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Oracle has rolled out a new high-end Sparc-based cluster server, a 16-core T3 version that seems to close off any debate on whether the company is serious about the hardware business.  In fact, our rumor mill and survey data show that Oracle may be ramping up for a major effort in 2011.  Software is the only place in tech where you can really build differentiation quickly and hope to sustain it for long enough to capitalize on your success.  We’ve already seen software taking a larger role in networking, and what we’re seeing with Oracle is a software company exploiting the engagement that differentiation can bring to move itself into becoming a mainstream, full-service, IT player.

The Oracle blitz would have a significant competitive impact.  Both IBM and HP, the incumbent giants, are relative lightweights in software relative to HP.  IBM lacks lacks any strong connection to the networking space.  Oracle’s server strategy focuses on database networking via appliances and through Infiniband, which is an alternative to the much-touted Ethernet-based data center networks.  That runs in opposition to the data center network strategies of not only IBM and HP, but also of Cicso, who is potentially impacted by a big move by Oracle into servers and data center networks for a bunch of reasons.

Then there’s SAP and of course Microsoft.  SAP unveiled a new real-time data analytics appliance, showing it’s going to shift more in the hardware direction, and there are rumors that it would be going even further in that direction, even as there are rumors that HP wants to do some serious software deals in 2011.  Microsoft might be left as the only relatively pure software play, except that there are also rumors Microsoft might be looking at the appliance game, not only for database products but also for collaboration and other middleware elements.  “Cloud-in-a-box” Azure-inspired technology is already sold by Microsoft partners, but Microsoft realizes that many of its hardware partners may end up being competitors if the appliance business really takes off.  Still, Microsoft get into any sort of hardware is a big risk to its current partnerships, and unless they see real stress cracks they’ll probably go slow.

There’s a curious fast/slow balance going on with regulations relating to the Internet.  The FCC’s December 21^st meeting will be critical in setting out the details of what looks like a complete FCC reversal of perspective.  Genachowski’s stance on neutrality has historically been “pro-Internet”, favoring OTT players over the ISPs/telcos.  His statement regarding the forthcoming order is almost the opposite, admitting explicitly to the value of usage pricing and implicitly supporting multi-tiered services and “special” non-Internet-but-IP services as well.  Further, the order appears to have little chance of being upheld if it’s appealed, raising the question of whether there were private discussions among the players that secured a promise not to appeal.  But I’m also hearing that the vote on the 21^st isn’t a sure thing at this point and the whole deal could fall apart at the last minute.

Other issues relating to lawful intercept and privacy are demonstrating that the Internet isn’t the PSTN.  The problem is that in the current IPv4-dominated online model, we don’t have permanent addresses for service access points or devices, and the transient nature of IP addresses makes it much harder to identify a specific online user to either apply intercept warrants or to record their tracking preferences.  Add to that the fact that many of the potential trackers are outside the reach of US law and you have some ugly potential.  We’re actually building a pretty good argument for mandating an Internet shift to IPv6, but it’s not at all clear that there’s anybody who could make the mandate stick other than the US government, and that agency is apparently unable to agree on even fundamental points of taxing and budgeting.

A final point comes to us courtesy of Pew’s research, focusing on what people know about the world around them.  Not much, it turns out.  What’s frightening about the results isn’t even the somewhat-expected fact that people know nothing about government, geography, history, or current events (outside of sports and gossip).  They also know little about technology.  Only about a quarter know that Android is Google’s operating system, for example.  Here we sit amidst the greatest collection of readily accessible knowledge of all time, and we’re getting stupider.  That has significant consequences for political policy, but also for our ability to manage our own technology decisions.  I’ve noted a similar effect in our enterprise surveys.   This is important because it’s telling us that the buyers don’t understand what they need to.  A solution might be to educate them, but not only don’t vendors really want to do that, the buyers themselves don’t want it.  “I don’t want decision support; I want to be told what to do!” is the typical survey response.  Buyers want a trusted agent, a company they believe in and will bet on to lead them through technology issues they believe they’ll never fully grasp.  It may be that becoming such an agent will be the critical path to success in the coming year.

