July, 2008

Comcast financials improve - in some ways

Comcast turned in a better-than-expected quarter (at least better in some ways), showing good growth in its triple-play and Internet offerings, but a decline in growth for digital cable. ARPU increased slightly, also a good sign. The success appears linked to the fact that AT&T and Verizon have not been able to roll out their services as fast as analysts had feared, giving Comcast more time.

We have noted that our own experience with FiOS shows the service to be excellent, but the time required to get it deployed in homes, measuring from when the fiber run begins, is as much as six months. Shortages of critical STBs have also hampered sales.

One interesting note from the Comcast report was that capex declined, which helped the bottom line. This decline, we believe, is a spending timing factor to improve this quarter’s numbers. We believe that Comcast will have to increase capex in 2009. The question now is whether Comcast and the cable companies can outspend the telcos given the pressure on telco voice revenue and the likely “digital pop” cable companies will secure in 2009.

Alcatel-Lucent CEO and chairman say goodbye after more losses

Alcatel-Lucent’s Russo and Tchuruk, the CEO and Chairman respectively, are resigning after the company posted yet another loss in the quarterly earnings announcement. The move was applauded by many (most) financial analysts, who believe the team has not been able to sustain the momentum of the companies individually, taking essentially the worst of both.

There is no question that the merger was among the worst in the market’s history in terms of the strategic loss of momentum. However, it is far from clear what will happen now. First, there is no indication who will take over from Russo; no credible candidates have been leaked. Second, the cultural problems of the two companies remain to be addressed. Third, the layers of middle management that were as much the problem as the senior management remain in place, creating a confused muddle of reporting depth that has made it difficult to make bold decisions.

There is a lot to fix, and yet there is also no question that ALU has the best strategic talent and the strongest position in a technical sense in the market today.

New search targets quantity, not relevance

Cuil, a startup search company, plans to go after Google on its own prime turf, the volume of pages indexed and available, and also present results in a magazine-like form that is more attractive to users.

This will be the first new search effort that is aimed at quantity rather than relevance, showing that the relevance differentiator has been difficult to validate in the minds of users. The project will launch this week (they say today) and is expected to draw a lot of early interest. The question will be how long that interest lasts and what paths Cuil has for monetization.

Juniper exec changes could indicate software emphasis

Microsoft executive Kevin Johnson, president of the Platforms and Services division that was working for the Yahoo acquisition, is leaving Microsoft to run Juniper Networks. Juniper issued a press release indicating that Johnson will become CEO and Scott Kriens will become the chairman and will still be involved in strategic matters.

We believe this is a good thing. Johnson represents a vision of where Juniper must go, which is beyond being a box vendor or its products will commoditize and its stock stagnate or fall. Kriens understands where Juniper is now, and how near-term modifications can be made to lead to the ultimate direction Johnson represents. Both the goal and the route are equally critical for Juniper, and we hope that the two can be harmonized by Johnson and Kriens cooperation and effective collaboration.

 We have heard that this change has been in the works for some time and was at least in part responsible for the other recent executive changes at Juniper. For Microsoft, which will be reorganizing its Platforms and Services area, the departure of Johnson seems to signal a bitter aftermath of the failed Yahoo deal and an internal conviction that the deal cannot now be done, though some inside Microsoft tell us that’s not necessarily the case.

At Juniper, the move is not completely a surprise. Kriens was one of the few executives to start a tech company and remain CEO through its IPO and operation as a major public corporation. Last year, according to rumors, there was board pressure to make some changes in Juniper and Stephen Elop was brought in (from Adobe). Elop left after a year (ironically, joining Microsoft). It would be significant in our view that Johnson, like the other executives recently joining Juniper have a software background.

We have long said that Juniper and other network equipment vendors needed to be more focused on the software layer of the network to insure they could sustain feature differentiation. The changes at Juniper suggest that there may be a shift to a more software-centric position, and perhaps a more aggressive positioning in the Carrier Ethernet space, but it is clearly too early to say for sure.

ITU approves 4G technical requirements

The ITU has approved its technical requirements document for 4G services and will be ready to consider technology applications this fall. This will certainly kick up the noise level in the WiMAX versus LTE battle, but the truth is that the issue may be less relevant because of the continued failure of the mobile operators to find a strong business case for non-voice services other than Internet access.

