Archive for March, 2006
PortalPlayer Preface Chipset Gaining Recognition
PortalPlayer (PLAY) continues to follow a trajectory of diversification from it’s core Apple (AAPL) iPod business. Portalplayer currently derives 90% of it’s revenue from Apple iPod and Nano hardware sales and is working on a new chip in partnership with Microsoft (MSFT) called Preface. Preface is the brain around which Microsoft Sideshow is built. We’ve written about the potential for the Preface chipset, and there are a few recent developments that reinforce our opinions here that I thought were worth sharing.
Most people saw the Sideshow announcement as constrained to laptop lids- we continue to maintain that Sideshow (and the Preface chips designed for it) is part of a larger strategy by Microsoft to enter the Personal Media Player (PMP) market. It would appear that Microsoft is now showcasing the Sideshow technology in some of these alternative applications, and that the mainstream press is picking up on this trend.
Well, SideShow isn’t just for laptops anymore. During the Media Center Boot Camp at the Electronic House Expo here in Orlando, Fla., Todd Rutherford, Microsoft Program Manager for eHome Control, demonstrated the technology implemented in a handheld remote. Just because it is a product of Microsoft’s mobility group doesn’t mean the solution must be tethered to a laptop.
SideShow can be implemented on virtually any piece of hardware capable of connecting, whether by WiFi, Bluetooth, Zigbee, Z-Wave, Ethernet, you name it. These auxiliary devices grab “gadgets” from the PC. Gadgets are mini applications that are sent, in an encrypted format, to the remote hardware by the computer.
In short, Preface is an ultraportable hardware platform for many devices and applications.
Also, If you’re interested in Sideshow and what applications Preface can enable, and can endure 20 minutes of amateur video, check out this clip from Robert Scoble (of Scobelizer fame). Just remember, Sideshow is a generic synchronization and consumer electronics technology, not just something that fits into the lid of a laptop.
Microsoft is clearly trying to drive hardware standardization of low-end consumer electronics hardware with Sideshow, much like it has been with Windows Mobile 5.0 for high end mobile devices. It isn’t clear to me that the valueship of a hardware partnership is factored into the value of Portalplayer. Microsoft, like Apple, can be an effective kingmaker in the hardware business. Check out HTC (2498.TW), a Taiwanese company that manufactures many of the Windows Mobile Smartphones and PDAs.
AT&T Project Lightspeed and the Jedi Mind Trick
The Death Star is looking vulnerable these days.
AT&T (T ) COO Randall Stephenson, speaking yesterday at Bank of America’s 2006 Media, Entertainment and Telecommunications conference attempted to exercise his marketing skills with a poor attempt at a Jedi Mind Trick.
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Expropriation is Not Competition, Even in France
The Wall Street Journal published an article on CLEC activity in France which praised the efforts of the French equivalent of UNE regulation and highlights the ‘competitive’ environment it has created. Yesterday the WSJ covered (and we commented on) the German government and Deutsche Telekoms efforts to have UNE rolled back.
UNE, like Net Neutrality, is a confiscatory government policy that expropriates an asset from it’s owner.
The article focuses on the ’success’ of a French CLEC called Iliad.
One telecom company in particular has exploited the changes and created competition in France — a start-up called Iliad. Over 1.1 million French subscribers pay as low as €29.99 ($36) monthly for a “triple play” package called Free that includes 81 TV channels, unlimited phone calls within France and to 14 countries, and high-speed Internet. The least expensive comparable package from most cable and phone operators in the U.S. is more than $90, although more TV channels are generally included.
And this is how Ilaid’s model works, for those who need a quick into to what UNE regulations are all about.
France Telecom had to allow alternative providers like Iliad, Neuf-Cegetel, and Telecom Italia SpA’s Alice to install their own equipment in the massive underground centers that collect thousands of phone lines. Regulators determine how much France Telecom could charge providers to rent its lines and how many days France Telecom has to fix service problems reported by competitors’ customers.
The reality? The fantastic broadband performance figures Iliad delivers are from a subset of users that happen to be close to central offices. Using UNE, Iliad can decide which customers they can market to, claim those lines from the incumbent telco, and then leave the high cost/low margin business to the incumbent.
CLECs like Iliad are only as good as the infrastructure they can free ride on.
The same situation existed in the USA until the Brand X decision was handed down, and that led to the rapid unraveling (2003, 2004, 2005) of domestic UNE regulations. The result? AT&T (T ) and Verizon (VZ) have now committed billions of dollars to build state of the art infrastructure.
The fact is broadband penetration in France and Germany is less than the USA, and real deployment of advanced FTTH infrastructure is nil in Europe with the exception of muni fiber in Amsterdam.
