Arris' Aqcuisition of Motorola Home Division: Verdict, Please

Arris recently purchased Motorola Home Division. The jury is still out as to whether or not it is a wise purchase.

It was not surprising to see that Google sold the Motorola Home Division. It was clear from the outset that it was a bad fit for Google. As you may recall in previous blogs, I had suggested that Google had no expertise in running a hardware business (http://acgresearch.blogspot.com/2012/10/google-motorola-can-this-marriage-be.html), and it probably had little interest in legacy-type technology.  Although official statements to the contrary, the latest announcement and reports in the press essentially confirm my initial assessment.

On balance, I am positive about this deal. The pros: 

• Strategically, this acquisition makes sense for Arris because it greatly diversifies its product portfolio and solidifies its presence in Tier 1 MSOs in the Americas.
• There is some product overlap, (for example, CMTS and QAMs), but it is not that significant, especially given that the majority of Motorola’s revenues are derived from STBs.
• Arris has technical expertise and credibility within the industry and has experience with the design, manufacturing and selling of cable hardware.
• Arris diversifies its customer base substantially and reduces its reliance on Comcast and TWC, which are about 50 percent of total revenues.
• Arris’ management has a good track record and has delivered consistent growth over the last few years.
• The combined company is sufficiently large to compete effectively with Cisco

The concerns to watch are: 

• Execution risk: Can Arris effectively swallow a company twice its size? Will it be able to integrate the two companies fast enough to minimize loss of momentum? Will the cultures assimilate?
• Market risk: Will the combine product strategy/portfolio/roadmap meet the market transitions? Will the economic uncertainty continue to put downward pressure on SPs’ CapEx? 
• Financial Risk: Will Arris be able to increase Motorola’s historically low margins? Was the price too high?

Personally, I was glad to see Motorola end up in competent hands (the other bidder, Pace, is also a competent player in the space and would have been a good match as well). It was hard to watch the division suffer under the lack of attention, strategic vision and direction provided by Google. While we see this as a positive development, we will not know how it turns out for several years.

For more information about ACG Research's Video Services, contact sales@acgresearch.net.

David Dines
ddines@acgresearch.net
www.acgresearch.net

Mobile Has Gone Mainstream

ACG’s analyst discusses the 2H 2012 Mobile IP Infrastructure and EPC Forecast and highlights trends and drivers in the mobile space and what providers can expect in the coming years.

Global mobile data traffic doubled in 2012 and will double again in 2013. According to a GSMA/Deloitte study, as mobile traffic doubles GDP per capita increases by 0.5%. The mobile industry, globally, is now outperforming total GDP growth because of growth in Android, iOS ecosystems, and penetration of mobile subscriptions in developing countries.

In 2012, the mobile industry has been a tale of two networks. 3G investments are slowing, as operators focus on optimization and plan new investments in LTE, Mobile IP Backhaul, and Small Cells. In contrast, LTE investment has seen it largest growth in 2012 with some vendors experiencing more than double growth in 2H 2012. ACG forecasts Mobile Packet Core (MPC) to grow at 0.6% CAGR by 2017; Evolved Packet Core (EPC) will grow at 53.7% CAGR by 2017. GSMA identified 134 commercial LTE networks operating globally, today. ACG expects this number to grow by 125% in 2013.

ACG Worldwide Mobile IP Infrastructure Forecast	CAGR
Mobile IP Infrastructure	16.6%
MPC Worldwide Forecast	0.6%
EPC Worldwide Forecast	53.7%

North America investment has been fueling the LTE industry, representing nearly half of all global subscribers and Verizon representing one-third of the total. Verizon, Apple, and Samsung and other vendors are dominating the LTE ecosystem, primarily focusing LTE offerings in the US, Canada, Japan, and South Korea. These countries have the majority of users. ACG forecasts major European LTE investments to be delayed by two years as EU member countries slowly allocate 4G spectrum and mobile SPs balance profits and CapEx.

