Category Archives: Bandwidth Metering

Service Provider CAPEX, Bits R Us and Compute Conundrum

. Bandwidth Metering, CAPEX, Networking . Leave a comment

What is wrong with service provider CAPEX?  Specifically I am referring to commentary from CIEN this week and ALU in July.  I think I have been writing about this trend for over a year, but I am going to summarize it (read through prior postings for more details):

- Connected devices (i.e. computers, tablets, smartphones) cause vastly more bandwidth to be consumed inside the data center than over the network

-  Wifi off-boarding removes RAN congestion

- CDNs position content closer to the consumption point

- Bandwidth is deflationary

- I have coverage at my residence for video (TV) from: Comcast, RCN, Verizon, DirecTV, Dish

- I have coverage at my residence for my mobile devices from: ATT, VZ, Sprint, MetroPCS, Boost, T-Mobile, VirginMobile and I think three others

- Every two months Comcast, Verizon and RCN mail me offers and canvass my neighborhood knocking on doors offering more for less

- ARPU is really capped by disposable income.  Here is a link to a chart at the St. Louis Fed.  You can play with it, but the general up trend from 1959 was decisively broken in 2008.  We are now just recovering.  I am not sure how much more consumers can pay to providers and content providers like Netflix, Apple, Amazon, etc.

- Recent CAPEX trends in terms of expansion and contraction are decisively in favor of content companies like Google, Amazon, Yahoo, Apple and Microsoft.  Traditional service provides still spend a lot of CAPEX, but it is to maintain and expand a transport network.  Content providers are spending

This is what I call the compute conundrum.

- The unspoken or ignored trend is the ability of content companies to (1) build their own data centers for compute, (2) store user data and desirable content in these data centers, (3) build their own networks by leasing fiber and (4) off load the access business (which is deflationary) to the service providers.

- Every year we hear the siren’s song for a CAPEX rebound on lazy reasoning like “billions of connected devices, trillions of streaming videos, transformational network projects” and what we get is a lot of spending at lower prices.

/wrk

* It is all about the network stupid, because it is all about compute. *

** Comments are always welcome in the comments section or in private. ** 

Service Provider Bandwidth: Does it Matter?

. Bandwidth Metering, Framing Exercise, Networking, Uncategorized . 3 Comments

Let us start with a question: service provider bandwidth does it matter?  Perhaps a better question would be: is service provider bandwidth a meaningful problem to work on?  I think it does matter, but I am not certain it is meaningful.  This post is not going to be a scientific study and it should not be construed as a start of a working paper.  This post is really a summary of my observations as I am trying to understand the significance of the messaging in the broader technology ecosystem.  I sometimes call these posts framing exercises.  I am really trying to organize and analyze disparate observations, urban myths and inductive logical failings of doctrine.

Frame 1: Bandwidth Pricing Trend

There is no debate on this point; the price trend of bandwidth is more for less.  Bandwidth is deflationary until someone shows me a data set that proves it is inflationary.  I agree that bandwidth is not ubiquitous, it is unevenly distributed and that falls into the category of: life is not fair; get used to it.  In areas in which there is a concentration of higher wage earning humans organized into corporations with the objective of being profit centers, there seems to be an abundance of bandwidth and the trend in bandwidth is deflationary.  Here are a few links:

  • Dan Rayburn Cost To Stream A Movie Today = Five Cents; in 1998 = $270 “In 1998 the average price paid by content owners to deliver video on the web was around $0.15 per MB delivered. That’s per bit delivered, not sustained. Back then, nothing was even quoted in GB or TB of delivery as no one was doing that kind of volume when the average video being streamed was 37Kbps. Fast forward to today where guys like Netflix are encoding their content at a bitrate that is 90x what it was in 1998.  To put the rate of pricing decline in terms everyone can understand, today Netflix pays about five cents to stream a movie over the Internet.”
  • GigaOm: See the 2nd Chart.
  • Telegeoraphy: See the chart “MEDIAN GIGE IP TRANSIT PRICES IN MAJOR CITIES, Q2 2005-Q2 2011”

Frame 2 Verizon Packet/Optical Direction

Here is a presentation by Verizon at the Infinera DTN-X product briefing day.  The theme of the presentation is that the network is exhausted due to 4G LTE, video, FTTx, etc and that this is driving the need for more bandwidth to include 100G in the metro, 400G and even terabit ethernet in the core.  I have heard these arguments for terabit ethernet before; I am firmly in the minority that it is a network design/traffic engineering problem – not a bandwidth problem to be solved.  It took the world fifteen years to move from 1G to 10, I wonder how long it will take to get to terabit ethernet.

Frame 3 Are the design assumptions incorrect?

When I look at the network, I think of it as a binary solution set.  It can connect and it can disconnect.  For many decades we have been building networks based on the wrong design assumptions.  I have been posting on these errors in prior posts.  Here is a link to a cloud hosting company.  I know this team and I know their focus has been highest IOPs in their pod architecture.  We can use any cloud provider to make the point, but I am using Cloud Provider USA because of the simplicity of their pricing page.  All a person has to do is make five choices: DC location, CPU cores, memory, storage and IP address.  Insert credit card and you are good to go.  Did you notice what is missing?  Please tell me you noticed what is missing, of course you did.  The sixth choice is not available yet, it is network bandwidth; the on or off network function.  The missing value is not the fault of the team at Cloud Provider USA; it is the fault of those of us who have been working in the field of networking.  Networking has to be simple; on or off and at what bandwidth.  I know it is that simple in some places, but my point is it needs to be as easily configured and presented in the same manner as DC-CPU-Memory-Storage-IPs purchase options are presented on the Cloud Provider website.  My observation is the manner in which we design networks results in a complexity of design that is prohibitive to ease of use.

