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Even as economic conditions worldwide appear to be improving at the macro level, there are renewed pressures on the Eurozone sovereign debt issue, and concerns that managing a global shift from stimulus to the control of debt and inflation will be challenging.  Bond ratings for Ireland sunk and there may be further revisions in bond ratings for Greece, and even for Spain and Portugal.  Some financial experts think that the “edge countries” in the EU will all require support as sluggish economic growth and relatively expensive social programs create a gap that only borrowing and austerity can fill.

One proposal now gaining strength is the issuing of a Eurozone bond that would be used to fund a large rescue fund, essentially transferring the faith and credit of all the major (and more successful) EU economies to the debt of the weaker members.  This won’t mean that austerity programs won’t kick in where the funds are transferred, though, and as a result the measure will trade the tension of disparate debt ratings for a new tension in disparate quality of life, something labor in the impacted countries is already protesting.  But a debt crisis would produce a lifestyle crisis too, so the choice is the latter alone, or both.

In the US, we had a rare show of partisan cooperation with the passage of the tax bill, a bill that includes a Social Security payroll tax reduction of 2% for next year that is a form of stimulus and also an extension of unemployment benefits.  The general view is that this will keep the US economy on track in 2011, and that’s what our model says.  It probably adds about 0.2% to GDP growth for next year, and may reduce unemployment by a half-percent according to our own numbers.

Another significant event in Congress is the fact that the behemoth spending bill that was prepared to fund the government has been pulled in favor of interim funding because it cannot be passed over Republican opposition.  The problem here, at least on the surface, is that the bill contains billions for projects of questionable value, and likely millions in special earmarks that were a specific target of Tea Party activists who were elected to the next Congress.  Some kind of reform of the bloated federal budget process may be forthcoming, which couldn’t hurt.  It may also be a sign that Congress is going to work harder to be bi-partisan in 2011 and beyond.

Alcatel-Lucent may be looking to change video collaboration, announcing that Bell Labs and a Belgian research giant IBBT will collaborate on applications to “bring a new dimension to video communications”.  The scope of the work appears to include both stuff likely useful in the near term (like video content analysis and management of each user’s view of a conference relationship) to things like immersive panoramic experiences, ultra-high-def, and even 3D that we think may be simply going too far to be relevant to people who don’t want to be on camera when they’re feeling ugly.  Our research has long shown that a better and more socially linked collaborative dynamic would be highly valuable, and in fact might kick off a wave of productivity-based IT investment that would restart an industry stalled in underperformance relative to its glorious past.  The question is whether the research process will deal with the real and current market issues; the future of 3D telepresence is still a bit off, I think.

Oracle is clearly not off at all.  Their revenues were up 47% in large part on strong sales of Sun hardware.  Pipeline deals for the Exadata servers were about $2 billion.  Clearly Oracle is a Big Player now, and clearly they’re a special threat to HP, at whom Ellison took a shot during their call.  HP’s weakness is software in our view, which is Oracle’s strength, and there is a very good reason to believe that the special strength of Oracle in middleware is the secret sauce for the company’s diet of competitors in the data center.  IBM matches Oracle’s credentials here, but the company poses a threat to everyone else’s data center plans, including Cisco’s.  The Cisco comment raises the key point, one I’ve been raising with respect to Oracle for a year now.  What will they do in networking?  If they want to be a full-scale data center player, they need a network strategy.

There are renewed stories that NSN is looking to sell about a third of itself to a private equity consortium.  The stories aren’t indicating at this point how the share would be divided among the buyers, nor where it would come from in terms of Nokia and Siemens.  It’s a classic good news versus bad news item no matter how it divides, though.

The good news side of this is that nobody buys something that’s worthless.  NSN does in fact have strong assets, and certainly those assets could be leveraged to produce a good return on any private equity investment.  The bad news is that if you’ve got good assets that could produce a good ROI, why aren’t they producing one for you, if not that you’re messing up?  Clearly neither Nokia nor Siemens would be looking to sell off a stellar activity.