The FCC’s upcoming neutrality order, presuming that it goes forward, isn’t the only thing that the Commission has commented on that could change industry direction.  Chairman Genachowski has also indicated that:

Our work has also demonstrated the importance of business innovation to promote network investment and efficient use of networks, including measures to match price to cost such as usage-based pricing.

This comment seems to put the FCC behind the industry on the issue of broadband pricing rather than behind the consumer or the OTT players, a marked shift for Genachowski and one that’s raised comments inside the Beltway that he’s sold out to the big ISPs.  It’s not as bad as that, I think, but it’s unfortunate the comment was made because it doesn’t solve the problem.  The big thing the Internet needs is settlement and not just usage pricing.  Collecting more from your own customer in a pure bill-and-keep framework does wonders for your own bottom line, assuming they’ll pay, but it doesn’t help the ecosystem.  The big questions, which we can’t yet answer, is how the FCC might respond to the Comcast/Level 3 deal and whether Genachowski and his clan will continue to rain on the Google/Verizon proposal.  An open commercial framework that lets anyone who wants special treatment pay for it is better than a system that just lets consumers pay incrementally.

The whole issue of more money for access, whoever pays, isn’t going to resolve the issue of monetization either, but it might take some pressure off and that would be a bad thing, I believe.  Ultimately, usage pricing will curtail usage.  ISPs tell me that their intention, which they’ve conveyed to the FCC, would be to set usage tiers high and hit the 8% or so of users who are massive bandwidth consumers.  They’re also proposing to set download and upload tiers independently, which could be used to punish file-sharing without going to court to block access.  Whether this comes about as planned, it will certainly still make people think twice about how much capacity they consume, and that may make things like online video less popular.  The best approach is a framework for operators to monetize things, which means a service-layer approach.

Cisco has long been absent from this space, but today they’ve revealed that they’re buying a small network management firm called LineSider, a company who makes software that uses policies about user/service/resource relationships to manage the network.  The Cisco move may be a counter to service-layer announcements by rivals Alcatel-Lucent and Juniper, both of whom have been touting service-layer goodies for over a year.  Cisco gained a big credibility boost in the service layer just by having blade servers and a complete data center story, but they lost some of their edge in our fall survey for lack of a complete service-layer execution.  They may now be working on one, and if they are it’s likely to make that space much more competitive and interesting.  Cisco, unlike its rivals, is a marketing machine.

The EU has opened an anti-trust inquiry into Google, not the first time the search giant has been in trouble with the EU but perhaps potentially the most serious inquiry yet.  Google’s market share in search and its potential for abusing that position have always been a concern, and in the EU you have to add to that the normal backlash generated among regulators by local competitors.  The problem that’s alleged is that smaller firms see their sites downgraded in positioning.

My personal feeling here is that the positioning of search results is a travesty overall.  There are dozens of sites that do nothing but try to intercept searches, there are optimization strategies that force higher rankings, and of course then there’s “ad words” paid advertising.  In many cases these days, you can’t do a search and find a useful response in the first two or three pages.  But does that mean Google is guilty of something?  If it did, the same searches with Bing would generate something different, and they’re not much better there.  The problem with search is that it’s sponsored.  That means it serves the interest of someone other than the person doing the searching.  Even the EU complaint is silly at one level; companies complain their rankings aren’t higher, implying that the rankings should be.  Why is that?  There’s an honest way to do search, but we’d have to pay to search to get it, and that’s not likely to happen.

Google’s not making things easier for itself with some upcoming announcements.  On the speculative side there’s the rumor they want local coupon site Groupon, a move that is almost certain to raise concerns about the growing scope and power of Google.  Groupon is also a potential aid in a social-network bid by Google, since it would give a tangible reward target (coupons) around which social ecosystems could be built.  The other announcement, this one a sure thing, is the Google Editions launch that’s expected literally any moment.  That would take Google squarely into the ebook space.

There’s plenty of competition in the ebook market from the likes of Amazon and Barnes & Noble, but that has some in the regulatory world worried because it could mean that Google hopes to leverage its previous activities with scanning works that were no longer authoritatively copyrighted and also its search incumbency.  What Google says about the program is that it would give the smaller bookstores a stake in ebooks, something they don’t have now and that many say they want.  But how the process will work, exactly, isn’t known.  It’s doubtful that Google would be able to sell ebooks for third-party readers like Kindle and Nook, which would force it to rely on apps on devices like computers and tablets.

