There’s a significant potential for some swings in stock prices this week (not that we haven’t seen them in the past!) because of the volume of economic news and the number of earnings reports due out this week. The number to watch closely is 3Q gross domestic product (GDP) growth, which our model pegs at about 2.1% in annualized form. While very few now expect a double-dip recession, the stock market will see this number as an indicator of likely near-term future economic health, and hedge funds will certainly short the market aggressively if it dips. I think it’s a bit of a tempest in a teapot, but whatever it is, it’s almost certainly better than 1Q and worse than 4Q, so we’re slowly recovering.
The FCC is getting itself behind a wireless-based thrust to cure national broadband ills, but I don’t much like Genachowski’s style here. He opened a recent talk with comments about the slide in U.S. economic standing worldwide, and then jumped to spectrum. To me that implies that we can lever our way into the top economic spot with wireless broadband. If there’s any truth to that, it’s yet to be substantiated by one piece of objective data. Sure we might start a wireless bubble, but it’s not going to transform our economy to facilitate Twitter updates or let teens watch music videos.
If we have an economic problem (which we clearly do), it’s because we can’t produce substantive products any more; we’re trapped in social networks and deceptive advertisements for herbal supplements and consumer product gimmicks. We became an industrial and economic giant by building the fundamentals—steel, cars, ships, planes. Heavy industry is the base of everyone’s economic stability, and figuring out how to provide government and technology incentives there should be our top priority.
Tech guru Ray Ozzie is leaving Microsoft, and in the wake of the announcement, a memo from Ozzie was leaked to the media. In the memo, Ozzie asks Microsoft to confront an age without PCs, an age in which Microsoft’s traditional PC incumbency would be meaningless.
What Ozzie is looking at is whether appliances like smartphones and tablet PCs, combined with cloud-hosted services, could change the appetite of the public for personal computing. I think that the answer is already known, but it’s ambiguous.
Apple’s moves to converge its iOS and MacOS platforms over time and to create a unified developer environment among their disparate devices are smart responses to the realities of the market and the present competitive environment. The questions are how far Apple will go, and what impact the efforts will have on the appliance space, the developer community and even the service provider market.
The iPhone launched the smartphone revolution, which in turn launched the applet/widget revolution, which in turn is opening the question of whether device-resident intelligence will play a commanding role in the development of what the buyer/user perceives as “services.” The iPad has had a similarly transforming effect in the tablet PC space, and competitors have already established themselves with smartphones — primarily via Android-based phones in the broad market and on RIM’s building on its enterprise incumbency. Competition is also increasing from both sources in the tablet space, with pretty much the same cast of competitive characters.
What creates Apple’s platform dilemma is that broader installed bases begat greater support for developer opportunity, and thus a larger application community. As I’ve noted before, this was one of the factors behind Apple’s loss of its early lead in the PC market to the IBM-compatibles. An open framework attracts support because it is open, but it also reduces the originator’s ability to control and monetize its own marketing, which is why Apple has traditionally rejected such an open approach. But a marriage of its Mac operating system and the OS used for appliances, plus the harmonizing of a development environment across both, would increase Apple’s developer mass.
The challenge is that it will also almost certainly cause Google to prioritize Android as a tablet OS, thus exacerbating the competition between these two industry giants. The further the Android OS goes in terms of supported hardware, the harder it will be for Apple to sustain itself as an appliance walled garden. Some gestures of openness exist through the developer program, but Apple’s long-standing feud with Adobe over Flash illustrates where walled-garden thinking can take you and how it can create a lot of gratuitous enemies.
On the service provider side, the competition between Apple and Google (through its Android proxies) creates yet another path to disintermediation. Ceding service-creation innovation to over-the-top (OTT) players was a problem in wireline, and ceding it to smart device vendors and developers in the wireless space only makes things worse. The so-far-ill-fated Microsoft phone strategy has been toying with hosted services, but probably more as a means of getting Microsoft into the OTT feature business than as a means of empowering operators. Can operators respond with an approach of their own? Can they respond in time? Their service-layer revenue future may depend on it.