But there are reports that the “managed services” space that Alcatel-Lucent, Ericsson, and NSN all crave share in is expanding; Ericsson won a 3 Italia deal to revamp their IT processes.  Not exactly a giant deal, and in any case it isn’t a broad endorsement of a outsource-based service-layer strategy.  Operators tell us that they’re happy to outsource stuff that’s a cost center, that has no direct competitive impact, and that depends on skills they don’t have and don’t want to develop.  They’re less sanguine about outsourcing what makes them profitable.  I think that the question here is whether the private equity guys are drinking the PR Kool-Aid on managed services or whether they see that changes need to be made in NSN’s service-layer positioning and are confident they can make them.

We said in our 2009 analysis of vendors that NSN needed to sing prettier at the strategy level to create service-layer-strategic traction with buyers.  We also said that such traction would be increasingly critical to success and to sustaining margins at lower layers in the network.  The problem is that our surveys have shown that NSN lost credibility in the period since that analysis.  While their worst dip was from the fall of 2009 to the spring of 2010, they’ve gained little ground between spring and fall, and in some key areas (like the radio network in mobile infrastructure) they actually lost slightly.  There’s absolutely nothing wrong with their product line or their technical skills here—their problem is purely marketing/positioning.

That’s the centerpiece of the dilemma that confronts any organization who buys a piece of NSN. You can believe that managed services tides will lift all boats, including NSN, and that you see this great truth even though neither of the current partners does.  Or you can believe that the problem of the service layer can be solved for NSN by singing their song more effectively.  Given that, I’d be looking at creating an NSN choir if I were senior management there!  Otherwise a deal could go sour simply by having the current NSN trends continue in the face of a newly aggressive position by one of the competitors.

We want to wish you all a happy holiday season and a safe, prosperous, and exciting new year.  Click Happy Holidays from CIMI Corporation for our 2010 holiday card.

Enterprises are pushing through a set of complex political and project dynamics in 2011 according to our surveys.  The changes and their motivations offer us an interesting view on the cross-currents that really define what enterprises buy and how they buy it.  Thus, they offer a vision of what we could expect in terms of competitive dynamics for the balance of this decade, at least.

Over the past couple of decades, spending on IT and networking has oscillated between modernization-driven and benefit-driven.  In rough terms, the former is reflected in the “budgets” for IT spending that are assigned to the IT organizations themselves.  The latter represents special off-budget activity that carries an IT cost component but generally is justified by an operations benefit case.  Over the years, there’s been increased pressure on the budget side, pressure to deliver more applications at a lower overall cost.  It’s this pressure that has created things like server consolidation and its successor concepts.  Over the years, this pressure has been relieved to a degree by the growth in the mission of IT, its expansion to new operations areas.  That pushes up spending and increases the role of IT within the company.

The relationship between IT and budget spending has proved to be a fairly reliable indicator of whether IT is in an expanding mode or in a consolidating mode in the market overall.  Expanding IT means that feature differentiation is easier because their new missions not yet committed to current vendors and not necessarily supported by current features.  Consolidating IT tends to empower incumbents and makes TCO the only strategy to argue.  In the last 50 years, the thing that drove the expanding/consolidating cycle was the advent of new productivity-augmenting IT paradigms.  We’ve had cyclical budget behavior based on that for nearly all of IT history, until 2002.

Enterprises have been following a path toward a different paradigm of computing, but their route has been complicated by the fact that like most consolidation measures it has a short focus.  You can get from NY to LA by making a decision at every intersection based on local conditions, but it’s not likely to be a happy (or short) journey.  Server explosions created in the heyday of falling server costs were stemmed by server and data center consolidation.  That’s because support costs were now higher than capital equipment costs.  Now, we’re seeing consolidation in the form of static VM assignment to applications giving way to virtualized resource pools, and enlightened enterprises see these as giving way to private and hybrid clouds.

I think that most of us realize that if you follow a path long enough you get a sense of its destination even if you didn’t have that from the first.  I think most would agree that when that sense of destination is achieved, progress along the path is faster because it’s backed by greater confidence.  So it is here.  But the question for the “market” is how this greater confidence and speed of progress might impact the sales of IT components, and the progress of IT evolution.

The number of IT executives who realize that something more profound than “modernization” is occurring (and is required) has grown significantly in the last year.  We’re creating a new architecture from IT by trying to make IT less expensive and more easily supported.  While those aims are tactical, the same changes in IT paradigm could empower new mechanisms to improve the IT/operations link, and business produtivity, in the future.