Frame 4 Cisco Cloud Report

I think most people have read Cisco’s Cloud Report.  Within the report there are all sorts of statistics and charts that go up and to the right.  I want to focus on a couple of points they make in the report:

  • “From 2000 to 2008, peer-to-peer file sharing dominated Internet traffic. As a result, the majority of Internet traffic did not touch a data center, but was communicated directly between Internet users. Since 2008, most Internet traffic has originated or terminated in a data center. Data center traffic will continue to dominate Internet traffic for the foreseeable future, but the nature of data center traffic will undergo a fundamental transformation brought about by cloud applications, services, and infrastructure.”
  • “In 2010, 77 percent of traffic remains within the data center, and this will decline only slightly to 76 percent by 2015.2.  The fact that the majority of traffic remains within the data center can be attributed to several factors: (i) Functional separation of application servers and storage, which requires all replication and backup traffic to traverse the data center (ii) Functional separation of database and application servers, such that traffic is generated whenever an application reads from or writes to a central database (iii) Parallel processing, which divides tasks into multiple smaller tasks and sends them to multiple servers, contributing to internal data center traffic.”

Here is my question from the above statistic.  If 77% of traffic stays in the data center, what is the compelling reason to focus on the remaining 23%?

Frame 5 Application Aware an the Intelligent Packet Optical Conundrum

I observe various transport orientated equipment companies, as well as service providers (i.e. their customers) and CDN providers (i.e. quasi-service provider competitors) discussing themes such as application aware and intelligent packet optical solutions.  I do not really know what is meant by the use of these labels.  They must be marketing terms because I cannot find the linkage between applications and IP transit, lambdas, optical bandwidth, etc.  To me a pipe is a pipe is a pipe.

The application is in the data center – it is not in the network.  Here is a link to the Verizon presentation at the SDN Conference in October 2011.  The single most important statement in the entire presentation occurs on slide 11 “Central Offices evolve to Data Centers, reaping the cost, scaling and service flexibility benefits provided by cloud computing technologies.”  In reference to my point in Frame 3, networks and the network element really do not require a lot of complexity.  I would argue that the dumber the core, the better network.  Forget about being aware of my applications; just give me some bandwidth and some connectivity to where I need to go.  Anything more than bandwidth and connectivity and I think you are complicating the process.

Frame 6 MapReduce/Application/Compute Clustering Observation

Here is the conundrum for the all the people waiting for the internet to break and bandwidth consumption to force massive network upgrades.  When we type a search term into a Google search box it generates a few hundred kilobytes of traffic upstream to Google and downstream to our screen, but inside Google’s data architecture a lot more traffic is generated between servers.  That is the result of MapReduce and application clustering and processing technologies.  This is the link back to the 77% statistic in Frame 4.  Servers transmitting data inside the data center really do not need to be aware of the network.  They just need to be aware of the routes, the paths to other servers or devices and they do not need a route to everywhere, just where they need to go.

Frame 8 What we value is different from what we talk about

Take a look at the chart to the left.  I put a handful of public companies on the list and I am not including balance sheets, debt and other financial metrics.  All I am pointing out is that companies focused on the enterprise (i.e. the data center) enjoy higher margins and richer valuations than companies that focus on the service provider market.  Why is that true?  Is that a result of the 77% problem?  Is it a result of the complexity of the market requirements imposed by service provider customer base?  Is it a result of the R&D requirements to sell to the service provider market?

Frame 7 Do We Need a New Network Architecture?

I have been arguing that we need a new network architecture for some time, but I think the underlying drivers will come from unexpected places.  It was not long ago that we had wiring closets and the emergence of the first blade servers in the early 2001-2002 time period started to change how data centers were built.  When SUN was at their peak, it was because they made the best servers.  It was not long ago that the server deployment philosophy was to buy the most expensive, highest performance servers from SUN that you could afford.  If you could by two, that was better than one.  The advent of cheap servers (blades and racks), virtualization and clustering applications changed the design rules.  Forget about buying one or two high end servers, buy 8 or 10 cheap ones.  If a couple go down on the weekend, worry about it on Tuesday.  I think the same design trend will occur in the network.  It will start in the DC and emerge into the interconnect market.