The Facebook privacy breach scandal, where popular application providers shared private data without user permission, is only the latest in a series of targeting-related breaches of privacy and violations of “policy.” The Federal Trade Commission (FTC) has been of two minds regarding the issue, with some believing that regulation was necessary to protect consumers and others believing the industry could regulate itself. The current direction appears to be toward self-regulation, despite the mounting evidence that the industry is unwilling and unable to do that. What’s going on here, systemically?
First, to understand targeting, you have to understand motivation. The goal here is not to get the right ad in front of the right person, it’s to get ads in front of fewer wrong people. The ad industry knows that things like TV commercials blast ads to the point where it’s unlikely that there’s any possible consumer who doesn’t see them. Thus, a well-targeted ad isn’t any more likely to be seen by the prospective buyer than one that’s simply broadcast. What is likely is that a well-targeted ad will be seen by a lot fewer people who aren’t likely prospects. Even if you pay more for such ads, you spend less with “overspray.”
This advertiser goal sweeps into a consumer market with an appetite for free stuff. Nobody wants to pay for anything if they don’t have to — nobody really wants to pay for content, or Internet services, or online applications, or whatever. They’re therefore likely to surrender a certain amount of privacy to secure what they want, believing that the cost to them is less than the benefit. Since one could argue that the goal of regulation is to protect the public interest, it would seem illogical to regulate consumers out of the benefits for which they’ve elected to trade.
But that presupposes they’ll actually get what they want, which is the big fallacy of targeting. As I noted, all you need to do is run the numbers for online ads versus TV commercials to see that what’s happening isn’t a flight to quality in terms of consumer targets, but rather a flight away from the non-engaged. That flight is motivated by cost, not additional revenue, which makes it by necessity a less-than-zero-sum game. That means that success in targeting funds not more experiences, but less. Consumers are giving away their secrets to lose, rather than gain, and that’s something regulators should be addressing.
Regulators need to think more about the future of the industries they regulate; the financial crisis proves that point. Those in the industry need to think a bit, too, because the real lasting opportunities are created by the long-term money flows. Cost conservation never leads to anything but commoditization, no matter what part of the network food chain you’re in.
Chicken Little got everyone upset by spreading the rumor that the sky was falling. When Apple and IBM reported their earnings earlier this week, there were immediate calls for a Chicken-Little-like response. Duck and cover? It’s not that simple.
Both Apple and IBM beat estimates, for starters, but it’s nothing new for Wall Street to sell off companies who meet and even beat expectations. The classic “buy on the rumor, sell on the news” mindset is exaggerated these days because hedge funds don’t hold stocks as an investment; they trade them to take advantage of either price increases or dips. When earnings have been reported, the prices tend to settle and news is more scarce, and thus it’s fashionable to sell them off and move to something else. All this means that sudden stock movements don’t necessarily mean anything, which is comforting for Apple, whose shares dipped more than 5% after hours.
We need to see how Apple’s or IBM’s outlook might reflect on 4Q. The holidays are critical, not only to draw down inventory but also because consumer attitude can’t easily be turned around except in November and in May. If we miss the current opportunity, we’ll have six months of slow growth and 2011 won’t measure up. If we meet or exceed holiday expectations, our model says we’ll have an upside surprise next year in tech and in the economy overall.
It’s always fascinating to listen to network operators and even large enterprises talk about their infrastructure projects, and I’m just starting to analyze the first round of our fall strategy survey, so I’m getting that chance on a large scale. It’s too early to say how everything is going to come out, but one thing that strikes me at this point is the discrepancy between how real network-builders see their networks and how vendors see them.
In the service provider space, the classic vision of networks is the hierarchy — access to aggregation/metro to core. The goal is supposed to be the creation of uniform connectivity and good bandwidth economy of scale, and the practice dates from the earliest days of packet networking. It’s also nearly always at odds with what’s going on in the real world. Today, network hierarchy is being replaced with delivery. It would be safe to say that were video content the only traffic source (or even the overwhelming majority of traffic), the Internet would look more like a content deliery network (CDN) than a hierarchical network. All traffic would be user-to-cache and the only “core” traffic would be to populate caches.