Any time a new paradigm is on the rise, differentiation opportunity can also be expected to be higher.  The consolidation-project differentiation apples may not be as easy to pick as apples on the productivity-differentiation side, but they’re just as sweet.  For all vendors, they represent the space that has to be attacked to gain market share in 2011 and for all the space that must be defended to sustain it.  There probably has never been a year in recent IT history when the balancing of strategic and tactical demands focused on the same issue set.  Next year will be one.

In the last week we’ve seen web attacks, password and private data theft, and in all a lot of things that raise the fair question of whether the Internet is becoming the wild west.  It has been for some time, of course; what’s happening online now is simply a continuation of a set of problems that the Internet as a community refuses to solve and that the governments of the world are unwilling to confront.

Ultimately we’ll have to deal with the issues of security and privacy that the Internet is presenting us, even though those issues have become more divisive for our having delayed so long to address them.  The question is how much worse the problems will have to get before the public marshals support for change.  We are, I think, only a couple of years of neglect away from doing real harm to the basic principles of the Internet—the openness and the lack of a tie to a specific business model.  It would be tragically ironic if we lost those benefits largely because of the unenlightened way we’re pursuing them.

We may see some changes at least in the US in 2011, and there are also signs that Europe may be taking some steps.  I could offer as proof all manner of arcane regulatory comments and trends, but more convincing is the sudden decision by Google to be much more accommodating to the telcos, and even to ally itself with Verizon in proposals for neutrality.  Google is also obviously planning its own transition to a broader business model than advertising, recognizing that only paid services can expand its total addressable market fast enough to sustain its stock price.  Google knows that it’s one thing to offer free best-efforts delivery of content and another to offer paid delivery—in the latter case you’ll have to provide some assurance things will work, but more significantly you’ll have to share the revenue.

Speaking of changes, it’s interesting to see that the Comcast vision of the future of video seems to be emerging.  First, Comcast has forced Level 3 to pay more to enable delivery of Netflix to Comcast’s customers.  Second, Comcast has been running an experiment in socially-linked video as a means of further differentiating its TV Everywhere online offerings.  But just as the biggest proof point for regulatory changes was indirect via Google, the biggest proof point for a Comcast change may be Verizon’s Seidenberg and his comments on a future Verizon model.  Verizon seems to be saying that they’re prepared to be much more “granular” in their video offerings and in their broadband pricing.  On the surface that would seem to be undermining their own FiOS model, but what it’s really doing is exploiting the fact that OTT competition in video hurts the down-market competitors more than up-market Verizon.  If Comcast is one of those, then Comcast has to embrace a bit of the technology of cord-cutting to avoid losing to the business model the technology represents.

TV is changing, but I wonder if the changes are as radical as some say; certainly my own research doesn’t bear that out.  Does the average household watch 13 hours of TV per week as one study shows?  I don’t know of any typical household where that would be true, do you?  It is true that people are spending more time online.  It is true that online time is pulling some viewers away from TV, but so far as I can tell this is what I’ll call “settle-for” viewers.  There’s nothing on they like.  They used to settle for something they sort-of-liked, but now they check Facebook instead.  That’s not destructive to TV viewing; wait till they skip their favorite shows to do something online before you start to worry.  Thus, Comcast’s experiments with “social viewing” may be at least on one potentially valuable path.  We’ll probably see many more experiments like that in 2011.  Meanwhile, reports that things like Netflix are going to kill channelized video are, to quote Time Warner’s CEO, like thinking “the Albanian Army is going to take over the world”.  The establishment has time to work some magic for sure.

Microsoft is also trying to change, and according to the latest rumors from the WSJ it will be launching not only a new line of tablets at CES but also a preview of Windows 8.  The challenge for Microsoft in the tablet space is formidable because tablets are seen today as a kind of fat smartphone without voice instead of being a laptop without a keyboard.  For Microsoft, any tablet win that promotes that simple model is a loss for Microsoft.  It’s not a big player in the smartphone space, it’s not a recognized consumer cloud powerhouse, and a tablet strategy would almost have to be synthesized from both these fundamental elements.

