October 2011 Earnings 1.0

Here is the start of my October 2011 earnings thread.  I am already a bit late having been positive on GOOG from the past, I did tweet it last week.  A few reactions so far:

GOOG: Sticking with my GOOG call from April, not much to update.

INTC: I have been positive on INTC based on my web 3.0 thesis.  It will be interesting to see if results were strong enough to break INTC out of the ten year down channel on a weekly basis.  Need a close above $22, but a close above $23.16 on a weekly basis would be a strong signal as that is the 38.2% Fibb going back to 2002.  I pitched this stock and thesis to a PM in NYC in September and he laughed at me.  Who is laughing now?

AAPL: I still like the product cycles and would be a buyer as it settles.  It is all about product cycles.

JNPR: JNPR was defiantly on the mind when I was thinking about my web 3.0 thesis and Moore’s Law exhaustion.  I read about fifteen reports on JNPR this morning, which is probably ten too many.  I would start by saying I think the company is in the midst of (i) product, (ii) market and (iii) leadership transitions.  These three forces need to harmonize for the company to go on a run and I do not see that happening for some time.

INFN: The company is making a bet on 100G and that they have the ability to scale their business to be a supplier in size to tier 1 service providers.  One cannot criticize the company for not taking on difficult endeavors.

APKT: Waiting on the official results after the pre neg which I posted about here.

YHOO: I think this stock is un-investible.  Negative product cycles and poor leadership; are there any other questions?

PWAV: I posted some thoughts on that last night.

MACRO: The market is really difficult to deal with on a daily and weekly basis.  It reminds me so much of 2008, even though I see people on CNBC who say it is not 2008.  I have posted on this in the past, but I will add when the market swings on reports from news outlets like Reuters, CNBC, WSJ and government officials and central bankers, we might as well appoint a Committee of Public Safety and start the Reign of Terror.

I will endeavor to post additional updates to this tread over the next few days.

Stocks of interest in the next few days:

10.19: RVBD, WDC

10.20: NOK, ERIC, T, STX, MSFT

10.21: GE, VZ

/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. ** 

Content Delivery Networks (CDNs) 08.21.11

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. **

Mobile Device Market Just Sucks

On Friday I was partially correct on NOK.  This morning NOK lowered their Q2 forecast citing a number of factors.  The stock is (11.5%) in the pre-market.  I said neutral on Friday; apparently it has lower to go.  In the press release NOK is citing a number a factors including a mix shift to lower priced smartphones and pricing actions in the market by competitors as well as itself.  I just struggle to see why anyone wants to bullish on the mobile device market unless you are AAPL, GOOG, HTC and QCOM.  Competition is brutal and I think tablets will have a more significant impact that people think.

To compliment the NOK train wreck this morning, the Rodman & Renshaw analyst Ashok Kumar dropped coverage of RIMM citing a number of factors, but basically saying that product cycles are negative and the company is falling behind the product cycle marathon and is generally un-interesting.

Here is what we know about the mobile device market: NOK and RIMM have both preannounced negative in Q2.  AAPL will release the iPhone 5 sometime this year.  HTC has one of the best engineering teams in the business.  Software is generally homogenized around Android and Widows Mobile.  Device prices trend lower.  If you cannot differentiate like AAPL, how is this a good market?

Interesting article in the WSJ describing how Activision Blizzard is planning to launch a Call of Duty online gaming service.  Not a lot of surprise here, but the implications are interesting as content owners create distribution for their content whether that is games, movies, applications, etc.  Service providers want to impose usage caps and force high volume users into upper service tiers and they will probably partner to create special service classes for content providers.  For example, when you contract for broadband at your home, you will be able to add a monthly surcharge for a policy based connection to Netflix or the COD network or some other content.  Just a random supposition on my part, but I think policy based SLAs will be a way for service providers to improve broadband margins.

 

/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. **

Wondering why my 80 year old dad wants a smartphone and what this means for the mobile device industry

Over the weekend my 80 year old father sent me an email asking for advice regarding upgrading his Samsung feature phone to a smartphone.  Apparently my sister had suggested a Droid and my brother an iPhone and my dad was thinking Blackberry.  I replied to his email asking him why he wanted to upgrade, how he intended to use the device and what is in the new device budget.  My dad is not an early adopter of the latest technology trends, but his is not illiterate either.  Below is a picture of him from the Korea War when America was still using exchange name calling codes in a two letter five digit format.

He replied that he did not know what social networking is, but he would like to talk on the phone, read email and text.  He has never sent a text message.  That forced me to think about what kind of device to recommend.  His current feature phone was designed to be a phone.  When the engineers at Samsung designed the clamshell phone my dad is carrying their first design objective was to build phone for talking.  The phone has a text message function, but with a standard telephone keypad it is really not a texting device if you are over 18.  As a phone for talking, the Samsung device is great.  The battery lasts for days, rarely drops a call and it is small and easy to carry.

When the engineers at Apple designed the iPhone, their first thought was to design a mobile computing platform that leverages the Apple OS.  They then thought to put a voice application on it and call it a phone.  That is much different design path than the Samsung engineers who designed a phone and thought to add some text functions.

