Google’s wireless position is half-correctly characterized by Business Week. Yes, it withdrew from the auction for the C block open spectrum (by all the rumors—it’s not official yet, but NO, it didn’t achieve its strategic objectives either. Google underlined a major vulnerability, which is that it depends utterly on others for access to the customer.
Not only does Google need the Internet, it needs a largely open Internet where it can dodge costs of access and transport and can exploit customer relationships. The problem is that open wireless is very likely not to be a viable business model no matter who has the spectrum. The fact that Google didn’t try to win is almost a complete proof of that.
In wireless, where all capacity is shared in a service area, user behavior interacts to create congestion and poor experiences unless it’s somehow regulated, which is difficult if any device and application can use the spectrum. Google has set up an experiment that it may now hope will never be conducted, because if it is, the results are not likely to be in Google’s favor.
An IBM study of telecommunications predicts that operators will be less focused on simple revenue growth or cost reduction and more on business model transformation in the coming five years. This harmonizes with our own survey, if one considers that “business model transformation” means redirecting business focus on different activities. One import of the shift that IBM focuses on is that this almost certainly involves more IT focus than pure network equipment focus, which we believe strongly to be true. This is likely another datapoint validating Cisco’s software shift, and it shows other vendors the direction to take. It also raises the question of whether IBM might either acquire or partner more strongly with a network vendor for service provider networking.
Regarding the Alcatel-Lucent/NEC deal and the rumored Motorola-Nortel deal, these developments are symptoms of the angst in the mobile infrastructure market, the slowing of investment in infrastructure that is accompanying a lack of convincing growth in ARPU, and concerns about regulatory shifts and voice pricing. The vendors are looking for something to hang their future revenue model on, as well as to reduce costs and pull back their exposure to the mobile market. More of this sort of thing, and other activities related to the overall mobile infrastructure challenges, can be expected through this year and into 2009.
Alcatel-Lucent posted another loss, warned on the current quarter, and suspended dividend payments, all of which will almost certainly lead to a management shakeup. The company is suffering under a mobile spending slump that has also hurt some of its competitors, and is unlikely to lift for the balance of 2008. Despite the publicized success of its IPTV strategies, it has also been unable to make the revenue shortage up with broadband success, and there is now indication that it’s shifting strategies to a more generalized access and metro strategy that would offer lower-cost deployment. Recent emphasis on DSL and PON are examples of this trend. We believe the company has little chance of pulling out of the current slump in 2008 even with a management change, and that some major restructuring and cost-cutting will be forthcoming
Cisco reported decent numbers for the current quarter but acknowledged the slowdown in orders that we predicted for the first half of this year. The company relies on enterprises for a large chunk of revenues, and that sector is very troubled by the credit crash and consumer concerns. We believe that spending for 2008 will recover in the second half. The slowdown will have its greatest impact on network vendors with a lot of enterprise exposure, but it will also make it difficult for Juniper to get quick traction with its new EX enterprise Ethernet line.
Telefonica has joined the ranks of operators who acknowledge they are testing PBT. As we have indicated, 10 out of 10 of our service provider survey base is conducting or planning PBT tests, but the majority have still not made their commitment public. We believe that there will be five more public announcements of PBT activity among major national providers in 2008.
Microsoft has offered to buy Yahoo, a move that clearly indicates it believes Google to be a threat, and also that Google may be vulnerable. The move comes after a slower-than-expected quarterly growth rate from Google and a better-than-expected result from Yahoo (though the results didn’t help the stock). This action will clearly raise a lot of regulatory interest, but it is believed that regulators are already concerned about Google’s power in online search and advertising and might give the deal a nod. We think this is an indication that the web search and advertising market will be much more competitive in 2008 and that M&A by both parties is now more likely.
Juniper announced its long-awaited EX series of enterprise Ethernet switches, and marketing partnerships with Microsoft, IBM and Oracle. The move to enterprise switching was expected but the partnerships are more a surprise, though how well they will pan out for Juniper is yet to be seen. Juniper lost its COO, Steven Elop, to Microsoft in January, and it may be that there are links between the move and the partnership, though details again are lacking at this point.
Verizon’s FiOS plans in 2008 include obtaining some franchises in major metro centers and increasing its HD channel count to 150, both of which are likely to cause further angst for the cable companies. In the former area, Verizon faces the issue of efficient delivery to multiple dwelling units (MDUs), a technical step that it’s been working to resolve through the use of in-building fiber or MoCA cable. The latter step is simply a matter of getting the business relationships in place, since FiOS has ample capacity to deliver virtually any number of HD channels. The current Comcast-satellite war over who has the most HD will be moot when Verizon gets its full complement of channels. All of this will be fueled in part by the digital transition that is scheduled for mid-2009. The coupons for customer conversion for over-the-air sets limited to analog tuning will launch shortly, and the campaign to prepare the market is expected to create a major surge in HDTV sales in 2008 and 1H09, making the question of who has the most HD channels an important marketing point.
The CES show next week will likely introduce many to the new and almost-emerged 802.11n standard for wireless LANs. Capable of supporting data and video concurrently, this is the wireless standard that many hope will cause consumers to upgrade their wireless hubs. To date, wireless hubs are one of the least likely to be replaced home technologies, with many users having theirs in place unchanged for five years or more. Another such technology set are home switches and routers, which have installed lives as much as a quarter longer than the wireless devices. WirelessHD, which is faster but shorter in range, is also expected to be demonstrated at the show.