But why Windows 8?  The problem that’s been reported is that Windows 7 is too gadget-intense for a tablet GUI where real estate is limited.  The buttons become too small to manage.  Some have pointed to the fact that when netbooks with Win 7 appeared, they often ran into trouble with applications whose window sizing strategy assumed a specific display form factor, and so cut off the bottom of menus and other windows when displayed on a netbook.  But just having a new version of Windows doesn’t establish a new GUI; developers would still have to embrace the change, and Microsoft would be breaking the momentum of Windows 7 at a time when that momentum may be critical for Microsoft.  How long would it be before users realized Microsoft was going to churn OSs every couple of years, and jumped ship to the thin-client-and-cloud approach.  Which would take us back to the tablet as the ultimate thin client.

Everything is circular, I guess.

The holiday season is always dominated by consumerism, but it should be pretty clear to everyone that networking itself is increasingly dominated by the consumer.  I think that we’re headed very quickly for a time when the consumer essentially funds all public networking, creates the design paradigms and the economic trade-offs.  Along the way, though, we’re facing some potentially significant hurdles and shifts in the course.

The Internet has already made public IP infrastructure the basis for public networks, though of course that infrastructure tends to be less homogeneous than many see.  Ethernet is a smarter edge strategy, for example, because most consumer services will haul traffic to either a metro off-ramp or a metro cache/server farm.  You don’t need a lot of connectivity to get to one place.  Still, the Internet has won IP a victory at the service layer, where the IP address space is the only framework we could expect to see in the network of the future.

This month, we’re heading to a kind of financial watershed with public network services.  There’s been a surge of growth in online services funded by advertising, but advertising represents only a fraction of the money needed to fund a public network, and recent legal disputes (on Interclick’s history-tracking, for example) show that advertising-related sites are pushing the limits of public and judicial tolerance in a quest to tie up those limited dollars.  Ultimately people have to pay for stuff to fund a three-trillion-dollar-worldwide industry like networking.  The FCC is likely to set the boundaries of where pay works and where it doesn’t in its December 21^st order on net neutrality.  But whatever they do, there’s no turning away from the fact that advertising isn’t ever going to fund the public network, so something else has to.

Consumers would love a free Internet, just like they’d like free automobiles, homes, or cheese.  That doesn’t make the concept practical, even in a political climate where give-aways are the rule and not the exception.  We’ve taken free-ness about as far as we can at this point; even Google I think understands that it has to move from being totally ad-driven to having some set of for-pay products and services.

What the FCC’s order will do is establish the legal framework for an Internet that’s cooperative in a broader way than at the pure connectivity level.  What’s needed is the same today as it was back in the mid-90s when I participated in an attempt to bring financial order to the Internet by creating a formalized mechanism for peering and settlement that included QoS.  We have the technical means to do what’s necessary, but we don’t have regulatory air cover.  The question now is whether we can get it.

Genachowski’s attitude on net neutrality appears to have undergone a transformation, and at the same time the Comcast/Level 3 settlement seems to open the door for settlement between content providers and CDNs and access providers.  Any settlement at all here would be better than we have, but Comcast/L3 doesn’t go far enough.  It comes down to a question of whether the relationship is “peering” or “transit”, and neither of these concepts goes far enough because both are simply different ways of viewing the permitted traffic balance.  There’s still no QoS-based settlement, and without that the Internet can’t provide pan-provider quality of experience.  There will be a transformation of investment and a transformation of Internet architecture if we can’t settle QoS-based relationships across ISP boundaries.  Such limitations favor investments in caching over interconnection, and favor larger and larger players to create fewer and fewer inter-provider boundaries.  We may start to hear some details on the forthcoming order leaked this week, in advance of the meeting.  Pay attention; it could be critical.

The economic situation worldwide continues to become more clear and more stable, though it’s sometimes hard to glean that out of the media processes.  Yes, there are still issues aplenty, but under all the swoops and swings of financial news and even financial markets, there is a clear sense that we’re trying to manage a recovery now and not trying to prevent another slump.  Volatility is a price we’re going to pay here, but it’s not a bad price overall.

