Nortel’s Ethernet sale: Who will buy?

We may be coming to the point of a Nortel Ethernet sale soon after the first of the year, according to some of our sources. Four companies have been named possible buyers (Cisco, Ericsson, Huawei, and Nokia-Siemens), but we are hearing that the front runner is Huawei and that Cisco is not a serious contender. There are potential issues in a Huawei sale but company executives from both sides have been working to make them less likely to derail a deal. Whoever does the deal, it is likely that it will spur additional activity in the Ethernet space, and a Huawei buy could well set the stage for an eventual takeover of all of Nortel by Huawei

SaaS could be 2009 capex avoidance plan

Many are expecting that companies will turn to cloud computing to avoid capex in 2009, and there are certainly indicators that would suggest that at least some are doing just that. Past history and buyer research. however, shows that companies often stand pat on older strategies during a downturn and change only when things get a bit better again.

In past declines, companies have not switched technologies as fast as in good times, even to apply cost savings. The reason is that they’re afraid of disrupting operations when they need all the sales and profit they can get. We expect that cloud computing might do extremely well in 2009 relative to current levels, but not explode as some expect.

In 2010, we could see a considerable ramp in cloud computing use. Software as a service (SaaS), on the other hand, appears likely to have a noticeable surge in sales in 2009 as companies turn to the model to avoid short-term application investments and expansions in IT due to new software needs.

China to invest $40 billion in 3G network

China will likely invest at least $40 billion in a faster 3G network based on China’s own TD-SCDMA, which differs from the international standards. The investment is expected to benefit primarily Chinese manufacturers. This may be an indicator that some major economies will spend to support their own industry rather than simply erect trade barriers or take other overt steps.

The U.S. decision to aid the auto industry would be regarded by some as a subsidy, again showing that countries will tread carefully to avoid poisoning the free trade atmosphere but at the same time support their own manufacturing sector as a necessary part of economic recovery.

Questions on whether Huawei has ties to the Chinese government and the military (particularly the PLA) have swirled for some time and have now been raised again in financial circles, which suggest that the Chinese giant may plan an IPO.

AT&T’s “business U-verse”: Focus on data

AT&T is launching a business service on U-verse, but the service focuses on data delivery rather than on video. The new offering will offer users 18 Mbps download speed and the option for static IP addresses to allow businesses to host their own sites or provide services on the web via their links.

It is likely that operators worldwide will increase their targeting of SMB users and secondary sites in 2009 to help ease any revenue hits they might take.

Australia nixes Telstra broadband bid

In a decision whose short-sightedness was worthy of U.S. process, the Australian government disqualified its national carrier Telstra from bidding on an enormous and controversial program to provide more universal broadband access in Australia.

There have been political fights between Telstra and various government agencies since the carrier started its path toward de-nationalized status. Australia is a country with incredibly challenging economic demographics, and we believe its regulatory bias should have been more pro-investment all along. Given that there are really no credible alternatives to Telstra, the move seems almost suicidal.

Over-the-top players: A race to the bottom

One of the forgotten truths of the current economic crisis is that while telcos worldwide will certainly be deferring some projects and obsessing even more about monetization, their competitors are likely to be even more concerned.

The guys at the greatest risk, in fact, are the darlings of the last couple of years—the over-the-top players. Many of these are still struggling to define any revenue model at all, and with advertising slipping and VCs demanding break-even performance, a lot of startups will die, and public companies will slump, shrink, be acquired, or disappear. In a race to the bottom, the guy with the lowest internal rate of return always wins because he can keep investing past his competitors’ pain point.

The issue is whether the telcos can take advantage of their opportunity. The recent interest in service mashups by Cisco and Alcatel-Lucent has the potential to allow the network operator to take control of the partnership with the OTT guys while the latter are down and out. Will they seize on that opportunity? That, according to our research, depends on how well the vendors (particularly the two we named) do to create the right ecosystem.

Cisco and blade server plans

Cisco has not been shy in pushing the envelope of what a networking company does, and one extension that’s been rumored for quite a while has now appeared in public—though still as a rumor. Cisco is said to be working on a blade server product family, something that would extend the company’s reach into the service layer of the network. The move would, in our view, help Cisco with service providers whose focus increasingly is on servers and service delivery platforms (SDPs) and higher-layer features.

 It would also help in the enterprise to support hosted applications that are tightly coupled with the network, including unified communications (UC). One impact of this step would be to formalize Cisco’s entry into the IT space, something that’s been inevitable anyway as Cisco works to rise up the value chain.

 In all, we believe this rumor is absolutely true and a good thing for Cisco. It will put considerable pressure on Cisco’s competitors, especially Alcatel-Lucent and Juniper, to flesh out their own strategies. Alcatel-Lucent has already announced a strategic shift to the “online ecosystem” that links developers and telcos, but Juniper has not articulated a strategy here yet, though the company has spoken at conferences on the topic of open networks.

Net neutrality breakdown?

There are strong indications that the “net neutrality” coalition of portal giants is breaking down. Microsoft and Yahoo have withdrawn from a cooperative agreement to support net neutrality and Google has been in discussion with access providers to come to some deal on “fast lane” content expediting for a fee.

The truth is that there has always been a level of dialog on this issue, and the portal players are now realizing that they need an alliance with the telcos. We believe this is linked to the Alcatel-Lucent and Cisco announcements on supporting the “ecosystem” of web developers and telco service features that were made last week.

We also believe this might be the signal of a major shift in Internet direction. The likely cause is the increased interest by access providers in content delivery networks (CDNs) to substitute caching for core bandwidth and earn money from the substitution. Lack of settlement has been the bane of the Internet for a decade.

Alcatel-Lucent position could be game-changer

Alcatel-Lucent has posted a press release with more color on its new strategy, one that makes it clear just how dramatic its new position is. The company is now committed to a program of facilitation for the composition of services by partners as a primary strategic thrust, a position that is totally unique in the equipment vendor space and exactly what operators have been telling us they want to see.

Quoting from their release, “This strategy requires providing an open environment, which does not exist today, where all these trusted capabilities can be available between the network and “over-the-top” applications typical of Web 2.0. It is a challenge that Alcatel-Lucent is uniquely positioned to address, with its long-standing relationship with network-based service providers and thousands of enterprises worldwide, its capabilities in delivering fixed and mobile broadband, flat-IP networks and its end-to end integration capabilities around the globe.”

Vendor PR is never a sure sign of things to come (like any form of PR), but this has the potential to be a game-changer of a strategy in a market where monetization has become a singular obsession among buyers.

Alcatel-Lucent strategy: Focus on third-party access

Alcatel-Lucent has announced job cuts and predicts a decline in global telecom spending of between 8 and 12%, which is much larger than any dip we can see based on any credible set of economic trends.

The forecast appears to be based on the presumption that the recession will continue not only through 2009 but through 2010 as well, since only that outcome would create such a broad suppression of spending.

The good news is that Alcatel-Lucent has targeted the strategic issue we believe has the greatest credibility: the linking of network assets to over-the-top players in what is popularly called “third-party access.” If they play strongly here, they stand to gain considerably, and even more so should the market conditions get as bad as they expect.