The real result of the ’success’ of Iliad and other CLECs is France Telecom isn’t deploying any new advanced infrastructure because they don’t want to be forced to hand it over to a CLEC. Deutsche Telekom, France Telecom, and Telefonica are all refusing to build new infrastructure until the obligation to allow another to free-ride on top of it is removed. This has pitted them against the wishes of the EU- which was the focus of my post yesterday.
Companies only invest risk capital when the potential returns warrant it, regardless of the wishes and magical wand waving of pundits and politicos in Brussels or Washington DC. Telcos will simply refuse to make new investments in technology if the upside rate of return is regulated by a government entity and the downside risk is left unlimited.
The only solution is to create an environment where multiple providers are financially incentivized to build competitive access infrastructures.
Here’s a summary of the blogosphere. Not surprising, everyone confuses expropriation with competition.
The Multimedia over Coax Alliance (MoCA) ratified their full specification today.
While reading this news item, I also noticed that Entropic publiclly announced their partnership with Motorola to provide MoCA chipsets in Verizon’s FiOS TV deployment. I broke the news a few weeks earlier (after sitting on it for two months following CES).
Impressions of a Data Center
A few weeks back, while in CA for OFC/NFOEC, I was lucky to get a late night tour of 365 Main, a massive, state of the art data center near the Embarcadero in San Francisco. My guide, Peter Kranz, was someone I worked with and co-adventured with in College who is now the owner and CEO of Unwired, a San Francisco based CLEC. His equipment is in this data center, and he invited me in for a look.
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Ich bin ein Broadbander
The WSJ on Saturday covered efforts by Deutsche Telekom (DT) to seek deregulation of policies similar to UNE-P regulations here in the US.
Europe’s largest telecommunications company is investing €3 billion ($3.6 billion) to connect residential customers to the Internet at speeds up to 50 megabits per second — more than eight times as fast as its quickest offering so far and faster than any other connection available in German homes. The move is crucial for Deutsche Telekom’s ambitions of offering a “triple play” of services spanning telephone, Internet and television at a time when its traditional business of phone calls is being shaken by major technological upheavals.
It looks like they managed to get a copy of Verizon’s (VZ) and AT&T’s (T ) playbook…
The German incumbent is lobbying to be spared such interference, arguing that it is creating a new service and already faces mounting competition from cable, Internet and other telecom companies. It has threatened to scrap the spending plan and lay off more workers if regulators impose too many restrictions.
The German government supports the removal of UNE-P like rules and has increasingly distanced itself from regulating the telco sector. Why? Concern over a broadband gap! According to the OECD, France, Great Britain, and Germany all lag Japan, Korea, and the USA in broadband penetration, particularly in next gen technology deployments.
Another quote from the WSJ article:
The government argues that there are three steps in fostering competition: privatization, regulation and deregulation. “The third step is the one that needs the most courage,” says Joachim Wuermeling, Germany’s secretary of state for the economy. That stance, however, puts Berlin on a collision course with European Union regulators in Brussels who are responsible for setting the terms of industry competition across the Continent.
As it turns out Telefonica and France Telecom want the same deregulation, and the EU is concerned that allowing Germany to deregulate would be a precedent for the entire continent. All of these carriers are making deployment of next gen broadband networks contingent on a release of obligations to lease the new infrastructure to competitive carriers.
I do not understand the mechanics behind the EU and how it represents the interests of corporations and individuals in member states, but it seems ridiculous that a sovereign country no longer has control of how a company can operate within its own borders. Who are the EU regulators looking out for? Themselves?
Companies only invest risk capital when the potential returns warrant it, regardless of the wishes and magical wand waving of pundits and politicos in Brussels or Washington DC. Telcos will simply refuse to make new investments in technology if the upside rate of return is regulated by a government entity and the downside risk is left unlimited.
I am frustrated the hypocrisy of those who lament broadband availability and technology, but at the same time refuse to allow those who make the risk capital investment to reap the benefits- instead they advocate confiscatory policies like Net Neutrality, and UNE-P.
The good news is that these debates are taking place, as we may be lucky enough to see the same destructive UNE-P legislation that was removed in the USA eradicated from three of the largest states within Continental Europe.
Thanks to Om Malik for some good data (.pdf link, in German) on German broadband policy.