Tablets are expected to put a dent in PC sales next year, but whether Google could climb to ebook success on the tablet space alone is a tough one to predict, particularly given that Apple’s iPad is the top tablet and that Apple has its own ebook aspirations.  We’ve been hearing about a Google strategy to create a virtual newspaper that would compete with Murdoch’s iPad daily, but that would certainly create more tension with news organizations already concerned by Google’s delivery of their material in search results.

With Cyber Monday turning in good numbers, it’s ironic that we’re also seeing more stress cracks in the business model of the Internet in its broadest sense.  The popular hope that somehow things will just get better and cheaper forever is colliding with hard economic reality within the ecosystem of the Internet as players work against each other to grab profits when paths to profitability are far from clear overall.

Today, Comcast and Level 3 revealed a fundamental problem with transport with the former demanding that Level 3 pay for transport of Netflix video that Level 3 is being paid to cache and deliver as a CDN.  Level 3, of course, is crying foul under net neutrality, but Comcast was the guy whose appeal of the FCC’s rules resulted in the Court of Appeals declaring the FCC had no right to enforce such principles.  While many will see this as yet another example of Comcast being the bad boy of ISPs, it’s really a sign that ISPs are fed up with people creating business models that depend on Internet access and transport and not paying for either one.

Another development is that Australia’s NBN, having moved to effective passage, is now embroiled in yet more controversy.  The problem is that NBN proposes to require that ISPs connect to them at a series of on-ramps, which puts NBN in the ISP backhaul business rather than the access business.  Many see that as an example of “mission creep”, of ambition to make NBN what’s effectively a new national carrier through a thousand baby steps.  NBN, who has refused to submit its whole business plan for an audit, is insisting it needs clarity on its point-of-interconnect (POI) mission, and Australia’s regulator is implying they’d reject the NBN proposal.

Here in the US, the FCC has been postponing its regular December meeting, some say to prepare for the politically explosive decision to discuss the net neutrality topic in general and the FCC’s “third way” regulatory solution to the current impasse in particular.  The challenge the FCC faces is significant; the public believes it can just order stuff and it will happen and yet the Comcast appeal proves that’s not the case.  The proposal the FCC has had from the first was to declare that broadband access (not the Internet) is a telecommunications service and thus regulated under Title II and in theory subject to all the wholesaling requirements of the Act.  However, the FCC then proposes to forbear from applying those wholesale rules, which it can (in theory) justify under Section 706.  There, “regulatory forbearance” is one specific remedy the Act offers the FCC to promote broadband.

There’s only one thing that’s clear at this point, and that’s the fact that we can’t go on the way we are.  Market forces worldwide are speaking the language of profit, and that speech won’t be ignored.

The holiday season opened a bit stronger than last year, with retail stores reporting higher traffic and somewhat better sales and online retailers reporting sharply improved results.  It’s too early to say how this will translate into seasonal gains because shopping behavior (like a lot of consumer behavior) has been altered by the downturn and the slow recovery.  People want to believe, but they’re still not sure they’re out of the woods, and there’s always some story that fans the flames of uncertainty.

One such something is the EU economy.  Ireland won its debt relief, not that there was much doubt about that happening, but it hasn’t entirely settled the markets.  We seem to have fallen back into the Eurozone debt morass, though it’s likely that the dire pronouncements of the end of the EU are radically overblown.  The real underlying problems are an equal measure of three factors, though, and any of them could at least hurt the pace of recovery.

The first factor is the inherent lack of political cohesion to match the EU’s economic cohesion.  When things are good, the union works—but everything works when things are good.  When there’s a crisis, it tends to hit the “southern” zone of the EU harder than the main industrial center.  Those economies want to respond with stimulation just like everyone else, but they can easily overdo it and risk creating default at the bank or sovereign level.  Then the rest of the EU has to bail them out.