I have been carrying a Blackberry device since 2000.  It was not always a phone, but it has always handled email.  That was the magic of the Blackberry.  The engineers at Blackberry said let’s design a mobile email device that uses the cellular network.  Then they made it a phone and after that they decided to make it web device.  It was the step beyond email and phone where Blackberry stumbled.  Today, there is no magic to email on a mobile device.

Nokia made a colossal set of mistakes, but the biggest like Blackberry was losing the innovation war to Apple and buying Symbian.  Symbian was a great operating system for the feature phone era – but it failed in the smartphone era.

Motorola or MMI as they are now called simply stopped innovating.  They fell behind the other device leaders after failing to replace the magic of the Razr and had to recruit a new CEO a few years ago out of QCOM named Sanjay Jha.  I have met Sanjay many times and I give him credit as he realized the market for mobile devices was going to be a product development marathon.  Product cycles will matter.  Miss a product cycle and it becomes hard to catch up.  That is what is happening to RIMM in the present year.  When Sanjay took over he knew he needed an OS that would be a winner and he chose Android.  The whole mobile device market really comes down to three operating systems: Android, Windows Mobile and iOS.

HTC embodies the concept of product development as a marathon.  They are a product development machine with phones on Windows Mobile or Android.  Samsung and Sony-Ericsson are another two developers of smartphones who have seen the light and are now using Android or Windows Mobile.

The business model in the handheld mobile device space is to pick an OS: Android or Windows as iOS is not available for license and webOS (developed by Palm now owned by HPQ) is really a cool OS, but very small amount of market share.  Next you need to develop a nice user interface (UI) to go on top of your OS.  Hire some excellent hardware, packaging engineers, use the latest chips from QCOM, STM, IFX, BRCM, then build a device, find market distribution and off you go.  This is a somewhat long answer by me to the Edlar Murtazin blog post today speculating that MSFT will by NOK’s device business.  If I was NOK and MSFT wanted to buy it, I could not sign the paperwork fast enough.  If I was MSFT, why would I want a mobile device business?  I have a mobile operating system business.  Which is more valuable?  I think the later and we can debate if MSFT is executing well, has leverage, blah, blah, blah.

When I first saw the iPad I was a bit skeptical.  I had accurately guessed the price at $499, but I was not certain it was a game changer.  Then I used the iPad.  I now have three in my family and it is an amazing device.  I am still carrying an almost two year old Blackberry 8900 as a phone, because it works well as phone and I really see no need to get a new phone now that I have an iPad.  I am also a T-Mobile customer and have been one since 2002.  I am waiting to see if the merger with ATT goes through, what my options are post closing before making any new device or service provider choice.

Back to my advice to my dad who is a Verizon customer.  I told him to look at the iPhone as well as the Droid Incredible and the Thunderbolt by HTC.  As the weekend wore on I realized I might have given him the wrong advice.  Why does he need a smartphone?  The few times he makes a call, he has the perfect phone today.  If he loses the small Samsung phone no one would care.  It was free.  Get another one.  What my dad really needs is an iPad with 3G.  That is the game changer.  When I came to this conclusion my next thought was what does this mean for the stocks in the mobile space?

Here are a six ten year charts to look at.  I think these charts tell you where the mobile device market is going.  Ten year weekly charts are nice because they diffuse the daily noise effect from rogue bloggers.  The other option is read the thousands of pages of research published annually on the mobile device market.  I just think it comes down to who is making cool devices, who can keep making cool devices and who are the companies that are making parts for the makers of cool devices.  Product cycles matter.  They always matter.  Buy stocks in positive product cycles and short stocks in negative product cycles.  Anymore thought beyond that last sentence is too much thought.  People need to let their over analysis go, it is not that hard to figure out and you do not have to calculate RIMM’s earnings if they sell a few more devices in Chile because the 12-18 demographic likes the BBM.  It is not that hard.  Product cycles always tell the truth:

NOK: Here is the poster child chart for missing a product cycle.  I marked the introduction of the iPhone, but it should also be noted that between 2006 and 2008, NOK spent a lot of time in legal battles with QCOM.  I wonder how much this distracted the management team when AAPL was readying the iPhone.  I think the stock will bounce around the bottom for awhile.  I simply do not understand the people who want to bullish on a company in this much turmoil as if a windows phone in Q3, or Q4 or Q1 is going add $20 to the stock.

RIMM: The recent close below the bottom trend line is not good.  Will this chart go the way of NOK?  Missing product cycles really sucks.

AAPL: This is called a positive product cycle company.

MOT: There is no chart for MOT as it is two companies now and the current data set for MMI and MSI is limited.

QCOM: Over the past 3.5 years, I have met with this company many times.  These were very trying times for the company and the stress showed on the management team.  The chart really does reflect that distraction of the various lawsuits both to investors and management.  Those distractions are now behind the company and the recent breakout is very bullish.

MSFT: Last week’s close was not good for MSFT.  I would be watching it here.  I see many reasons why the company is in a negative product cycle, but I am more inclined to say this is being priced into the stock and it sets up for a buy in the 2H 2011.  Time will tell.

GOOG: No ten year chart here, but a nice series of higher highs and higher lows.  As with MSFT, last week’s close not positive, but I like how the company is setup.

/wrk

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