Comcast’s Balance Sheet Secret
Broadband Issues points to a great article on local video franchising and the impact of eliminating them in favor of a national franchise. Here’s a key passage the article (emphasis mine):
Reclassifying Asset: Cable companies currently listing their local cable franchises as assets will need to figure out a new way to capitalize on this local relationship, reclassify these video franchise assets, or possibly write off these video franchise assets. For example, Comcast (CMCSA) currently lists its cable video franchises as nearly half ($51 billion) of its over $104 billion dollars of assets. It is able to list this asset as until the national video franchise is realized, the local cable franchise represented a pseudo monopoly to provide video services to a community’s residents. However, the advent of a national video franchise eliminates these pseudo video monopolies so the value of these franchises that are declared as assets could come in to serious question by the financial community.
Even if local video franchises are not rolled back by Congressional action, the emergence of solid competition in these franchise areas clearly has a depreciating impact on those assets as well. Either way, it appears that the balance sheet of Comcast is due for a rather large adjustment.
The local video franchise has turned into a public piggy bank for towns. Municipalities extort gather fees from the local cable company, and sometimes demand perks like carrying a local access video channel and funding the equipment necessary for it. Instead of encouraging an open market for video services in a town, most towns try and preserve the monopoly for the solid tax stream it brings in- costs ultimately paid by town residents who subscribe to the service.
I don’t think the cable companies like this racket but now they cling to it as it is the only regulatory barrier keeping others like AT&T (T )and Verizon (VZ) from offering video service.
Capitalism in France vs. China
From today’s Financial Times($$$ link):
Disillusioned France hungers for reform without revolution
France’s students are in revolt. Its urban ghettoes are sporadically aflame. Its trades unions are planning national strikes on Tuesday. Its discredited 73-year-old president, Jacques Chirac, is serving out his time. An opinion poll, published by Le Figaro newspaper on Saturday, showed that 50 per cent of French people did not have faith in the market economy – compared with 20 per cent in communist China. One of history’s eternal questions resounds around Paris once again: can France reform itself without revolution?
What a tragedy for France, and what a leading indicator for China considering most of the population of China is still outside the city centers, with little or no exposure to a vibrant market economy.
Schumpeter was right - as capitalist societies advance their tolerance for risk and disorder declines, ultimately resulting in a repudiation of capitalism. 100 years ago France was at the vanguard of science, engineering, and risk capital. Since their massive nationalist and financial failure with the Panama Canal, their national intolerance for bold financial, military, and scientific risk has been the primary result of their decline as a relevant world power.
My son starts preschool in the fall. When the teacher informed us the children learn French the first word out of my mouth was -
Why?
There is a weekend Chinese school where I live. I think it is time to look into enrollment options for children of a non-native speaking family.
Lightreading has a good quote from Scott Ford, the CEO of Alltel Corp. (AT) on Net Neutrality.
I’m here to advocate that we have grocery store neutrality. You can come to the grocery store, pay $50, and you can have just whatever you want, take a cart, just load up on it. Or Taco Bell neutrality — it’s $25 a month, I can drive up and I can have a taco or whatever, or I can come with all those people in the Verizon commercial… bring them to load up on Taco Bell.
Taco Bell neutrality, grocery store neutrality, Net neutrality… They all make the same amount of sense.
Online Gaming the Next Broadband Growth Driver?
I’ve questioned in the past whether the US really wants broadband, and I think that the lack of a killer app, not availability, is what prevents widespread adoption. A comment made by a reader a keynote speech by Sony(SNE), and an article in the WSJ helped crystallize some thoughts I have had.
China is regulating the amount of time children under 18 can spend playing online videogames. When China steps in to start regulating a runaway trend you can be sure it is starting to reach critical mass.
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Verizon Clarifies Position on Business Broadband Deregulation
From the WSJ today($$$ link)….
Verizon (VZ), making clear its view on some implications of a confusing move by the Federal Communications Commission earlier this week, said regulators’ decision to deregulate broadband data services it provides to large business customers won’t free it from conditions imposed when it acquired MCI Inc. Verizon also said the decision won’t eliminate its obligation to continue payments to a fund that subsidizes phone services for low-income and rural customers.
It looks like access lines that were originally owned by MCI are still subject to price controls, but ones owned by Verizon are not? What about lines that were originally leased by MCI from Verizon? Anyone know a good source on the net to get good hard data on exactly what this ruling means?
What really strikes me about these recent developments is that the mainstream media could care less. When the Brand X decision was handed down, the digital elite prophesized doom at the hands of the cable and telco monopolies. The same thing happens with business broadband leased lines, you could hear crickets chirping, and good details are not readily available.
So far the only outrage is coming from Washington DC and the carriers that were previously free-riding on Verizon’s infrastructure. Here’s a quote from the best article I have found on the subject.