Looking at the future

Significant spending shifts will continue in the mobile industry in the next five years. Mobile SPs are curtailing 3G and 4G RAN spending and reviewing future CapEx outlays with low-cost small cells. Restructured mobile data services and new pricing for 3G and 4G will cause demographic shifts globally; 3G networks in some regions will become value-based offerings for wholesale, machine-to-machine, and low- to mid-market demographic segments.

IP wars will continue in 3G, 4G, mobile devices, and patents as a means to prevent sales and market share gains by Apple, Google, HTC, Microsoft, and Samsung. RIM will divest some of its device business by 2014. ACG predicts BlackBerry 10 will fail in global market adoption at levels forecasted by the vendor. The 3G refurbished device market will continue to grow, especially in the EMEA region. Verizon, Apple, and Samsung will continue to dominate LTE device offerings and mobile ecosystem for next two to three years.

For more information about ACG Research’s mobility services, contact sales@accgresearch.net.

Evolving IP and Optical Architectures

ACG Research's whitepaper "Evolving IP and Optical Architectures" discusses the challenges service providers  are facing and explores the pros and cons of next-generation networks.

The inflection point of 100G being deployed in the network creates the perfect opportunity to re-evaluate and optimize your network, click (http://www.juniper.net/us/en/dm/acg-supercore-wp/) here for your free white paper on how today’s network architectures are evolving and how operators will benefit by moving to new and more cost-efficient network architectures.

For more information about Eve Griliches, click here.

For more information about ACG Research's Packet Optical Transport click here or contact sales@acgresearch.net.

Eve Griliches

egriliches@acgresearch.net 
www.acgresearch 

Breaking out the Business Case for Software Defined Network

Though much has been said and written about software defined networking (SDN), little has been said about its business case. We know at a high level that the service provider board members of the Open Networking Foundation including Deutsche Telekom (DTE.DE), Facebook, Google (Nasdaq: GOOG), and Verizon (NYSE: VZ) view SDN as a means to reduce their costs and increase service delivery velocity. A more detailed view of the SDN business case can be developed by digging into the cost structures of these large service providers. Click her to read more.

Click here for more information about Michael Kennedy.

Click here for more information about ACG Research's business case analysis services.

To read more of Michael Kennedy's articles on FierceTelecom, click here.

Michael Kennedy
mkennedy@acgresearch.net
www.acgresearch

SDN Business Models: Which Will Succeed?

As I see more and more companies enter the software-defined network (SDN) market, my hardware-centric mind struggles to understand the business models of many of these software offerings. After talking to industry experts I have come up with four basic models:

1. Embedded Model. This model is hardware based. System vendors will likely throw in the controller and open APIs for free and price the hardware accordingly; the hardware covers the cost of the software development. This technically obscures the software solution within the hardware price. Benefits of this business approach is that the hardware stays in the network a long time, and additional add-on software features and/or applications and upgrades can be sold at increasing profits. This model will be used by key networking infrastructure vendors as well as SDN start-ups that have hardware-based solutions wrapped together with the controller and applications. This model is likely to be the most successful in the long run, because end users are leaning toward a full software and hardware package versus piecing the components together themselves.

2. Cloud-Based or Application Hosting Model. This model is per virtual machine (VM) and is time based, similar to the Amazon usage-based billing system. Use a number of VMs within a certain period, and the price scales with the usage. There is no tie to specific hardware. It may sound like a low-cost entry approach, but this is likely to be one of the most expensive models because the complexity to evaluate the year-end cost is quite difficult. Additionally, it is likely too expensive for the typical enterprise to embrace given large-scale virtualization deployments are in the very early stages. 

3. Subscription Based. The subscription-based model simplifies things a bit for the customer and enables either a quarterly or annual fee to be attached to the controller and applications purchased. The controller can be separate from the applications or bundled, enabling multiple offerings that are a single price. Upgrades can be priced by quarter or year, which enables up-selling of new applications in a very straightforward format.  

