The study commissioned by the Internet Innovation Alliance that showed the Internet running out of capacity by the next decade is coming under criticism as favoring the telco perspective. We believe that the study’s conclusions on Internet capacity shortfall are likely inaccurate since they do not take into account the metro nature of most content traffic and the impact of CDNs. However, we do believe that the Internet is threatened by an imbalance of demand and supply created by the over-the-top players and the all-you-can-eat pricing model. The issue is at the heart of the net neutrality debate, but public policy to prevent access and Internet providers from earning a fair ROI would simply stifle broadband deployment. It is clear that work is needed to develop a useful balance of interest here.
Research is confirming what many have noticed anecdotally: Cisco, Juniper and Nortel are gaining in the carrier router-switch market and Alcatel-Lucent is declining. The shift is likely driven in large part by the shifts toward Carrier Ethernet deployment from traditional routing, a shift that Nortel stands to gain the most from because of PBT. Nortel showed the largest gains, too. Juniper just announced an Ethernet product, and it showed gains as well. Cisco has an Ethernet line and had a strong showing. While Alcatel-Lucent has Ethernet products, it has been submerging them in its IPTV positioning. We believe this shift will not stop at the end of the year, and that it will put the greatest pressure on Alcatel-Lucent. But it will also pressure Juniper since that company has no PBT capability in its Ethernet product. PBT’s features and perceived future value are the real drivers of the change, make no mistake.
Earthlink has decided to shut down its efforts to create a series of municipal WiFi networks to bolster its sagging ISP business. The decision was inevitable in our view, because as we have noted often there is no way that fixed wireless technology can support consumer broadband requirements that are becoming increasingly biased toward high-duty-cycle content delivery. Portable applications are the only way that this type of network could be made profitable, and Earthlink and the vendors supporting its efforts have failed to make that point to the marketplace. We have heard that the issue of “portability versus wireline competition” was at the heart of the Clearwire-Sprint WiMAX breakup; the former was satisfied to continue its positioning of WiMAX as a supplement to wireline but Sprint wanted a more wireline-competitive position, which the technology cannot support
A study predicts that the unbridled downloading of content will increase Internet and broadband access traffic to the point where serious slowdowns could occur by 2010, and an investment of nearly $150B would be required to fix the problem. The exact numbers and dates here may require some justification, but the overall problem cited is real. The challenge with the current Internet model is that there is no financial back-pressure against multiplying traffic, which also means that there is no incremental revenue associated with that traffic. The pure over-the-top model risks a separation of “return” from “investment” and that means that even if these numbers are true there may be little or no incentive for the operators to spend the kind of dollars suggested. The suggestion that “something must be done” may be valid, but there has to be a commercial framework created that permits investment or nothing will be done.
Verizon has asked the Multimedia over Coax Alliance (MoCA) to work on raising the maximum broadband capacity of MoCA to 400 Mbps, a move that may signal Verizon’s interest in using MoCA to distribute video and broadband to multiple homes from a single remote. All operators, (even Verizon whose territory is dense and valuable) will find a significant portion of households non-economical for FTTH, and changes to MoCA to provide headroom would allow Verizon to use cable to increase the cost efficiency of its FiOS delivery where subscriber density and/or ARPU are lower.
Oracle is launching a major telco OSS initiative based on conformance with the Telemanagement Forum (TMF) SID data model and architecture. The move is an evolution of Oracle’s growing interest in the carrier market, but it also represents a key step in its competition with IBM and perhaps for the industry as well. The Oracle OSS model includes the ability to import information from other information systems, but it also integrates many of what would ordinarily be seen as enterprise applications, such as ERP. This increased focus on business applications for OSS processes is reflective of the TMF view but also tends to favor software players like Oracle against middleware/hardware players like IBM. For the industry the move likely means much greater service provider focus on OSS processes, since the giants of the industry are now contending with each other in that space and elevating their issues to be visible to senior management. We believe this will put additional pressure on network equipment vendors to take some stand in the OSS and service management space,or risk being marginalized under the software umbrella of others like Oracle.
Google made its expected mobile announcement, but in an unexpected way. The company announced it was developing a free cellphone software package designed to move cellphones from voice instruments to portable terminals on the web, through what Google calls the “Open Handset Alliance.” The Google move won guarded support from the FCC’s Martin, but otherwise disappointed many analysts and Google watchers. While the move does not preclude the announcement of a gPhone, we think it may indicate that Google cannot come to terms with incumbent mobile operators under the current conditions, and is seeking to build its market share in the mobile platform space to make itself a more attractive partner. Our sources say that Google wanted a better deal than Apple, and that mobile opeators felt Google had nothing on the table to justify such a concession.
Hammerhead Systems has announced a service-based PBT (Provider Backbone Transport) strategy that adds the MEF E-LAN and E-Tree connection models to the traditional PBT E-Line model. The move is the first in the industry to aim PBT directly at creating retail services rather than at managing traffic and failure modes. Hammerhead also announced a partnership with Soapstone Networks, a unit of Avici, to provide flexible control plane support for the Hammerhead products. We believe this is an important step in evolving PBT to serve a key mission in both metro infrastructure and service infrastructure, and for the first time it gives some credence to the PBT-versus-MPLS battle that has raged in the media.
Sprint Nextel has turned in another bad quarter with net dropping by 77%. The problem appears to be the loss of high-spend customers who prefer the coverage of rivals AT&T and Verizon. Sprint was perhaps the largest of the wireless carriers to rely on low-quality, bad-credit customers for growth, and the strategy has now backfired as these customers fail to show ARPU growth, or even outright default on payments. Another issue of course is the lack of branded multi-play options; Sprint has no TV and no wireline strategy. We do not think there is any chance that Sprint can stand alone for long; the question is who might acquire them. National footprint is less valuable to cable companies who don’t have that footprint for wireline, but Sprint is the only provider who could cover a major MSO’s territory, and FMC could provide symbiosis for a player like Comcast. The problem with the MSO buyer is the low ROI of Sprint. The other option is T-Mobile, a unit of DT, or one of the major wireless carriers. A T-Mobile deal would likely gain approval; we doubt the FCC or FTC would approve a buy by Verizon or AT&T. Sprint may be driven by its problems to become the most aggressive WiMAX player; only something like a major WiMAX success could save it as an independent. There are also more rumors on Sprint and Google’s “gPhone”, but we don’t think that would be enough to turn Sprint around.
The FCC voted today on a number of matters that impact the competition between cable companies and telcos, and it appears that the telcos won the day. In one action, the FCC adopted a Second Report and Order that further clarifies the right of new market entrants to obtain fair process in franchising negotiations. The cable companies have been using their lobbying to stall franchise agreements for the telcos in many areas, and while this second step does not make it impossible to stall further, it does make it likely that tactics to delay franchising will invite FCC action and perhaps even further steps. Second, the FCC has ruled that agreements by owners of multi-tenant housing (apartments, etc.) cannot enter into exclusive deals with a single video provider. The MDU order was unanimous but the Second Report and Order on franchising split along party lines. The number of such splits has encouraged some commentators to suggest that if the administration changes with the next presidential election in the US (which seems likely at the moment) these issues could be reversed. We note that the FCC is essentially a court, with less latitude to reverse itself than a purely administrative body, and that in many cases the split vote reflects less an issue of fact than one of contribution balance. Congress, for example, changed hands and yet the stance of Congress on telecom has not changed since. The FCC also voted to require VoIP providers to support local number portability.