Factor number two is that the EU’s lack of political cohesion kept them from responding as aggressively to the downturn as the US did.  Make no mistake; without the massive stimulus and rescue process here we’d be staring at 1929 revisited at this point with an exit only a decade down the road.  It’s not great now, but it would have been a lot worse, and for Europe they hedged a bit too much and so didn’t push their own recovery strongly enough.  Probably they hoped the US would pull them out with renewed demand, which a lower Euro has helped generate.  That, of course, threatens to pull the recovery down for the US and other countries who are in less trouble.

Factor three is that the financial markets are still maverick, and in this case they’re pressuring the debt of the second-tier EU players like Greece, Ireland, Portugal, and Spain.  The first three are the least stable but the three together don’t make enough of the total Eurozone GDP to create a crisis.  Spain, on the other hand, is about 12% of that GDP, and if it were to sink into a problem state it could threaten Italy.  Speculators have been taking advantage of the fact that the EU isn’t taking decisive action (action that could leave them holding the bag, in fact) and bidding up things like credit default swaps (remember them?).  Spain has recently said that it blames speculators betting against Spain for the majority of their problem.

The big problem is that the EU’s will to do something here isn’t credible; speculators are free to bet against individual countries perceived as weak.  If the EU takes strong steps suddenly, the result would be a major financial hit for speculators, and some I’ve talked with believe that the pressure on Greece, then Ireland, and now Portugal, or perhaps Spain, or even Italy, is a tactic by speculators to raise the ante and to try to create a problem beyond what the EU is prepared to solve, thus crushing the union itself.  Such a move pits the industry against governments, and that may be an over-reaching that would finally bring some order to the markets.  It’s sad that speculation could work against countries, force peoples to change their lives and risk their futures.  Sad, but it’s also the way things are now.

Governments can solve problems, and sometimes cause them, and sometimes a bit of both.  Australia, who I’ve been watching as an indicator of the extreme end of pro-consumer telecom regulation, has passed the bill that will split Telstra and create a telco that’s now more reliant on what I’ve been calling the “service layer” than any other in the world.  The NBN that will now provide broadband access may creep further into infrastructure, and so Telstra at this point would do well to firm up its higher-layer assets and prepare for being a kind of new breed of OTT player, one with the low internal rate of return expectations and capital base of a public utility.  That could be a truly formidable competitive position providing that Telstra can shed the inertia of a telco along with the access assets.

I’ve argued for years that breaking up the regulated monopolies that were the telcos was a mistake; competition isn’t created by deregulation unless regulation suppressed it, and in the telco world the fall of the CLEC wave is pretty positive evidence that VCs and private equity don’t want to fund competitive telecommunication; the return is too low.  Thus, getting Telstra out of the access business isn’t going to make Australia’s network more competitive, it’s just going to change dominance from Telstra to NBN.  But that may not be bad, even for Telstra and its shareholders, if the company can shake off the old model and embrace the opportunities of the new.  If they do, it’s a half-step to making Australia a poster child for the way telecom will be done worldwide.

No, they’re not related, but both are providing some news this short work week here in the US!

HP’s numbers seem to illustrate a point I’ve been making about the IT spending plans of enterprises.  Storage was their big product star, gaining about 25% where other product areas gained less than 10% in sales.  The reason that’s interesting is that storage is the component of IT spending where the most money comes from departmental rather than project budgets.  Orderly growth of company information drives storage demand, and so it’s immune to project slowdowns of the type we’re seeing elsewhere.  It’s also true that HP’s revenues are more biased toward departmental budget spending than other vendors because of their focus on areas like laptops, desktops, and printing that are also more “refresh” than strategic in terms of budgeting.

The larger storage growth seems to argue for an HP gain in market share, but it’s not totally clear that’s happening based on our enterprise surveys.  HP didn’t gain in strategic or product influence in the storage area, but they do appear to be benefitting from the account control they have in the small-enterprise-and-down space.  It looks like their sales force is doing a better job of selling storage, and thus gaining an advantage at a more tactical level.  However, we did note that the primary storage players like EMC lost a bit of strategic credibility, which suggests that the enterprise buyer is looking to more full-service players for advice.  Bad news for the specialists, if true.