/wrk

* It is all about the network stupid, because it is all about compute. *

** Comments are always welcome in the comments section or in private. ** 

Content Delivery Networks (CDNs) 08.21.11

. AAPL, AKAM, Bandwidth Metering, CDNs, Chain of Commerce, Content, Exaflood, GOOG, JNPR, Networking, OTT . 4 Comments

I had an email question two weeks ago regarding CDNs and where they are going or not going and who will be the winner or loser.  I answered the question privately, but it gave me cause to think about content deep networking, CDNs and what is going on in the network because of the evolution to longer form data, or big data depending on what term you prefer.  There is no question that Web 1.0 (~1995-2000) built on small HTML files is much different than Web 2.0 (~2002-2008) and Web 3.0 (~2009-?) with streaming HD content, state aware apps and access points at the edge that have higher connection speeds and capacities; all that being said, I am still a bit of an OTT skeptic.  Here is a chart I produced over a year ago using data from AKAM and CDN pricing trends.  The chart is not updated, but I think it shows the conundrum of having to serve longer form data in a market of declining ASPs.  I noted on the chart the start of iTunes, which is the poster child for the old content consumption model in which the user had to own the rights locally for the content.  The new content model which iTunes is using too, the rights are licensed by the content provider (AAPL, NFLX, AMZN, etc) and the end-user rents usage rights, usually as a monthly fee.

When I wrote that I was an OTT skeptic, I meant that I find it hard to quantify the OTT problem and I find that service providers (SPs) find it hard to quantify the problem.  I think there is no shortage of emotion, but I am not sure everyone is talking about the same problem or maybe they are just using the perception of a problem to force a discussion about another subject matter, which is what I really believe.

To start, let us step back and ask what video/OTT problem are service providers and the infrastructure companies are trying to solve?  Is it a bandwidth problem (i.e. real capacity constraints), a revenue problem (i.e. SPs want a share of NFLX revenues) or a CAPEX problem (i.e. SPs do not want to spend)?  I talk to a lot of people on many sides of the debate; I talk to equipment companies and I read the industry and investment reports.  I am skeptic when smart people tell me that it is a well known and understood problem that video is clogging the network.  Is it?  Can someone show me some stats?  When I read puff pieces like this, I struggle to grasp the meaning.

If OTT video is growing 40-50% over the next four years it is somewhat meaningless to me because network technologies and network capacities are not static.  The whole OTT space is a bit of conundrum.  There is a lot of noise around it and that is good for selling, marketing and thought leadership, but it seems vastly under invested if there is such a problem on the scale it is made out to be.  I think the data center (compute) scaling (more VMs on a Romley MB and the virtualization of the I/O) into the network is a much, much bigger market.

What are CDNs really good at?  Distributed CDNs like AKAM are really good at distributed content hosting like big file upgrades and regional specific content distribution like day and date.  iTunes is hosted by AKAM and they do a good job of ensuring you cannot download content specific to the UK in the US.  AKAM also offers really good site acceleration services for web properties that have low to medium traffic demands, but might have a spike in traffic due to an unforeseen event.

Centralized CDNs like LLNW and LVLT do really well at serving up specific content events and they are much better at hosting content that requires that state be updated, think Gmail which likes to update state on a regular basis.  Before thinking about CDNs, think about NFLX or Youtube.com (YT).

A year ago most service providers (SPs) who thought they had an OTT video problem viewed YT as the biggest problem, but as a problem it was small.  NFLX has overtaken YT traffic.  From a SP perspective, there are several ways to handle the problem of OTT video or user requested real time traffic.  (i) SPs can ignore it, (ii) SPs can meter bandwidth and charge consumers more for exceeding traffic levels, (iii) SPs can block it or (iv) SPs can deploy variations on content deep networking strategies.

Content deep strategies use products from companies like BTI Systems and JNPR (Ankeena acquisition) to mention a couple.  These companies deploy a caching CDN product in the network around the 10-50k user stub point.  The device replicates popular content that it sees requested from sites like NFLX (it is a learning algorithm) and thus the 10-50k user group does not have to traverse the entire network topology for popular content from streaming sites.

Similar to a cable node-splitting strategy, hosting popular content deeper in the network works well and seems to slow bandwidth consumption growth rates to very manageable levels.  CDNs win because they do not have to provision as much capacity and the SPs win because they have less money going to the CDN and less capacity issues in the network.

The user experience is better too.  When you see ATT and LVLT wanting to build a CDN service (GOOG too) it is really about content deep and putting content local to the user.  This is something I wrote about in my blog back in April.  Recently, there were reports of LVLT and LLNW combining CDNs and this makes sense to me as scale will matter in the business.

In terms of BTI, I listened to a webinar they produced about a month ago that was hosted on Dan Rayburn’s site.  BTI is claiming 10 content deep networking customers and in trials with a tier 1.  Specifically (if I heard the presentation correctly), they said that at the Tier 1 SP trial, OTT video traffic was growing at 3% per month.  311 days after insertion, video traffic is growing at 0% a month and that was during the rise of NFLX.  When BTI started their content deep solution it was all about YT, but this has changed in the last 9 months due to NFLX.

What I really think this entire debate is all about is money.  I put a chart in the April post that you can view here.  It is all about the chain of commerce.  Why did we pay $15 dollars for album in the 1980s and $9.99 for CDs in 1990s?  The answer is the chain of commerce could support that pricing model.  Today, the chain of commerce is shrinking and consumption habits have changed.  SPs do not want to be relegated to a “bits r us” business model.  They want a piece of the revenue stream from the content creator, to the content owner, to the content distributor, to the CDN, to the SPs and finally to the consumer.  I think the real issue is not the network, but the network is being used as a facility to broker a bigger discussion about the division of revenues.  I could be wrong too and the whole internet could collapse by 1996.