In the enterprise space, people are starting to realize that the applications that consume a mass of incremental bandwidth aren’t universally distributed through the business. Enterprises tell us that 73% of all their data center traffic and 81% of their collaboration traffic moves less than 10 miles. The data center network is growing very fast as inter-process and storage traffic multiply, and LAN traffic in major headquarters facilities is growing nearly as fast, but branch traffic is growing at a much slower rate.
You need only reflect on what happens in a local sales office or branch bank to understand why. Most remote-office traffic is transactional and thus doesn’t expand with anything but business activity. Who does a bank teller collaborate with if not the teller in the next station (who is hardly a communications destination)? Who does a real estate office manager or manufacturers’ rep communicate with that would necessitate telepresence?
It’s never a good idea to be disconnected from the market reality. We can’t build optimum networks for anyone without understanding what their networks are really doing, and it’s not a problem confined to the network space. Enterprises tell us that vendors are proposing data mining benefits across an employee population whose job activity doesn’t involve any of the data they’re proposing to mine. Providers tell us that vendors are suggesting operations cost savings that exceed their total operations budgets because they don’t understand how much is really spent on operations, or even what the word means to the network operators themselves. Then there’s the question of what new services will do to the space overall.
Appliance players like Apple, Google (via Android), Microsoft, and the host of tablet and phone vendors are creating a more responsive consumer playground to cater to instantaneous trends, or to launch those trends where possible. With a low-inertia alternative developing, we could end up with traditional networking and even IT simply getting out-danced. You can see already that metro networking is becoming Ethernet networking. Alcatel-Lucent’s recent super-switch shows that vendors realize that transport/connection is getting pushed to lower OSI layers, but do they realize that differentiation/innovation is harder to deliver there? The more we want to dazzle the consumer, the more we need to create new in-network value, the more we need to examine a new conception of what a network is and what it contains.
The rumor that AOL and some private equity firms have been in talks with Yahoo regarding an acquisition seems to be most rooted in the Wall Street Journal, but some insiders tell us that it’s true. They also say there are still some significant points of dispute on the proposed deal, and that the odds against success are still better than even.
At one level, something like this is inevitable. AOL and Yahoo are both brands past their prime, victims of change (in the first case), and of competition and complacency (in the second). We think that’s the big issue here. We’ve got a marriage of inconvenience, a union being proposed where neither party brings really strong assets to the table. AOL died in all but the real sense when broadband replaced dial-up, and Yahoo is dying not only from Google but from the fact that more users are abandoning search in favor of social networks.
The big revolution online is yet to come. Just as we didn’t want to be informed by the Internet when there was an entertainment alternative, we don’t want to be social only while sitting in front of our computers. Appliances like iPhones and iPads are now driving the bus for the Internet’s future. Applications not only make information anonymous, they make the Net anonymous itself. You push a button and you get your answer; magic might as easily deliver it as search. We’re mashing social networks to increasingly look like SMS. In the drive to socially connect, we’re pulling everything that could be a differentiator out of the process of being online.
Social networking and apps are their own worst enemies. They’re creating a world where there’s no room for billboards, and they’re funded by the expectations of those who want those billboards in everyone’s line of sight. This conflict will self-limit the whole social network process, and so invalidate anyone’s deal for Facebook. It will also reshape the market so thoroughly that older brands have no meaning, making the Yahoo/AOL alliance kind of like ignoring the lifeboat as the Titanic goes down and holding onto another drowning victim instead. All these guys need to examine the future more carefully, because the present is becoming the past.
Microsoft has launched its smartphone operating system initiative – Windows Phone 7 — and from what’s been revealed so far and how operators have reacted in conversations with us, the new mobile strategy is fatally flawed. In fact, unless Microsoft makes truly radical changes or has some literally unprecedented success, it’s probably the end of Microsoft in the mobile space.