Netflix announced a streaming-only service, about two years after they should have in my view.  The new service costs about eight bucks per month and provides access to about half the Netflix film library.  Comments from their CEO sound to me like he’s preparing stockholders and customers for a shift to an online model; pricing on the old mail-the-DVD service is going up too.  For the broader market, there are three interesting things about the new Netflix strategy.  First, it may presage a war between TV and movie content.  Second, it brings the focus on the question of whether ads play a part in premium streaming because Hulu’s premium service still shows ads and Netflix doesn’t.  Third, it opens the question of whether consumers, service providers, and content players like Netflix might not now unite to try to encourage deployment of premium handling options for Internet streaming.

The TV/movie and ad/pay dynamics are related, I think.  TV has always been ad-funded and consumers don’t expect to pay for premium TV experiences, but movies have always been for-pay and that’s what Netflix is known for.  The big question now is whether we might see studios and other content resources pushing to produce for-pay content in shorter formats to compete with ad-sponsored TV, and whether the increasing intrusion of advertising into viewing traditional channelized video will contaminate the user’s enjoyment of television to the point they’d either flee to online (where presumably ads would follow) or to a pure pay model.  The problem with the latter is that securing all the current TV content in pay form would cost users about three times as much as they currently pay for subscription TV services, and it’s far from clear whether a price of a third the current level would sustain Netflix’s interest, or anyone else’s on the producer/distributer side.

The seemingly never-ending Eurozone sovereign debt and bank stability issue moved a step closer to resolution, and at the same time a step further away.  That’s been the history of this issue from the first, and it continues to cause concern for the global economy.

Ireland, in the most trouble after Greece, accepted IMF and EU help over the weekend, and that news was heartening to those who feared a sovereign default, bank failures, or both.  But at the same time the move likely rewarded speculators who’d been pressuring Irish bonds all along, and that may induce them to try the same tactic with Portugal and Spain.  That risk, combined with the classic “sell-on-the-news” Wall Street mindset, has weakened markets a bit as of this (Monday, November 22) morning.

There’s also some indication that China may be looking at its own policies, and anything China does sends ripples across the rest of the world’s markets since China is the hottest economy right now.  China has been taking some steps to curb inflation, and it has now seemed to signal that it might allow the Yuan to rise against the dollar and thus against other world currencies.  That would make global imports to China cheaper, helping other economies.  Thus, the markets at least are likely going to be whipsawed by the dual issue of currency; a weak Euro based on bank/sovereign debt issues and a stronger Yuan based on China policy.

Consumer research has now indicated that the average family in the US will spend about $75 more for the holidays, which would be good news for the economy in general and retailers in particular.  But even that won’t restore the good old days; the last time that spending per family was at or below the current level was in 2002.  Still, positive movement is better than the alternative, and stronger retail sales for the holiday season is critical in running down inventory levels and sustaining manufacturing growth.  Stores have generally pulled out all the stops, with longer hours, Thanksgiving opening, free shipping for online sales, and early discounts.  The general view in the retail industry is that this is essential in building holiday momentum.  Some retail experts believe that the notion of having early-season pricing at list and discounting as you get closer (or beyond) Christmas is self-defeating, and our model suggests that inducing earlier bargain shopping will increase spending by customers.

In the regulatory world, the FCC is said to be working behind the scenes to lobby for legislation on net neutrality, but in the most recent public comments on the topic, one of the commissioners was quite clearly promoting the notion that the FCC should act to reclassify broadband as a telecommunications service.  Whether there’s interest in legislation may well be moot since Congress has had little success in passing telecom legislation since 1996, and since the topic has become more complicated with the dispute between Fox and Cablevision.

In telecom, there are reports that NSN might consider an IPO to provide an exit for its somewhat-in-disagreement partners as an alternative to a restoration of their pact or a complicated private equity deal.  We’re not sure how this would fare given NSN’s market position; it’s not that the company isn’t large but that it seems stuck in neutral at best with respect to growth and market share.  We think NSN could be a powerhouse based on its objective assets, but like many of the Euro-giant firms it seems to have a problem with positioning itself in the new telecom market.  It’s not an easy place to be these days for sure.

