Which means what it should be doing now is what’s going to be the obvious choice in 2024.
Which is the service layer. The debate over whether Juniper should have jumped on OpenDaylight or bought Contrail is moot in two ways—it’s already been resolved by the fact they did by Contrail, and it’s the wrong debate to begin with. The controller doesn’t matter, it’s just a higher level of plumbing. What matters in the service layer is the creation of services, the architecture that couples features to transport/connection. There was plenty of time to grab supremacy in this space, there were specific opportunities Juniper had to embrace the service layer and build network value for its customers and profits for itself. I watched them turn their back on at least one such opportunity. Even now, it might not be too late, but the Elliott move will make it very hard for the new CEO to balance between a totally different near-term strategy that would require a truly insightful SDN/NFV overlay on either Contrail or OpenDaylight and a hungry activist investor who wants all the focus to be on cutting staff, cutting M&A, paying a dividend, buying back stock, and contracting into the networking equivalent of a white dwarf. By the end of Q2, Juniper either does the right thing or there will be no right thing left to do.