Framing Exercise: Web 3.0 and the Network
I firmly believe that we are at the end of the Web 2.0 era and we are now in the early period of what I will call the Web 3.0 era. My definition of the Web 3.0 era is going to be different from how web centric people will call Web 3.0. I look at network from the perspective of (1) how the network is built, (2) what are the driving forces in the network and (3) what are the behavioral changes that will occur within the user community that deploys networks.
I have had a thesis on the evolution of the network that I have been building for some time. It starts with the collapse of Web 1.0 in 2001. Web 1.0 was the static content era based on HTML in which the network was not very efficient. The inability of the network to support dynamic content is why companies such as AKAM were very valuable. AKAM provided a fix to the network inefficiency problem and made the user experience better. It was also an era in which a lot of CAPEX was spent on building long haul (LH) networks. The problem was not a lot of CAPEX was invested in the access portion of the network and bandwidth swaps could only mask the lack of revenue bearing traffic from the access portion of the network for so long.
Frame 1: Web 2.0
Web 2.0 started to take root in 2003. The foundations for the network as a platform took hold and for the next seven years the network changed culminating with virtualization building a firm foundation, but there were many important network milestones along the way. Social networking sites were started: Friendster.com in 2002, Linkedin.com in 2002, Myspace.com in 2003, and Facebook.com in 2004. State aware applications such as Gmail (live on 04.01.2004); user generated content sites emerged like YouTube.com in November 2005 and AMZN launched their S3 storage service in March 2006. Web 2.0 destroyed a large amount of equity value in mobile device space because the legacy mobile device companies like RIMM, MOT and NOK were slow to respond with devices that supported the Web 2.0 world. AAPL was really the first company to build a mobile computing platform for Web 2.0 and they were at the forefront of network evolution that Web 2.0 was driving with a property called iTunes that leveraged the network as a platform. When iTunes and Web 2.0 were combined with a mobile computing platform called the iPhone in January 2007, magic happened.
I have included a series of 10-year equity charts for HPQ, INTC, AKAM, CSCO, NOK, RIMM and JNPR. I have purposely excluded AAPL, AMZN, NFLX and DELL. The charts I chose reflect the market collapse in 2008 and rebound in 2009-2010. For discussion purposes I am going to ignore the market melt down induced by the global credit crisis and collapse of LEH in 2008. I am already on record describing what I termed as the catch-up spend post the LEH collapse here and here. As investors and technologists we should not perceive the catch-up spend as a new market cycle or validation of a technology or market strategy. The catch-up spend was a reaction to a market spending contraction – not a new world. I think the catch-up spend might have fooled a few companies into thinking it was the rebirth of their traditional market, when the catch-up spend really had nothing to do with Web 2.0. Let me illustrate this point with a few long term equity charts. Long time readers will know I like weekly charts on a ~10 year time span because I think they filter out the daily noise and help understand the direction of companies when overlaid with important events. On each chart I have inserted an orange scribble line which is my attempt to insert a proxy trend line assuming that the macro credit crisis and catch-up spend events had not occurred and the consumption of technology was allowed to evolve independent of global events. I trying to separate technology trends (i.e. product trends) and technology market evolution (i.e. technology adoption cycles) from outside influences which is the equity component of my Web 2.0 to Web 3.0 thesis.
HPQ: This is an interesting chart when you consider that it is framed by $25B for Compaq in September 2001 and the iPad shipping in January 2010. Assume for moment that the credit crisis did not happen and the chart is down a bit in 2008 and then peaked in 2010. HPQ acquired EDS in 2008. They did this because they were believing in the ongoing propagation of Moore’s Law and the enterprises would consume more network infrastructure and having the ability to influence or control the decision making process in regard to that consumption was a good position. Kind of interesting that the peak in HPQ equity coincided with launch of the iPad, which marks an important transition point for the PC market in the same manner that the iPhone marked a transition point for the mobile device market.