The latest move by the FCC is likely to face challenges from competitive carriers, say experts. But some analysts say these protests are just sour grapes, since the deregulation of business broadband is a necessary step in developing a mature, market-oriented broadband market.
“The standalone CLEC business is fading,” said Jeff Kagan, an independent telecommunications analyst based in Atlanta. “This isn’t the same industry that it was in the 1990s and the 1980s. There is much more competition. The CLECs complaining are likely the ones that haven’t evolved to change with the maturing market.”
Considering the fundamental value of these connections to businesses, two very different things could be happening:
- Businesses are aloof, and unaware of the massive monopoly that has now seized control of their key digital infrastructure
- Businesses see this as a positive development, that will give their broadband suppliers an incentive to build new, better infrastructire for them to use.
Got Facts? I’d like to get a debate started but they are in short supply.
Telecom Deregulation Gets Extreme
The Telecom Act of 1996 is rapidly being dismantled. Verizon asked for, and received, regulatory relief on business leased lines provided to businesses.
Covad and Earthlink were shattered by rulings ending their right to lease back physical connections into residences. This was first challenged and won by the cable industry in the Supreme Court Brand X decision, and DSL was reclassified as an information service by the FCC shortly afterwards. At this point, the companies that own the physical infrastructure that connects your residence to the Internet do not need to share that connection with another carrier or ISP. Verizon no longer is legally obligated to lease it’s copper pairs to Covad or AOL at prices dictated by the FCC.
In December 2004, Verizon petitioned the FCC to handle business connections in the same manner. The FCC commision (two Republicans and two Democrats) voted 2-2, and the lack of any conclusion on their part automatically forced the petition to be granted. FCC Chairman Kevin Martin put his stamp of approval on the outcome yesterday.
This is very radical stuff. The MCI/Verizon merger united a company with the access lines with a company that derives it’s most profitable business from connecting businesses. A major condition of this merger was that the companies unbundle the access lines to MCI competitors- the exact regulation that was just removed by the FCC.
The ruling is likely to face significant court challenges from companies like XO communications, who provide enterprise connectivity. They are analogous to Covad in the residential market, and such a ruling is a large strategic threat to their business.
Deregulation is now driving innovation in how broadband connections are made to the home. After the FCC indicated that new investments to the home would not need to be shared, Verizon and AT&T have aggresively started deploying new infrastrucutre.
Most businesses today use 20 year old T1 or T3 technology to connect to the internet or provide intranet connectivity between their sites. Now that the carriers can set pricing on their infrastructure, and set pricing on new, more advanced infrastructure, we should see these lines finally start to be replaced.
Another observation is that a lot of duplicate last-mile infrastructure to the business will need to be built in order to navigate around the Verizon monopoly. The dark-fiber guys with connections to downtown buildings suddenly are going to have more customers like XO looking to use a new right of way.
Lot’s of thinking to still be done on this subject. It’s a very disruptive event.
UPDATE: Lightreading has a comprehensive article on this subject.
Thoughts on PMC-Sierra
Investors Business Daily (IBD) interviewed PMC Sierra (PMCS) CEO Bob Bailey. The article starts out with the standard ‘pumper’ language, talking about analyst upgrades and how comm-semi is climbing out of the doldrums, lead by access and VoIP. Not a huge amount of enlightening info for those familiar with the business, but great fodder for the ADHD investors who want action. I attended a PMC-Sierra investor conference last summer - there were maybe 6 analysts who bothered to show up and listen. My guess is that today, the same conference would draw 15.
I admired PMC-Sierra while working at Vitesse Semiconductor (VTSS). PMC has an excellent system/architecture based approach to design which sometimes worked in Telecom but is ideally suited to more commodity and standardized markets like storage. The first post I wrote for this blog was on PMC’s acquisition of Avago’s (Agilent component spinoff) storage semiconductor business. While the acquisition looked cheap from a financial perspective, I predicted it would create strategic and pricing challenges going forward.
In telecom, Lucent’s system architecture would be slightly different than Nortel’s box which would be slightly different than Huawei’s box. PMC’s approach required customers to adopt their architecture - if it didn’t match the customer’s legacy architectural approach they couldn’t win the business. Some customers were wary to design in PMC because it locked them into PMC-Sierra as a vendor. The upside with the PMC approach was all of the components fit together nicely and worked. Here’s something I wrote for Lightreading in 2000 on semiconductor companies that lacked an open hardware architecture:
Convincing vendors to buy chipset solutions that don’t interoperate across standard interfaces is like asking them to drink the entire pitcher of Kool-Aid. Customers do not want to be locked into a Jonestown architecture.
