Notebook 12.19.11: NFLX, Mobile Devices and SP CAPEX

In the world of virtualization, we are somewhere between exiting the first stage and seeing how the second stage develops and ultimately it will all depend on how the third stage develops to see if the virtualization wave translates into a big driver of the cloud.  Here are the three stages of the virtualization:

Stage 1 Server Virtualization: Server virtualization made life a lot easier for sys admins.  This was the primary driver for the first wave.  It is still on going, but we are in the sunset for this stage as we are seeing the emergence of the second stage.

Stage 2 Software Stage: This is the stage that we are currently in and we will see if the business proofs created in this stage become sustainable, long term businesses.  In the second stage of virtualization, software engineers begin to write software differently.  Software is architected for the virtualized environment.  This is about open APIs and a cultural shift in software coding behavior.  If want to dig into the details of what I am referring to I suggest you review this 269 slide presentation here.  I inserted an interesting slide from the presentation to the left.

Stage 3 Real Businesses Emerge: This is the next foreseeable stage of virtualization and developments in stage 2 are trying to test or prove their efforts in stage 3. The real businesses that emerge in the open API / virtualized infrastructure of the cloud will be called proofs.  I am not certain if we have many proofs yet, but we are trying.  I do not see a stage 4, but that does not mean a series of additional stages will not appear – they are just presently not visible.

NFLX

This brings us to NFLX which has certainly been the subject of a lot of drama this year and I too have written about NFLX here, which I point out specifically for the commerce reference of Braudel which I think is important to keep in mind when evaluating content businesses.  Last week NFLX stock was rallying on take out rumors by VZ.  A buy side PM friend emailed me “You see desperate NFLX longs put out rumor today VZ was interested acquiring them. Totally stupid and you would think they could make something better up. Closed down 3.”  I tend to agree with the comment for two reasons.

(1) The first is that NFLX has a content acquisition problem for which they need to raise capital.  That is clearly a problem that VZ would solve, but what would VZ gain?  The NFLX service is an open API hosted on the AWS infrastructure, i.e. stage 2 of virtualization.  The question is how sustainable is the business and will it become a proof in stage 3?  Here is an excellent overview of the NFLX open API.  Back to the VZ acquisition rumors and for all I know VZ could be buying NFLX at this very second, but I would suppose the real value of NFLX to VZ is the engineering team that built out the open API platform in a year.  There is value in the subscriber base, but clearly this has been greatly diminished.  Therefore, I think the real value is the 300 engineers and 700 employees that built the product offering.  If that is true, that brings us to the second point (2) as I think VZ could hire that team for a lot less than paying for the whole company.

Mobile Device Market

Gigaom had two visually interesting posts recently on the mobile device market here and here.  If you look at the first post it shows a visual history of the mobile device market including the $1,000 StarTac in 1996 and $500 Blackberry’s in 2001.  My conclusion in the wake of RIMM’s earnings last week and this visual reminder of phones I owned over the years is that the mobile device market still sucks.

Service Provider CAPEX

Hard for me to understand why analysts are writing about CAPEX uncertainty for 2012 when there were warning signs six months ago.  Links to some of reports this morning are here and here.  Now that it is getting fully priced in I think it is time to start thinking about initiating new longs in the space over the next few weeks.

/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. **