November, 2008

Good season for start-up acquisition

Tellabs is indicating it may be willing to use its strong balance sheet for some down-market M&A, something that we think might be a very good idea for a lot of the larger players in the current market.

The industry is filled with small startups, some of which have good technology and strong roles in the network of the future, but little mindshare or account control. As investor fears mount, the price of these smaller players is dropping, making them a decent buy.

We believe that the deals will have to be made before the end of 1Q09, however, because it’s likely the new administration will be able to move forward enough that a recovery (not a full one, mind you) will be visible in the second half.

Cisco’s four-day holiday: Signaling stability?

Cisco plans an unprecedented shutdown for four days during the holiday period, part of a plan to achieve over a billion dollars in cost savings to help counter the impact of the downturn in IT and networking spending.

We believe the step is a kiss blown at Wall Street, something Cisco knows is likely not to be the right answer but that may be necessary to support the stock price in the near term. Even in that light, we believe the move to be unwise because it tars Cisco with the brush of a firm experiencing problems in the downturn, something competitors might play on directly but that will indirectly challenge the most basic value proposition Cisco presents to buyers—stability.

Cable advertising standards and programs

Cable companies’ efforts to create a uniform national ad market are moving forward even as some in the industry hope for an Obama FCC decision to permit further mergers and acquisitions. At the moment, the market share cap imposed on cable prevents further consolidation, and cable operators feel that this may be limiting cable’s potential to create a uniform ad strategy.

The “Canoe” initiative is being supplemented by the SCTE 130 ad platform standard that is likely to be the common mechanism for interactive advertising in cable from 2009 onward. The move is seen as essential in making cable TV more competitive with the Internet, but it will also likely put pressure on the telcos.

Yahoo’s Yang steps down

Yahoo’s Jerry Yang, an icon in the search business and a focus of shareholder angst after refusing the Microsoft deal earlier this year, is stepping down as CEO. The move is not a surprise, given that it now appears that there is no way shareholders could hope to recover what they lost when Microsoft was turned away.

Since the decision, which resulted in a board change led by Icahn, Yang has failed to offer any constructive steps to building value as an independent company. The board is likely to at least consider Susan Decker, the president, as successor. We believe this would be a mistake; she might well prove simply a proxy for Yang’s views.

Obama economic moves strengthen financial markets

The Obama economic plan, and economic team, are both taking shape and the Street likes what it has seen. Obama is set to name NY Fed chairman Tim Geithner as Secretary of the Treasury and Lawrence Summers as chief economic advisor. The former set up a major gain in the Dow on Friday.

The Obama camp has announced it will pursue a broad infrastructure-modernization and works program stimulus that could involve more than $600 billion and take two years. Over the weekend, the government decided to rescue CitiBank, removing the risk of a major bank failure from the market and signaling the end of the apparent policy of non-intervention that allowed speculators to hammer stocks without fear of being trapped by good news. The deal will involve U.S. guarantee of certain mortgage-backed assets, totaling over $300 billion and including some commercial mortgage-backed securities that appeared to be the new problem with Citi. The government will also get $7B in new preferred stock.

Many believe that the move was generated by Obama administration intervention, and in particular Geithner’s relationship with Paulson, and this was the strongest signal that there might not be a period of inaction between administrations. The auto industry, reluctant to agree to sweeping changes that Congress was likely to demand in return for a loan, is now lobbying for a loan program to automakers’ finance arms to spur demand again. The Fed is reviewing measures that would pump up the money supply via direct lending, and also lower long-term rates; these would presumably supplement the traditional rate cuts that are now nearly at an end as rates hit 1%. All this has made the markets happy; U.S. futures were higher this morning, Europe was strong and Asia mixed with Japan higher.

Global broadband to become universal service?

Worldwide broadband subscribers have reportedly passed the 400 million mark, and some telco planners are now seriously looking at broadband as their “dialtone” service in both wireline and wireless—but beyond 2011.

The decision to move to a universal broadband delivery would increase capex, but it is apparently being driven by the cost of the dualistic voice/data structure that is now in place. The barrier is monetization of broadband, which has lagged expectations for both wireless and wireline. Operators believe that additional capital and operational savings are also likely to be necessary. We provide some insight into current operator views of the future in the next issue of Netwatcher which will be released this weekend.

Ericsson develops packet-optical gear for metro surge

Ericsson is fielding a line of packet optical gear designed to address the expected surge in metro networking. The new products will support a T-MPLS control plane, but Ericsson plans to upgrade to the more modern MPLS-TP and is also considering PBT (PBB-TE).

Metro capacity may be driven by a host of factors in 2009 and 2010 and the operators may be more interested than usual in the optical layer. This has implications on the Carrier Ethernet and IP MPLS wars since optical spending tends to encourage operators to deploy some control plane architecture, and that could then pull through either switches or routers.

Verizon is latest tier 1 to launch CDN

Verizon will be launching its own CDN for its FiOS network and other network properties, building it based on equipment from Velocix. The move is the latest in a round of CDN and cloud computing announcements by Tier One carriers, and we believe that most Tier Ones will be launching both these services in 2009 or 2010. One reason is that the operators are likely to be major consumers of both types of services as their own offerings to customers evolve, and another is the fact that the massive data center deployments and storage farms associated with video provide significant economies of scale in IT that can be leveraged by both CDNs and cloud computing. Clearly this does not bode well for current players in the space.

What are Yahoo’s options?

November 17 2008 regarding Yahoo.
The Economist has said in print what most people probably have been thinking: Jerry Yang must go. Their criticism is very much our own. Yang and Decker have not developed any meaningful strategy to replace the Microsoft deal they opposed. In fact, you could argue that their approach was to say that if the deal were not done, things would simply go on as before. If true, that type of progress would be unacceptable to shareholders. If not true, then what will be done?

We believe that many Silicon Valley firms believe they are still the “owners” of their own companies, when in fact they’ve done an IPO and are now responsible to shareholders. The problem is that there are few options for Yahoo. One good one that remains is a tight partnership with the telcos.

CIMI Corp. special report on economic crisis

Our report Surviving a Tech Market Nuclear Winter is now available. Click Here for a table of contents and report pricing. This 60+-page planner’s handbook to tech success in today’s challenging financial times covers a wide range of issues of concert to the enterprises and service providers.