The recovery-management process has created what are essentially two polar extremes in terms of global economy.  One, epitomized by China, is trying to manage a growth explosion that threatens to destabilize not only the economy but even the political system.  The other, epitomized by the EU and in particular the UK, is trying to control the cost in public debt that stimulation policies have created.  The US is somewhat the man in the middle here, for a lot of reasons.  Because the US is the largest global economy and by far the largest consumer market, everyone sees it as a potential ladder for their own growth.  Because of the size of the US economy, government has been prepared to risk a higher debt level than the Eurozone, and recovery here creates a shadow of the inflation issues of China.  In the middle again.

But US trade numbers this week were very favorable.  That’s clearly not because imports have sagged; the consumer economy in the US is recovering.  Exports to China and other emerging markets (Mexico, for example) were stronger.  This demonstrates that the world isn’t acting as a brake on US growth, at least with current trade and currency balances.  It is clearly acting as a brake on employment growth; US companies still tend to offshore jobs to reduce labor costs.

The challenge of the here and now, in truth, is more political than economic.  Look under both our poles and the US middle ground and you see economic processes that are polarizing the population or threatening to.  China has to effectively bribe farmers to stay on the farm.  In the US, financial prosperity for business comes at the price of decades of essential zero-growth incomes for most workers.  In Europe, populations threaten disorder in response to austerity measures that are seen as “populist” in societies that aren’t used to having no wealth to redistribute.

The current Bush Tax Cut fight is an example of this political tension, but of course it will ultimately pass, with perhaps the sacrifice of an estate tax break that we think was likely put in the deal to be sacrificed in the first place.  The good news is that the bill will net to a positive economic impact for 2011, likely raising GDP by at least a quarter-point and perhaps a half.  But the bad news is that it won’t really “create jobs” of any quality.  The fundamental problem of labor as a cost in a business with a profit goal has not been solved, nor has technology (for the first time in fifty years) offered the prospects of a solution.  We are restructuring the nature of employment, and that will of course exacerbate the political polarization.

The issues between China and many of the West, especially the US, also loom as an example of polarization.  Success at the economic level is stressing China, creating a risk of internal strife.  For political reasons, it’s convenient for the west to fan that a bit, and the combination of the North Korea crisis and the Nobel Peace Prize debates are creating more tension with China than usual.  That seems to be polarizing political opinion within China, hardening the hard-line elements.  While we don’t think this is much more than a lot of song and dance on both sides, it does raise the risk of a slip that would create more economic pressure and uncertainty, and so at the moment it probably represents the greatest threat to world economic recovery.

In Europe, Ireland is struggling with austerity measures, and other countries like Spain and Portugal realize the cost of succumbing to the bond raiders.  The EU has been signaling that it will intervene more effectively, making attempts to attack sovereign debt or national banking more risky.  That process may not yet be over, but financial industry moderates realize that pushing too far will rekindle a demand for regulations that would be truly effective, and thus curtail the industry’s free-market piracy.  That would be good, but another fallen sovereign financial pillar is a high price to pay.  Some regulatory sanity is in order, but money talks in politics and we probably have to see much worse to do much better.

Our Annual Technology Forecast issue of our technology journal Netwatcher is coming out this month as usual, and we’ll be looking at the world economy and technology markets in depth there.  This issue will run over 25,000 words, making it the most thorough appraisal of the new technology year that’s likely to be provided anywhere, by anyone.  More economic details, including forecasts for growth, will be provided there.

Google’s let the industry have its first look at Chrome OS, which it sees as being the framework for a “cloud client” device and a platform that combines a Google desktop position with one in the smartphone space (Android) and a service-side position (Google’s cloud services) to create a new and complete (yes, and completely Google) solution for future computing and communication.  I don’t think Google has grandiose visions of owning the computing/networking world, but I do think that they’re thinking through the process of ecosystemic computing more seriously and effectively than most.  The launch of Chrome OS commercially may be delayed, but some of the impacts may be visible even before the launch.

If you look at Chrome OS and Chrome (the browser on which the OS is based) what you see is a reflection of the fundamental truth that cloud computing is not a ceding of computing to the cloud, but a rebalancing of computing activity between the cloud and the client.  In effective cloud computing, the process-intense tasks of information editing and display should be pushed outward to the client to reduce the impact of these tasks on central resources and to insure that the network connection to the client doesn’t become congested with a lot of unnecessary display-oriented babble.