/wrk

* It is all about the network stupid, because it is all about compute. *

** Comments are always welcome in the comments section or in private.  Just hover over the Gravatar image and click for email. **

Data Center and Bandwidth Metering Thoughts

. Bandwidth Metering, CAPEX, Networking . 2 Comments

I am off to CA for the week, as such posting will be infrequent at best. GigaOM had a short piece on server architecture.  I call attention to it because there are number of debates going on in the world of “Cloud Networking-OTT-Data Centers-Bandwidth Metering-Server Virtualization-Net Neutrality” or as it is frequently called by its initials CNOTTDCBMSWNN, which is pronounced “see-knott-d-see-bm-swin.”

As I have written before, I am in the high power processor camp with Urs Hölzle.  I am much more interested in high-powered core processors, virtualizing the I/O, running 50, 75, 100 VMs and making the network element interface with the processor element to not only provide a layer 1-3 connection, but proceed higher in the stack to manage VM flows through the I/O to the compute element.  I think the evidence is clear that the network needs to ride the price/performance curves of storage (i.e. drives) and compute (i.e. microprocessor) have set.  The network is the lagging element and throwing more switches and transceivers at the problem is not a solution.  If you are missing the context of my prior posts read the networking section bottom up.

Bandwidth Metering

Metered billing and usage caps will not go away.  NFLX had an editorial in the WSJ decrying bandwidth metering and usage caps.  There is a lot to think about in the 578 word editorial.  As a starting point, I understand why NFLX wants to promote unlimited bandwidth and low usage costs to promote their business model.  If I was on the NFLX leadership team, I would do the same.  However, this is not a new debate.  A few of my readers remember my old blog from 2006-2007.  The subject of free bandwidth to all was a subject of a series of posts in which I received the most email and comments.  I even wrote a book in which the drive to unlimited bandwidth and the deconstruction of the regulated telecom industry on a global basis was the primary subject.  I will start by repeating something I wrote back in February 2007 which was specific to LVLT:

Extra Fiber Story:

I do not believe in the promotion that extra fiber capacity provides L3 with a distinct competitive advantage.  This comment was again propagated by 24/7 Wall St. post on the breakup value of L3.  Here is a quote from the 1999 L3 Annual Report on the company’s strategy to “…Become the Low Cost Provider of Communications Services,” page 4.  The challenge with being the low-cost provider; it usually means you are also the low cost profit center and unless you have business scale on the level of Wal-Mart, it is hard to generate vast profits from low-cost bids.  For those who are reading and thinking “low cost” and “low bid” are mutually exclusive, I state that in would of service provider pipes, low cost means lowest bid and win on price.  Now L3 does have nice margins and they promote this fact in their presentations, and they have taken out other LH competitors to stabilize market prices, but something is wrong with the business model because they are not profitable.  Joseph Nacchio was famous for using AT&T’s balance sheet to destroy LDD pricing in the 80-90s in war with MCI.  Service provider wars are fought on price.  I think L3 knows that competing on price in a bits/per second market structure is not a strategy for long term success.  When Level(3) tells the world about all their excess wholesale fiber and low-cost network, I think the smart purchasing agents in companies like Google, Microsoft and Wal-Mart are eager to start the next round of contract negotiations because they view optical circuits as a commodity.  The question to be answered is how do L3’s assets evolve into a profit mechanism that allows them to win and control market share?

Video Driving Bandwidth Story:

Here is the challenge with the whole video is consuming internet bandwidth story: too many people are promoting this story liberally and detailed metrics are hard to find.  The challenge has always been the last mile connection to the end-user.  I have posted in the past how Verizon is affecting this market by pulling fiber to the home with additional data here.  Even though we are seeing increased broadband penetration in the US read this link and this link, we are still missing data points to collaborate assertions that backbones are running out of capacity.  One would assume that Verizon and AT&T, who have been very aggressive to pull fiber or broadband to homes and offer triple play services, would need to upgrade the capacities of their long-haul backbones to support the video traffic.  Has anyone seen an RFP from Verizon or AT&T for a new backbone?  I have not.  I know they are adding 10G channels to support capacity demands and I know they are looking 40G solutions, but they are not pulling fiber and building new backbones.  If the two biggest service providers are not upgraded their backbones, why should we believe that video is going to drive a vast amount of traffic (i.e. business) onto the L3 backbone?

Here is a 1999 profile of Level(3) from Network World, “Crowe’s Level 3 is building an end-to-end IP network that will – if everything goes according to plan – carry a big chunk of the converged voice and data traffic of tomorrow. Level 3 will build local networks in major U.S. cities and interconnect them over a fiber backbone, all at a cost of between $8 billion and $10 billion. Crowe’s aim: to undercut entrenched carriers on price and gobble up big corporate users’ rapidly growing data traffic.  Crowe figures his advantage is that he ‘s building Level 3′s network, which won’t be fully operational until at least 2001, from the ground up to support IP data packets. The incumbent telcos, on the other hand, are struggling to retrofit their circuit-switched systems to handle all the data flows. That means higher costs for them and plenty of opportunity for him.”

