Service Provider CAPEX, Bits R Us and Compute Conundrum

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.


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

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

Exaflood Does Not Make Sense

Another nice weekend on the east coast of the US and there is so much to think about that happened over the past week.   CSCO spent five billon of their off shore pile of cash on a video company.  ADTN announced a terrible quarter to start the year.  These two events are part of the conundrum of the past 10-11 years that when I hear people telling me how the internet is going to break, the upcoming exaflood and video is a huge problem it makes little sense to me.  At first I was going to write a big post with all sorts of charts, but the weather is too nice and I am not going to bother with the details.  It might be better to just state my opinion and if you feel differently go ahead and put money to work.  Just remember:

Innovative, Alternative Technology Solutions = Velocity

Developed Technology = Spent Capital, Doctrine, Incrementalism and Creativity Fail 

  • Since 2001 mobile phone and now smartphone growth has been great.  We have more smartphones and now tablets that sales exceed a billion devices a year.  2G went to 3G and now 4G…all of it means more devices using more capacity.
  • Many of the local loop upgrades are done in the US.  DOCSIS 3.0, FTTx, xDSL…yes, we have solved the local loop bottleneck.  It took ten years, but we are on our way to universal broadband.
  • OTT video is everywhere and soon we will have 15 or more NFLX copy cats and that is because content, especially video is a DIY content solution
  • File sharing, Dropbox,, Megaupload, S3…yes we have storage in the cloud
  • State aware apps like Gmail are the norm

All of these drivers of bandwidth are ongoing in the ecosystem and yet service provider CAPEX is lumpy!  CSCO has to buy a software based STB/codec company and ADTN who is in the heart of the local loop upgrade market has a huge miss because service providers CAPEX is lumpy, spotty, insert word of your choice.  Go look at any 10-year weekly chart of a service provider communication equipment company and you will see that the trend is down.  If the traffic trend is up, why is the equity value chart trend down?  Enough said on my part on the subject.

The NYT reported that CSCO was supporting a spin-in startup called Insieme.  I have a lot of thoughts on this subject, but I am going to take a few days to collect and organize my thoughts on the subject.  It will be the topic of my next post.  I posted some additional thoughts over on the Plexxi blog as to what I am seeing in the DC market.



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

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

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.


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.


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

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

More CAPEX Thoughts

A note from George Notter at Jefferies this morning detailed many of concerns and the thesis I have been working on since July here, here, here or you can just find them all here in regard to CAPEX.  Coverage of the Notter note can be found here.  I have the note and it is far more bearish than the coverage it received in LR.  If you have been a regular reader of this blog, than you have known about this CAPEX trend since July and this is not a surprise.

In the note, Notter cited accelerating ATT order and forecast cuts in the last 3-4 weeks; he is not sure what is going on; has never seen this before; could be any of three explanations for the cuts; ATT will dispute the cuts; but all will be better in Q1.

Side note: anyone have thoughts on the Cisco webinar on Fabric Path today?  I attended the presentation.


* 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. **

October 2011 Earnings 1.1: RIMM, RVBD, ERIC, ATT, CSCO

A few reactions to reports from yesterday, this morning and other news:

RIMM: I got an email last night asking me if I was following the activists who are posturing for changes at RIMM and one of their proposals was to break up the company into three companies: devices, networks and patents?  I have no idea how or why you would want to separate networks from devices, this is not NOK or ERIC with large independent business units.  RIMM’s devices are directly tied to their NOC operations.  I do not think that separation is even possible.  It is beyond me why people with a poor understanding of the company’s technical operations are promoted by various media outlets when all they are doing is talking their book.

RVBD: The numbers look fine.  I was thinking about a theory on RVBD that if there is a slowing trend of spending in enterprises, that RVBD should do better in that environment as they provide a lower cost solution that extends the life of the current network and enables enterprises to put off upgrades which is what is really needed to solve network performance issues.  In time, I think RVBD’s WAN acceleration will go the way of the distributed CDN, but this is probably a few years out.

ERIC: Wow…those margins suck, but I would say that mid-30s is going to be the new normal over the LT and some companies will need to adjust to that trend.

ATT: The CAPEX number is out and it is $5,220B for Q3.  Waves of relief emails are pouring into my inbox.  I have been bearish on ATT CAPEX, as noted in prior posts, and I still think something is amiss based on APKT, PWAV and JNPR commentary.  I would say that I modeled ATT CAPEX to be a little ahead of this number and if ATT still plans to spend to $20B in CAPEX, then the Q4 number should come in around $5,300-5,340B.  In all, that still tells me that multiples are going to be finishing their correction, contraction process.  The CFO will probably make a statement on CAPEX later this morning on their call.  I have updated the charts I posted in July and added a simple chart of ATT CAPEX back to 2002.  The wireless revenue miss is going to cause all sorts of questions to be asked.  Does this mean they have made enough investment in wireless or not enough?  I will wait to make a final call on ATT CAPEX until I hear from CSCO in November and CIEN in December.

