February, 2008

Cablevision reduces capex, ups FiOS competition

Cablevision reported better numbers, best of the major cable TV providers, and a sharp reduction in capex. Capex as a percent of revenues has dropped from over 16% (about what the US RBOCs spend) through 13% to slightly more than 11%. All of this suggests that the firm is taking a price-war model stance in competition with FiOS versus a feature stance, which is what competitor Comcast is taking. Cablevision had little to say about advances like DOCSIS 3.0, which would let cable spans increase their broadband speed to FiOS levels. Note that cable broadband is more “shared” than DSL or FiOS and thus raw speed numbers are not necessarily indicative of relative observed performance. We think the capex ratio shift here is the important element; a “successful” cable competitor is one that lowers capex-to-sales below RBOC levels, which means that the RBOCs can outspend the cable companies in capital improvements. Thus, ironically, innovation in access networking must come from the “conservative” carriers.

Nortel’s Carrier Ethernet perception confused

Nortel, whose performance in the last quarter was significantly below expectations, is pinning a lot of its hopes on grabbing a major share of the Carrier Ethernet market. A major barrier to Nortel’s goals is a lack of company perception on just what that market is, arising out of the same kind of product-group parochialism that we have cited for Alcatel-Lucent. Metro infrastructure is a single strategy, not a combination of three or four technology- and customer-specific approaches, and without that understanding you cannot hope to succeed. With its advanced PBT position, Nortel is well positioned to address this “real” metro market, but as a company its strategies have fallen behind its technologies.

FCC chairman advocates spelling out P2P policies

Comcast and its opponents faced off at an FCC hearing, but little of substance was brought into the open. The positions remain largely as filed in the various briefs; Comcast says that network management is essential for overall service quality and net neutralists say that any constraints will be the end of the Internet. Chairman Martin’s comment about the fact that such things should be done with open policies and transparency seem to us to be the signal that the FCC will mandate that these traffic management practices be spelled out in the user agreements. We do not expect any substantive policy announced favoring net neutrality despite the tone of some post-meeting commentary.

Juniper separates router control plane processing

Juniper today announced a significant shift in the traditional architecture of routers, one that allows an external server (the JCS 1200) to provide control plane processing for forwarding-plane networks created on Juniper’s line of routers. Traditional router architecture has used either an integrated processor for both data forwarding and control processing, or a separate board within the router for the control plane handling. The new architecture allows an enormous increase in the processing resources available to handle “control plane” activity, which includes the processing of management requests, topology updates, and other IP control packets. Since Juniper has previously announced an “Open Junos” architecture where developers can add logic to the Junos control plane software, this would appear to open the door to embed significant service and feature intelligence in network devices. This in turn could empower service providers to differentiate their services through these embedded features, or to sell access to them as a new revenue source.

Google video ad trials - the clueless approach

Google has launched a trial of its controversial banner-add-on-video strategy, and we believe the step shows the extent to which the online content ad process is detuned from market reality. The approach has continually been shown to be offensive to viewers of video, far more so than the ever-offensive banner ads on web pages. In addition, it shows that Google has no real notion of how to address online content sponsorship other than to try to replicate the banner-and-click approach, and that is not attuned to the current broadcast TV advertising paradigm. Google also plans to put video ads on search result pages, a step that is likely to further clutter the search results and create more user angst.

T-Mobile takes VoIP/wireless integration step

T-Mobile has announced it will be offering a limited trial of an unlimited VoIP calling service to broadband customers of any sort for $10 per month plus the cost of the equipment ($50). The new service may be a step toward integration of home voice services and wireless voice using dual-mode handsets, something T-Mobile has also pioneered. This is likely to create a price war in VoIP and may also hasten the FMC evolution of US providers, which will bring the femtocell/WiFi debate to a head.

Verizon goes on the offensive on upload speeds

Verizon has finally awakened to one of the major weak points in cable broadband services delivered and taken steps to exploit it. A FiOS ad talks about the fact that FiOS delivers not only fast downloads, it delivers uploads 25 times faster than cable, and upload speed was the big problem with cable from day one. Cable broadband is shared bandwidth in both directions, but the statistical sharing of the downlink still lets customers have decent experiences given that there’s as much as 8 or even 16 Mbps to share. But the uplink is only between 256 kbps and 512 kbps, and any significant uploading (such as P2P hosting) creates a major problem for the MSOs. That’s why Comcast is prepared to duke it out with the FCC on the issue of P2P traffic management, and that battle is likely what’s spurring Verizon to take the offensive in its ads.

Google’s withdrawal from spectrum auction: What it means

Google’s wireless position is half-correctly characterized by Business Week.  Yes, it withdrew from the auction for the C block open spectrum (by all the rumors—it’s not official yet, but NO, it didn’t achieve its strategic objectives either. Google underlined a major vulnerability, which is that it depends utterly on others for access to the customer.

Not only does Google need the Internet, it needs a largely open Internet where it can dodge costs of access and transport and can exploit customer relationships. The problem is that open wireless is very likely not to be a viable business model no matter who has the spectrum. The fact that Google didn’t try to win is almost a complete proof of that.

In wireless, where all capacity is shared in a service area, user behavior interacts to create congestion and poor experiences unless it’s somehow regulated, which is difficult if any device and application can use the spectrum. Google has set up an experiment that it may now hope will never be conducted, because if it is, the results are not likely to be in Google’s favor.

Telecoms focus in on business model transformation

An IBM study of telecommunications predicts that operators will be less focused on simple revenue growth or cost reduction and more on business model transformation in the coming five years. This harmonizes with our own survey, if one considers that “business model transformation” means redirecting business focus on different activities. One import of the shift that IBM focuses on is that this almost certainly involves more IT focus than pure network equipment focus, which we believe strongly to be true. This is likely another datapoint validating Cisco’s software shift, and it shows other vendors the direction to take. It also raises the question of whether IBM might either acquire or partner more strongly with a network vendor for service provider networking.

Proposed deals verify mobile angst

Regarding the Alcatel-Lucent/NEC deal and the rumored Motorola-Nortel deal, these developments are symptoms of the angst in the mobile infrastructure market, the slowing of investment in infrastructure that is accompanying a lack of convincing growth in ARPU, and concerns about regulatory shifts and voice pricing. The vendors are looking for something to hang their future revenue model on, as well as to reduce costs and pull back their exposure to the mobile market. More of this sort of thing, and other activities related to the overall mobile infrastructure challenges, can be expected through this year and into 2009.