When I look back on that post (note some the links might not work) it seems we are still having the same debates four years later.  I am not a believer in the concept that bandwidth is free.  It costs money to build networks and the margin on broadband services is not great.  Service providers are trapped in a “bits R us” model and NFLX wants to use this network to deliver content from a centralized DC model.  I do not see OTT as a network problem – it is economic problem.  I am sure if NFLX wanted to work out a deal with a service provider in which there was some sort monetary exchange for each broadband sub accessing the service, we would not hear about the subject.  In the current network architecture choices I do not see a service provider saying “here is $20B, build me a network with unlimited bandwidth that others can use that I can charge a user $75 a month and let others build a far more profitable business over my network without bearing the cost of the $20B build.”

What I do agree with in the NFLX editorial is that “bandwidth caps with fees piled on top are a lousy way to manage traffic.”  That is one of the reasons why I think that the network element is out of phase with the compute and storage elements.  The bandwidth flow control needs to be in software and configurable by the user – it is not a hardware device.  That was the conclusion I wrote in one of my very first posts on the network.  It is written here and here.

A colleague sent me an email last week in which he was using the Kübler-Ross five stages of a dying model to explain a technology adoption process.  I thought is was entertaining so I adopted his format to fit this blog post for the service provider, legacy network infrastructure provider as well as the OTT content provider.  I remind readers that I view video as an application and there are many types of OTT content such as gaming, higher performance compute applications, etc.  The OTT debate is not just about video, it is about any type of compute application (i.e. content) that is hosted in the data center and sent to the end-user in which state control is important.

Kubler-Ross Stage

Service Provider

Network Infrastructure Provider

OTT Content Provider

Denial

 Network is fast enough Deploy More Routers and Switches Bandwidth is free

Anger

 Usage Caps OTN/Ethernet OAM hate speeches Consumer access to unlimited bandwidth is good for society. It fosters innovation, drives commerce, and advances political and social discourse. Given that bandwidth is cheap and plentiful and will only grow more so with time, there is no good reason for bandwidth caps and fees to take root.

Bargaining

 Bandwidth Metering Just do MPLS Transfer payment?

Depression

 Buy Content / Cloud Providers Lower margins Growth limits / Exclusivity Deals

Acceptance

 There is a limit to how much a user will pay New solutions / New Architectures Digestion of new accord

Many aspects of this process are playing out before us, but often we do not want to accept the implication of the changes we see of evidence of because we are limited by induction and survivorship biases.  Already in Europe and other parts of the world wireless service providers are sharing capacity.  With sharing comes rationing and that is what we are seeing in the US with bandwidth caps.  The final stage which will start in the next 18-36 months and last for the better part of a decade is a sustained process to add capacity to networks, but this will only start when the chain of commerce for content finishes a recomposition period and network technologies and architectures are proved into the network that support new controls and content.

Miscellaneous Notes from Past Week and Thoughts on Week Ahead

A few more pre-negatives to close the week: XXIA (not a good indicator for service provider CAPEX), PFL.L (supply chain) and LG (mobile devices).  More and more it looks like AAPL, Samsung and HTC are your mobile device market winners with MMI, NOK and RIMM share losers.

This coming week three preliminary technology reports: AMAT on Tuesday, ADTN on Wednesday (numbers out the night before, guidance around 10:50am on Wed) and GOOG on Thursday.

/wrk

* It is all about the network stupid, because it is all about compute. *

** Comments are always welcome in the comments section or in private.  Just hover over the Gravatar image and click for email. **

Bandwidth Metering II

. Bandwidth Metering, Networking . 1 Comment

A prominent subject for my blog has been bandwidth metering.  The GigaOM site had some interesting discussion on bandwidth and capacity trends.  The capacity versus bandwidth chart was the most interesting chart to me.  The last chart shows that storage capacity is outstripping the bandwidth made available in the network; hence the network has been lagging the advances in compute and storage.

This is not the first time I have pointed this out and why I am not a believer in the exaflood thesis as a growth driver for networking companies.  There is a cruel humorous aspect to the future.  It rarely unfolds the way you think it will and it is often unevenly distributed.  Maybe that is why there are now weekly notes on price erosion in the ethernet switching market.  The legacy tail of networking infrastructure is not keeping pace with the other dislocations in the tech ecosystem.  More expensive hardware in the GPM range of 60-70 points is not going to solve the network from lagging the growth of the other parts of the tech ecosystem.

This brings us back to bandwidth metering and usage caps. When it costs a lot to deploy a network, you limit the use of the network.  That is how networks were built in the in years before the client/server network.  Most people forget, but even Novell had usage based caps built into their software.  When I built my first Novell server, one of the options in the setup was to create usage caps for users, groups and time blocks.  This was clearly a leftover from the mainframe era as it was not really necessary on a LAN, but traditions are hard to remove.  Fast forward more than twenty years and service providers are still limiting the use of the network because bandwidth is not free (it is expensive) and they are charging more for premium users because growth of the other parts of the tech ecosystem have been putting pressure on the network.

