Mark Evans wrote a thought provoking article on the "Americanization" of Nortel and then posted the story in his blog.  It is the story that gets your thinking going (that is what makes an article great, no matter what your viewpoint happens to be - as long as you can get together with some friends for a beer and have a discussion about the material, the article's mission is accomplished).

So I felt compelled to get on my soapbox and write a quick comment, but that got me thinking a bit more.  Mark might have a valid point about of the loss of Nortel's Canadian entity, but I believe that the major "Canadian content" loss happened way before, when the ownership of the company changed.  When Jean Monty sold the controlling share that Bell Canada had of NT stock, Nortel certainly lost a bit of that identity.  There is still the Bell Canada/Nortel joint research center in Ottawa, but you do not hear so much about BNR anymore (the lab I worked at here in Toronto used to be BNR but it no longer exists).  However, that was not really the "fault" of the Nortel executives, or the board, etc.  It was just a process - Monty astutely cashed in the BCE NT chips (near the height of the stock), although what he did with the proceeds of that sale might be open to another debate altogether. 

But the point is that the Bell Canada sale of Nortel's stock definitely marked a loss of the company's Canadian identity (for one thing, obviously the shares changed hands and perhaps the foreign ownership percentage of the stock went up).  Bottom line is that this will probably continue to happen, although not quite as much.  I am talking about the change in RRSP foreign content rules, which might lead some Canadian investment houses to slowly start moderately divesting from their Canadian stocks (that had to make up 70% of their fund portfolios in order for the fund to be considered domestic).  This might lead to more of NT stock going to American hands.

As far as R&D goes, yes, it is true that Nortel already had centers in Mission Park (CA), Richardson (TX) and Raleigh/Research Triangle Park (NC) for a long time.  But that makes sense, given the fact that a lot of the telecom action in North America happens to be in the US (which has far more enterprises and big telcos - Verizon, SBC, Bell South and Qwest).  But I expect Nortel to still continue having its own R&D centers in Canada, as Canadian engineers still represent better bang-for-the-buck than their American counterparts (which are more expensive).  So I do not foresee a JDS-like massive migration to the US for Nortel.  On a separate note, from all the foreign telecom vendors that have Canadian representation, only Ericsson has a Canadian R&D center (a lab in Montreal).  That is interesting, considering how many talented people we have - perhaps Ottawa should consider offering more incentives to strengthen our own Silicon Valley (in Ottawa).

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After much anticipation, the winners of BT's £10 billion (or about US$19 billion) RFP for its 21st Century Network (21 CN) were finally announced today.  The key objective is to upgrade UK's legacy PSTN and evolve it to a multi-service IP based network carrying both voice and data services.  The project will span five years and the migration of customers onto the new network is expected to start next year.  A grand total of eight vendors were selected for six major areas of this massive undertaking:

• Access (DSL, Metro WDM): Fujitsu / Huawei
• Metro Routing: Alcatel / Cisco / Siemens
• Core Routing: Cisco / Lucent (with Juniper's routers)
• iNode (network intelligence / softswitches): Ericsson
• Optical (long haul, switching): Ciena / Huawei
• Services: Lucent

The results have disappointed some Marconi investors and rumors already have started about a possible sale of the company (ironically to Huawei, one of the 21 CN winners).  Marconi's loss also has negative implications to Sonus, which was hoping to leverage its gateway product as part of the Marconi solution.  Huawei's wins on two areas (access and optical tranmission equipment) is a proof point of a higher penetration of low-priced Asian manufacturers into Tier 1 carriers.  Also, the commoditization of low margin business (broadband access and optical networking) is expected to be a contuining trend.  Cisco's win is another validation of its CRS-1 routing platform, which will be used on BT's IP/MPLS core.  Lucent comes out as a winner, getting a lucrative portion of the puzzle (services, which carry good direct operating margins of about 10%).  Lucent will resell Juniper's routing systems, but these will be souped up with Lucent's own OS software and extra tools (developed at Bell Labs) to optimize network efficiency.  The selection of Ericsson might be indicative of BT's future plans to provide its customers with a seamless wireline/wireless service.

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Cisco (Nasdaq:CSCO) has also been quite active lately from an M&A standpoint, and its most recent acquisition was announced on Tuesday: Sipura Technology.  The transaction, valued at $68 million (a cash and stock options combo) solidifies the Linksys wireless division (Linksys was another acquisition made in 2003 geared towards the SOHO/small business and home markets).  Cisco had been OEMing Sipura's ATAs since 2004; analog phones and fax machines can be connected to these ATAs to create a phone line over a broadband connection (e.g. DSL).  Om Malik had an interesting post on this transaction (including the past Komodo story).  Sipura is the third company bought by Cisco this year (after Airespace and Topspin).

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Besides the PEC deal, Nortel (NYSE:NT) also got a lot of press (particularly across the Ocean) on a rumor that it has been linked with Siemens on some cooperation deals involving both wireline and wireless products lines.  According to an article in German magazine Der Spiegel, executives from both companies met "secretely" near the Munich Airport to discuss product partnerships and maybe even some co-development (ed. note: well, the Genie is out of the bottle by now, but one always wonders how the press gets this info - which company was this info leaked from?).  Obviously, many are thinking about a possible spin-off of the German vendor's money losing handset division, but I doubt that Nortel would make a play there.  However, perhaps a wireless equipment play could be a remote possibility (Siemens next-gen wireless sales globally trail only Ericsson and Nokia), as could a VoIP-related deal (Nortel holds the edge over Siemens here, with almost a quarter of the global share, compared to roughly 10 percent by Siemens). 

The current consolidation in the carrier space, and the difficulties that Euro vendors have achieving a higher penetration on this side of the Atlantic (and vice-versa) help fuel the rumor mill of such deals. But, speaking about Nortel specifically, the company needs to continue on the path of building partnerships (such as the ones that it already has with LG Electronics in Korea, Putian in China, in addition to other smaller arrangements in the US and India) in order to boost its performance in the highly competitive telecom space.

