November, 2009

Nortel Ethernet auction: Ciena ups bid, NSN steps back

NSN released a statement that it did not submit the highest bid for the Nortel Ethernet assets, and that means Ciena won the bid with a higher offer than its straw-man previous bid—rumor says nearly $770 million.

We think this is a good thing for NSN because we doubt the symbiosis would have been as strong. NSN is not a marketing company, and NSN needs to leverage any Nortel asset win far beyond Ethernet in order to gain value. That’s unlikely, given that NSN doesn’t have much in the way of higher-layer technology of its own. We also think that’s true of Ciena, perhaps even more true. Ciena can’t be buying market share at this point, particularly when it’s a North American company itself and thus has an opportunity to make its own way in accounts where Nortel was strong.

In technology terms, Nortel has been the originating champion of PBT, but was unable to keep the momentum going on its own concept, even though carrier interest in the technology was the highest of any in the history of our operator surveys. We don’t think Ciena is going to be strong enough in a marketing and strategy sense to keep it going either, and thus this bid may well kill PBT.

Google Chrome OS initially targets netbook subset

Google announced its long-awaited Chrome OS yesterday, and there were some very interesting surprises. While it’s clear from Google that Chrome is expected to be a real and full-scale desktop-to-netbook OS, it’s also clear that Chrome is initially targeted at a subset of the netbook line, those with solid-state disk. This shows, in our view, that Google is seeing Chrome OS as a true Internet appliance, one that presumes nearly universal connectivity and extemporaneous use.

Chrome is in many ways a novel GUI, one designed to create “panels” that support applications that are likely to be persistently needed (like a lightweight word processor). Chrome presumes a virtual user is hosted in the cloud with the Chrome OS system being a portal to that user and the user’s data. Thus, most information won’t be available on the local system if the user is offline, though it does seem that Google intends to create stronger online/offline mode operation in the future. Applications would run in what would normally be called a “browser access” model and thus would support any sort of SaaS offerings available online.

Chrome OS is open source and can be extended, and we think that developers are already hard at work creating laptop/desktop versions with disk support and some application data persistence. But this shouldn’t take our eye off the ball. Chrome OS is an “Internet-in” model of an operating system, and is far better aligned to the way we’d use computing in a broadband “always-on” future. In all, Chrome OS is a credible step toward a true netbook framework. The question is whether we’re far enough into that “always-on” future world to exploit it quickly and help it take off.

FCC broadband analysis uncovers seven critical gaps

The FCC has jumped decisively into the broadband deployment issue with a number of new initiatives. In the “concrete” area, it issued a declaratory ruling to expedite the decisions on cell tower installation, removing what some operators characterized as selected local logjams.

Perhaps the most far-reaching thing in the laundry list of broadband commentary yesterday was a task force report from the national broadband plan activity that listed no fewer than seven critical gaps that impact broadband availability. In summary, they were USF limitations, demographic inequality, consumer education problems, spectrum limitations, infrastructure cost barriers, STB innovation stagnation and privacy issues. While there has been publicity to suggest that open access is now a strong contender, those views are linked only to past studies and not to any current comment by the FCC. We indicated our view on the Berkman study in a past blog; we disagree almost totally with its findings.

Bidding for Nortel’s Ethernet assets highlights NSN’s needs

Yesterday was the final date for the submission of bids for Nortel’s metro Ethernet assets. Financial analysts are generally saying that the deal would be favorable for Ciena at its straw-man bid price, but of course the favorable outcome demands it getting the bid.

Nortel, whose latest quarter showed more bloodletting, is in the process of self-dismemberment down to a minimalist piece nobody can quite identify yet. NSN is also widely expected to bid for the unit to rekindle its chances in North America, where rival Ericsson’s win of the Nortel wireless unit has given it a leg up. The Ericsson CEO did a bit of crowing over its position in North America, in fact.

With Alcatel-Lucent winning many of the AT&T procurement zones and Ericsson strong in wireless, NSN needs to get effective in a hurry. We don’t think that the Nortel deal will do enough; NSN should look to broader M&A and strategy changes quickly.

Droid, Android, and how Google could hurt Apple

Verizon, Motorola and Google can all be pleased at the pace of Droid sales, estimated at $250,000 the first weekend. While Apple’s iPhone sales record dwarfs that of Droid, it’s still the fastest-selling Android phone, and it’s said to be already responsible for half the Internet activity for Android handsets. Another report says it will likely drive Android past Windows Mobile in market share soon, a formidable achievement despite Microsoft’s indifferent promotion of its mobile phone system in the past.

Droid seems a clear winner, which could have significant impact on the credibility of Google’s Android and the potential Android may have as the near-term, de facto competitor to the iPhone and the eventual winner in the smartphone space. Apple with iPhone now faces a very “Mac-like” dilemma. The IBM PC won decisively in the market because it was open, but Apple has stayed very profitable and continues intact, while the PC has been fragmented and sold off to various players.

Should Apple now open things up with iPhone to seize market share or play the same game in the smartphone space? We think they’ll decide for the latter, but Google is a much smarter competitor than any Apple has faced before, and an Android success could establish Google as a broader alternative OS player, something that would hurt not only the iPhone but the Mac.