So how is the future going to unfold for networking companies?  There are only guesses and some guesses are better than others.  I think expensive network infrastructure means that service providers respond with higher prices (caps and tiers) and within the data center/enterprise market new forces emerge.  I have written extensively about this in the past two months.  I think succinctly summarized it in my 06.24.11 post “#2 Infrastructure Vendors Create 4th Leg: Shared cache concept and I think this is big, but this is the part of the network evolution that I wrote is really two networks: a network for humans and a network for machines to maintain a shared cache.  I believe in point #2, but maybe in a different way.  I really think that more VMs on a blade and I/O virtualization are a big way to achieve statistical gain.  I also think this is going to put pressure on the network element to do something different.  Network vendors that can integrate the network element into the I/O of the compute element are going to be very valuable.  Application delivery controllers (ADCs) become a virtual (i.e. software control) capability that is stretched across the compute/IO/network element.  This will allow it to scale and achieve maximize stat gain.  The networking vendor that figures this out with #6 below = big time winners.”

Some Random Notes for the Macro Inclined

I compiled a list of dates and events from my friends at DB and ISI for the European Summer Vacation 2011….actually one of the notes said “don’t go on vacation.”  Here it is:

  • 27-30 June (unconfirmed): Greek parliament debates and votes on austerity.  There will be two votes.
  • 3 July: EU finance ministers to approve fifth loan tranche.
  • Early July: IMF Board to approve fifth loan tranche.
  • 7 July: ECB meeting.
  • 11 July: EU finance ministers to approve new Greek loan program.
  • 15 July: Greek sovereign liability due.
  • The EU vowed to rescue Greece, but markets closed Friday still little reassured, eg, Spain 10-year above the firewall at 5.68%, Greece stock market -1.7% w/w, Italy stock market -4.7%, and STOXX Europe Banks index down -1.6% d/d.
  • Trichet said risk signals “Red Alert” as the crisis threatens banks.  Mervyn King said the crisis in Europe is a major threat to British banks. Moody’s warned Italian banks and 2 government institutions they were on watch for a ratings downgrade.
  • Wen said China inflation rate will be “firmly under control” and pointed to a moderation in lending, an “oversupply of industrial products, and abundant grain.”  China mfg PMI of input prices declined to 53.1% in June versus its recent peak of 83.2%. China mfg PMI slipped to 50.1% in June with China Daily reporting “China’s mfg sees sizable slowdown.”

/wrk

* It is all about the network stupid, because it is all about compute. *

** Comments are always welcome in the comments section or in private.  Just hover over the Gravatar image and click for email. **

Bandwidth Metering, Usage Caps and the Optical Upgrade Cycle Talk….

. Bandwidth Metering, Networking . 4 Comments

Historically users have preferred flat rate pricing, which is often in the favor of the service provider.  I have some thoughts on this concept, but I would state up front that my thinking is based on these two papers from Andrew Odlyzko and this one by Peter Fishburn.

The net of the decision for users to prefer flat rate versus usage billing has to do with (1) insurance effect as people like to have capacity available in case of unforeseen circumstances, (2) over estimation of what they typically use and (3) what Nick Szabo termed as “mental transaction costs” but I would tell you in that in real life it has more to do with the prospect theory.  The prospect theory was developed by Amos Tversky and Daniel Kahneman were pioneers in the study of cognitive science – how humans handle risk and the manner in which cognitive powers can be applied to economics.

In short, the prospect theory suggests that people are more motivated by losses than by gains.  They developed a model which showed that the way in which an investment is framed affects the choice that people will make.  The term “frame” is being used in the economic context, but you would call it “marketing” or “positioning.”  A foundation of behavioral economics is that framing biases affect how investment and lending decisions are made.  Investors are more likely to be motivated by losses, than by rational choices, hence it is better to buy or overbuild than get caught short in a networking world.  It turns out that the prospect theory is true for buying a service…like a network connection…as well as making a financial investment.  Humans by a large margin tend to want to over buy and the few cases that you find when people under buy, it is because they do not have the financial means to avoid points 1-2-3 above.

There is a long list of failures in the world of bandwidth management…companies like Enron Broadband…which does not mean that it is a poor business path – but rather that the few successful business examples played on the three themes from above.  A few examples:

  • Akamai Dynamic Site Accelerator:  This is an extremely profitable business for AKAM…what are they selling?  Peace of mind.
  • Nortel 10G LH: When Nortel commercialized their 10G optical systems, they were betting that the growth of the internet would rapidly drive telecom service providers to deploy 10G systems faster than projected – but when they went to sell the 10G system, they did not find any buyers for their more expensive 10G system.  John Roth (NT CEO) made deal with Joe Nacchio.  Nortel would sell 10G systems to Qwest at 2.5G prices and when the traffic on the 10G systems exceeded the capacity of the 2.5G systems Qwest was considering, Qwest would pay Nortel a premium for use of the capacity above 2.5G.  It was a win, win deal.  If Qwest’s network never needed the capacity that Nortel’s 10G systems provided, then they had not over paid – but if the network usage grew, Qwest had the bandwidth installed in the network to support the unanticipated demand.  What was NT selling?  Peace of mind.

I can come up with half dozen more examples, but this is really a long introduction into some thoughts about bandwidth metering that I started writing about a few weeks ago.  One of the developments I see going forward is really two networks.  The human network is going to have usage caps and the machine network will not.  Humans are living with them today in the mobile market.  Just go to any wireless service provider website and try to buy a 3G or 4G device without a data plan.  Not going to happen, unless it is wifi only.