With Phone 7, operators have only limited ability to create their own services or their own “brand” with the handsets they have to subsidize. Microsoft justifies this with the notion that the user experience is seamless everywhere, but that’s not what operators want—they want an experience that differentiates them. Even Apple was smart enough to realize that they couldn’t tell operators that they were “partnering” without providing some sort of unique service-to-phone tie. Alcatel-Lucent recognized that a seamless experience had to start with a mobile operator ecosystem largely because without it, there would be great resistance to any kind of roaming data plan or any cross-operator feature set. So it established its Open API program as a federation.
Federation is what Microsoft needs to be looking at. The operators want to build a global ecosystem of national or even regional players. Microsoft had a chance to bring something tangible to the table in that space, something broader and more powerful than even Alcatel-Lucent proposed. Instead it has extended its past CSF strategies into its present mobile offering, and compromised it fatally.
With its new implementation of Groups, Facebook has revamped the way it maps relationships into something multi-dimensional instead of the classical “star” configuration. At least Facebook has offered the option of doing that; whether users will bother is another matter. What’s more interesting to us is the drivers that made the company change it in the first place, and what it says about social behavior online, and the services that might be based on it.
There’s always people on social networks that measure themselves by the number of “friends” they have. On business-based LinkedIn, for example, there are whole groups of users who do nothing but race to establish tens of thousands of contacts. The problem with this approach is that it tosses out the whole notion of a relationship in a social sense. Studies show that people don’t have that many real “friends” or “contacts.” About 80% of the average person’s social interactions take place in a group of less than 100 people. In real life as in cyberspace, we have to balance how many such relationships we create against the difficulty of sustaining them.
Social communication has to reflect the value we place on each individual, but social networks have to build community mass. We can’t use the latter principle to establish frameworks to support the former; social communication has to be personal. Will you ask your whole community of Facebook friends for advice on a car? Perhaps you’d ask the question, but you know that: a) most wouldn’t respond; and b) you wouldn’t weigh their responses equally.
How we watch television, buy cars or plan projects may all involve social interactions and therefore appear to map to social networks, but it’s not a simple direct matter of building a flat community that centers on each of us. Groups “friend” other groups; they have fuzzy boundaries; they interact through filters. In short, they’re not Facebook groups, even now, and we’re entering a time when the difference between real social groups and online groups will matter a lot to us.
Wireline social networks are free and relatively controllable, but that’s not true for mobile. Constant tweets or status updates are a lot more distracting because I’m living when I’m mobile, and I’m sitting when I’m on wireline broadband. Mobile broadband is going to change our notion of groups and friends from our current Facebook simply because it’s going to force us to decide between living our own lives and paying with airtime and distractions for how others want us to think they’re living theirs. If you want to look for a truth that Microsoft could exploit to get into the mobile market, look there.
Cisco released its expected consumer videoconferencing solution with the somewhat cutsey name of Umi. To make things worse, it is supposed to have a horizontal accent line over the “U” to indicate a “you” pronunciation. Whatever the spelling and character set, it’s potentially a significant product. Umi brings HD videoconferencing to the home TV, and while it doesn’t have some of the social/chat features that Cisco promised, it could still be a game-changer in a number of ways.
Free Internet video calling is already available from a number of sources in PC-to-PC form (Skype and Google), but Umi promises a friendlier form — from the living room on an HDTV big screen via a high-speed Internet connection. If adoption is what Cisco hopes for, it could popularize video calling and generate a ton of new traffic, at a price of $599 for the hardware and a monthly subscription of $24.99. For a router vendor that already has a big market share, organic growth of that sort is a good thing—maybe.
The “maybe” here is that a strong showing for video calling in any form could push operators over the edge into metered usage pricing, which would be a bad thing for router vendors, Internet users and frankly just about everyone. There are many who believe that it’s inevitable (we’re among them), but extravagant video growth would certainly hasten the day. In particular, it could push a pricing change as early as 2011 for some markets, particularly cable MSOs. Because cable operators have constrained upstream capacity, applications like video calling that source as much as they sink, bit-wise, are particularly challenging.
It could also polarize the current public policy debates on net neutrality, mixing billing/cost issues with net neutrality carriage issues. It could be a destructive mix, and we’re likely to see the impact sooner rather than later.