January, 2009

Verizon and AT&T planning FMC transitions this year

Verizon has discontinued its Voicewing VoIP service, a move that some find contradictory to the earlier introduction of “the Hub” a VoIP phone, and Verizon’s femtocell announcement made this week. It’s actually the first logical step in the Verizon evolution.

Voicewing’s features and price points were wrong for the new service, and Verizon is getting out from under it now, as it prepares for the new positioning. We expect both AT&T and Verizon to launch similar “carrot” VoIP services to draw users from TDM as the end-of-life problem for switches approaches.

The big move will be the FMC transition, which both companies expect to make by mid-year, possibly as early as March. This shift will create significant changes for the market, but the biggest changes relating to content delivery network(CDN) and cloud deployment are yet to come.

The Internet access traffic management flap, net neutrality and reality

Google is releasing a set of tools from its Measurement Lab that are intended to help consumers figure out if their ISPs are doing them wrong with traffic management. The new tools capitalize on the flap created by the Comcast-FCC war on bandwidth management policies.

At the same time, Cox is saying it will be implementing a traffic priority handling system that unlike Comcast’s “level” approach will preference “real-time” traffic in congestion periods. This, they feel (and we agree) is consistent with the FCC’s 2005 four-point net neutrality position (which isn’t an FCC order and thus doesn’t have regulatory force anyway).

All of this is critical for the industry because the notion of unlimited, virtually free, access bandwidth is a hopeless dream. That means that either heavy users are going to be made to suffer delay, or users overall will suffer. The Google move, the Comcast flap, and all of the noise are simply providing cover for the imposition of usage caps, and that would potentially reshape the online landscape, particularly video.

Don’t think Congress will fix the problem with “net neutrality” either; you can’t legislate broadband expansion and the stimulus decision not to address it on a broad scale says Washington won’t pay for it either.

On Verizon’s and Tier One revenue…concerns beyond the economy

Verizon wasn’t able to match analyst estimates for growth in Q1, but the company’s wireless unit increased revenues by 12%, even while subscriber growth slowed and losses increased slightly.

In the wireline area, Verizon continued to lose both business and residential fixed lines to mobile, to cable and (relatively few) to VoIP. FiOS reported strong numbers and good growth, but there are concerns that even this most successful of the telco TV offerings may not grow fast enough to generate the revenue and profits to offset wireline declines.

Verizon has been bringing out VoIP and femtocell add-ons, as other reports on this blog show, and we believe the company is preparing to make a more elaborate VoIP and FMC offering available. Its Voicewing product apparently has been withdrawn.

While revenues for Verizon and other Tier One providers are up, which would not put direct pressure on capex, we believe service providers, including Verizon, are very concerned about the declining voice margins, declining mobile growth, and the failure of their monetization strategies so far. These factors will have far more influence on spending in 2009 and beyond than the economic problems.

DPI: Use it, but don’t use it

Deep Packet Inspection (DPI) continues to be a contentious topic, and service providers are so leery of regulatory intervention that they avoid words with any of those letters in them.

They’ve told us to ask vendors not to use the term—they prefer “application-specific routing” or something similar. There are in fact a lot of valid applications of DPI, such as the XO model where it is used to monitor application performance.

But DPI is like firearms or interrogation or a lot of other stuff that has valid uses and egregious misuses, and it is typecast by the latter. We’ve not seen much interest in rehabbing the concept by renaming it, but operators have made their positions very clear, and we think there’s some indication that vendors are catching on. If that’s the case, then “xxx” might be a really hot concept in 2009.

Sprint layoffs are cautionary ARPU tale

Sprint is a poster child for the “Value of ARPU.”

Consumer telephony is enormously impacted by the cost of customer acquisition and the reduction of churn, and a lot of “costs” are more related to sustaining the relationship than to providing services.  In that situation, it pays to have a lot of arrows in the quiver to mine revenue from each relationship.

When the other interexchange carriers (IXCs) got bought, Sprint was left on the table with no local exchange wireline business, which left it only wireless.  Every customer it loses means a special marketing effort is needed to reach out to restore, where AT&T and Verizon can mine their bases with every bill they send out, at no incremental cost.

Sprint was slow to realize it had a special advantage in being mobile-focused, as well as the special risk of ARPU management and the associated challenges with churn.  They didn’t address the issues, and buying Nextel just diverted them and increased the base of mobile-only customers, which increased all these risks.