One of the reasons I am not in the exaflood camp, is I cannot find a reason why service providers (SPs) would let that happen.  The SPs are already in a “bits R us” business, so why would they want to continue to roll down the price curve and let users consume/create more and more bits for less?  It is simplistic to think that OTT services will ruin the network.  The real question to consider is how will OTT services be monetized and where in the network will value be created?

On a day in which CIEN is (16%) after reporting earnings and a variety of analysts are shouting “only a pause in the optical upgrade cycle” I think it is prudent to really think about what upgrade cycle are they referring too.  This is not a blog post about CIEN, I think there is a long life to service provider network upgrades to 40G, 100G, SONET/SDH replacement, evolution to packet, etc…the question I am exploring is who or what is driving the network upgrade/evolution and should we expect the winners to be the companies before us today because that is precisely what many of Wall Street analysts what you to believe.

I think what is missing is an understanding of how I/O virtualization is going to affect network design.  We continue to move into a persistent connected device network in which we want to consume more long form or big data content.  If the next evolution of statistical gain is not achieved in the switch fabric, in the metro or core of the network, then where will it be found?  Will it be achieved in the I/O and the CPU?  If that assumption is true then how will the network interface change?  If I/O virtualization is going to enable the CPU to run at higher efficiency rates, then that has the potential to put pressure on the network.

The exaflood debate and how it affects the network is really a two part debate: (1) machine or (2) human.  Where will the flood occur if it occurs at all?  How will devices such as routers, L2 switches, optical switches, WDM elements and network appliances interface with the server which I call a compute point?  Do these devices now need to be I/O and CPU aware?  Something tells me it is all about how the network interfaces with the compute element and I would submit that the number of companies thinking this way is very few.  Most companies have been focused on the 2009 catch-up spend.

/wrk

* It is all about the network stupid, because it is all about compute. *

** Comments are always welcome in the comments section or in private.  Just hover over the Gravatar image and click for email. **

Do you want to own content? Reviewing thoughts from Sep 2006

. Bandwidth Metering, Content, Networking . Leave a comment

I am off to CA for a few days, so blogging will be on hold until the weekend.  With reports today about a COD network, the OTT pompom waving, Apple’s rumored iCloud announcement in the WSJ and the negative NOK pre-announcement, I thought this would be a good opportunity to review a post I wrote on my old blog from September 2006 (full text of that post below for your review).

Back in 2006 I defined content as “applications that provide services, entertainment broadcasts, videos on demand, music on demand, interactive gaming, real time broadcasts, collaborative productivity applications, and information that results in the completion of an economic transaction in which value is exchanged.”  I think that is accurate.  You want to own the application, the media content or the broadcast rights to a real time event.  Those elements have licensing value – albeit that value chain has become compressed since the mid-1990s due to the lower cost of delivery and increased access options for consumers.

When I wrote the 2006 post, I thought the world of content could be put into four groups: (1) owners, (2) aggregators (3) service providers and (4) infrastructure providers.  A few months shy of five years later, that grouping still looks accurate.  The two questions investors what to ask are what is the value of each group relative to the other groups and what would actions would various group members take to alter their value positively relative to the other groups?  Below is a real simple table for blogging purposes:

Owners Aggregators Service Providers Infrastructure Providers
Record Labels Google RBOCs and PTTs Network Equipment
Movie Labels Apple MSOs CDNs
Compute Apps Netflix CLECs Colo and Hosting Firms
Real Time Broadcasters Amazon Wireless Providers Mobile Devices
Microsoft / AOL

What I think is more interesting than debating the model or who belongs in what bucket, is what the various companies are doing in the ecosystem to create value, which means take market share, take a larger portion of the available revenue and force others to live on less revenues.  This is why I think usage caps come to wireline connections just like they exist for wireless broadband connections.  When you use shared wifi connections provided by transportation services, hotels, meeting sites they tend to limit your ability to consume long form content.

The whole idea of a game specific network for COD is because “Jamie Berger, Activision’s vice president of digital for “Call of Duty,” said the company has about seven million daily players of the game who spend, on average, about seven full days a year playing the game against others online. Players often use headsets to communicate verbally with other online gamers.”  I have no idea what the company is going to charge, bet let’s say it is $3.99 per month or $40 on an annual basis and three million people sign up for the service, that results in $120M in found revenue for franchise.  When I wrote the two networks would exist in the future and the compute point matters it is because of “persistent network connections like Gmail, Facebook, applications, non-streaming content, games, etc are changing the rules as to how content is stored and handled.  Where and how the security and policy authentication occurs is affecting content distribution. The future is more bandwidth with shorter distances between the compute elements.  Despite all the papers on data center fabrics I read, the winners will be the companies that deliver constant improvements in bandwidth and enable a closing of the distance gap between compute elements.”

/wrk

* It is all about the network stupid, because it is all about compute. *

** Comments are always welcome in the comments section or in private.  Just hover over the Gravatar image and click for email. **

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Tuesday, September 19, 2006

Do You Want to Own Content, Aggregate or Provide Access to Relevant Content?