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Nortel (NYSE:NT) was back on the headlines today spending money to the tune of $448 million (in cash) to snatch up IT services firm PEC Solutions (the deal is expected to close later in June).  PEC is a player in the government IT Services industry, which is being pegged at an estimated $60-65 billion in 2005, and growing at annual rate of about 4%.  The idea is to merge PEC with Nortel's Federal Network Solutions unit and to create a new business unit (a US-based wholly owned subsidiary called Nortel PEC Solutions) - thereby avoiding any restrictions a Canadian company might have in competing for US government contracts.

The reaction thus far has been mixed, with some naysayers pointing the fact that this was an expensive cash transaction in an industry that is growing at a relatively modest rate.  But the flip side of that argument is that the transaction opens the door to a very profitable LOB for Nortel (13-15% margins are typical) in a market where the company was not previously able to firmly establish itself.  Plus, of course, it is a way to get CEO Bill Owens to leverage his military connections to help boost the company's chances of securing US government contracts. 

This is just one of many moves Nortel will be making this year - there should be more M&A activity, as well as some consolidation. 

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Siemens' handset business has been suffering for quite sometime, despite some innovative models that the company has launched over the past year (including the SK65, which was reported here last year). Rumors have been everywhere, including a report that appeared this weekend on the Sueddeutsche Zeitung.  In that particular report, Taiwanese electronics powerhouse Acer was linked with being a potential investor in the German vendor's mobile phone unit.  Motorola has also been linked as a potential candidate in other articles.  In the meantime, losses the that cell phone unit have reached 100 million € (roughly US$ 130 million), and despite all these sales or partnership rumors, the exiting administration has given no guidance on the direction the company will take to find a solution.  The appreciation of the euro versus the dollar is further exacerbating the problem, and the company believes the € will rise over $1.35 this year.

Siemens shareholders expect incoming CEO (Peter Kleinfeld) will find a solution (i.e. spin off, seek a partner or even close the operation).  But Acer is denying the newspaper report, and the Motorola partnership does not seem a very likely scenario anymore, given that the US vendor has already made good progress into the European continent, so teaming up with Siemens would not be as advantageous (the Motorola story has been floated around for the past couple of years, before the Euro progress made by Motorola).  I had an "Eureka" moment thinking about this issue and thought of a more interesting partner that has not been mentioned too much... LG Electronics.  This could potentially create a Sony-Ericsson type entity, which can pickup strong shares in markets such as Asia/Pacific, Europe and the Americas.

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Another interesting panel that I participated on at VON Canada was the IMS (IP Multimedia Subsystem) general session.  So what is IMS?  Many folks still think of IMS as it was originally by design, i.e. a spec geared towards delivering SIP services to the wireless space (as defined by the 3GPP folks).  In reality, it is much bigger than that. 

The best way to define IMS is as an access agnostic spec that enables service providers to deliver a new generation of SIP-based multimedia apps (in the SS7 and SIP domains).  This allows for the convergence of wireline and wireless network architectures and the benefits are OPEX savings (due to a decreasing incremental cost of deploying apps within this framework), a faster time-to-market (due to reduced complexity) and the new apps, which are geared towards increasing subscriber stickiness and the uptake of enhanced services.  The key idea is the re-use of common functions: IMS takes the network from a vertical integration modus operandi to a horizontal architecture model where these common functions are re-utilized.

In other words, IMS is supposed to be everything the intelligent network was supposed to be plus more.  But before drinking all the vendor Kool Aid, much work still needs to be done, both in terms of the actual IMS standard itself, the value proposition of vendors to service providers, the conceptualization of new services and the establishment of new pricing models that will make this network evolution a bit more palatable to service providers.

The session proved to be really interesting - I was particularly impressed with the candor of all the panelists.  Some folks might have expected that given the fact that there were four vendors (IP Unity, Lucent, MetaSwitch and Nortel) and one lone service provider (Bell Canada), the tone of the session would have been based on more hype and promotion.  However, that was not at all the case - in fact, the session provided a realistic view of the current state of the market, the realities facing both vendors and service providers, as well as the issues that still need to be worked on.  I will be posting more on IMS in the future, so stay tuned.

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Intel announced a couple of days ago the volume production of its IEEE 802.16 standard WiMax modem chipset (known as Rosedale), geared towards equipment vendors that are targeting the broadband wireless market.  The chip, now officially called the Intel PRO/Wireless 5116 broadband interface device, is fabbed externally and utilizes a programmable architecture.  Intel is only delivering the silicon, with the vendors being able to implement their own software up to the MAC.  Intel expects most vendors will use 5 MHz for channel bandwidth thereby yielding roughly 10 Mbps of IP traffic. 

The chips will be used in CPE gear and eventually in wireless base stations.  The advent of the 802.16e standard (expected to be ratified later in 2005) will lead to better power efficiencies and the silicon will be targeted for desktops by 2007.  As of today, Intel is producing the Rosedale chips externally and as the uptake increases, the production is expected to shift in house.  Despite the fact that 2005 volumes are expected to remain relatively low, there is a lot of hope that with 802.16e, reduction in costs, higher volumes and economies of scale can be achieved. 

Despite the fact that this is still probably the bottom of the first or top of the second inning in terms of WiMax (to use the baseball analogy), I believe that this is still a very important milestone for Intel, because the company has finally delivered the next step in its vision.  Also significant the fact that Intel currently has 12 hardware customers and 100 operators planning to sample their Rosedale chips (the manufacturer customer list includes the likes of Airspan, Alvarion, Aperto Networks, Axxcelera Broadband Wireless, Gemtek, Huawei, Proxim, Redline Communications, Siemens Mobile, SR Telecom and ZTE).  To add a further dose of realism (and silence some skeptics), a total of 15 carriers worldwide will be announcing their intentions to trial the Intel 5116 WiMax chips.  The list includes: AT&T, Altitude Telecom, BT, Brasil Telecom, ETB, Iberlanda, Millicom, Qwest, Sify, Speakeasy, South Africa Telkom, Telmex, Tower Stream and UHT. 

