Huge Shift in Telecom Industry Supply Chains

Continuous Computing, a suppler of protocol-centric hardware, software and systems to telecom industry original equipment manufacturers, is introducing a solutions and services practice in response to demand for more prepackaged platforms from global customers.

The new practice will deliver customized, fully-integrated, application-level solutions to network equipment providers, especially in the wireless space, and including deep packet inspection capabilities.

The move reflects a change in global telecom operations and technology development, which require faster development at lower cost, at a time when virtually all service providers and equipment suppliers have fewer in-house resources to do so, says Brian Wood, Continuous Computing VP.

The new capabilities will accelerate the creation and delivery of carrier-class systems to service providers much faster, in many cases as much as 12 to 24 months faster, says Wood.

The demand for more prepackaged platforms also is part of a broader industry trend to focus on core competencies, while outsourcing lower-level or less-essential functions to business partners.

In part, that is a simple response to the fact that virtually all communications entities now operate with fewer in-house resources. But it also reflects a drive, across the ecosystem to add more value and differentiation.

“At all levels of the value chain, everybody is trying to add more value,” says Wood. “over the last two years we had been at platform level but now we are moving to the systems level.”

“OEMs are moving to software features while operators are moving to the marketing level,” he says.

“Everyone is moving,” Wood says, and the transformational change arguably is greatest for the equipment providers, who have to change the most as headcounts are orders of magnitude lower than in decades past.

There also is an industry-wide narrowing of the gap between enterprise solutions and carrier-grade solutions. Traditionally, enterprise products had a lifespan of two to three years, so costs had to be lower.

Telecom products had lifecycles more in the seven to 10 year range, and were hardened. So development cycles were longer and cost was higher.

These days, the gap is narrowing. Telecom equipment cycles are moving closer to the enterprise lifecycle as everything becomes IP based.

So there is less distinction between enterprise class and carrier class products. Obviously carrier class products require more redundancy, more cooling and other modifications of basic platforms to harden them.

But that is a truly big shift. Differentiation now occurs at the level of software, not hardware or protocols. And enterprise and carrier systems increasingly are produced on a common foundation.

Broadband Mapping: Studying Non-Problems

About $350 million of the version of the broadband stimulus package passed by the Senate will go toward mapping broadband coverage. Some will argue that it doesn't matter what "stimulus" spending goes toward, as long as the money goes to work immediately, is targeted and terminates once the recession is over, and there is sound logic there.

The issue, though, is whether there is a terrible problem requiring that we "study" this matter some more. If one looks at where the United States ranks in telephone penetration, for example, the United States ranks about 16th, as measured by the Organization for Economic Development and Cooperation.

One can quarrel with the methodology OCED uses, but for the moment consider simply the well-developed state of landline voice service. Does anybody really think the United States has a problem with wired voice penetration?

And if not, why is a "15th in the world" ranking for broadband access a problem?

A "back-of-the-envelope" forecast by economists at the Phoenix Center suggests that U.S. broadband subscription rates (keep in mind that we are talking about demand for the service, not its availability) will be about 75 percent of the telephone rate in 4.4 years, and broadband will equal the telephone subscription rate in 9.6 years.

There is a difference between "lack of supply" and "lack of demand." The OECD statistics for broadband penetration are a "demand" metric, not a "supply" metric. And yet even on that score the United States demand for broadband already is equivalent to wired voice.

Some things do need to be studied because there are problems of supply. But supply isn't really the issue for broadband. The problem is demand.

In fact, as wired voice demand continues to decline, at least in the consumer market, why would we not see calls for studies of why wired voice penetration is so "low"? The reason we don't hear such calls is because demand is shifting. There is no problem with "supply."

Mapping broadband might be a useful exercise for some. But mapping doesn't change the demand equation, which is the only problem broadband currently faces. One might argue that prices are too high, or speeds too low. But that is a problem only if supply is not being upgraded. And it is hard to argue that is not occurring at a rapid pace. In fact, broadband already has been adopted at rates that surpass nearly all key consumer products of the last 100 years. Only use of the Internet itself is a reasonable candidate for "fastest-adopted" innovation.

There are lots of problems to be solved. Mapping broadband, to pinpoint supply constraints, doesn't strike me as being one of them.

Telco broadband Now Shifts to Video

The telco broadband market experienced a significant downturn in new subscriber additions during 2008, according to iSuppli Corp. Of course, the reason is that the market is mature: most users who want broadband already buy it. As a result, the next several years will be about enticing customers to migrate to higher-speed tiers and enhanced services, principally IPTV.

In part, this will lead to a shift in lead product offering and a slower growth rate than broadband access had achieved. Some major telcos are pushing IPTV services more than Internet access, a product category in which there are entrenched incumbents. In the broadband access market, there were no incumbents to dislodge, so growth was not a zero-sum game. In the IPTV market, growth will come in the form of market share shifts, a tougher proposition. 

“New telco broadband subscriber growth saw a 9.1 percent decline in 2008 following double-digit gains during the prior five years,” says Steve Rago, iSuppli principal analyst. “Hardest hit was North America, with new subscriber additions in 2008 amounting to 3.1 million, down 56.1 percent from 6.5 million in 2007. 

"The world’s developed regions reached broadband saturation during 2008, while developing regions continued to grow," he says.  "Of these regions, Latin America experienced the strongest growth."