4. Capitalized Model. The capitalized model is where the customer purchases the controller (and/or applications) for a one-time price and capitalizes it over time. This is where you find out where the purchasing power is in the organization. Often the networking team will submit a VM or subscription-based proposal, and the CFO will insist on a one-time price instead.

Several of these business models, in theory, are compelling, but have become extremely complex for the end user to evaluate, specifically, determining what the end cost of the network will be. End users are telling us that the simpler the business model, the more likely the sale, given the CFO influence. Thus, the capitalized model, in many cases, is actually the most popular right now, despite what the market is telling you.

For more information about Eve Griliches, click here.

For more information about ACG Research's SDN services contact sales@acgresearch.net.

Eve Griliches

egriliches@acgresearch.net 
www.acgresearch 

ECI Delivers on Native Packet Transport

Packet optical transport products were introduced to the market to handle the ever increasing packet traffic in an affordable manner by lowering the cost of transported bit.  However, simple and low-cost packet-based equipment may lack carrier-grade transport attributes. Adding attributes such as protection, redundancy and resiliency to packet-based products has proven to be more difficult than expected, often resulting in higher capital costs related to addressing these requirements.

Managing large-scale networks also has proven to be more expensive than anticipated and operators have started to conduct thorough total cost of ownership (TCO) analysis for their networks, which provide evidence that operation expense (OpEx) is an important factor that impacts overall considerations. In addition, although Ethernet services are growing rapidly, it has become clear that mixed traffic is still running over most networks, and this situation is not expected to change in the foreseeable future. Consequently, operators have found that the overall cost of a packet-based transport network is more expensive than initially anticipated.

See ACG's Product Impact on ECI’s Native Packet Transport (NPT). 

For Michael Kennedy's TCO on ECI's MPLS-TP NTP Solution, click here.

For more information about Eve Griliches, click here.

For more information about ACG Research's Packet Optical Transport click here or contact sales@acgresearch.net.

Eve Griliches

egriliches@acgresearch.net 
www.acgresearch 

Transition Defines Service Provider Video Infrastructure Market

In addition to facing the macroeconomic uncertainty that is challenging nearly all IT markets, the SPVI market is undergoing significant transitions on three major fronts:

Converged IP infrastructure: Cable operators’ desire to move to a converged IP infrastructure has been in the works for several years. This is understandable, given the complexity of the legacy systems and the mission-critical nature of the infrastructure. The development of the CCAP architecture addressed this need, and CCAP based products are being trialed now. We expect commercial deployments to start in late 2013. Interestingly, this transition is being driven and managed by the service providers with the cooperation of the traditional networking vendors.

TVE is part evolution and part revolution. It is evolutionary in that we have had the ability to stream video content to computing devices for over a decade. It is revolutionary in that tablets, mobile devices and LTE wireless are providing consumers much greater choice and control over content, location and time. This transition is in full progress and is being driven by a different set of players than has been customary: consumer electronics manufacturers, content owners and the standards bodies that influence protocols and technologies such as MPEG dash and HTML5. This is unfamiliar territory because the SPs or the traditional vendors are not in control of the device and have less influence over the design, implementation or utilization.

The OTT revolution is also fully underway, but the impact is not totally felt as yet. This revolution is not about technology but business models and revenue participation. The balance of power has shifted more to consumers. SPs must find business models, pricing, packaging and bundles that appeal to consumers and that they can provide in a profitable manner. While content owners have significant leverage in the OTT model, they are also dependent on consumers’ tastes and requirements.

These transitions are dramatically changing the roles and relationships of the technology suppliers, service providers, content owners and consumers and are creating significant challenges for all the parties. In addition to these macro transitions, pay TV operators are facing increased demand for higher speeds and more competitors (fiber, DTT, satellite and cable), and need to upgrade existing networks to stay competitive.  

These market conditions present a difficult landscape for SPs and their suppliers, as it dictates not just a technology transition but a re-evaluation of core business models as well.  These are definitely interesting times for the pay TV market.

