Interestingly, the financial analysts aren’t seeing anyone decisively winning that battle—at least, not right away. I agree, but the reason why is more important than the factoid itself. You can’t fix an outcome; what is, is. But in theory, at least, you could mitigate a cause.

Data center networks are migrating because data centers are migrating, and the drivers of the IT side of the migration are obviously most likely to be giant server and/or software companies. If you want a buyer to approve an eye-popping cost, and if you want to keep most of the money that’s changing hands, you’ll tend to exalt the benefits of your own gear or software and underplay the other component requirements—the ones you can’t fill on your own. Why is IBM doing OEM deals for network gear and not making the stuff itself?  Because it wants to lance any objection boils at the network level, but focus on the IT side.

In the service provider space—both network operators and over-the-top (OTT) giants—we’re seeing a drive to create a cloud without much vendor support from either the IT or the network giants. This is in sharp contrast to past practices in the industry, where vendors presented a Fuller-Brush-Man-like inventory of stuff that represented the operators’ only choices, and thus drove network evolution. The buyer is out of control, both today in the operator space and, eventually, everywhere that consumes data centers. That’s going to create a whole new tech industry.

Google is likely an example of all of this. At the developer conference, it introduced what might be (note the qualifier—”might”) the most revolutionary thing in Android since the first notion of an Android smartphone.

Android@home is an attempt to make Android king of the little-known but highly important “embedded control” market space.  A device that has computer technology support for its own functions but doesn’t provide a GUI through which the general power of computing can be exercised has historically been called an “embedded control device.” There are arcane EC-OSs, and there have been for years, and there have even been attempts to make a general-purpose OS like Windows or Linux into an EC-OS. None have had much success, because nobody has really promoted the notion.

Google aims to change that, creating an Android-inhabited universe in the home where a grid of intelligence manages the environment, fills our needs, etc. If you believe in a smart home, you believe in a pervasive EC-OS.  Google wants you to believe in Android as one.

There is no question whatsoever that Apple sees something similar, and is moving perhaps with less public fanfare toward that same goal. Google’s move may flush out Apple’s own intentions, which I believe include the linking of an iOS home network with an Apple-provided, cloud-hosted set of services. That’s surely Google’s direction. The two companies are envisioning “the cloud” in a more dramatic way, as a kind of “life fabric” that surrounds us through wireless connectivity and that hosts smart agent devices that each cooperate to play a role in how we work, play and live.

Telcos know that they can provide better IT economy of scale off future service-layer IT deployments than any cloud or hosting vendor could. What they want is the customer base. Whatever the return on server investment for hosting/cloud companies might be today, it’s high compared with a telco ROI. Add to that the fact that the telcos could create the same hosting service at a lower base cost and you get a pretty nice profit picture.

The growing and more visible interest of telcos and cablecos in the service layer is creating some fear and uncertainty among over-the-top (OTT) players. Netflix, whose delivery model adds to operator costs while competing with operator TV strategies, is saying it doesn’t want to see the telcos hurt. As well it shouldn’t, but it may be too late at this point.

With revenue-per-bit declining, there’s nowhere to go but up in a service sense, and that means increased competition with the OTTs. It also means more spending on the service layer and less on the network, as well as more focus on service integration with the network as a strategic differentiator in both services and networks, capex-wise.

Light Reading is reporting that the early efforts of the council are focused on things like wellness, security, home monitoring, and smart home and energy management. All that appears to be true, but these also seem to be the flagship applications that are expected to bring focus to a larger question—how to create “services” in an age where the network isn’t enough. Dare I hope that this might bring some long-needed clarity and impetus to service-layer planning by vendors? Hope, I guess. Assurance is still another matter.

What’s so interesting about the Verizon move so far is that it’s being brought to market through a partnership, at least in its wellness manifestation. Given that VDMS is also a partnership strategy, it sure looks like Verizon at least has decided that the wholesale-feature route is the way to go to market.

That would create an interesting new model of services that doesn’t pit operators against over-the-top (OTT) players, but rather creates a partnership in the feature area. Telcos and cablecos might offer wholesale features in a growing variety of flavors, which OTTs would roll into an even-more-diverse set of retail offerings. Of course, this is all predicated on other operators following Verizon’s lead. I think they will.

