July, 2009

Qwest to go for delivery conduit, not content broker

Qwest suggested during its second-quarter earnings call that the company would be pursuing a video strategy that would make it less a content broker and more a delivery conduit. Just what the technology might be like is still up in the air.

We’re hearing that there are two approaches being considered. One would rely on a partnership with a satellite player (Qwest has a DirecTV deal now) for broadcast channels and use the Qwest network for video on demand (VoD). The other would be a pure play on OTT-like video based on Qwest CDN assets and local priority content distribution to the access network. We don’t think these two options are very far apart, and thus we believe something CDN-ish is going to happen at Qwest.

Velocix purchase positions Alcatel-Lucent in CDN market

The growing interest of telcos in content delivery networks (CDNs) is the driver behind the acquisition of CDN specialist Velocix by Alcatel-Lucent. We’ve noted both here and in our Netwatcher newsletter that operators like CDNs because it gives them a paying role in over-the-top content distribution, as well as a means of providing their own video-on-demand content services.

Obviously what’s interesting to carriers is interesting to carrier-focused equipment vendors. Velocix has been popular with carriers; the company has deep packet inspection (DPI) and content node assets that Alcatel-Lucent can use in gaining traction in the emerging CDN deals, which in turn may be critical to the emerging content plans of the carriers.

From a strategic perspective, Alcatel-Lucent is also interested in projects like CDNs because they represent both equipment and service revenue opportunities, and they’re likely early examples of the growing trend toward operators letting integration/management contracts for new service-driven infrastructure projects.

Verizon’s Q2 earnings indicate difficult voice migration

Verizon reported earnings and the results were in some ways alarming. The company’s net income fell 21%. Neglecting the Alltel acquisition, revenues grew less than 2%, about a third of prior-year levels. While wireless and FiOS were strong, Verizon (like AT&T) saw business and wireline revenues decline.

The announcement that the company will cut another 8,000 jobs will hearten Wall Street, and many attribute this to prudent response to revenue decline, but we think it’s really something different. Like all wireline/wireless providers, Verizon is finding it attractive to transition its wireline voice customers to either a wireline package like FiOS that creates ARPU, or to wireless. In the case of wireless, the result is a reduction in operations costs, since wireless has no “installation” or outside plant maintenance on a per-customer basis.

In short, Verizon and other operators are now looking at getting out of the wireline voice business, at least in the sense that they’re actively hoping to migrate any voice user to something more profitable.

Ericsson’s Nortel wireless win linked to carrier buying trend

Ericsson came from behind to win the Nortel wireless auction, beating out both NSN (the original straw-man bidder) and a private equity bidder for the deal. There’s still a step of court and regulatory approval, but we’re not hearing issues in either of the two areas so far.

The Nortel deal gives Ericsson another North American asset after its win of a management contract for Sprint. It also means a major disappointment for NSN, which really needed to boost its own position in the U.S. in particular.

Obviously everybody knows at this point that wireless capex will beat wireline for the foreseeable future, but we also think that the move is linked to an overall change in provider procurement policies worldwide, a shift to a partnership with a few key vendors that control significant opportunity ecosystems.

Other deals like this are likely to emerge, inside and outside the wireless space, as vendors mass up and position for the fall cycle. We cover this shift in depth in the July issue of Netwatcher.

Content trends include emphasis on revenue-sharing

Over a thousand publishers have banded together in an organization aimed at insuring they receive reasonable returns on their publishing investment, particularly from news and editorial content creation. The Fair Syndication Consortium includes giants like The New York Times and The Washington Post, and more than 50% of the top news publishers, according to its spokesperson.

The group will look for places where content is syndicated and “contact” the sites to encourage revenue-sharing, presumably with the goal of then taking legal action if no deal is forthcoming. The formation of a trade group like this is an admission that regulators are unlikely to do anything and that portals and other sites that repurpose content probably won’t do anything voluntarily either.

The question is how effective this can be, given that some content skimming takes place where there are no commercial treaties. It does show that content producers are seeing “aggregators” as being more profit-skimmers than partners, which raises the stakes for online portals and even search engines. Disney is also looking at a pay/subscription plan for online content, so it looks like models beyond ad sponsorship may be finally emerging in video.

Mobile broadband growth has upside and problems

Mobile broadband traffic, primarily to smartphones, is growing primarily due to increased use of video content. Research shows a 30% increase worldwide, and this is both a driver for LTE and a source of concern for mobile operators.

At present, mobile data plans aren’t uniformly all-you-can-eat, so most operators have some revenue upside to traffic growth in mobile services, but it’s clear that mobile content will threaten the older 3G network paradigms and force 4G migration at the current pace of growth. Operators may thus have to accelerate LTE, a trend that is already becoming visible, and the current plans may be inadequate if smartphone wars among providers stimulate further content viewing and traffic growth. The trend may also keep mobile tied to usage pricing as a defensive move.

Juniper and IBM Ethernet OEM deal focuses on data center

Juniper and IBM have announced an OEM arrangement that will allow IBM to label and sell Juniper’s Ethernet products designed for the data center. The pact covers selected models in the EX and MX lines and is similar to the deal already signed by IBM with Brocade.

The news is very good for Juniper because data center networking is an area where budget constraints are minimal this year and are expected to be even more so in 2010. The Cisco decision to sell blade servers has put Cisco in increased competition with IBM and HP. It’s also true that HP’s switch success worries IBM as much as it worries Cisco. Juniper now has a solid partnership in the enterprise, as it already has in carrier Ethernet with its NSN joint venture.

Broadband stimulus details signals coming regulatory trends

The details of the funding policy statement for the broadband stimulus package may shed some light on future trends in access and offer some hope that regulators may understand advanced services issues. The document notes that for many services, the performance perceived by the user is more related to the “middle-mile” or aggregation infrastructure than to access speed per se. It also acknowledges that there will be applications that require performance levels that cannot be provided within the context of the public Internet, where customers are necessarily oversubscribing the network to make costs rational.

As a result, the document indicates awareness that there may be applications that will share the high-speed access network but not be the Internet. These alternative uses would not be subject to net neutrality principles, at least as the policy-makers currently see it. This position, taken two years ago or even a year ago, might have encouraged more wireline telco investment, but it may now be too late for that to happen.

BT CTO’s departure spotlights IT-centric carrier changes

There may never be a clearer indicator of the change in the carrier market than the departure of BT’s Matt Bross, and the fact that there will no longer be a CTO at BT. The role is being absorbed into the CIO role as the activity merges into a new IT-centric division.

The CIO, Al-Noor Ramji, heads the new Innovate and Design unit that seems to be an integration of web, platform, network and OSS issues and is really more an operations group with IT responsibility. We think it is very clear that BT realizes that software, partnerships, platforms and OSS/BSS are now more central to its operations and profitability than its network.

BT’s 21st Century Network (21CN) has been in transition for two years, and we think the notion will gradually be phased out.

Tier 2 and 3 carriers spend in 2nd quarters

Tier 2 and 3 providers apparently spent more in 2Q than expected, according to a UBS survey. We noted that this class of provider generally did their strategic review earlier this spring than the Tier One carriers did. Tier 2 and 3 companies also tend to have less administrative inertia in making purchases based on budget releases, so that’s logical.

If this is all true, then one might expect that Tier One spending will increase in the third quarter of this year, which would be good news for the industry. There are some signs that Tier Ones are still percolating their new policies, however, and that at best, any 3Q budget spending will be back-loaded.