New Fiber-To-The-Home connections grew by 90 percent and new high-speed VDSL connections grew by 54 percent compared to 2007, iSuppli says. In the cable world, many European and American operators introduced DOCSIS 3.0, significantly increasing broadband access data rates.

The next round of growth therefore will not come in adding new broadband subscribers but getting them to upgrade to higher-speed and enhanced services. Analysts at iSuppli believe 2008 was a milestone in the growth of very-high-speed access networks, and expect accelerating growth in the category over the next several years.

Telco TV was a major driver of high-speed access upgrades during 2008, iSuppli says. Virtually every telephone company and competitive access supplier deployed or made plans to deploy television services during 2008, the firm says. Overall telco TV subscribers grew by 8.8 million to end 2008 at a total of 18.5 million.

Telco TV during 2008 transitioned from the early-adopter stage to the early majority stage, so sales volume should now start to ramp up significantly for several years. North American telephone companies added a net 3.3 million television subscribers in 2008, the company says.

Every Company is a Media Company

Smart businesses are beginning to produce content that’s less about their product and more about topics that their customers gravitate to, writes Rick Burnes, an inbound marketing manager at HubSpot.

Whole Foods publishes recipes and cooking videos. These companies are producing quality media, just like The New York Times or Discovery Channel.

Why? Every company, no matter what industry, is essentially gathering and distributing information, both to employees and external audiences, and trying to attract attention from prospective customers. 

Traditionally, this has been an "outbound" function using intermediaries such as media, trade shows, email blasts and direct sales, where companies reach out to potential customers.

These days, one sees use of webinars, blogs, Web site content, news feeds, videos and other efforts that invite potential customers to show up.  So every company now produces and distributes content. 

Market Doesn't Like Bank Bailout, Apparently

Judging by the plunge on the markets as Treasury Secretary Geithner spoke...

Verizon FiOS Challenges DirecTV as HDTV Leader

DirecTV continues to offer the most high-definition channels of any pay TV provider, but Verizon is catching up quickly with its FiOS TV service, according to Pike & Fischer. The firm finds that as of January 2009, DirecTV was offering as many as 104 channels in high-definition format. But that only beats Verizon's HD menu by one channel.

Comcast, the largest cable operator in the United States, has one of the smallest selections of high-definition channels, Pike & Fischer says. Comcast in some markets is offering less than 40 HDTV channels, although the company's marketing focuses on its large selection of HD movies, TV shows and other content available on demand.

Most providers examined in the study charge a premium price for HDTV service, usually less than $10 per month. But some, including Cablevision and Time Warner Cable, offer a substantial number of HD channels for free.

Qwest: Enterprise and Wholesale Drive the Business

Some will look at Qwest Communications International Inc. fourth quarter and full-year results and see trouble; others will see improvement. Irrespective of those judgments, it should be noted that for Qwest, business markets and wholesale are the majority of the business. 

Mass markets, which includes both consumer and small business revenue, represented about $1.4 billion worth of fourth-quarter revenue (and some portion of that is small business). 

Wholesale markets contributed $789 million. Business markets represented $1.1 billion.  In other words, Qwest one of these days relatively soon will be earning more money from wholesale and business customers than from consumers, as important as consumer markets may remain.  

Furthermore, revenue in business markets grew year over year, while mass market and wholesale revenue declined, with those declines attributable to voice services. 

In the fourth quarter of 2008, net income was $185 million, or 11 cents per diluted share, compared to $366 million, or 20 cents per diluted share, for the fourth quarter of 2007. Bad, eh?

Not if one considers the adjustments. The results include severance charges of $19 million, or one cent per diluted share, in the fourth quarter of 2008. More important, though, the earnings per share calculations reflect higher pretax income compared to the fourth quarter of 2007, offset by increased tax expense as the company recorded normal effective tax rates beginning in 2008. 

Income before income taxes in the fourth quarter increased 17 percent compared to the fourth quarter of 2007.

Revenue in the quarter was $3.3 billion, a decline of three percent compared to $3.4 billion

in the fourth quarter of 2007 and a decline of two percent compared to the third quarter of

2008. 

Adjusted EBITDA for the quarter was $1.18 billion, a four percent increase compared to $1.14 billion in the year-ago period and a nine percent increase compared to $1.08 billion in the third quarter. Adjusted EBITDA margin was 35.6 percent compared to 33.1 percent in the fourth quarter of 2007 and 32.1 percent in the third quarter. 

For the full year, net income was $681 million, or 39 cents per diluted share, compared

to $2.9 billion, or $1.52 per diluted share, in 2007. Full-year results reflect the same normal effective tax rate dynamics as the fourth quarter. 

Earnings per share results include net special charges of three cents per diluted share in 2008 and 20 cents per diluted share in 2007. Income before income taxes was up 13 percent after adjusting for onetime

items.

Total revenue for the fourth quarter of $3.3 billion reflects an eight percent year-over-year growth in data, Internet and video revenues, which was offset by a decline of nine percent in voice revenue and a 33 percent decrease in wireless revenues.

As Qwest tells the story, income before income taxes increased 17 percent year over year while EBITDA increased four percent. Enterprise data and IP revenue was up nine percent year-over-year.

Data, Internet and video revenue now 25 percent of mass markets revenue, a key measure of how well Qwest is replacing declining landline voice revenues with new and alternative revenues. Qwest's consumer broadband subscriber base increased nine percent year over year.