The debate here, crystallized in the Comcast/Level 3 dispute, was recently punted by the FCC even though no formal complaint has yet been filed. But not only may Level 3 file such a complaint, Netflix is making noises that it might do the same.

Cable MSOs are particularly sensitive to OTT video competition because of the fear that cord-cutting will catch on. They’re similarly concerned that HD and 3D services, when streamed, will create even more traffic and pose major congestion issues unless cable companies build out more. Remember, their cable spans are shared-capacity, so they may have to make more radical changes to scavenge bandwidth for online services. And they want somebody to pay.

One obvious shift is the increased interest of portal players in having their own content, something that we can fairly say is extended into the TV space by the recently approved Comcast/NBCU deal. Ads have to live in something that consumers want in order to be pulled into view, and so all ad sponsorship (and pretty much all of the online world) has to have that magnetic content.

It used to be that you could act as a portal by simply aggregating everyone else’s content, a move that played to early desire by practically every business and content producer to have a web presence. AOL’s decision to buy the Huffington Post (a growing liberal media site) reflects the reality that most content sites are now looking at monetization on their own. That means that portal/aggregator sites have less to work with—unless they start becoming producers.

What’s interesting about both the Comcast and AOL decision is that the choice is one of buying professional content and not going with the “crowdsource” trend that’s obviously cheaper. Google’s challenge in monetizing YouTube is most likely the reason, and the fact that crowdsourced portals would start to look a lot like social networks. Been there, done that.

Yahoo! is the poster child for the other shift—we’re seeing the semantic web not as an Internet trend but as an aggregator trend. Think “semantic portal.” The idea is to combine search and context with portals and targeting to produce relevant content for consumers. The relevance factor makes the portal more attractive, and presumably would therefore help Yahoo! monetize its higher overall scores at serving content to consumers (Yahoo! beat Google slightly in unique visitors, for example, in comScore results). That might let Yahoo! pay more for content and dodge the pay-wall trend.

What all this means, of course, is that the bloom is off the rose. We’re past the growing-up phase of the online world and into the hard business middle-age. I’ve noted issues of maturity as they apply to the ISPs in the last couple of posts, and the new trends show that maturity is upon even the OTT players. The question is how much of the online revolution is a fad. Here in the U.S., where alternative channels of information dissemination are the richest in the world, we have the lowest online penetration and the least interest in getting online among those not there already.

Does that mean that we’re already seeing an opt-out effect? It doesn’t seem so, but it does appear that we’re seeing the lack of universal opting in. That could be a result of a lack of “fad sensitivity” among a segment of the population. If so, the effect could spread as having your own personal website or being on Facebook or Twitter, or even playing with a smartphone at a party, ceases to be cool. Not only do we have to worry about reinventing the Internet as a network, we have to reinvent the coolness model every year or so, because the requirements to achieve the cool state shift rapidly. Good thing I gave up years ago!

The thing that has made over-the-top players successful in the service layer is that they’ve dodged inertia. Because they don’t worry about standards beyond blowing a casual kiss here and there, they can expose features via APIs very quickly. If you wait for industry consensus on APIs, you’re putting yourself at the tail end of a multi-year process and then saying you’re running at market speed. I’d like to see Alcatel-Lucent open up more regarding how it will create features in Application Enablement and how quickly it can expose them using RESTful APIs.

Google let the industry have its first look at its Chrome OS, which it sees as the framework for a “cloud client” device, as well as a platform that combines Google’s desktop position with one in the smartphone space (Android) and a service-side position (Google’s cloud services) to create a new and complete (yes, and completely Google) solution for future computing and communication. I don’t think Google has grandiose visions of owning the computing/networking world, but I do think that it’s thinking through the process of ecosystemic computing more seriously and effectively than most. The commercial launch of Google’s Chrome OS may be delayed, but some of the impacts may be visible even before then.

If you look at Chrome OS and Chrome (the browser on which the OS is based) , what you see is a reflection of the fundamental truth that cloud computing is not ceding computing to the cloud, but rebalancing computing activity between the cloud and the client. In effective cloud computing, the process-intense tasks of information editing and display should be pushed outward to the client to reduce the impact of these tasks on central resources and to insure that the network connection to the client doesn’t become congested with a lot of unnecessary display-oriented babble.