How long before the Centrino model takes over WiMax as well?  Well, it will be a while, as power efficiencies of 802.16e will be needed.  So this second phase push probably will not happen until 2007, at which point the technology will start getting moved into notebooks.

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I will definitely be posting more on the Skype story (got a couple of separate threads there worthy of separate postings).  But first, an insight on the analyst panel at VON Canada, which counted with Jon Arnold (a friend and ex-colleague of mine at Frost&Sullivan), Jeffrey Fan (director and equity research analyst at UBS here in Toronto) and yours truly.  I understand that due to force majeure reasons, Daniel Berninger had to drop out, and I certainly hope that everything will be OK with his kid.

The discussion centered around VoIP in three key areas: enterprise, service provider and the MSOs (the focus of most of Jeff's research).  Jon asked a few thought provoking questions, particularly about the rollout of fiber-to-the-x to various homes.  One thing I definitely brought up is that in contrast to their US counterparts, Canadian carriers such as Bell and MTS have very good loop length profiles.  In fact, according to Bell, 85 to 90 percent of its customer dwellings are within 1,200 meters of the node (that's about 3,600 feet, well within the 5 kft. distance to ensure a bandwidth of between 15-20 Mbps for a FTTN deployment with ADSL2+ or VDSL2 as a last mile technology - note Bell is going with a VDSL solution).  That is way better than SBC, for instance, which has over 57 percent of its loop lengths exceeding 6 kilofeet.  So FTTN with VDSL2/ADSL2+ seems to be the right approach for Canadian ILECs such as Bell to bring the triple play to all of their customers as quickly as possible.

Jeff mentioned the triple play efforts of some MSOs, including Shaw and Rogers.  Interestingly enough, nobody from the audience asked any of us whether or not the $55 that Shaw is charging per month will be able to deliver the uptake in triple play services.  Obviously, since Bell and Shaw own the only two DBS licenses in Canada, that leaves Telus a bit vulnerable on the video side (until the latter launches its own IP-TV solution) - and until that point in time, maybe Shaw will just continue to keep its price at that level.

Jon also made a few comments about the uptake of VoIP in the enterprise, where thus far, the CPE approach seems to be winning.  The slow uptake of IP Centrex has surprised some, but given the dynamics of the market, and the typical lenghts of contracts offered, in hindsight, the modest ramp-up was to be expceted. 

All in all, it was an interesting session - it would have been nice to have Daniel in there, as well as Cody Willard (perhaps we can have him in a future session). 

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Note: Mark Evans wrote about Merrill Lynch analyst Glenn Campbell's estimate that Shaw is signing up about 1,000 customers a week for cable telephony in Calgary, but the question still remains whether Shaw can reach 20% penetration of cable subscribers within 5 years.

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One of the highlights of Day 1 at VON Canada was Niklas Zennström keynote speech right before lunch.  Mr. Zennström is the CEO of Skype, the peer-to-peer VoIP client that is taking the world by storm, earning huge coverage in the blogsphere, from Andy Abramson to ZDNet blogs (by authors such as Russell Shaw). 

Despite the skepticism of some bloggers such as Om Malik, the results of Skype over the past year are nothing short of amazing.  According to the numbers in Niklas' presentation, the company is attaining a growth rate of 1000% a year, reaching an installed base of roughly 35 million users worldwide.  Given that Verisign is pegging the global number of Internet users at 900 million, Skype has captured almost 3.89% of the total number of cybernauts out there.  But that also includes users still bogged down by low bandwidth, so a more telling statistic would be the penetration of Skype into the global installed base of broadband users.  A quick scan at ITFacts.biz reveals that 150.5 million users around the globe have broadband access.  This yields a Skype penetration figure of about 23.3 percent, which is pretty good for a company having a product that has been launched less than two years ago.

More importantly, Skype has also been very adept at increasing the take rate of premium services (i.e. getting the subscribers that have been obtaining the free service to pay for extra services such as SkypeOut or SkypeIn).  Thus far, the company is counting mostly on SkypeOut, and is getting a take rate of roughly 3.43% of its users (corresponding to 1.2 million SkypeOut accounts).

Figuring out the annual ARPU for SkypeOut might be a bit tricky, but here are a few datapoints: James Enck figures that $75 per annum is a reasonable figure.  After consulting the SkypeOut pricing list, one can see that the per-minute rates for the U.S., France, Germany, Italy or the U.K. are 2.3 cents US$ per minute.  So the $75 translates to roughly 272 MOU per month, which might be a bit optimistic (granted that the assumption there is that most users make calls to cheap locations instead of India (18.5 cents/min.), a mobile phone in Yugoslavia (28 cents/min.), Vietnam (35.8 cents/min.) or a U.K. wireless number (27.5 cents/min.).  I would suggest 3 hours per month at the "low" rates is a more conservative assumption (want to err on the low rather that high side).  That means $4.14 per user per month or an annual ARPU of $49.68 (let's just round it up to $50 for convenience).  Of course, this can be done in a more scientific way factoring in the top countries by users (Rodrigo Sepulveda Schulz has a list here), but the numbers wouldn't be that far off (Poland has a charge of 3.5 cents/min. and Taiwan 2.9 cents/min.). 

Now, fast forwarding a bit to the short term future, it would not be unreasonable to see Skype get 25% penetration of 200 million broadband subs by the end of this year (about 50 million subs).  Assuming that the take rate for SkypeOut grows to 5%, that yields 2.5 million paying customers by the end of 2005, at an annual ARPU of $50 resulting $125 million in revenues for SkypeOut.  In Niklas' presentation, he mentioned a SkypeIn annual fee of 30 € per user, which translates to roughly $39.10 (let's just use $40 for simplicity).  With a take rate of 2.5% (assume half of SkypeOut due to the fact that it is a newer service), this means 1.25 million customers generating revenues of $50 million for SkypeIn, or a combined total of $175 million for Skype services (for 2005), not including extras such as SkypeVoicemail or headset partner deals.

