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Our next Market Area Focus will be on the broadband access market. This will appear in our February 2001 issue, but it will be for subscribers only.
In our December Technology Forecast issue, we talked about the importance of inducing the RBOCs to quickly develop their data assets and modernize access to support residential broadband. In early January of this year, an appeals court hearing a case on the FCC's decision to require SBC to form a separate data subsidiary ruled that the step was an illegal dodge of competitive wholesaling requirements. If this ruling stands, it could have significant impact on the market, so we'll examine the issues further this month.
The FCC "advanced services subsidiary" rule, which we call the Asub strategy, grew out of a 1998 request by the RBOCs to the FCC for exemption of their data services from regulation under the Telecom Act. This, in turn, was derived from a series of interpretations of the Act by the courts and the FCC, ruling that the Act applied to not only voice services but also to data, to past and future infrastructure, and in short to nearly anything the RBOCs did. The RBOCs (not surprisingly) took this as an almost hard barrier against their further investment, since wholesaling elements and services would reduce their profits and increase their competitive risk. Since the Telecom Act requires the FCC to take steps to assure universal advanced services, the RBOCs asked them to intervene.
The FCC, in September of 1998, indicated that they lacked the statutory authority to exempt data services, but pointed out that forming a separate subsidiary would shelter data assets, since the RBOCs were non-incumbent in the data services space. They later ordered that step as a condition in both the SBC/Ameritech and Bell Atlantic/GTE mergers. It's this Asub rule that appears to be overturned.
Now, the RBOCs really don't want Asubs; they've indicated a number of times in public comment that it raises costs. The FCC wanted them because they gave the RBOCs a way to invest in data, and because the wholesale relationships between an RBOC and it's Asubs were guarantees that good wholesale rules would be quickly developed, which CLECs could then exploit. In short, the Asub issue was a guarantee that the RBOCs really opened their networks, since any CLEC would have the same deals available as the RBOC made available to their Asub.
What happens now, then? If the RBOCs don't want Asubs, then the question is whether they want what the Asubs gave them enough to appeal this ruling and play out the legal remedies. While they certainly wanted the relief Asubs promised in 1998, it's not as clear that they want it now. The problem is the credibility of the Internet model.
When the RBOCs saw the NASDAQ crash of 2000, they had to wonder if all this dot-stuff was really just hype, and thus whether there any money in the Internet service space. Since CLECs are dying, IXCs look shaky, and ISPs aren't feeling all that well either, why not sit around a year or so while all the other carrier classes die off, then move forward where revenues look strong?
Two factors actually promote this wait-and-see view. First, the FCC also provided the "packet infrastructure exemption", in Docket 99-238, allowing RBOCs to shelter their new age outside plant targeted at residential customer broadband empowerment. This ruling has not been overturned. In theory, RBOCs could continue to deploy DSL from within the ILEC, without unbundling the elements. They couldn't provide higher-level data services without wholesaling them, but if they're not profitable, so what? Second, Congress has been trying to legislation that would largely exempt the RBOCs from wholesaling and unbundling, and thus moot the court ruling (by changing the law out from under it). Maybe the ruling would spur Congress into action.
Restating the former point with the maximum level of cynicism (which is often the right level), the RBOCs might indeed realize that the current regulatory framework (induced by AT&T in part, for its own reasons) has the accidental effect of putting the industry into a kind of death spiral. In 1998, the RBOCs warned the FCC that current regulatory interpretations would force them to withhold much of the needed broadband modernization on the grounds that the investment could not earn a favorable return, and would thus be a disservice to shareholders. Armed with an Appeals Court ruling that seems to stymie FCC attempts to address these restrictive interpretations, the RBOCs could wrap themselves in a cloak of holy righteousness and wait for the inevitable. We told you so, guys, and you didn't listen.
The loss of the Asubs would have the effect of eliminating the very intra-RBOC relationship set that the FCC had counted on for insuring that access assets were promptly and effectively exposed for competitive exploitation. Now, we can't even be sure they'd be developed. The only potential positive impact of this would be to force the RBOCs to link data service market entry to long-distance market entry (they have to get the latter to get the former), which would perhaps force the RBOCs to develop a next-stage business model that would favor RBOC merger with or acquisition of IXCs. Data-driven RBOCs don't need the assets the IXCs have, and might thus let them die on the vine. Hence, the IXC support for the court's invalidation of the FCC subsidiary rule.