For more information about ACG Research's Video services, click here or contact sales@acgresearch.net.

David Dines
ddines@acgresearch.net
www.acgresearch.net

Multiple Factors Reduce Optical Network Forecast

ACG Research has reduced the Optical Networking forecast for 2012-2017 from a 3.6% five-year CAGR to 2.6%.

• Economy: The economy continues to affect the market as regions such as the euro zone have not improved, and North America has not built any significant momentum toward a clear or immediate surge in spending. There seems to be few outlets for positive data points.
• Capital Expenditures: We are not seeing the CapEx flush that some expected in the second half of 2012. While AT&T has reported increased spending for broadband over the next three years, we believe only a portion of this will trickle down to optical expansion requirements.
• Guidance: Several vendors are guiding flat or are lowering expectations for Q4 (Alcatel-Lucent is an exception). Those heavy in the enterprise have reported corporate trepidation and are slowing their spending because of indecision.
• Company Size: We are seeing smaller companies doing better than some larger ones primarily because they are well diversified in their customer bases. Most medium or smaller companies are selling to content providers as well as the enterprise, which helps buffer the lower spending by Tier 1s. Those that are largely Tier 1 focused are feeling the most pain.
• Pricing Pressure: 100 G pricing and general ASPs have fallen more than 50% in the last 5 quarters for some vendors.
• Product Management Choices: Vendors that have multiple products are not making the difficult product management decisions to move forward and support key programs. Research and development is being spread across multiple platforms, resulting in delayed product and lack of innovation.
• Consolidation: We expect these factors will finally result in consolidation in the optical market.

ACG continues to be cautious in our overall estimates for the next five years. The transition from separate IP and optical platforms to converged packet optical-based platforms remains slow as operators weigh the advantages and disadvantages of integrated solutions and the effect of SDN on the overall marketplace.

For more information about Eve Griliches, click here.

For more information about ACG Research's SDN services contact sales@acgresearch.net.

Eve Griliches

egriliches@acgresearch.net 
www.acgresearch 

3G Technology Slowdown Prompts Vendors to Refocus

Diminishing revenues in 3G technology contributed to the Worldwide Mobile IP Infrastructure market decline of 4 percent in Q3 2012. Traditional mobile radio access network (RAN) vendors will see a massive reduction in macrocell CapEx spending by mobile SPs in the next 4–5 years. In 2012, this trend is emerging in the 3G RAN market, and its effects will continue globally in 2013, with some vendors seeing double-digit declines in 3G revenues.

Mobile service providers are struggling to maintain profitability against the data tsunami and network capability (in some cases data growth of 30% monthly), which is forcing these them to rethink CapEx and OpEx models. For mobile SPs faced with tough boardroom decisions, traditional mobile “network economics” and business plans do not work. Network performance, optimization, and small cell-based capacity planning is top of mind for these executives.

All Tier 1 vendors are now refocusing their engineering, marketing, and sales efforts on mobile IP backhaul, LTE, and small cells. Globally, the mobile IP backhaul segment has taken main stage with new product announcements by Alcatel-Lucent, Cisco, and Ericsson. The industry is also seeing strong growth and consolidation in this segment, traditionally represented by specialist vendors. 

Q3 2012 Worldwide  Mobile IP Infrastructure Market Share
Vendor	Rank	Market Share
Cisco	1	32.8%
Ericsson	2	19.7%
Alcatel-Lucent	3	18.5%
NSN	4	9.5%
Huawei	5	6.9%

Evolution of Mobile Industry and New “Network Economics”

ACG estimates small cells will carry 50% of data traffic to SPs’ networks by 2016. The impact of 50% macrocell offload has radical results in today’s $30B+ mobile RAN industry, already seeing downward trends in 3G RAN revenues. Deployment of small cell and its adoption in developed markets will radically shift CapEx spending starting in 2013, and cause tremendous shifts in vendors’ profitability, market shares, and engineering development in the next three years. While this market has been dominated by purpose-built femtocell products from a handful of niche-market vendors, all Tier 1 vendors are aggressively investing heavily.