That is a pretty amazing result, particularly considering the very low marginal cost per call minute and the near zero customer acquisition cost.  How much will this make the company worth?  Valuation depends on the sensitivity analysis of various DCF scenarios, but regardless of the multiple, with this much revenues, the company should be able to invest in R&D and enhance the product even more.  For kicks and giggles, why not partner with an speech rec vendor and bundle in some speech rec features (that would really make Om Malik's discussion about passing the "mom test" academic)?  Cannot use a simple interface to make a call?  Simply say the number you want to call!  Of course the speech engine does not even need to be that sophisticated (it could have a very small vocabulary, which does not add that much to the cost and/or complexity of the application).  But this is just one of many ideas of what Skype can do with the revenue streams.  Another one certainly is to hire top talent.  One sign of good things to come is the hiring of Microsoft guru Lenn Pryor, who left the Redmond,WA software giant to join Skype - a great coup for Skype.

Of course, despite all this optimism, a certain dose of reality is also needed.  For Skype to succeed, peering agreements will be sine-qua-non, and while Skype has the jump on the competition, more of such agreements are going to be required over time.  Moreover, for SkypeIn, Niklas also highlighted in his presentation that the company will need authorization from telecom authorities around the world to offer local numbers.  Thus far, the only countries with SkypeIn numbers are the U.S., U.K., France, Sweden, Norway, Finland, Denmark, Poland, and Hong Kong (ed. note: later, I asked Niklas about why Canada was not on the list, and he mentioned nothing happening yet, but my suspicion is he will probably wait for the CRTC VoIP decision in May before making a move in that direction).

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After making strategic investments in "advanced technology" areas such as security, storage, wireless LANs (including companies such as Aironet and Airespace), enterprise VoIP, Optical (SONET), and home networking (including companies such as Linksys), you can tack on the newest addition to the list: clustered servers.  Cisco (Nasdaq:CSCO) announced yesterday the acquisition of Topspin for $250 million. 

The Mountain View (CA) company is a provider of so-called server fabric switches, which are designed to connect interconnect servers in a clustered environment and also deliver network and storage connectivity to that server cluster.  Topspin was founded in April 2000, has about 135 employees in Mountain View and Bangalore, India, and will join Cisco's Data Center, Switching and Wireless Technology Group. 

The raison d'etre of this acquisition is the increasing popularity of the clustered server approach.  The idea is to pool IT resources into a single virtual machine that monitors system demand and accordingly tweaks the supply.  Moreover, Topspin may complement Cisco's Ethernet and SAN switches, making Cisco a top player (#1 or #2) in the SAN switch market.  Another Topspin intangible is its relationships with companies such as Dell, HP, IBM, NEC and Sun, all current Topspin partners.

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CNet has an interesting article detailing the City of Philadelphia plans about making 802.11 access ubiquitous across its streets. As reported here before, Verizon supported PA state House Bill 30, which states that an ILEC will get the first rights of refusal if a city in the state decides to follow Philly's footsteps and offer wireless broadband access to the masses.  However, Verizon agreed to grant an exception to Philadelphia, and in time, residential consumers will be able to get throughputs of 1 Mbps at prices ranging $16 to $20 per month.  This is still a far cry from what cybernauts can get in France (10 Mbps for €10 a month), but cheaper than the other broadband offerings in the area (3 Mbps for $30 a month by Verizon or $45 monthly for 4-5 Mbps by cable companies such as Comcast).   more »

For people following the MCI sweepstakes, this week is providing yet another interesting twist to the story. The latest thickening of the plot: in what some believe to be an astute move by Verizon (NYSE:VZ), the company offered Carlos Slim, the largest shareholder of MCI, as much as $25.72 for each of Slim's 43.4 million shares.  This is a significant premium over what other MCI shareholders will receive from Verizon (which has agreed to buy MCI for $23.10). Moreover, Verizon's MCI shareholder offer was constituted by 60 percent cash and 40 percent stock, whereas Mr. Slim got paid fully in cash.

The thinking was probably to buy off and silence the largest shareholder, in order to avoid further shareholder dissent.  But it might backfire, as some MCI shareholders are upset.  Here is exhibit A from Bill Miller of Legg Mason (via Light Reading):

As I indicated in my letter to the Board last week, events had made Verizon's $23.50 offer moot; this subsequent development confirms that. There can be no reason for the Board to support an offer to MCI owners that is substantially inferior to what Verizon has just agreed to pay for a non-control block of stock. Shareholders would be outraged if the Board did less than insist that the identical terms be made available to all other owners.

This reminds me of George Orwell's Animal Farm famous quote: "'All animals are equal, but some animals are more equal than others".  In order to win MCI, Verizon will have to ultimately sweeten their offer to the rest of MCI's shareholders, and get it pretty close to the deal extended to Slim. There is legal precedent for suing boards of directors when they let different classes of shareholders be taken out at different prices, so there will be pressure coming to both the MCI board and Verizon. Furthermore, there has also been some speculation that Qwest will raise its bid to $30 a share, or change its composition (50 percent cash, 50 percent stock). So we still have not heard the final chapter of this story... stay tuned!

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Peter Howe, one of my favorite technology writers in the Boston area, had an interesting interview with Sprint's CEO Gary D. Forsee that appeared in the Boston Globe last week (Mr. Forsee was in Beantown to give a speech at the Boston CEO Club, among other things).  One of the key highlights of the interview was about dual mode phones (i.e. handsets that can allow seamless roaming between 802.11 and 2.5G/3G networks), a topic that I have discussed at length here at TF and in other publications as well (such as the IPCC January 2005 newsletter). 

Mr. Forsee believes dual mode handsets will hit the US market in 2006, and I would tend to agree with that.  Now that most technological challenges have been overcome (e.g. the handoff and battery power issue, the latter thanks to 802.11e and smart solutions such as Motorola "deep sleep" strategy), the key hurdle that needs to be overcome is the million dollar market issue.  Some wireless operators will probably reject the technology (at least initially) as a threat to their margins because it will cause a big reduction in the amount of 2.5/3G minutes of usage, that will be shifted to cheap (sometimes even unlimited) calls via 802.11 WLANs. 