All this could be changed if Congress acts, of course. As we indicated, it's also possible that SBC and the RBOCs in general would use the decision of the appeals court to force Congress to pass more sweeping reforms than the FCC could enact under the current legislation. But that legislation faces an uncertain future, having failed to pass for two consecutive years, and having now technically expired. In the 107th Congress, it needs to be re-introduced.
Complicating the latter point is the fact that the Senate committee that was holding hearings on the new legislation is one that shifted from Republican to Democratic control. Generally, the Republicans have favored opening things up for the RBOCs, and the Democrats have not. While the bill's sponsor is still on the committee, the committee is evenly divided among the parties (as is the Senate, of course), and the Democrats hold the chair.
All this augurs rather badly for near-term action on the legislation. Between now and about March, Congress is likely to be hammering out the pecking order within the parties, and between Congress and the White House. Then there are the confirmation hearings. Probably nothing could be passed before the end of March, even fast-tracked.
In any event, the thing to watch now is the way SBC handles the appeal of the recent ruling. If they move really quickly to appeal, it would suggest that they see a strong indication of economic value in the long-term future of residential broadband. If they seem to sit on their hands, or even accept the ruling (which would be indicated by their pulling their Asub, Advanced Solutions Inc., back into the mainstream RBOC part of the business), it would suggest that either they don't think much of the residential opportunity, or don't think any live competitors will exist to exercise the wholesale rights the ruling would create. In either case, it wouldn't be a good sign for the near-term health of the market.
An RBOC slowdown on deployment would also impact vendors, particularly Alcatel and Marconi, who benefit from aggressive RBOC access modernization because they can both support new-generation ATM-based fiber deployment and the traditional suppliers of the RBOCs (like Lucent and Nortel) can't. If the slowdown were significant, it might create a major opportunity for Lucent to catch up in new-age outside plant equipment, which could make Lucent a big winner later on.
A slowdown would have a major negative impact on the IP equipment space, too. Traffic growth on the Internet would drive infrastructure growth (assuming any ISPs have money), and traffic is more easily created from broadband customers than from dial-up customers. Cisco would clearly be the most at risk here, because their only real WAN constituency is the ISP space. Juniper, the "anybody-but-Cisco" alternative de jure, would also be likely to suffer.
Slowing deployment in the near term because of Internet profit fears could also have an impact on the content space. On the one hand, Internet delivery of content would surely be negatively impacted by an RBOC slowdown on the DSL front. On the other hand, the failure of the Internet to provide a justification for DSL deployment might make RBOCs seek another service concept with better credibility. That could justify independent content networks that are focused on content delivery alone, and do not carry normal Internet traffic. These networks work in conjunction with the Internet, letting customers set up content relationships on the "Big I" and then be shifted to another network for actual delivery. Content networks of this type require service switches in the access POP to do the traffic segregation and recombination. A big video content victory would be a victory for Marconi, whose MX remotes are more content-ready than the Alcatel LiteSpans.
We'll be following these important issues over the next six months, and we'll be bringing reports regularly. Many of these will probably be subscriber-only, so those really interested in this space should probably consider getting on the list before too much happens!
Broadband access is the hottest technology issue of this decade. If we get it, we can open the door to exciting new communications services and applications. If we don't…you get the picture. But there's a lot of confusion about the concept of providing broadband access. Who or what are the target markets? What technology is best, and for which players? Can access stand alone, or must it be offered with services to raise margins?
Over the next months, we're going to look at various aspects of broadband access, starting this month with a primer on the high-level approaches. Next month, we'll offer a Market Area Focus on the opportunities in broadband access alone-access without services. In future issues, we'll examine the specific technology associated with many of the broadband access options. But, sorry, this section is for subscribers only!
In past issues of Netwatcher, we've addressed (by proxy) Lucent and its management, offering our advice on what the company needs to do to maximize its success. This month, we're going to take a look at another big name with visible challenges of its own-Cisco. When we first raised our questions about Cisco two years ago or more, most thought we were suffering from some kind of cognitive disorder. Hopefully, events have erased that attitude, so it's time to offer the same kind of comments on Cisco that we've offered on Lucent. Can this data giant restore itself to financial luster? If so, how? We think the answer to both questions lays in the way Cisco got to where it is.