A good example comes from a Google demonstration of the WebGL 3D rendering framework. If you want to show sharks swimming, you can either send pixel-by-pixel information on the successive positions, compressed information on the same thing, or objects that can be locally rendered. The latter will be better than any of the former choices from a cloud performance perspective.

I think it’s clear that’s what Google is thinking. What’s not so clear is whether it can actually achieve its goals of creating cloud dominance, and if it does, whether it can monetize its success there. Some of Google’s recent ventures, like Nexus S and Editions, seem to be a bit less than half-baked in terms of maturity of the business plan. Conceptually, Chrome OS has been around for a long time, and so have Google’s cloud aspirations. That the two were related is no secret, but it’s how they might relate in a business sense that’s hard to see. Does Google think it can sell ads to enterprises that display during their work-day applications? Seems doubtful. Does Google then think that Chrome OS and its cloud approach is a consumer solution to computing? If so, why make such a fuss about things like replacing Microsoft’s Exchange or SharePoint?

Whether Google makes a success of Chrome OS or not, though, it’s going to show us some things about computing in the future. The network isn’t going to be the computer, I think, but it’s going to be one of the computers, a new kind of partner in a much fuzzier relationship between users and computational tools. In that new relationship, there will also be a lot more to worry about in terms of how each piece integrates with the other pieces, and likely more functional segregation of tasks than administrative segregation. The GUI-versus-application thing is an example. A cloud application, like all applications, will have a network subsystem, an application subsystem, and a database subsystem that serve the user appliance. Some smarts will reside in all of these places, and those smarts will be marshaled in some coordinated way to serve the mission. We’re creating a future that blends SOA principles with principles of GUI design, database design, device design, security, and connectivity. It’s the creation and sustaining of that complex web of stuff that forms the opportunity for the future, and also its challenges.

But there’s more! Part of the Google Chrome OS preview was a comment that at least the prototype netbooks that will be deployed in the extensive pre-release test will be equipped with Verizon wireless services. Google and Verizon, once seemingly irreconcilable enemies, are showing increased coziness. Their net neutrality proposal, which was hated and criticized by everyone, including FCC Chairman Genachowski, looks a heck of a lot like what’s likely to emerge from the FCC’s December 21^st public hearing on the topic. It’s all about ecosystems, again.

Yet a pride of lions that eats all its prey species quickly dies off. Google knows that as the OTT giant du jour, it can’t afford to let the problems of disintermediation become critical enough for operators like Verizon to reduce network investment or impose usage pricing with tiers that result in what effectively become taxes on new applications. When I survey users about pricing sensitivity, the results are probably unsurprising at one level. They want unlimited-usage pricing the most. They want low-threshold usage pricing the least. In between, what they’d prefer as an alternative to the latter is application-specific pricing, meaning that they’d like to see any premium charge for usage bundled into the charge (which they or advertisers pay) associated with the application or experience. That way they don’t have to worry about a secret price being added to the visible price and called due later on with their monthly bill.

So it may well be that Google recognizes that the Comcast/Level 3 deal , whatever the rights and wrongs of how it should be characterized might be, is still the right industry answer. Charge for what the user wants, all at once. That means having the content provider collect and settle with the access provider.

What about the kiss Genachowski blew at usage pricing, then?  It may be that he’s simply waving a troll at the kids, creating a threat that makes a spindly carrot look more appetizing.

I’ve commented several times recently on broadband issues, many arising out of what it has become increasingly clear are misleading or bad numbers about broadband deployment. It’s not surprising that broadband would become a political football in this most political of all recent election years, but it’s bad for the industry because it’s pulling everyone’s eyes off of the ball. Despite continuous evidence that economic density is the most decisive factor in broadband market effectiveness, we continue to ignore it. Despite the fact that there’s no clear indication that broadband has any societal value whatsoever, we continue to assert that it does. A real plan, based on exploiting what we know and objectively studying what we don’t, could get the market moving.

Meanwhile, the mobile space is showing us the shape of the future.