Rule #1 for vendors: Most of the smart people out there are not working for the same company. Realize this, and make the best of the situation by allowing each company to customize its solutions in the areas where they add the most value. Forcing them to use your “All in One” solution is arrogant: It requires customers to believe that you are smarter than everyone else — and that you will continue to be.
Storage is built on common hardware architectures, so you don’t need to cater to 3-4 different architectural approaches. Using a proprietary approach would be pure suicide in this market. PMC’s system based approach should work out because there is no doubt about what hardware architecture to use. This also means that other semiconductor companies can easily enter the market, and many are.
The reality is, in storage, software is the only differentiator going forward. Semiconductor companies that do well going forward will be the ones that give away the best software to go with their silicon. There is no differentiation in the chips anymore. If PMC can accomplish in software what they accomplished in telecom hardware, they will do well. And I simply don’t know what their storage software expertise is like.
One interesting quote in the interview caught my eye:
IBD: How long have you been making storage chips?
Bailey: About three years ago, we entered the enterprise storage business. We wanted to diversify from pure telecom, which is a feast or famine business.
In telecom, there are about 15 carriers that purchase about 90% of capital equipment. They all buy or stop buying in symphony with one another, mainly due to economic cycles. It can whipsaw suppliers. It makes for a volatile stock.
Telecom was not always feast or famine. The reality is there was one huge feast 1999-2001 and one huge famine 2001-2005. It has yet to be seen that telecom is tightly tied to economic cycles. I think what Bob really wanted to say is his stocks performance was tightly tied to the cyclical interest of investors in Telecom, and he got tired of dealing with that.
Am I the only one who believes storage is more cyclical than telecom? What is more cyclical than Enterprise technology capex? And why would it be decoupled from the telecom capex cycle, if one now exists?
WSJ Analyzes Stock Option Backdating
The WSJ Saturday edition is quickly becoming one of my favorite reads. The weekly interview in the editorial section is well done and pulls in important people with a low public profile (past guests include Jean LePen, Newt Gingrich, Carlos Ghosn). Page one typically features some in-depth investigative journalism. Last week it was statistical trends on mortgage refinancing. This week it was a well documented article on options backdating, when companies retroactively set the strike price for employee stock options. My previous employer, Vitesse Semiconductor (VTSS) and CEO Lou Tomasetta was profiled as one of the ‘accused’.
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Why Softbank Bought Vodafone
The WSJ reports on the sale of Vodafone’s (VOD) Japanese wireless network to Softbank (SFTBF).
It was expected that Vodafone would shed their assets in Japan, just as it is expected they will shed their portion of Verizon Wireless to the one and only buyer in the USA - Verizon (VZ). It was expected that a private equity firm, specifically Cerberus, would take control and manage the asset.
Softbank is already the number two provider of broadband services in Japan with their Yahoo! branded DSL offering, but they lack the ability to sell mobile voice services. AT&T now owns 100% of Cingular after the acquisition of Bellsouth, Verizon will inevitably purchase Vodafone’s share of Verizon Wireless, and Softbank needed a wholly owned wireless subsidiary.
Why? The purchase becomes compelling when you consider that the wireless capability now turns a dumb pipe broadband provider into a nationwide voice carrier.
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The Internet - Not Yours to Take
I will continue to rage against the Net Neutrality machine and the Digital Elite who feed it.
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AT&T Breakup Value Updated
In January ‘06 Tickersense offered an analysis of what 500 shares of AT&T (T”) purchased before the 1983 breakup would be worth today.
The author of The Stalwart pointed out the analysis failed to account for dividends paid over the last 20+ years. Considering these companies were heavy dividend payers it diluted the analysis significantly. Regardless, they also included a nice little chart that illustrated the taxonomy of mergers and divestitures. I include it again, though it already needs a little updating and I’m sure it will need more in the future.
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JDSU - Blast From the Irrational Exuberance Past
I returned last week from what was the most upbeat optical networking conference (OFC/NFOEC) in five years.
Then Footnoted.org, a site devoted to extracting interesting nuggets from SEC filings decides to unearth memories from before the dark times… before the empire. I’ll just quote the post.
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Verizon uses MoCA to reduce FiOS costs
An article appeared in ZDNet yesterday that provides a clear explanation about the modifications Verizon (VZ) is making to its FiOS FTTH rollout. It’s big news for MoCA and Entropic Communications, a private chip firm that I believe has this key FTTH design win. Continue reading
AMCC demonstrates GPON MAC
AMCC (AMCC) demonstrated a GPON chipset in a Xilinx FPGA at OFC in Anaheim. No announcement (that I saw) was made, and no press was in Lightreading.
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