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Juniper exec changes could indicate software emphasis

Microsoft executive Kevin Johnson, president of the Platforms and Services division that was working for the Yahoo acquisition, is leaving Microsoft to run Juniper Networks. Juniper issued a press release indicating that Johnson will become CEO and Scott Kriens will become the chairman and will still be involved in strategic matters.

We believe this is a good thing. Johnson represents a vision of where Juniper must go, which is beyond being a box vendor or its products will commoditize and its stock stagnate or fall. Kriens understands where Juniper is now, and how near-term modifications can be made to lead to the ultimate direction Johnson represents. Both the goal and the route are equally critical for Juniper, and we hope that the two can be harmonized by Johnson and Kriens cooperation and effective collaboration.

 We have heard that this change has been in the works for some time and was at least in part responsible for the other recent executive changes at Juniper. For Microsoft, which will be reorganizing its Platforms and Services area, the departure of Johnson seems to signal a bitter aftermath of the failed Yahoo deal and an internal conviction that the deal cannot now be done, though some inside Microsoft tell us that’s not necessarily the case.

At Juniper, the move is not completely a surprise. Kriens was one of the few executives to start a tech company and remain CEO through its IPO and operation as a major public corporation. Last year, according to rumors, there was board pressure to make some changes in Juniper and Stephen Elop was brought in (from Adobe). Elop left after a year (ironically, joining Microsoft). It would be significant in our view that Johnson, like the other executives recently joining Juniper have a software background.

We have long said that Juniper and other network equipment vendors needed to be more focused on the software layer of the network to insure they could sustain feature differentiation. The changes at Juniper suggest that there may be a shift to a more software-centric position, and perhaps a more aggressive positioning in the Carrier Ethernet space, but it is clearly too early to say for sure.

NSN moves on to next-generation optical access

Nokia Siemens Networks (NSN) has announced it will not continue to invest in GPON, focusing instead on DSL and next-gen optical access (NGOA).

The decision, we believe, is attributable to a number of factors, including the truth that PON in any form is not universally feasible (where demand density is low it won’t recover costs at current price points).  In addition, vendors including ALU already have a substantial lock on the GPON business, and an NGOA that combines fiber remote and DSL or multimedia over oaxial cable access (MoCA) with PON could be the real long-term winner. We’re hearing interest in this last point from both carriers and equipment vendors.

Microsoft’s Yahoo bid

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.

Internet traffic growth could be $150 billion problem

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.

MoCA help for FiOS FTTH?

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.

On FiOS growth and Verizon strategies…

Verizon reported earnings that were higher than expected, but not a blow-out. The most interesting numbers released were for FiOS, which added over 200,000 customers in the quarter and is now approaching the three-quarters-of-a-million mark. And, like AT&T did earlier, Verizon is showing off some strategies that it hopes will expand not only its FiOS offering but also transform its revenue model overall. In fact, we think Verizon’s stuff might be more interesting in this latter zone than AT&T’s was. An example is Verizon’s desire to broaden text messaging from the mobile SMS framework of today to a user-centric and virtually universal service, blurring the boundaries between instant messaging and SMS forever and presumably increasing the appetite for both. The strategy would be smart because of points made in earlier entries here; mobile data services in general have not taken off in many markets except in the youth sector. Since IM is popular with business users, Verizon hopes that creating “IM FMC” it can broaden the use of mobile services for things other than voice. Verizon has a similar strategy in gaming, where it plans to have a hosted game set that can be played at home, from a laptop portably, or from a mobile device. Finally, Verizon plans to introduce much more proactive home network management, for the user themselves through automatic discovery and linking of compatible devices and for the operator through TR-069 to provide delivery management for high-value services. Verizon’s spend per FiOS customer is in excess of $800, and so the company is eager to find new ways to create revenue from those users.

AT&T to buy EchoStar to bolster U-verse?

AT&T is reported to be preparing to make an offer for EchoStar, the DBS company with which it partners for its Homezone service. We believe this to be a clear indication that AT&T recognizes that it cannot make U-verse available for a large population of its customers and that they will instead have to rely on a satellite partnership for the broadcast program delivery, reserving IP for VoD. The challenge AT&T faces is that its relatively low demand density makes it difficult for AT&T to push fiber to the home, and without FTTH the mapping of broadcast channels to DSL delivery (U-verse) adds network complexity and cost at the metro level. The decision may induce Verizon to accelerate its own FTTH plans to reduce its reliance on satellite partnership.

Doubts about consumer demand for bandwidth

Research is casting doubt on the notion that consumer demand will explode bandwidth needs, a story promulgated by Cisco and others. Skeptics note that in mature markets where high speed is available, traffic grows at about 18% per year. We agree with the notion that traffic explosions are highly overrated, but we believe that some of the conclusions that the more conservative camp draw from their numbers are also off the mark. There is little doubt that the growth in Internet traffic alone will not drive bandwidth growth by much more than 20% per year in most markets, and will likely do less in many. There is also little doubt that consumers will increase their consumption of non-Internet (meaning content video) traffic through substitution of downloading or streaming video versus traditional TV viewing. The question not yet resolved is how these truths will balance over time. We also note that the current rate of revenue-per-bit decline is faster than the rate of traffic growth, which is what apparently leads some to the conclusion that providers should be encouraging more bits to be used. That’s not a reasonable assumption; commoditization of bit pricing is the problem even today.

Cable research misses the mark

Pyramid Research has released a report that indicates that cable companies enjoy more synergy in triple- and quad-play services and as a result, telcos are losing margin in their multi-tiered services. While we agree with some of this, we think it misses some key points. First, the best competitive strategy is to be moving from a low-margin, low-growth area to one of higher margins and growth. That’s what the telcos are doing with their video offerings. Second, cable companies started with high-capacity delivery in video, o it was logical that their infrastructure was able to manage lower-bandwidth service needs. However, the telco modernization of their plant threatens the cable companies’ ability to match data bandwidth and video, particularly VoD and FTTH broadband, and the recapitalization of the cable plant would be (as CableLabs itself has noted) very expensive. Finally, the internal rate of return for telcos is historically very low, making it easier for them to embark on low-ROI projects, while the cable guys have higher IRRs and less tolerance for poor returns. It is also interesting that cable is not a strong competitor elsewhere in the world. There are too many issues not covered here for us to be fully comfortable with the results.

Relevant Reading
Pyramid Research

Verizon adds SLAs for non-Verizon network

September 26 2007: Verizon is adding end-to-end SLA availability on its business IP services, the first time a major US operator has crossed boundaries to offer an SLA on a network partly delivered by someone else. The move is a validation of work by standards groups like the IPsphere Forum to provide a means of creating a uniform SLA across multiple network partners. Verizon is a member of IPsphere but it has not been indicated that the service uses IPsphere technology.

Relevant Reading
InfoWorld