A good example comes from a Google demonstration of the WebGL 3D rendering framework.  If you want to show sharks swimming you can either send pixel-by-pixel information on the successive positions, compressed information on the same thing, or objects that can be locally rendered.  The latter will be better than any of the former choices from a cloud performance perspective.

I think it’s clear that Google is thinking, but what’s not so clear is whether they can actually achieve their goals of creating cloud dominance, and if they do whether they can monetize their success there.  I pointed out yesterday that some of Google’s recent ventures, like Nexus S and Editions, seemed to be a bit less than half-baked in terms of maturity of the business plan.  Chrome OS has been around conceptually for a long time, and so has Google’s cloud aspirations, and that the two were related is no secret.  But it’s how they might relate in a business sense that’s hard to see.  Does Google think they can sell ads to enterprises that display during their work-day applications?  Seems doubtful.  Does Google then think that Chrome OS and their cloud approach is a consumer solution to computing?  If so, they why make such a fuss about things like replacing Microsoft’s Exchange or SharePoint?

Whether Google makes a success of Chrome OS or not, though, they’re going to show us some things about computing in the future.  The network isn’t going to be the computer, I think, but it’s going to be one of the computers, a new kind of partner in a much fuzzier relationship between users and computational tools.  In that new relationship, there will also be a lot more to worry about in terms of how each piece integrates with the other pieces, and likely more functional segregation of tasks than administrative segregation.  The GUI-versus-application thing is an example.  A cloud application, like all applications, will have a network subsystem, an application subsystem, and a database subsystem that serve the user appliance.  Some smarts will reside in all of these places, and those smarts will be marshaled in some coordinated way to serve the mission.  We’re creating a future that blends SOA principles with principles of GUI design, database design, device design, security, and connectivity.  It’s the creation and sustaining of that complex web of stuff that forms the opportunity for the future, and also its challenges.

But there’s more!  Part of the Google Chrome OS preview was a comment that at least the prototype netbooks that will be deployed in the extensive pre-release test will be equipped with Verizon wireless services.  Google and Verizon, once seemingly irreconcilable enemies, are showing increased coziness.  Their net neutrality proposal, which was hated and criticized by everyone including FCC Chairman Genachowski, looks a heck of a lot like what’s likely to emerge from the FCC’s December 21^st public hearing on the topic.  It’s all about ecosystems, again.

A pride of lions that eats all its prey species quickly dies off too.  Google knows that as the OTT giant de jure, it can’t afford to let the problems of disintermediation become critical enough for operators like Verizon to reduce network investment or impose usage pricing with tiers that result in what are effectively taxes on new applications.  When I survey users about pricing sensitivity, the results are probably unsurprising at one level.  They want unlimited-usage pricing the most.  They want low-threshold usage pricing the least.  In between, what they’d prefer as an alternative to the latter is application-specific pricing, meaning that they’d like to see any premium charge for usage bundled into the charge (which they or advertisers pay) associated with the application or experience.  That way they don’t have to worry about a secret price being added to the visible price and called due later on with their monthly bill.  So it may well be that Google recognizes that the Comcast/Level 3 deal, whatever the rights and wrongs of how it should be characterized might be, is still the right industry answer.  Charge for what the user wants, all at once.  That means having the content provider collect and settle with the access provider.

What about Genachowski’s kiss blown at usage pricing, then?  It may be that he’s simply waving a troll at the kids, creating a threat that makes a spindly carrot look more appetizing.

Google, master marketer, may be showing some signs of excessive spread.  The company has launched its long-awaited Google Editions and also the next generation of its Nexus phone, and while supporters are trying hard to find great things to say about both, it seems clear to me that neither is fully baked.

Google Editions is an online bookstore that supports online reading in a browser rather than through the traditional e-reading applications.  The platform has gotten early criticism for being amateurish, but I’d have to disagree; its navigation is different from that of Amazon or Barnes & Noble, but not worse.  The thing I find hard to figure is the sense of the offering; what’s Google trying to do here?