Verizon “Hub” VoIP to be FMC flagship

Verizon will be launching a VoIP product, “the Hub”, that will also be the flagship of its FMC and likely femtocell position. The new product is designed to deal with the end-of-life issues facing TDM voice and to provide a lower-cost way of offering voice services without risking loss of customers to other providers or to free Internet systems.

Verizon will be using integration with Verizon Wireless services and management of all voice calling from a single device as the kickers. All of this proves that telecom providers are looking at the service layer for their solutions; nobody believes Verizon will build out IP infrastructure for this. It will simply ride on capacity that’s already there.

Cisco blade servers — part of a bigger plan?

Rumors that Cisco was going to enter the blade server market have been swirling for a year now, and got some boost from being published in The New York Times this week. It appears from our sources that Cisco really is entering that market and will be making the announcement fairly soon.

The move is obviously a gutsy one. On one hand, Cisco seems to understand better than any of its competitors that if bits are commoditizing, you better be in a business that commoditized bits will stimulate if you’re going to keep pumping out bit-producing products.

The other side of the issue is that servers per se aren’t exactly an exploding market, and margins there are typically low. IBM and HP will really hate Cisco for competing and will likely counter-move. The risk for Cisco in being an ordinary IT server is so large it’s hard for us to believe the company would do it, and so we think Cisco may be trying something very smart, which would be to create specialized server appliances for feature hosting, linked intimately with Cisco switches and routers and creating a service ecosystem. Given Chambers’ announcement of service mashups or API harmonization at Cscape, this could get really interesting.

CIMI Corp. analysis on critical telecom vendors

The February, March and April issues of our newsletter, Netwatcher, will include a special series on eight critical telecommunications vendors. We will present a SWOT analysis of each vendor based on our assessment of the critical market issues in 2009 and beyond.

     - February: We’ll cover Alcatel-Lucent, Cisco and Juniper.

     - March: We’ll cover Ericsson, Nokia-Siemens Networks and Huawei.

     - April: We will cover Ciena and Tellabs.

In April, when all the material has been published, we will prepare a special document that includes all three sets of material plus an introductory section that outlines our view of the market. This will be available at no charge to retainer clients and Netwatcher recipients. We will also provide it as part of our TMT Advisor Information Services series at no cost to any service provider planner who registers with us prior to its release.

Contact us now at tmtadvisor@cimicorp.com for registration. You must provide your name, job title, and the name and URL of the service provider that employs you, and submit your request on your company email. Copies of this document will be available to others at a cost of $150 U.S., prepaid. Contact us for details.

Low financials pose strategic change challenges for vendors

Nokia reported worse-than-expected numbers, which puts additional pressure on the broad-based players in the space, including Alcatel-Lucent. The problem these giants, which include Nortel, face is the need to combine their massive product families into symbiotic groups that can build better and broader solutions.

Players in the space have tended to become isolated business units in a loose collective, and this dissipates the benefits of a broad portfolio. Such breadth makes it harder to keep all the heads above water in a downturn. We now expect that Alcatel-Lucent will report disappointing sales as well, which will increase pressure on the company to make good on its new strategy.

New report looks at broadband stimulus policy differences

The dust has all but settled on the broadband stimulus, which is clearly now going to be directed at a modest expansion of broadband to underserved areas. The bill has no money for broader stimulation of broadband deployment of any sort, and the only measure it contains that might impact the broadband industry overall (the “minimum speed” provisions for aid qualification) are now the focus of debate and may be dropped from the bill.

There is a fundamental policy issue emerging between the Obama Administration and the Democratic Congress in our view: The former wants very pragmatic and useful legislation, and the latter wants to address partisan issues and ideology. How that balance will be struck overall is yet to be known.

We have released the second audio brief in our TMT Advisor Planners’ Briefing series, covering the prospects for and impact of broadband stimulus in the U.S. under Obama’s economic stimulus package. As the briefing says, this program is very unlikely to live up to industry expectations, and we offer our views of the impacts of the package in this special audio report.

This is the second report in our series and you must register with us to receive these briefings by email. If you haven’t registered you’ve already missed one report, so don’t delay. Click here for details. Register now via email at:  tmtadvisor at cimicorp.com. Be sure to mention the TMT Advisor Planners’ Briefing series in your subject line.