This narrow-minded vision might end up costing wireless carriers even more than the small loss of minutes of use.  Savvy service providers (tier 2 wireless, MVNOs such as Virgin, or MSOs such as Comcast, Cox and Time Warner) will see this as an opportunity, not a threat.  Because most of them will gain - for MSOs, anything is gravy, as they fight the competitive threat of the RBOCs "quad play" (triple play of voice, video and data plus wireless); for tier 2 wireless players, the increase in ARPU due to extra pull-through data revenues will make this a worthwhile play; for MVNOs comes the opportunity to get more revenues from customers looking to get extra value. 

But, more importantly, how significant is the amount of lost revenues due to fewer minutes spent on the 2.5/3G wireless networks?  The prevalent modus operandi is for cell phone users to hang up their calls as they enter their offices or get closer to another fixed line phone.  I know I do that - and not only to save money off my wireless plan, but also because the still unknown effects of too much talk time on my cellular handset.  Again, wireless operators are failing to see that most of those minutes were not really there to begin with (e.g. even on the wireline side, enterprises use a PBX, which can be thought of a big multiplexor, to save them money).  In the end, for fear of cannibalization of revenues, they might miss on the bigger picture.  But in time, they might realize that if they do not forego some of those minutes, their competitors (tier 2 players, MVNOs and MSOs) will certainly do so.

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Update: Obviously, Sprint is astutely leveraging the opportunity by enabling MSOs (and potentially MVNOs in the future) to provide the wireless part of the "quad" play to these players.  It would not surprise me to see Sprint also play a key role in enabling the seamless roaming play.  The wireless operators I was referring to above were just the big incumbents.

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With wireless markets nearly tapped out in Western Europe and slowly getting to that point in North America, handset manufacturers will be soon focusing on cheaper handsets that can sell well in the so-called "emerging markets".  In markets such as Brazil, there are many pre-paid customers who typically bring a low ARPU, so there is also added pressure for the carriers not to subsidize high-priced handsets if their payback period would be long.

In the quest for that cheaper cellular phone, vendors are faced with margin risks.  For instance casings for phones typically cost $8-$10 with not much variance due to the handset price.  For an average $150 handset, that translates to roughly 6% of the cost of the handset.  However, applying the same logic to chaper phone (let's say a $50 phone), the same casing would constitute 16 to 20% of the price.  With margins staying relatively flat, at roughly the 10-15% range at current prices, vendors will find it hard to embark on an ultra-low price handset strategy.

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The other day, I stumbled upon some Romanian/US SME Internet usage stats at Dragos' @rgumente site and that got me to ITFacts.biz, a great site that publishes factoids on anything from 3G to WWW.  The VoIP section was interesting, as were the telecom and VC sections.  I spent a good chunk of time browsing that last one, and discovering information such as the fact that Sillicon Valley, New England and NY Metro constituted 56% of the capital and 49% of all VC deals reported in 2004, according to PWC.  Definitely a very bookmark-worthy website.

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I do not know if anybody had the opportunity to check out the FOREX markets during the past few days, but there was a major consolidation session in Chicago on Friday, as the Fed made a few hawkish statements about inflation, and a lot of traders sold their USD shorts.  Should this trend continue, chances are that the Euro will lose some of its shine versus the dollar.  So maybe the time has really come for Euro vendors (e.g. Alcatel, Ericsson, Siemens) to really consider even more North-American based companies to complement their respective product portfolios.  Arguably, this has been already taking place, with Siemens and Alcatel quietly buying companies such as Chantry Networks and Spatial Wireless (respectively).  But we expect to see a lot more of those acquisitions in 2005.  It is now still relatively cheap for a strong Euro player to buy some assets on this side of the Ocean, but that window might close if US interest rates keep going up.

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In what industry watchers believe the first of many SBC (Session Border Controller) plays this year, Juniper bought Israeli startup Kagoor Networks for $65.5 million in a deal announced earlier this week (Tuesday).  The hefty multiple (more than 13x 2004 sales) caught a lot of attention, given the amount of other SBC companies available in the marketplace.  Companies such as Acme, Jasomi and Netrake can also be potential acquisition and/or IPO targets.  So why $65.5 million for a company that is not yet profitable?  Obviously, Juniper (Nasdaq:JNPR) felt that Kagoor's product was top class, but Kagoor also happens to have key relationships with the same companies that resell Juniper, namely Lucent, NEC and Siemens. 

It was surprising for some to see Juniper acquiring an SBC vendor, when all along the street kept dreaming up scenarios such as a wireless gambit, an Ethernet company purchase, or a Layer 4-7 play.  Other folks in the Street were even speculating Juniper might acquire Sylantro.  But in the end, Kagoor can play a key role in Juniper's Infranet initiative and is the first piece to fall into piece in the 2005 SBC puzzle.

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Many folks were anxiously waiting for the first FCC ruling after the appointment of Kevin Martin as the new Chairman, succeeding Michael Powell, to observe whether or not there would be a change in bias within the Commission. If the first ruling after Martin being named is at all a valid indicator, the FCC might become a bit more pro RBOC (albeit that UNE-P and the fiber ruling last October also benefited RBOCs).

Some VoIP providers will find it hard to digest the news that the FCC has again sided with the phone companies, issuing a controversial split-decision that they do not have to abide by state rules requiring them to sell stand-alone high speed Internet service (the final vote was 3x2 in favor of Bell South, which opposed regulation in Florida, Georgia, Kentucky and Louisiana that forbid its practice of linking DSL service to local phone service).

This will also prove to be a major challenge to “cord cutters” (i.e. a group of 20 million US residents who chose not to have local phone service and instead rely solely on cellular phones). These cord cutters that had naked DSL might now be forced to buy local phone service.

The interesting question is whether or not this will work in favor of the RBOCs, as the cord cutters were already unsatisfied with their local phone service, and certainly would not want to be in a position where they would be forced to buy that service just for the sake of having DSL. Therefore, they might consider cable (if available in their area) or maybe some broadband wireless option before, as a last option acquiring local phone service again.