Q4 2012 will mark significant milestones in small cells industry, with the maturity of next-generation silicon, vendor focus, and capital investment. Small cell represents a massive paradigm shift for the mobile industry; most vendors are offering or have announced next generation platforms ranging from 20mW to 5W licensed radio solutions, designed for indoor/outdoor requirements of mobile SPs. 

For more information about ACG Research's Mobile IP Infrastructure service click here or contact sales@acgresearch.net.

Looming Fiscal Cliff and Europe Uncertainties Continue to Undercut Router Market Growth

In addition to economic uncertainty, vendors in the router and switching market are dealing with more intensive competition, diminishing service provider’s profit margins, and their largest customers cutting spending and delaying purchases of new equipment.

Against a backdrop of global economic instability and political unrest, the Worldwide Carrier Routing & Switching markets reflected typical cyclical performance, remaining slightly flat in Q3. ACG Research anticipates global economic uncertainty, a challenging market and aggressive competition will continue to put pressure on vendors’ pricing and margins. “Enterprise CEOs will, most likely, remain conservative and more focused in their IT spending and hiring for the remainder of the year,” states Ray Mota, managing partner. “These factors will continue to force vendors to innovate and develop technology that can deliver significant operational savings as well as address market demands for new and cutting-edge services that are application focused. Despite some vendors providing low guidance for Q4, AT&T announced a CapEx increase of $2.5 billion per year.”

Q3 Total Worldwide Carrier Routing & Switching market posted revenue of $2.75B. The global market decreased 1.7% q/q and 2.5% y/y. Core Routing revenues were down 1.9% q/q and 9.6% y/y. Edge Routing and Switching revenues were down 1.7% q/q and down 0.4% y/y.

Cisco posted a total worldwide decline of 0.3% q/q and a decrease of 0.8% y/y. In spite of the decrease Cisco reports that its CRS and ASR series continue to demonstrate strong traction. Alcatel-Lucent decreased 2.16% q/q but was solidly up 8.2% y/y. ALU’s 100 Gig is a big differentiator for the company, and the company continues to see more sales traction with this port for core solutions, edge and metro. Juniper increased worldwide routing revenue 1.2%, q/q but was down 7.7% y/y. The company cited the reduction in service providers purchasing high-end networking equipment, difficulty penetrating new markets with new products and strong competition from Cisco as factors influencing its quarterly results. 

Vendor	Q-Q MS Point +/-	Y-Y MS Point +/-
Cisco	+0.8	+1.0
Alcatel-Lucent	-0.1	+1.8
Juniper	+0.5	-1.0
Tellabs	-0.1	-0.4
Huawei	-0.2	-0.2

In the US the threat of the “fiscal cliff” is creating a tremendous uncertainty and service providers are monitoring it closely in order to get some visibility on what kind of impact it will have on consumer, small, mid and enterprise business spending. The threat of another recession could potentially extend service providers’ build-out of new services that, in turn, could impact their CapEx spending. ACG plans to monitor this closely in 2013 with our service provider capacity index service, which tracks the rate of change in capacity and how “hot” SPs are running their networks.

QUARTERLY TREND and DRIVER HIGHLIGHTS

• Core network traffic is growing in excess of 50% per year and new services such as content-rich digital media, cloud and mobile placing new requirements on the network.
• Competitive factors such as lower pricing and reduced margins are putting pressure on the routing segment.
• Interest in mobility and cloud computing continues to grow, especially with SPs that recognize that to have a cost-effective, scalable, automated data center that enables them to offer new services/products they need technology that can deliver significant operational savings.
• In a recent ACG survey, 78% of respondents reported that they have SDN plans that were either under discussion or were planned deployment. Interest in SDN has increased in momentum for two primary reasons: 1) a less than positive macroeconomic environment and 2) providers are searching for a new way to deliver new services and realize significant operational savings while increasing service velocity.