If you make a bunch of bucks selling something, the logical conclusion to reach is that selling that thing is good, and that the success you've enjoyed there must be preserved as the highest business priority. That's particularly true when one of your sales formulas is to assert that "product equals you as supplier", meaning that you are the player that defines the product space. "Nobody ever got fired for buying IBM", the slogan of the '60s in the computer space, became "Nobody ever got fired for buying Cisco" in the router space. Cisco thus got tagged with and linked to the router paradigm.
The problem with this kind of company-equals-product equation is that when the product's growth potential doesn't match the company's growth expectations, the linkage starts to hurt. Cisco's growth through the '90s was largely attributable not so much to the Internet (which had its major impact from mid-1998 onward) as to the modernization of corporate networks-the shift from SNA-dominated, through SNA-accommodating, to IP. Cisco sold routers to corporate America, and it paid off.
The problem is that corporate America doesn't have an infinite appetite for anything, but in particular for high-tech networking. Information empowerment, as we've said, has value in proportion to the unit value of labor of employees. Historically, the top 15% of the labor market has clearly justified empowerment, the bottom 60% has not, and the remainder has justified it depending on complex factors like the relationship between the "transitional-area" employee and the high-credibility information user. It's a truth, though not well known, that the range of employees empowered by networking has not broadened significantly in the last seven years. In the last three years, it's become clear that the information appetite of the empowered class is growing more slowly. All this adds up to a plateau in private networking.
The increased level of technology difficulty end users face in exacerbates the problem. As the industry has become more hype-driven, it has become less effective in preparing users to make effective technology choices. Technology startups have eaten the labor pool almost completely in some areas, and few end users of technology can promise technical employees a career path to match that of a high-tech firm of any sort. All of this has contributed to growth of interest in outsourcing, and in particular growth in interest in what might be called "implicit outsourcing", the consumption of application-level services as an alternative to creating application networks from low-level services.
The shift away from private network building put Cisco in a troubling position. To continue growth, they needed to expand their market into the provider space. There, however, the IP router was as much an instrument of network Marxism as a beneficial product. Incumbent players have long resisted building IP router networks to fulfill deterministic service needs. Many thought that when Cisco bought StrataCom, whose ATM products were installed in most of the carrier ATM networks, Cisco intended to remedy its router-centric approach. They didn't, at least not effectively.
We've said, perhaps more pithily than necessary, that Cisco's problem was that it was a religion and not a business. At the sales level, people were trained and encouraged to believe that IP was the single path to network salvation. That kind of attitude doesn't mesh well with a multi-product, multi-technology, market paradigm. Non-IP product lines within Cisco tend to get shunted off into organizational backwaters, disconnected from the seats of power and thus relatively powerless to introduce change to Cisco positioning.
The router religion position is hardened by the fact that most competitors, acknowledging that Cisco has virtually branded the router space, tend to sell the "not-router". Juniper is the only company who has really taken on Cisco in the router space, and they were careful to limit their excursion to the deep core product area where Cisco had done less to establish itself. If competitors were going to go into Cisco accounts to sell the "not-router", the best sales response was usually not to try to sell "not-routers" in competition with those new vendor/competitors, but to shift the sale to the familiar router turf. Any sales guy will tell you that the best way to un-sell a competitor is to un-sell his product concept, not the product itself.
If a protestant minister or Catholic priest were to suddenly stand up and announce that the congregation should start chanting a mantra, there'd be a bit of culture shock in the church. That backpressure from the dedicated buyers of Cisco gear is another factor that has promoted the IP religion. People have bet their job on the Cisco router choice, and they don't want Cisco sales people to start getting weird, technology-wise, and making those past decisions look questionable. "Wadda you mean ATM," a dedicated IP-head might say. "Last week you told me routers were the future!"
All of this has made Cisco double down its bets on routing and IP, focusing its ads on the emerging carriers to dodge the technology biases of the incumbents, and literally betting against the business model that now drives networking worldwide. How many Cisco commercials have you seen that say things like "In the future, long-distance calls will be free?" How comforting that must be to the guy making his living selling long-distance service!