On one hand, it seems pretty clear that ebook readers are a threat to Google because they aren’t web-enabled and thus dodge Google’s incumbency.  If you buy an ebook from a Kindle or Nook or even from the company’s website through a browser, you’re dodging Google.  But realistically Google can’t be a part of everything, and that’s the rub here.  The experience for Editions is designed to be based around the browser.  Though you can download ebooks in ePub or PDF form, transfer them to readers (like Nook) that support that format (using Adobe’s free Digital Editions software, and even read them with some of the PC apps (Nook for PC, for example), the process of getting an Editions book on a reader is considerably more complex than the process of getting the same book from the reader’s online library.

In all, Editions looks like a store in search of a reader, which leads to the second item in the Google news—the next-gen Nexus.  This new phone isn’t being touted by Google as the re-invention of the smartphone market; in fact, the launch has been low-key.  The only really distinct thing about the new Nexus S is the fact that it’s equipped with near-field communications (NFC) for use in retail as a substitute for a credit card.  While the Nexus S will be available by the holidays (in Best Buy for example), and while it would support the Android application for Editions, it doesn’t seem to me that this is the justification for Editions.  You can get Android apps for Kindle and Nook books, after all.

It seems more likely that Google is preparing Editions to support Android tablets, but it’s hard to see how even that mission is served in any distinct way.  It’s not that Editions is bad or that the Nexus S isn’t capable, but that the effort of launching either of the two doesn’t seem to be aimed at a clear and valuable payoff.  Google might be spreading itself too thin.

There continues to be a series of contrasts in the global recovery, and in several dimensions.  The fundamentals of consumption and production seem to be moving slowly positive worldwide, though the pace is slower in Europe.  In Asia, there’s more worry about things like inflation (China) or deflation (Japan), and in the US the big problem continues to be unemployment, which jumped to the surprise of many in the last week.  There are also some undercurrents that could exacerbate some of these larger trends, and I’ll focus on these today.

The sleeper issue in the US is the state of state/local budgets.  Reductions in tax collection have hit governments hard, and some (like California) also have political problems that make it much harder to create fiscal stability.  The result is that we’re looking at possible shortfalls significant enough to create an uptick in jobless claims in themselves, and at the very least we’d expect the public sector to generate relatively little in the way of new jobs in the near future.  In the Federal sector, we’re clearly headed for considerable pressure on both total employment and salaries, and that will have some negative impact on the job market overall.

In Europe, the issue is what some have called “bond vigilantism”, a decades-old concept that essentially says that bond investors will punish governments for policies they don’t like.  That’s what’s been happening in Europe, where weak EU economies are being pressured through high interest requirements and credit insurance rates.  Objectively neither Spain nor Portugal should have any sovereign debt or banking problems at this point, but both may end up with both problems because of bond speculation.

In Asia the big problem is the combination of inflation risk from economic growth and problems with an export-economy mindset.  Virtually all the Asian economies are export-driven and most have taken steps to stem internal growth to sustain labor cost benefits and to control the impact of industrialization.  Those steps have, in Japan, created an economy that’s taken frugality to a new level and has actually undermined the domestic economy.  As other countries in Asia catch up with Japan (China and even Korea) the result is an economy that may have neither internal nor external stimulation for growth.

A final issue here in the US is politics.  Anyone who reads history would have to realize that we’re in a period of political polarization that’s almost unparalleled since the pre-Civil-War era.  Fed Chairman Bernanke spoke over the weekend and among his comments was one that we were creating a society too polarized.  His view was that education was the polarizer—people with more had half the jobless rate of those with less—but I think the issue is more complicated.  Clearly the US could not absorb a large incremental population of highly educated job-seekers even if we had the system and funding to turn them out.  The real issue here is that we’ve created a society that’s bordering on masters and servants—a small producer economy largely focused in the financial and high-tech sector and a growing population of service-economy workers who really serve that first group and each other.  It’s the ultimate opposite of Asia; instead of creating so much manufacturing goods we have to sell offshore to get rid of them, we produce nothing but things we can’t sell offshore because they’re personal services.  We can’t mow the world’s lawn, after all.

The economic downturn we’re recovering from was caused by financial-industry excess, but under it is still a systemic problem with the creation of jobs and wealth.  We took the easy path, shifting with capitalistic fervor to a derivative-based financial growth strategy rather than trying to figure out how to build more and better stuff.  That both opened the door for the Asian economies and closed some doors here.  It’s time to open them again.