For more information about ACG Research's Router and Switching service, click here or contact sales@acgresearch.net.

Ray Mota

rmota@acgresearch.net

www.acgresearch.net

Optical Market Decreases in Q3 2012

In addition to economic uncertainty, vendors in the optical market are dealing with more intensive competition and diminishing profit margins as well as seeing their largest customers cut spending and delaying purchases.

The Worldwide Optical market decreased 3.7% quarter-over-quarter and remained relatively flat year–over-year. We project that 2012 will post revenue of half a billion dollars below 2011 total spend as service providers have informed us that we should not expect a CapEx flush in the last quarter of 2012.

Bright points in the numbers show BTI continued its upward growth quarter-over-quarter (15%) and year-over-year (45%). Infinera also posted very positively, up 27% quarter-over-quarter and 10% year–over-year. Both ECI and Alcatel-Lucent were down.

We expect market consolidation because of price erosion. Some vendors will merge or sell off assets or will have to terminate product lines. All options are being explored to bolster cash balances to more normal levels. 

For more information about ACG Research's Packet Optical service, click here or contact sales@acgresearch.net.

Eve Griliches
egriliches@acgresearch.net 
www.acgresearch 

Medium-Sized Businesses Buy in to Carrier Ethernet Services

In  his most recent FierceTelecom article, Michael Kennedy, ACG Research business case analyst, discusses why medium-sized businesses are now embracing Carrier Ethernet. No longer satisfied with limited bandwidth requirements provided by a few T1-based access facilities,  businesses are demanding high-speed and high-quality data services. To read more, click Medium-Sized Businesses Buy in to Carrier Ethernet Services.

For more information about ACG Research's business case analysis service, click here or contact sales@acgresearch.net.

Michael Kennedy
mkennedy@acgresearch.net
www.acgresearch

Google-Motorola: Can This Marriage Be Saved?

Stock plunge, premature earnings release, Motorola's losses, what more could go wrong for Google?

To say that yesterday was not a good day for Google would be a gross understatement. RR Donnelly, its financial printer, released Google’s Q3 results in the middle of the day (East Standard Time), rather than after the markets closed. In addition to the embarrassing snafu, Google’s profits were well below expectations. Since Wall St. hates surprises, the double whammy caused the company’s stock price to decline 8% on 6 times the normal volume. 

Much of the media attention is focused on the weakness in advertising revenue. Total activity is up, but the cost per click is declining, in part driven by the move to mobile, which commands a lower price and potential competition from Facebook. Only a few analysts and reporters focused on the more than half a billion dollar GAAP loss from Motorola this quarter. 

I have been consistently (since its announcement) saying that the Google-Motorola wedding was not a match made in heaven (read the original blog here). My analysis focused on how Google’s poor track record with hardware, its potential conflict with its customers and how the cultures did not fit. (Yes, I may be wrong in the long term if Google can successfully expand its Kansas City gigabit fiber experiment nationwide and have a captive market for its CPE, but that is a big if). 

The company’s results to date have been validating my position. The Home segment was down over 3% Y-Y, which will likely reinforce its market share losses. Interestingly, my comments about the Home segment were more pronounced for the mobile segment, which was down 27% Y-Y this quarter. Since I do not focus on mobile handsets directly, I did not write much about the mobile segment. In hindsight, this is not a surprising outcome given how competitive the handset space is and how aggressive Samsung has been in its battle with Apple. 

Year-to-Year Change	3Q11	4Q11	1Q12	2Q12	3Q12
Home	-9.5%	-10.3%	-2.2%	-8.4%	-3.4%
Mobile	19.7%	4.7%	3.1%	-24.7%	-27.0%

Google is facing serious issues in its main business and the distractions of a half a billion loss from Motorola, weakness in the handset business, and the slow decline in the home segment are not helping it financially or strategically. Maybe it is time for a divorce? 

For more information about ACG Research's Video services, click here or contact sales@acgresearch.net.

David Dines
ddines@acgresearch.net
www.acgresearch.net