This year, of course, the emerging carriers are not exactly emerging. In fact, it's not clear whether they're even surviving. NorthPoint went into Chapter 11; they may or may not be able to restructure. The regulatory decision of mid-January (see Management Briefing) actually hurts CLEC/DLEC players like NorthPoint by threatening to eliminate the RBOC incentives to modernize infrastructure and expose DSL assets to competitors. All of this creates a risk for Cisco, because the loss of capital to the emerging players means loss of sales to Cisco. Not to mention the risks of Cisco's financing these players.
The religion of IP has forced Cisco to back what has turned out to be a losing play in the service provider space. It puts their carrier strategy in disarray (to use a popular media phase), and it sets up the obvious question, "What next?"
OK, so how does our Cisco-at-the-crossroads take a logical road? What would that road be? Will they do it? There are obviously a lot of questions we could ask here, and Cisco's success depends on their having the right answers.
First and foremost, Cisco needs to accept the demise of the new-age carrier players. Unless they turn their backs on an attractive but illogical hope that somehow these guys will rise from their ashes, they can't possibly get onto the right track. In addition, the new-age players represent the views that tie Cisco most tightly to the concept that Cisco success equals Internet success, equals IP convergence, equals a bunch of things that probably are impossible to get. Kiss a CLEC and kiss off the future, Cisco.
The corollary to this is that Cisco needs to be kissing RBOCs, in particular. That will be challenging in the near term given the regulatory tumult and its unique impact on RBOC buying. IP, DSL, and a lot of the traditional Cisco themes are really held hostage to regulatory policy now, and that means that to attain any near-term traction, Cisco needs to be looking for themes with less convoluted legal basis to them.
Which brings up our next point, Cisco needs to leverage its ATM plays-StrataCom and Sentient-quietly and effectively in "orderly evolution" missions at the RBOC. ATM access is an RBOC given. ATM regional and inter-office networking, likewise. These activities may be impacted in a scheduling sense by the regulatory mess (the former more than the latter), but less so than the service business that the regulatory challenge directly addresses. In addition, by diving downward in the network below the level of IP, voice, frame, and all that service stuff, Cisco can dodge the question of the role of IP. A buyer who asks for an RFI or RFP on ATM switching isn't exactly doing general technology assessment-they're trying to buy ATM switching. Sell it to them, and pass on the question of the role of ATM versus the role/religion of IP.
Here is where the submergence of the new age positioning we recommended as our first point comes home to roost. Cisco can't kiss ATM as the RBOC answer while kissing IP as the new-age answer; inconsistent positioning never works effectively. The marketplace and regulators are giving Cisco a once-in-a-lifetime opportunity to shift gears because outside factors have changed conditions, not because they picked the wrong strategy.
It may well be that Sentient (the "any-service-any-port" people Cisco bought a year and a half ago) is a key factor here. Sentient technology would look really logical in a virtual ATM tandem application for either an RBOC regional toll network or simple metro inter-office network. Sentient technology could also create a logical CO switch to concentrate all that ATM DSL and provide service carriers with access to ATM VCs to customers.
But of course, Sentient has looked as good or better for this mission for a year or more. Cisco bought these guys and seemed then to submerge them into organizational depths no one has plumbed since. That brings out our next point; Cisco needs to be more strategic with its acquisitions. As we see it, Cisco has done most acquisitions for sales-tactical reasons, simply to answer the requirements of a particular sales situation. Having little or no strategic agenda to drive these moves, Cisco has had little interest in weaving a strategic context to envelop them, and thus has failed to develop a market paradigm that embraces more than its core IP products. Tactical acquisitions, in short, have favored the religion-of-IP viewpoint.
The lack of acquisition-integrated strategic advance also poses a risk of failing to develop acquired assets properly. StrataCom and Sentient each had images of the requirements of their specialized market spaces, and each were moving with some degree of effectiveness to develop opportunities. What is Cisco's vision of their respective spaces? Have they such a vision? Unfortunately, we don't know that because non-IP product positioning from Cisco is pretty low-key, and the public utterances they've presented so far don't give us much confidence we know the story.