Jim Cramer says the way to play YouTube.com is to invest in Level(3). I can think of three important questions to consider:

  1. Are Cramer’s comments just a trade on YouTube.com’s value to the share price of L3?
  2. What is the state of long term expectations regarding Level(3)?
  3. As technology, services, media and content markets evolve, will the greatest value be found in companies that own (i.e. license or create) content, aggregate content or provide access to content? A few definitions to consider:

Content: Applications that provide services, entertainment broadcasts, videos on demand, music on demand, interactive gaming, real time broadcasts, collaborative productivity applications, and information that results in the completion of an economic transaction in which value is exchanged. To avoid any confusion, voice is service that is provided by an application called VoIP. It is true that legacy voice is deployed the world over, but voice as a service is migrating to IP and is a flat rate ($24.99 a month) application.

Content Owners: Companies or entities that create and or license the intellectual property rights to content.

Content Aggregators: Content aggregators are companies such as MTV, Apple via iTunes, Digg.com, YouTube.com, eBay.com, Google.com, Yahoo.com and MySpace.com. These companies provide an indexing and ordering function, as well as provide content aggregation that is relevant to various demographic groups. A seminal aspect to the success of MTV has been its ability to remain relevant over a 25 year history to specific demographic groups. The web sites that focus on social networking face the same challenge as MTV. We can call this the “MTV Challenge.” How does a company, broadcaster, web site remain socially relevant? This is the same challenge that any consumer products company faces. How do you maintain a stable of hot and relevant brands?

Content Service Providers: Content Service Providers are what people traditionally called carriers, PTTs, ILECs, RBOCs, CLECs, Cable, Cell Phone Providers, Telcos, Wireless providers and service providers. Although there is a lag in the migration of legacy services to new services, these companies are increasingly finding themselves competing in the same game. They all come from separate domains of expertise, but they are now in the same arena. Content Service Providers are companies that provide connectivity in all forms that enables consumes and businesses to access content.

Content Infrastructure Providers: This is a large group of companies that create and build technology elements that enable content service providers, content aggregators and content owners to create and deploy applications. Companies in this category are Cisco, Akamai, Alcatel, Microsoft, HP, IBM, Dell and many others.

Getting back to the question, the answer to question one has to be yes.  Level(3) was a company that started with an IXC (i.e. long haul exchange carrier) business plan to build a US backbone and rely on local service providers (e.g. CLECs, ILECs, RBOCs) to fill their long distance pipes. The answer to question two lies in understanding the history of Level(3) and the market structure it is operating in today. Well after the collapse of the telecom bubble, Level(3) is a company with annual revenues in the range of $3-4B, $7B in debt and negative EPS history. The incumbent (i.e. ILEC and RBOC) service providers in the US own ~80% of the local loops and the two largest backbones (AT&T and MCI) are owned by the two largest service providers in the US: at&t and Verizon. Level(3) needs to find a niche in which to excel and perhaps being a specialty service provider to content aggregators such as YouTube.com will be successful – but it will not lead to Level(3) being a tier one service provider.

The answer to question three is the most difficult. The whole crux of the net neutrality debate is founded in the principle that content service providers want to charge more for the use of their network elements. The evolution of technology by the infrastructure providers has created a world in which applications can operate independent of the service provider. This relegates the service provider to being a provider of bits per second or a low profit business. The proliferation of networks and access options has created a challenging business model for service providers in relation to the investment costs required to build new networks. The conundrum is that content owners have a proliferation of content distribution options, content aggregators have additional leverage because they are able to create a socially important or relevant brand and content service providers are forced to compete on price to secure the business from content owners and content aggregators. Service Providers are at the bottom of the value pyramid.

An example of this evolution is the NFL. The National Football League (NFL) is arguably one of the strongest consumer content brands in America. A few years ago they started their own television network. Why? They did this to provide more content to the extreme element of their targeted demographic who wanted to come home and watch reruns of college athletes running the 40-yard dash in February. This is the point where the NFL started – but it is not the point where they are going. In 2006, they started broadcasting games on the network. Why? Twenty years ago the costs associated with building a broadcast television network was beyond the intellectual scope and ability of the NFL. In 2006, the proliferation of content distribution options has grown to the point where it is now conceivable that the NFL could in time, directly license their content to end-users. The whole NFL package could some day be an on demand broadcast via the internet, wireless, podCast, YouTube.com and various other content aggregators or service provider outlets. If this evolution occurs, it is because the NFL can keep more of the broadcast revenues and advertising dollars, rather then distributing profits throughout the broadcast television industry. When this occurs I would expect to hear about a “broadcaster neutrality debate.” An additional point on the relevance of content, do you remember when CBS lost the NFL package to FOX and subsequently watched a number of affiliates join the FOX network, which in time created a bigger outlet for FOX content? This is the same evolution that is occurring in the world of relevant web sites.

/wrk

Sandvine and Lightreading are making my point…

. Bandwidth Metering, Networking . 2 Comments

When I wrote about waiting on the coming exaflood, one of my conclusions is that fixed broadband connections are going to face usage caps just like a wireless broadband connection.  The more you use, the more you will pay.  Apparently Lightreading.com has come to this conclusion as well and it is courtesy of Sandvine and their internet traffic report.  Here are the two relevant charts in my opinion.  Chart 1 and Chart 2.  The rise of real time traffic is what I was referring to on Friday’s post about “…persistent network connections like Gmail, Facebook, applications, non-streaming content, games, etc are changing the rules as to how content is stored and handled.”

/wrk

** It is all about the network stupid, because it is all about compute. **