Notebook 03.06.12: RIMM, Product Cycles and Content

I am off to OFC/NFOEC tomorrow and as Andrew Schmitt of Infonetics tweeted (@aschmitt) earlier, I am looking forward to the “Drink every time someone uses the word “bandwidth” and “explosion” in the same sentence. #OFCNFOEC drinking game.”  This is post is a collection of things I am thinking about, therefore I am writing them down in my notebook to validate or dismiss.

RIMM: With the news last week of more layoffs within the WebOS group at HPQ, it shows the missed opportunity that RIMM had with PALM.  If RIMM had acquired PALM instead of QNX, they would have had a legit, complete OS to put across their devices.  The mobile device market would have four OS contenders – not three.  Unfortunately, HPQ acquired PALM and has pretty much killed WebOS.  I am not saying that acquiring PALM would have saved RIMM, but they would have had a chance.   I have spent a fair amount of time posting about RIMM; I read the other day that RIMM was up that day on take over rumors.  I still wonder why would someone want to own the RIMM business?  Seems crazy to me and as for the new CEO, I agree with him the only way out is hard work and hope they made some correct decisions.

Service Providers: I read an interesting sell side note from Deutsche Bank today in which the analyst (Brian Modoff) wrote that he had spoken to several US carriers who were disappointed in one of their large infrastructure suppliers because this company was not designing products how they wanted the products designed.  Well…that pretty much sums up my post here and here from the last few weeks.  Nothing kills creativity faster in the organization than becoming the outsourced engineering arm of your customer.  I want to solve my customers challenges, I just want to do it on terms that are best for my business – not their business.

Content: I have posted three times on content.  For some reason, I glanced at a TV today in a hotel lobby that was tuned to CNBC.  There was some bizarre conversation about Apple and mobile devices and Dow 13k and it triggered a thought.  One of the trends I have been tracking is what I call DIY content.  That was the point I was making about Verizon not buying NFLX, but hiring the team from NFLX.  My view is that it is increasingly easier for content owners to distribute their content and this will increasingly pressure content distributors and content aggregators.  The middle ground between the consumer and the content creator will NOT be a good place to be unless you can own the distribution ecosystem (i.e. devices) like AAPL.

Off to LA tomorrow for OFC and looking forward to meeting PollyAnna and hearing about the how the internet is about to break under the weight of all those videos.


* 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. ** 

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 (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.


* 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

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). Continue reading