With acquisitions preceding as they are now, Cisco risks diluting its whole marketing initiative by trying to integrate their tactical acquisitions into an overall positioning. Retrospective positioning of products is difficult in the media, and paying the price for two dozen bought-and-paid-for companies may be more than even Chambers can pull off. Obviously, taking care in 2001 would at least slow the pace at which non-integrated components were acquired.
PR introduces our last recommendation; Cisco needs to try to shed its predatory-giant image. In many industry groups, Cisco participants are seen as heavy-handed manipulators, and some of Cisco's own initiatives have been threatened by a revolt of partner players, spawned by a feeling the players were being used by Cisco. This growing vision of Cisco as an evil empire poses a major PR threat, because reporters tend to favor David over Goliath in any case, and a really offensive and pushy Goliath is even worse.
Good press is the core requirement for any new marketing initiative, and Cisco needs to be sure they get it. Even shedding their current bully image might not be enough; reporters have heard the same stories so many times that it's getting hard to make news articles out of them. What if Chambers stood up and said, "Our image of what the Internet could be is in jeopardy, and what's needed to fix it is a more realistic view of the role of IP in infrastructure and services?" That would be news. It might also tarnish the IP religion. Would a position in that direction but not as radical serve the mission of establishing a new Cisco attitude, we wonder? It would clearly depend on what that position turned out to be.
Right now, Telecom spending is in a bit of a growth recession, with all of the major carriers projecting essentially zero growth in capital expenditures. There are a few areas where there may be incremental spending, and some where we can expect reductions. Suppose that Cisco managed to get themselves into the key ATM projects of the RBOCs? Suppose they shed some IP bigotry and managed to promote this success without sounding like they were halfway embarrassed by it?
The regulatory logjam we now have might slow RBOC modernization in both access and interoffice applications. That would give Cisco a shot at these deals, deals that are now largely in the pocket of the more traditional telecom vendors who are Cisco's archrivals. We'd probably see a glitch in the revenue stream over the next couple of quarters, because spending by the RBOCs won't completely make up for enterprise and ISP softness to come. Beyond that mid-year hiccup, though, Cisco could be positioned to at least stave off the competition of offshore giants like Alcatel and Marconi, both of whom are seeing RBOC success as their stepping-stone into the US market. If they succeeded in doing that, they could take on Nortel and Lucent some time in 2003.
Suppose Cisco doesn't do these things? As we've said before, enterprise spending will tail off through this year, and Cisco can expect that their growth expectations will never again be met by expansion in the enterprise market. Worse yet, Cisco (like Cabletron before it) is dependent on the control of their accounts at the sales level. Sales account control is difficult to maintain as sales and profit margins shrink, and the revenue stream from accounts ceases to provide the income a good salesperson needs to see. When you can't afford to stay on site, you can't control the buyers' direction in purchase policy. You lose business. Thus, the reduction in enterprise buying could cause a kind of snowball reaction on revenues.
If Cisco faces clearly bad quarters in the absence of any clear remedy other than to assert that IP will be really big in another quarter or so, they risk tarnishing their invincible image. What if somebody does get fired for buying Cisco? The credibility issues that could be created would then act to reduce the chances that a successful carrier strategy could be developed.
The Internet itself presents a similar credibility risk to Cisco. "We build the Internet" is a great tag line if the building of the Internet is seen as successful. Is the Internet good business today? Clearly it isn't, for the carriers who buy the gear. Can it be rehabilitated? Probably, but doing so may require that we first acknowledge its problems, which Cisco advertising isn't doing. Chambers isn't really doing it either. Loss of Internet credibility would not only tend to dry up ISP buying, it would seriously impact enterprise spending on IP. Who loses most there is who has the largest IP market share…you know who that is. Incumbency in a rising market is a virtue; in a falling market it's a vice.
So there we are. The question is whether the current market slump is a simple hiccup between waves of IP-driven hype, or whether we're finally going to have to face reality. If it's the latter, Cisco needs to consider the points outlined above. If it's the former, Cisco may have a year or two to stay its current course, and it will have to address these issues at the end of that period. It can be argued that forcing truth on the market today will hurt the truth-teller most of all, but it can also be argued that it's easier in the long run to make reality palatable than to try to promote an alternate reality.
In short, Cisco has its eggs in a very shaky basket. We will probably know by the end of the year whether the company can navigate its course through these troubled waters without breaking some of them, or all of them.
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