CSCO: Acquired private company in which they had previously made an investment.  This is just further evidence of a content deep networking trend and that CDNs can easily be built by service providers.  I covered all this is prior posts.


* 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. ** 

Powerwave and AT&T CAPEX

Almost two weeks ago I posted about APKT and AT&T CAPEX.  You can read it here.  I wrote “Two days ago APKT pre-announced a Q3 miss due to a delayed order from AT&T.  The question is why did AT&T push out an order from Q3 to Q4 as the CEO stated?  Was it just a delayed PO in a larger multi-vendor deal or something else?  There is another theory that occurred to me today and that is ATT is in the middle of a fight with the DoJ over acquiring T-Mobile.  When a company spends $20B a year in CAPEX and has 294k employees, it has the assets to make a statement.  It is just a possibility.”

After the close PWAV guided Q3 revenues to be -60% from prior guidance.  On the call, the CEO clearly stated “…in the North American market, we believe that the uncertainty has been added to the market, given the government’s recent opposition to the proposed merger of AT&T and T-Mobile, which we believe has led to delays in spending of these operators, and they are reevaluating their capital spending plans.”

The question is how significant and broad are these delays?  JNPR reported tonight and the results do not seem to reflect any additional weakness than what was already expected.  In two days we will get the full AT&T and we might be able to see if there is a CAPEX slowdown or a shift in spending priorities.


* 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. ** 

CAPEX Thoughts Ahead of Q3 Earnings

Next week starts tech earnings and we will get a lot of data points on service provider CAPEX in the US.  I am going to make the assumption that Asiais fine and EMEA is soft, so anything worse or better will be a surprise.  What I want to know is what is going on in the US.  There are few reasons for my curiosity.  The first data point was NTAP’s CFO, Steve Gomo at the Deutsche Bank Tech Conference on September 14.  He said “…there’s I guess some minor mindset out there that thinks that they’ve [Financials] purchased so much that they’re kind of on a pause, they’re digesting what they’ve purchased. I don’t think we’re in that category. We’re pretty close to some of these very large banks, again nine of them we consider major accounts, where we have major accounts we have executive sponsorships and whatnot. So we’re very close.  And what we’re seeing is literally reduction in spend. And somewhat dramatic reduction in spend. And I’m not going to name names here, but we have several banks that have told us that they’ve been asked to cut back billions or $500 million type of spend out of their IT budget between now and the end of their fiscal years.”  What concerns me about this statement is if this spending reduction is being seen by the enterprise sales teams of large service providers (an if statement) then they will slow role CAPEX in 2H of the year.  To reiterate, this is an unproven assumption.

Two days ago APKT pre-announced a Q3 miss due to a delayed order from AT&T.  The question is why did AT&T push out an order from Q3 to Q4 as the CEO stated?  Was it just a delayedPOin a larger multi-vendor deal or something else?  There is another theory that occurred to me today and that is ATT is in the middle of a fight with the DoJ over acquiring T-Mobile.  When a company spends $20B a year in CAPEX and has 294k employees, it has the assets to make a statement.  It is just a possibility.

There have been no other significant negative pre-announcements by networking companies in the quarter to scale of APKT, so it is very plausible that this was just a one off event.  However, I would remind readers of what I wrote back in July about CAPEX.  Maybe I was not clear in my July post so I will try to be clear now.  I think there is real risk that 2011 is a year in which CAPEX ran hot in the 1H and will be slow in the 2H.  Maybe this has been priced into the street already – then again maybe it has not.

We will start to acquire data points next week:

–         ADTN on 10.12

–         JNPR on 10.18

–         T on 10.20

–         VZ on 10.21

–         TLAB on 10.25

–         ALU on 11.04

–         CSCO 11.09


* 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. ** 

Friday Musings, August 5th  2011

I had a few other titles for this post:

“Don Quixote and the 1G to 10G, Romley, Big Data Super-cycle”

“Brocade’s Warning”

“Inflection Points are a Time to Pause and Consider the Path Forward”

Before we get into a heavy technology post, I will say that one good jobs report from the BLS does not solve the public sector credit crisis and counterparty risk concerns.  Again, it just reminds me of 2008 when few people wanted to talk about the real issues, they just wanted to tell stories of how their daddy bought stocks after the Great Depression or after the Portfolio Insurance crash of 1987 and it all worked out.

BRCD pre-announced results short of expectations this morning citing weakness in storage and ethernet switching.  Looking back on the JNPR results a couple of weeks ago and looking forward to CSCO and HPQ, this clearly tells me there is pause in spending.  I do believe there is a significant inflection point in 2012 driven by the 1G to 10G upgrades initiated by Intel Romley MBs and the big data play – but I differ from many analysts who think that the incumbent players are going to get the business from this super-cycle.

I think this pending super-cycle is causing a pause in spending and it is opening a window for enterprises to stop and think about architectures and CAPEX.  There is no rush to add legacy equipment to a data center or a network today.  I think the macro drama is another reason why the big consumers of technology see no rush to spend and the pending super-cycle reinforces a prudent pause to ask: what is the best technology and architecture path going forward?