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As I wrote in a January note after the Cisco acquisition of Airespace, there would be many ramifications arising from that transaction, including possible partnerships between Alcatel, NEC and Nortel and WLAN vendors such as Aruba, Meru, Strix or Trapeze.  Well, one of those new partnerships was officially announced earlier this week, when Nortel and Trapeze Networks agreed to an OEM and development partnership.

Trapeze will embed its technology into some of Nortel's platforms to give wireless capabilities to things like remote access, switching and security.  The first co-developed product between both companies is expected to be introduced during the May/June timeframe.

Note: It looks like Alcatel also found a similar partnership in the WLAN space, with Aruba Networks, initially capitalizing on the latter's security and other network management products.

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Interestingly enough, despite my previous post on the dismal record that M&As have had in the past, one of the biggest topics du jour that is occupying the mind of many telecom analysts is that of equipment vendor consolidation, given the similar activity that has happened on the carrier side. 

The rationale goes that because they are fewer customers and probably some reduced CAPEX spend, there will be less revenues to be had by the same number of vendors, ergo the trend is for some of the vendors to amalgamate and be bought.

Light Reading went wild with a few scenarios that could be read here.  Even in Wall Street, some analysts have been in a speculative mood lately.  For instance, CIBC World Markets mentioned in a report that Nortel could potentially beef up its enterprise division by acquiring companies such as Mitel or Inter-Tel (I really do not see either scenario happening, as there would be a lot of duplication and not enough synergies, although a Mitel sale to another vendor such as Hewlett Packard should not be discarded in the long-term future). 

But speculation keeps the world turning.  We will definitely see some M&A activity happening later this year, but certainly not as being anticipated by some telecom industry insiders. 

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Gizmodo had an interesting entry about KDDI's AI-MATE (see photo to the left), a prototype which the Japanese operator is calling a "hybrid communicator", blending the functionality from a cell phone and a PDA.  The model will make its debut at the Expo 2005 in Aichi, Japan (which begins on March 25th).

On a separate note, we can add a couple more datapoints to the "Chaku-Uta Full" polyphonic tones download service that I wrote about recently.  KDDI announced earlier this month that the service surpassed the 3 million download mark on March 1st, after surpassing 2 million downloads earlier in February (on Feb. 5th).

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Nortel (NYSE:NT) reported its Q3 2004 results, with a revenue tally of $2.179 billion (as opposed to the Street's consensus estimate of around $2.270 billion). Enterprise results were in line, whereas wireline were a bit lower and wireless a bit higher than expected. But the shortfall really came in the optical side, mostly attributed to "a cumulative correction of approximately $80 in the third quarter of 2004 for revenues previously recognized primarily in 2001 and 2002 relating to the delivery of future contractual post-contract support, or PCS, and other services.”

But going forward, if Nortel is to win back the full confidence from the Street, more transparency in the reporting of results will be required (as Lucent did after its own settlement with the SEC).  So, in the future, items such as the mysterious $159 million charge on the BSNL contract (that adversely impacted gross margins) need to be better explained.

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Of course no sooner that I wrote about Nortel's optimism about its prospects in Asia, two things happened: one, Q3 results started being dissected over the weekend (Mark Evans had a good piece about that), and then today (Monday), there was a lot of talk on the Street about the reorganization of China Unicom.

It turns out that China Unicom is considering abandoning its dual network (CDMA/GSM) strategy, selling its GSM network to China Telecom (a wireline carrier).  That transaction could then open the way for China Unicom to align itself with another wireline service provider (China Netcom).  So what's the upshot of all this?  Well, perhaps a short term increase in 2/2.5G spend with easing demand for a 3G ramp-up, as both wireline and wireless carriers will now have 2.5G wireless offerings to concentrate on the short term.

It is expected that the Chinese government will still issue three or four new 3G licenses before the end of 2005, but the initial pace of deployment will be slower than initially anticipated.  So what's the impact to Nortel?  As one of the primary CDMA suppliers in the China Unicom account (alongside Motorola and Lucent), Nortel will benefit in the long-term, as the Chinese operator will only have to focus on the evolution of its CDMA network.  But in the short to medium term, spending will be reduced, as there is a lot of unused capacity in China Unicom's current CDMA network.

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Industry sources have informed us BT will seek to select its short list of equipment vendors for the 21 CN RFP by March 31st (although some folks feel that might actually come in April, during their analyst call). There has been a lot written about BT's major next-gen network initiative, also known as the 21st Century Network (or 21 CN, for short) RFP. This ambitious undertaking calls for the building of a new network, followed by the switching off of older PSTN infrastructure by the end of decade, and is pegged at £10 billion ($18.7 billion). 

Companies in the running include Alcatel (access and Ethernet), Cisco (which might see some action involving its new CRS-1 core router and hopes to leverage its long standing relationship with BT), Fujitsu (DSLAMs), Marconi (which is a long-term supplier to BT, and one of the favorites to win a part of the VoIP buildout; there will be lots of lobbying for Marconi), and Siemens (one of BT's strategic suppliers, providing gear such as the HiPath next-gen line).  There could be also some companies which can benefit from partnerships to win a portion of this business, such as Sonus, which has a non-exclusive partnership with Marconi (if Marconi is one of the winners, it will leverage Sonus' gateway)

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Nordic Wireless had an interesting post on the success of Japan's new polyphonic ring tones download service called “EZ Chaku-Uta-Full”. These polyphonic songs play 64 notes simultaneously and can be downloaded to mobile phones via 3G networks.  The service made its debut in mid-November of last year, and notched 1 million downloads within a span of 48 days: on January 5th, KDDI and Okinawa Cellular (a KDDI company) announced that milestone.  As of January, only KDDI was offering chaku-uta in Japan, with four handset models being supported and a base of 410,000 users.