4G is going to bring usage pricing to mobile, and it will leak back into 3G and into wireline eventually, at least in markets where economic density and access profits are low. Smartphones are reported by one analyst firm to be creating a mobile market owned by handset giants like Apple and Google rather than the operators. While that’s clearly an exaggeration, it’s true that smartphones are disintermediating operators in the mobile space, just as the over the top (OTT) players disintermediated them in wireline.

Operators fled wireline into mobile to flee low return on investment (ROI). If mobile gives them the same low ROI, can they then flee to telepathy or something? They’ll simply have to accept that revenues will tail off, which means that capex will tail off. Big telco Verizon and the cable industry overall both showed us that Wall Street will punish those that let capex rise as a percent of sales.

Enterprises have had their own challenges. We’ve seen that spending on some hardware and software has been strong throughout the year, but that strength has been created in large part by the suppression of orderly upgrades of baseline IT infrastructure by the past economic crisis. You can only catch up for so long; after that, growth will depend on exploiting new productivity paradigms, and the market hasn’t been very good at doing that since 2001.

I’m not playing Chicken Little here. The industry isn’t going to crash. In fact, it’s likely that by 2012, it’s going to prosper, because any time demand overwhelms the insight of the sellers, a new crop of leaders are going to be created. Incumbents in all areas of tech have gotten too comfortable with old paradigms, and new players are the ones agile enough to seize the opportunities.

Those “new players” aren’t likely to be startups, considering VCs have fled the equipment space in favor of social networking and other areas with more potential for bubble-creation economics. Instead, they’ll be smaller vendors, often public companies. Watch F5 and some of the deep packet inspection companies; they are looking to skim the networking cream. In IT, watch Oracle; software has the most direct link to productivity, and so software companies can transform to build new cost/benefit paradigms most easily.

What is interesting to me is that all of this is coming to a head right now, and why might be the most interesting thing of all.

The reason is mobile 4G services and the fact that these services are being driven by appliances – smartphones, tablets and even e-readers. Mobile disintermediation via appliances is a real risk, and 4G bandwidth levels mean that there is truly an opportunity to create a new model of the user’s relationship to the network. The risk that the new model might end up being a reprise of the over the top (OTT)-dominated wireline broadband market is very real now. Further, 4G deployment offers operators a chance to reset the pricing and service relationships, to a point. Operators either have to take the opportunity and level-set 4G differently, or they have to avoid 4G investment, regarding it as something unlikely to pay off for them in terms of return on investment (ROI).

This is Alcatel-Lucent’s issue here. Companies like Alcatel-Lucent have arguably been most successful in the wireless arena, and an operator trend toward stagnation of wireless investment would be a major barrier to Alcatel-Lucent’s future profitability. But the truth is, the company isn’t the only one with a stake in the 4G game. With the exception of Cisco, whose ambitions for revenue growth are spreading to markets adjacent to networking, every one of the major network vendors is a slave to wireless capex growth because wireline growth will not sustain even their current numbers.

It is clear to me is that everyone in the broadband game realizes that 4G is the watershed issue — the place where we either get control of network evolution in an economic sense, or admit we can never control it. In the latter case, it’s clear that we’ll see sharp capex declines beginning in 2012 (according to our model), as ROI pressure on operators constrains network investment. In the former case, we could see the very thing that Carter says we need — immersive broadband that touches all of us in all aspects of our lives because it can profitably be made to do so. It’s not a glamorous vision for the U.S. market because we want to believe everything is free. It’s not simplistic, like Cisco’s vision of driving infrastructure investment simply by forcing more traffic onto the network, regardless of the ROI. But it’s a true vision, and Alcatel-Lucent is perhaps the best in the industry in articulating it.

But can they deliver it? The principles of application enablement are surely relevant to creating what Carter hopes for, but they’re not a sufficient condition as they stand. There are too many holes in the story of the “European way” when the rubber actually meets the road. In a way, the potholes are a bigger threat to ROI than the current disorder, because without a clear path to invest, everyone will hunker down and look ahead to when that path becomes clear, which could hurt capex even earlier.

Four vendors (Alcatel-Lucent, Ericsson, Juniper and NSN) have the assets to build the kind of future Carter talks about, and not just for Europe. Which one will come through? We’ll likely know by spring. Carter’s speech is proof that the issue is too acute to be ignored any longer.

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.