Let me provide an example of how macro events create opportunities for new technologies to emerge and take hold.  Here is what I wrote about APKT from April 2011.  “I define luck as: where planning meets opportunity.  The APKT team made the assumption that the proliferation of billions of IP enabled devices will use thousands of networks to communicate with each other and these networks will need devices on the borders to translate the languages between the networks.  This is called session border control and it is a software function that resides on an appliance.  The technology assumption was correct; all the company needed was an event to make the market.  Luckily for APKT a large number of investment banks (IB) massively over inflated the residential as well as the commercial real estate markets using leverage, derivatives and synthetic financial products.  I am pretty confident that the global financial crisis was not in the APKT business plan in the years leading up to 2009.

When the global credit crisis hit in 2008, it changed the technology buying process.  APKT became a winner and CSCO not so much a winner.  What really happened was the buying decision process and decision makers for technology provided by APKT changed.  CFOs started showing up in the decision making process and they wanted to buy technology that had a longer shelf life.  They wanted to break from the past and acquire technology that had longer deployable life span in the network.  You can see this in the revenue line in mid-2009.  Quarterly revenues start to move significantly higher after ten quarters of a relatively tight range.  This is when the market began to broadly adopt their technology and eight years of work began to pay off.”

My hypothesis for the next 12-18 months in the enterprise is the architectures for the data center and campus interconnect networks are up for grabs.  It is wide open and incumbents are not guaranteed to be the winners when the decisions are made.  In the service provider networks, the same is true.  There will be a lot fewer routers and switches and the routers that are deployed, may look very different from the routers you know and love today.


* 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. **

July 2011 Tech Earnings 1.3: CAPEX Thoughts

I just spent some time reading through ERIC and T notes, but before I detail some thoughts on CAPEX a quick comment on FFIV which I wrote about on June 23.  To me it looks like an EPS beat on tax and the growth rate is contracting ~400-500bps Q/Q.  That is not a good trend for a high multiple stock.  FFIV is a great company, but going forward they will have a lower multiple.  It is not the end of the world, just the way things work.

On to ATT CAPEX and I have already seen five notes telling me about a lagging indicator which is the Q2 CAPEX number from ATT.  All of these notes took the ATT CAPEX number as positive indicator for several networking infrastructure stocks.  A few months back we had CIEN report and then comments from the JNPR CEO and today we had no information from ERIC which always makes investors happier so what should a person make out of the big quarterly CAPEX print of $5.35B from ATT – yet the less than bullish comments from optical and routing/switching companies?

Here is a chart that shows the quarterly CAPEX profile for T from 2007 through the end of 2011 and I estimated 2011 Q3/Q4 CAPEX based on commentary from the CFO that T would spend closer to $20B in CAPEX for 2011.

T is an important indicator for the health of the economy as well as tech in general; just as WMT and FDX are important indicators for the US and global economies.  On the surface the CAPEX print today combined with guidance seems bullish.  However, look at this second chart that I marked.  Does 2011 look like 2008?  As I stated before, I am not a big history repeats itself person, but there are some similarities between 2011 and 2008.  2008 was BSC then LEH, mortgage crisis and credit crisis meltdown.  2011 is Greece, Ireland, Spain, Portugal, Italy and the US debt ceiling talks.  I am not worried about a US default.  If that happens we have bigger problems, but I am concerned with Europe and the slowness of the US economy and the overnight numbers from China were not great.  In August, we are going to hear from CSCO who will be the first big tech company to tell us about July.

In September, we should hear from CIEN and they will tell us about their views for the 2H of 2011.  On September 4 2008, despite the run in T CAPEX, CIEN was one of the first companies to lower expectations based on a contraction of CAPEX.  LEH declared bankruptcy ten days later.  CAPEX for T in 2009 and 2010 both started from lower Q1 bases and built through the year.  These were also the years of QE1 and QE2 and what I had termed the spending catch-up cycle which I now think is at a close as evidence by FFIV, STX, RVBD, etc.  The red dot at the bottom right of the chart, that is where I would expect T CAPEX to start in 2012 if 2011 is a repeat of 2008 CAPEX spend.  If that is the case, then forward expectations in the market are too high and CxOs have been telling us that for a few months.  I still believe in product cycles and this is merely a hypothesis by me and I could easily be wrong.


* 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

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.”
Continue reading

Evening PS…

ADTN cited CAPEX weakness at one of the their major customers in the Q.  There is nothing surprising that budgets are slow to get set and spent to the start the year, but this did come the day after Morgan-Stanley upgraded ERIC and ALU on a “US CAPEX Surprise.”  CIEN was marketing with RBC today and they were positive on the optical upgrade cycle.  I am positive on it too as network cores have been under invested for a about four years.  We will have more on the optical upgrade cycle and what to do with all those mobile device companies soon.

– GC