What does this mean?  Can we have a future in which there will be more chaku-uta downloads on the wireless networks than i-Tunes downloads on the wired Internet?  Well, the graph below certainly suggests that, as the chaku-uta full service has had a much faster ramp-up.  One key takeaway is that for some applications, the mobile network might actually be the preferred means to get a service (particularly with the advent of HSDPA and burst data rates of up to 14.2 Mbps).  Another one is that the iPod will get more competition not only from Dell, Virgin, Creative Labs, IRiber and Archos, but also from cell phone manufacturers, which will embed mp3 functionality on their handsets and team up with service providers offering chaku-uta-like services.

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Since I was at 3GSM and VON, I could not attend CTIA this past week, but a friend gave me some interesting information about 3G developments in China. There was quite a bit of chatter in both New Orleans and Cannes that the 3G licenses in China would finally be issued by the end of 2005. Apparently, China Unicom mentioned that any service provider consolidation or reorganization would be revealed by that time frame. That is why there is an expectation that the first equipment contracts will be issued the end of the year or  the start of 2006.

Nortel (NYSE:NT) was bullish about its 3G chances in China.  The company hopes to leverage their current incumbent position with China Unicom (having roughly a 20% share of the Unicom account) into an EV-DO contract once 3G licenses are issued.  Nortel was also optimistic about taking advantage of its JV with LG to win some more business in South Korea, hoping to benefit from the KTF and the SK Telecom buildouts.

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Since I saw Larry Borsato mention some figures in the 99.999% availability requirement-for-VoIP-networks debate, I decided it was time for me to dust off my networking theory book and implement Erlang's formula on an Excel spreadsheet using VBA, to get a better feel for how much each "9" matters.

Here are the results that I got:

Availability	Associated Downtime per Year
99%	87 hours and 36 minutes
99.5%	43 hours and 48 minutes
99.95%	4 hours and 23 minutes
99.99%	53 minutes
99.999%	5 minutes

Again, in Greg Galitzine's example, a Verizon bureaucrat's two plus days delay in dispatching a technician to handle the case resulted in service availability going down from 99.999% to under 99.5%... wow! - how quickly that number can fall!

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About a week ago, I wrote an entry asking how reliable VoIP should be and mentioned some research that was conducted by Professor Henning Schulzrinne and one of his students (Wenyu Jiang) at Columbia University.  The actual research on VoIP service availability in the Internet was conducted a while ago (the paper was presented at the PAM (Passive and Active Measurement) Workshop in La Jolla, CA back in April 2003.  That particular study reported that when the Internet is used as the transport network, the VoIP service availability is approximately 98 percent.  The key factors in arriving at this figure were the call success probability (on average 0.47 percent) and the outage-induced call abortion probability (i.e., the likelihood of the caller hanging up after a service interruption, found to be on average equal to 1.53 percent). Combined, the results yielded a net service availability of roughly 98 percent.

Then, I mentioned the Ofcom figure of service availability for wireless networks in the UK (running at a rate of 97 to 98 percent service availability, according to a 2002 survey).  My intent was just to talk about the social aspects of VoIP, and to speculate about how some of the technology's early adopters were willing to tolerate something in between the availability of wireless service and the "assumed" 99.999% POTS figure (I say "assumed" because of stories such as Greg Galitzine, whose Verizon service outage of more than two days took his POTS availability to less than 99.5% for the year).

Well, Om Malik jumped all over my post, believing that I was really prescribing VoIP as a POTS replacement technology at a smaller availability than the status-quo.  Of course, that was not the case at all.  I was just putting myself on the shoes of a new entrant to the marketplace, and trying to figure out how much is needed as a minimum initial threshold, until more mindshare and market share are captured, before making a higher CAPEX commitment to raise the bar of the service. 

The fact of the matter is that, on a controlled network, one can greatly improve the availability, by adding redundancy (e.g. using RAID hard drives and "hot standby" servers or by implementing a highly reliable LAN/WAN design with multiple switches and routers at the Layer 2 and Layer 3 network levels for redundant connections and call paths).  These more highly available systems require more equipment and supported communications links, thereby increasing the overall system cost.  I was just trying to ask how much each 9 is worth, and what are the tradeoffs in terms of what the investment requirements are and what the customers are willing to accept.

Of course five 9s is highly desirable, because of the possible consequences of a service outage (even as temporary as it might be).  Here, the notion of expected value takes hold - i.e. even starting with a low probability event, when factoring in the bad consequences associated with it, the expected value could be high (e.g. someone who is relying on VoIP service as a primary line and all of a sudden cannot call an ambulance due to a service interruption).  That is why I advocate adherence to this high availability target.  But Rome was not built in one day - and neither were fully redundant, highly available and controlled VoIP networks, so this will be a gradual process.

One final comment - five nines as a goal should be pursued only when VoIP is to be relied on as the only means of communication, but with the advent of data apps (IM, web collaboration, etc) and the proliferation of mobile networks (3G, WiFi, and eventually WiMax), other means of communication are becoming widely popular, which means that POTS is no longer as exclusive as it once was.  It is important to keep in mind that when the POTS network was built, the telephone was the only game in town, and that was a key consideration that had to be factored in the design of that network.

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Research in Motion (Nasdaq:RIMM) shareholders were probably jumping for joy after the company announced yesterday that it reached a favorable settlement with NTP on their ongoing dispute over some intellectual property rights.  Some expected much worse than the deal that RIMM was able to arrive at, including not only an upfront cash settlement, but also a hefty ongoing royalty.  As it turned out, the company managed to settle all the damages from the previous infringement and to gain a paid-up perpetual licence for $450 million (apportioned as follows: $137 for past and $313 for future infringements). 

Now investors can forget about this issue and start focusing on the fundamentals behind the stock, and the increased competition that is looming over the horizon.  The addressable market opportunity is still a substantial one, with China providing a good upside, particularly considering a potential rollout at China Mobile.  Furthermore, the Fast100 Program (calling for a rollout of RIMM's platform at 100 small carriers on an accelerated basis) remains on track.

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An insider Wall Street source called me today to let me know that a White House official hinted that Kevin Martin will be named as the new Chairman of the FCC, following the departure of Michael Powell.