CSCO: A few observations from the CSCO chart as this is company I have written extensively about in the past. They bought Pure Digital (Flip) at the bottom of the equity cycle. The thinking was that video was going to be a huge driver of the next evolution of the network. In June 2008, CSCO was starting to market and provide thought leadership around the concept of a Zettabyte Era. They have continued to update the models and provide copious amounts of data on the subject. The problem with all this data is I fail to see a follow through from the traffic trends in accelerating equipment demand. I think the network is going to look different, but I think many incumbent vendors think that the network will look like the past. After all, history does repeat itself (that was a joke). In July, I wrote “intended network design has changed little in twenty years. I look back in my notebooks at the networks I was designing in the early 1990s and they look like the networks that the big networking companies want you to build today. If you are selling networking equipment for CSCO, JNPR, BRCD, ALU, CIEN, etc, you go to work every day trying to perpetuate the belief that Moore’s Law rules. You go to work everyday and try to convince customers to extend the base of their networks horizontally to encompass more resources, vertically build the network up through the core and buy the most core capacity you can and hope the over subscription model works. When the core becomes congested or the access points slow down, come back to your vendor to buy more.” X. Looking at the chart of CSCO, the average person would assume that NFLX streaming event would have been a big driver of CSCO revenues. Hmm…why did that not happen or will it?
JNPR: JNPR is very much a product cycle company and I think the ten year chart illustrates that point. The question is how will a hardware centric company do in a software/virtualized world of Web 3.0?
AKAM: I have already written a longer post on CDNs, thus I am not going to add much to that post. What I will say is content deep networking strategies, increased fiber penetration and software based network controls (e.g. ADCs in virtual form, cloud based SLA controllers, etc) that enable the end-user to control the network access point in a world of state aware apps and real time content is not the best environment for companies that provide solutions intended to improve the inefficiencies of the network. In other words, companies that created value by improving or fixing the network may see less applicability if the network requires less fixing and less improving.
INTC: The era of Web 2.0 was not overly kind to INTC. They never made it big in the mobile device market, the PC market eroded over time and the glory of the 1990s never returned. I am working on a thesis that Web 3.0 might be a better era for INTC.
RIMM and NOK: I have written extensively in the past about the mobile device market, but a few thoughts on RIMM and NOK. Both NOK and RIMM missed the Web 2.0 evolution and how it would impact adoption of their products. RIMM is another example of a company that fixed or improved the operation of the network and that function has little value going forward into the world of Web 3.0. That is a direct reference to the RIMM NOC. So much has been written about NOK I doubt I can add anything insightful. What I will say is their equity charts are twins. Both charts peaked between the iPhone 1 and iPhone 3G and launch of the iPad was just another kick when they were down.
Frame 2: Web 3.0
I would be upfront and say that my definition of Web 3.0 is very much a work in process. I know it when I see it. I am sure my definition will change and evolve. Currently I am using the descriptor of: metadata personalization, real time content, big data, and big personal pipes with user defined controls. With that sounding like research project, I am more inclined to just identify the trends and examples of Web 3.0 and let the definition take its final form in the future. Here are some signs posts along the way that point to Web 3.0:
- HP to sell or spin off Compaq ten years after they paid $25B to buy Compaq. What screams “end of the Web 2.0 era” more than this decision?
- Commodity HW and appliances with value add software will define the new network. This implies that HW based network infrastructure will suffer margin erosion as legacy HW solutions reduce ASPs to match SW based solutions.
- The network aides of the past become less useful (e.g. HW based ADCs, WAN acceleration, CDNs, etc) and new devices that aid content replication locally become far more important as networks see the transition from 10 to 100G.
- User (consumer or enterprise) defined and controlled network pipes. Power to the people to define and control their network experience (i.e. bandwidth).
- Decline of managed services and the rise of the enterprise customer as their own service provider using managed fiber with peering relationships with traditional service providers.
- More FTTH builds around world with governments helping pay for part of the infrastructure build.
- Power, heat, cooling and all the physical requirements for big data deployments continue will drive the adoption of optics and content deeper in the network and an evolution away from OEO.
As always this post is just a rambling of my thoughts about networking. None of it should be taken too seriously as I could easily be wrong.
* It is all about the network stupid, because it is all about compute. *
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