NSN talks up open IPTV developer platform

NSN, following on a show theme that IPTV needs to be more developer-friendly, has been talking up its open platform at the telco TV show, and its efforts raise some interesting questions.

We agree that simple IPTV isn’t innovating fast enough to be viable. If you look at the cost of IPTV versus linear RF multi-channel distribution, the latter is a clear winner, so unless telcos considering IPTV have no cable competitors, they face a difficult problem of ROI and pricing.

There is also little question that traditional linear RF channelized TV in its digital form is becoming more interactive and thus eroding the differentiation that IPTV might claim. Developers could help the process along, but we think the real issue is whether an open developer process can be made to support a single vendor’s platform. Too general an approach to developers risks eroding NSN’s differentiation and that of its customers because developers could take their solutions elsewhere.

A stronger strategy would be to integrate developer support for IPTV with similar developer capability elsewhere in the service layer. NSN, at its recent Dallas analyst event, seemed reluctant to productize its broader service-layer middleware tools. We think NSN will have to in order to make its IPTV platform an effective solution to the real problem, which is operator agility in services overall and not just in IPTV.

HP’s 3Com acquisition: Vendor market activity spurred the move

HP has made a somewhat-surprise move and acquired 3Com, a venerable but now fallen giant in the networking field, and the move is very likely an explicit a changing of the guard with respect to enterprise networking.

We’ve noted that the control of network decisions is passing to data center IT personnel, and thus that network sales engagement means having IT products in the portfolio. HP obviously has them and is just as obviously now planning to expand its network portfolio.

But we think Brocade’s purchase of Foundry and Cisco’s decision to enter the server space is the catalyst for the move. 3Com has a new data center switch product that could significantly augment the HP portfolio, and also a relationship with Huawei and a position in Asia.

Tapping the China market is likely an early goal for the deal. The HP move could put pressure on IBM, which has been relying on partnership relationships in networking rather than fielding its own product. It may also put some of the smaller vendors in the LAN space into play, including Extreme, and possibly Brocade or Juniper.

Sprint & WiMAX partners to invest more in technology development

Sprint and others in the WiMAX partnership have agreed to contribute more money to the 4G wireless technology despite the view by some that WiMAX is the poor stepchild of 4G and that LTE is the anointed. The problem is that they have fallen into a nomenclature trap. 4G technologies are alike in that they’re the generation after 3G, but WiMAX and LTE are in different families, and in truth are not likely to be very competitive.

WiMAX is aimed at migratory users who operate from a small number of fixed locations in some random sequence—hence our name for the group and the behavior. LTE is a successor to 3G mobile service, largely aimed at a mobile or at least a regularly moving population. The preferred LTE instrument is the smartphone; for WiMAX, it’s the tablet or the netbook.

We think Sprint and its allies are on to something here. Wireless behavior is constrained by its device support, and little devices are not great vehicles with which to view content or even web pages. Yes, there will be many iPhone and Android lovers who will use their mobile devices from fixed locations, but we think a large number of users will adopt a larger device designed for sedentary applications in cafes and other locations.

There’s still plenty of time (and ways) to mess this up, but we think Sprint could redeem its position with WiMAX. In fact, it’s the only way it can do that. Sprint is cutting its workforce, which hardly speaks favorably about its prospects with normal cellular services.

New broadband stimulus proposal emerges from FCC inquiry

A proposal to pay ISPs to connect broadband customers is one of those that’s emerging out of the FCC broadband policy debate, and the concept has some merit. A direct payment for a connected subscriber might address the fact that there is a very large base of consumers who can get broadband but don’t, and not being willing/able to pay for it appears to be the largest reason.

A subsidy would be a strong incentive to boost broadband usage, but there are major risks. The incentive might spawn another overlay CLEC model that doesn’t really address cost management and thus doesn’t create a viable market. Users might be pirated to gain their subsidies and given substandard services. Some significant tuning on the idea is essential if it’s to form an element of a future broadband policy. We think, for example, that the funds should go only to ISPs who provide facility-based services.

Nortel’s Ethernet auction: What of the NSN speculation?

It’s almost time to play “Who’s Got the Nortel Ethernet” assets, with the auction coming in little more than a week. The big question is whether NSN, Cisco or another player might jump on Ciena’s stalking-horse opening bid.

Most financial industry speculation is aimed at NSN, whose numbers seemed to show more product sales erosion than others in the market. At NSN’s analyst event, there was a sense that professional services were the name of the game, though of course they could never sustain a business of that size. Furthermore, nobody knows how much of the professional services business NSN could get without a strong equipment base. In short, NSN needs to sell gear.

The Nortel stuff would bring them a much better North American presence, one of the problems NSN is contending with. It may collide with the Juniper/NSN joint venture, however, enough to reduce its overall value. We don’t think NSN could up the Ciena bid more than about $250 million without paying so much the Street would trash its stock. We also wonder whether more low-OSI-layer assets will really help.

Our feeling: leave Nortel alone.