Cellular services at 100 Mbps may be technically feasible under either of the standards sets, but there is no way that Internet mobile access could sustain the investment given the price resistance of the users.

There are clearly major steps needed here, and the ITU and other standards bodies are not focusing on any feasible approach, in part because the business side of the process is out of their scope. We believe that the operators themselves have been struggling with what to do next, and they are becoming a bit more direct in their criticism of equipment vendors’ lack of help in this area.

Brocade to acquire Foundry

Brocade Communications, a data center fibrechannel switch player, is acquiring Foundry, the Ethernet switch company. The deal is likely to meet little resistance from any regulatory or shareholder perspective and so can be considered done.

We believe this move is a step toward recognizing a major truth of enterprise networking, which is that in market cycles driven by IT factors, as this one is, data center switching is the most likely to lead the networking portion of the purchase cycle. In addition, data center products can pull through products elsewhere (which this deal is clearly banking on), while the opposite is not true.

Given the increased influence of IT in overall technology procurement (and the collateral decline of the influence of networking), we believe this to be a very smart move indeed. This acquisition may lead to some additional consolidation in the LAN switching and data center area as other players make counter-moves.

AT&T earnings to show spending preferences

AT&T is expected to show weakness in its earnings report this week, with accelerated line loss in the wireline space and with reduced mobile profits.

The WSJ article blames this on the economy, but there is little evidence from past economic slumps, even recessions, that consumers cut back on telecommunications services. Most have contracts that set their spending in any event.

We believe this is a more general problem with AT&T. The company is more vulnerable to mobile revenue caps than Verizon because U-verse is a less valuable and profitable property. It is also more vulnerable to cable competition in voice and broadband, and we believe that the cable companies are targeting AT&T specifically because they need some success against the RBOCs.

The key will be what AT&T says about spending; it will show where the company believes  future must lie.

IBM earnings point to SOA success

IBM reported exceptionally strong numbers, and so one of our critical data points for the future of tech has been obtained, and in a positive direction. IBM revenue growth accelerated to 13%, EPS grew by 28%, but the US sector was last among the major markets with only an 8% growth rate.

EMEA led with 20% and Asia showed 16% growth. The growth was in software and services (about 17% in each category); computer hardware grew at only 2% overall but systems grew at 10%.  IBM’s branded middleware grew at 21%, and WebSphere by 9%.

We believe the IBM numbers, particularly its service numbers, show that projects on SOA-driven modernization and the mashup process are pulling through software purchasing, thus creating the normal behavior for the IT cycle we believe to be driving the market at the moment.

We note that IBM’s information management tools expanded by 30%, showing that changes in IT directions are also changing the information content of worker experiences. All of this points to a positive data point for recovery of enterprise networking in 2009 and the need to prepare for this immediately. We believe that the strategic management changes by Cisco and Juniper are designed in part to prepare for the coming year’s changes in opportunity.

SK Telecom sniffs around Sprint

The low dollar may be contributing to interest in Sprint by SK Telecom, though many international operators have eyed acquisition as a means of entering the US market.

There isn’t much commentary on the deal, but we are hearing the SK Telecom may be betting that the WiMAX position in the US will be worth more than investors currently believe it will, and that the value of Sprint will therefore be higher.

There is no assurance that regulators would buy such a deal, even if Sprint were to agree. However, if the deal is even attempted it would likely show that Sprint’s board is concerned about the company’s future. Sprint continues to be dependent, in our view, on getting a lot of non-traditional devices onto WiMAX, and it is not likely that much progress can be made in this area until 2009, even with the backing of Intel.

NSN moves on to next-generation optical access

Nokia Siemens Networks (NSN) has announced it will not continue to invest in GPON, focusing instead on DSL and next-gen optical access (NGOA).

The decision, we believe, is attributable to a number of factors, including the truth that PON in any form is not universally feasible (where demand density is low it won’t recover costs at current price points).  In addition, vendors including ALU already have a substantial lock on the GPON business, and an NGOA that combines fiber remote and DSL or multimedia over oaxial cable access (MoCA) with PON could be the real long-term winner. We’re hearing interest in this last point from both carriers and equipment vendors.