This week was marked by the usual combination of good fundamentals and hype and hysteria in the media and markets.  The Irish debt crisis, which is objectively solved at this point, has been the source of rumors that have whipsawed stocks and created a new set of reasons for individuals to avoid the markets.  But underneath, companies at the retail level are doing better and forecasting a stronger season, and research firms report that nearly 90% of shoppers still have buying to do.

In advertising, online debate continues to focus on the topic of “click-through rates” or CTRs, which have replaced the simple ad appearances as the desired metric.  The problem is that like anything else it’s possible to game CTRs and even when they’re not gamed, they don’t tell the whole story.  Our research here has shown that “trajectory” is the big issue; Microsoft recently validated that by working toward a “path-based” set of conversion metrics that track from a sale back through the sites/pages that led to it.  The greater level of refinement here is both good and bad.  The good side is that the changes could make online ad performance tracking more credible.  The bad side is that it’s demonstrating how non-credible it is at the moment.  Advertisers tell me that they believe there are no credible studies proving the effectiveness of online advertising beyond conjecture.  That doesn’t mean it’s not effective, but that we can’t identify why it is, and therefore focus on making the “why” work better.

The biggest area of interest for advertising online continues to be video, and there are some interesting trends there too.  Hulu decided to go out of “beta” and lower its base price, which some think is a bad sign but which many network operators are happy to see.  What I’m hearing is that people won’t pay too much of a premium for what is still a best-efforts experience, and the less they pay the more prioritization of delivery might earn.  Not only that, lower retail prices mean that OTT players have less incentive to be in the market, but network operators have much lower ROI targets and can play there comfortably.  Google TV is also apparently laying an egg, much to the surprise of armchair statisticians who have interpreted the drop in cable customers as people “cutting the cord”.

The data shows that 350-odd thousand people were “dropping cable”, but that whole statistical assumption is flawed.  First, there is no tracking of individuals or households here; what gets reported is the net of adds and drops.  Second, there are always people dropping cable because they move, die, consolidate households with another, etc.  That brings up “third”, which is that the thing that impacts all subscription TV is net new households.  Any time there’s an economic crisis, what happens is that fewer new households are formed because graduates and new workers either stay at home with their parents or join to create a group home.  This cuts down on the add part of the equation, and that means fewer customers.  In short, there is nothing we could say about the “cutting the cord” paradigm given the current data, and the experience of Hulu and Google suggests that cord-cutting isn’t a factor.

Staying in the video space, the Senate passed a measure that would allow the Justice department to get a warrant to cut off the domain decoding for pirate websites, and it might also allow them to force ISPs to “disconnect” the routing.  Neither measure would be truly effective in my view, and while I’m a supporter of enforcing copyright law I’m not sure this is the right way to go about it given the risk that it’s not going to work.

Speaking of not working, Australia’s NBN seems to be trapped in the political world.  A vote yesterday on forcing the government to submit the NBN business plan to the Productivity Commission for review failed by only one vote.  While there’s every indication that the public likes the idea of super-fast broadband, there’s an increasing sentiment that the NBN planning is a charade, with too much of the assumptions being hidden for there to be any confidence that NBN will work.  NBN recently named Cisco as the winner for its data centers, something that surprised those who thought the NBN CEO would steer the win somehow more toward is Alcatel-Lucent alma mater.

If things sound sleazy here, don’t be surprised, because according to Harris poll data, people distrust advertising by an overwhelming margin, and other data says they distrust product reviews submitted on retail sites, social network privacy protection, and of course politicians.  What we’re seeing, I think, is a general sense among consumers and also enterprises that they are being duped by everyone.  That makes it much harder to buy things that are perceived as risk-generating, either because of cost or because they push the buyer into an unfamiliar cost/benefit trade.  As I’ve noted regularly, we’re seeing enterprises simply stalled on projects that would raise their IT-to-revenue commitments, because they can’t get any validation of the benefit case.  All of their vendors, they tell me, are either saying nothing useful or are saying things the enterprise believes are objectively lies.  All of this is eroding the influence score that various influence conduits exercise on buyers, with the effect that the total amount of positive influence available at best barely reaches the level needed to induce a decision.  You tell me how that makes sense, dear equipment vendors!