Many had considered Martin to be the favorite in succeeding Powell, due to the fact that he already has considerable regulator experience (4+ years at the FCC), the fact that he worked on President Bush's campaign, and that his wife is an assistant to the President on economic policy.

It will be interesting to see what Martin brings to the table, particularly regarding the VoIP friendly stance that was adopted by Powell.  Although Martin has clashed with Powell before (on local phone competition back in 2003), he maintained the party line for the most part of his FCC tenure.

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One interesting thing that happened while I was in Cannes last month at 3GSM was the frequency that I would hear the default Nokia ringtone song.  Particularly when attending press conferences of some rival equipment vendors (such as Ericsson or Siemens).  It seemed that the standard Nokia tune kept getting played and disturbing some of these events (one fellow even joked that Nokia always had someone planted in the audience with a cell phone, but it could have been just a coincidence, as attendees often forget to mute their cell phones and put them on vibrate mode).

Well, one Finnish colleague told me that the song is nothing more than just a piece by Jean Sibelius (the Finnish composer shown on the photo, who authored a piece called Finlandia, which later became the country's national anthem) simply played backwards.  I was a bit puzzled, since I never heard the story.

As it turns out, he was pulling my leg.  I did a bit of digging and found out that in fact, the tune comes from a classical guitar work called Gran Vals, which was composed by Francisco Tarrega in the 19th century.  I was also able to discover a good article detailing the history of ringtones.

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Jeff Pulver was a guest speaker yesterday at a dinner event hosted by Ditech Communications, a major sponsor of Spring VON.  Ditech delivers echo cancellation and voice processing products used by wireline, wireless and VoIP service providers. 

One of the highlights of his speech was his lobbying for a wider adoption of wideband CODECs in the VoIP world.  The impressive uptake of IP phones and the imminent roll out of 3G wireless handsets have both generated a substantial opportunity to deliver better than toll-quality audio performance in the new packet-based telephone network.

This better than toll-quality sound can be obtained by using the capabilities of the data network that is not limited to 8-KHz sampling rate (about a 4-KHz pass-band) present in the existing telephone network.  Jeff's point is valid, since inexpensive DSPs can compress wide bandwidth signals for transmission over the packet network, and a slightly bigger bandwidth consumption should no longer be a major issue.  If I were a VoIP marketer, I would love to play side-by-side two clips: one with G.711 and one with G.722, and then explain that the first clip was legacy wireline sound, whereas the second really captures the essence of VoIP - being able to deliver a much better sound quality.

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Much has been written about Nortel's appointment of a new COO and President on March 4th.  Gary Daichendt, who has remained pretty much on the sidelines of the telecom world since stepping down from Cisco after a six year tenure in 2000, is the newest exec to join Nortel.  Daichendt was the VP of worldwide sales at Cisco (just one of two VPs reporting directly to CEO John Chambers, with whom he worked both at IBM and Wang Laboratories). 

As a result, Nortel CEO Bill Owens will give up his title of President, while becoming Board Co-Chairman, while new CFO Peter Currie will gain the extra title of Executive Vice President.  The fact that Owens will get expanded powers as the CEO (as a co-chair in the board) and that his handpicked CFO is getting the exec VP title indicate that the Nortel Board might not be preparing to replace Owens with an executive with more industry experience, contrary to some views expressed in the blogsphere. 

However, Owens nearly impeccable reputation got a bit stained when Nortel's accounting department failed on repeated occasions to deliver SEC filings by certain deadlines promised by him.  In January, the failure to deliver at least Q3 2004 results by the end month might have resulted in the departure of Bill Kerr as the CFO, and the appointment of Peter Currie to the job.  While Mr. Kerr was planning to step down anyway, the word on Wall Street was that the switch was triggered by this latest setback in reporting results on time.  Currie became the company's sixth CFO in the past five years.

So what does Daichendt's hiring mean?  Of course, he brings a lot of intangibles to the table, including his extensive telecom background, which is particularly important when attempting to secure major carrier deals where industry know-how is sine-qua-non for understanding deal lingo.  Bringing in an IP champion in the executive suite also shows Nortel's commitment to the technology, as the market transitions from TDM-based equipment to packet switched gear.  The company certainly has been further along in incorporating IP-based technologies into its product mix.

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Om Malik reported on the outages of Vonage and Lingo last weekend, and also a similar instance last year with AT&T's CallVantage service.  He wonders what the impact will be in terms of customer satisfaction, once users realize that current VoIP services will be hard pressed to deliver a service that matches the 99.999% reliability of a carrier. 

While the above mentioned service outages make one ponder on the availability of VoIP, I wonder whether the bulk of the current VoIP users really have such high expectations about the reliability of the service.  Or, even more importantly if they are able to live with less than 99%+ reliability.  The question is: is that carrier-grade reliability necessary for the current early adopters of VoIP?  Particularly when considering that with the advent of mobile communications, the end-user tolerance for noisy lines, dropped calls, etc. has gone way up.

Columbia University Computer Science Professor Henning Schulzrinne has been determining the availability of an average VoIP call as early as April 2003.  One of his findings is that when the Internet is used as the transport network, net VoIP service availability is approximately 98 percent.

Recall that VoIP service availability is defined as the likelihood of a VoIP call being successfully established on the caller’s first attempt. To put the 98 percent number in context, the PSTN runs at an availability rate of 99.99% to 99.999%, whereas mobile networks in the UK run at a rate of 97 to 98 percent service availability (according to a 2002 survey ran by Ofcom, the Office of Communications, which is the is the regulator for the UK telecom industry).

Professor Schulzrinne's findings show that the early adopters of VoIP services relying on the Internet for transport are already used to living with less than even two nines worth of availability.  So how important really is the 99.999% figure?  Perhaps all that is required for the VoIP SPs using their own networks is sufficient CAPEX to fine tune these networks to offer just enough availability.  And how much is "just enough"?  I would say somewhere in the middle between the availability of wireless and POTS services.  It would be interesting exercise to estimate how much CAPEX each 9 is worth...

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