Winners and Losers in the Coming Super-Network War

SATURDAY, JUNE 8, 2013

Winners and Losers in the Coming Super-Network War

By TIERNAN RAY | MORE ARTICLES BY AUTHOR

Ciena, Cisco, Oracle, and F5 Networks could benefit as a battle looms between content and distribution.

The 17% surge in shares of networking-equipment firm Ciena (ticker: CIEN) last Thursday, following better-than-expected fiscal second-quarter earnings, was no doubt driven by some of the animal spirits lately boosting tech stocks. But the surge was not entirely adrenaline-based.

The network—the very “pipes” that carry the data, along with the software directing it, whether on the global Internet or a small corporate network—will play an increasingly pivotal role in commerce and work and play, particularly as a dramatic new age of content and services unfolds.What this new age will require is something we might call the Super Network. It will have to be huge, of course, but it will also have to be built on software technology that makes networks much more nimble, malleable, and deployable in novel (and probably still unforeseen) ways.

The companies that will benefit from this explosion in size and sophistication include networking stalwarts like F5 Networks (FFIV), Cisco Systems (CSCO), and Ciena, but also outliers such as database giant Oracle (ORCL). They will all enrich themselves as arms merchants.

For a battle is looming between two giant industries—the phone companies, on one hand, and on the other the powerful software and services companies that define the Web, such as Facebook (FB), Netflix (NFLX), Google (GOOG), Amazon.com (AMZN), andApple (AAPL). The telcos, including AT&T (T) and Verizon Communications (VZ), and Vodaphone (VOD), operate the fiber optic lines and the switches, and the wireless base stations, that transmit bits. Facebook and the rest find ways to make dollars on advertising and subscriptions on top of those bits.

But the arrangement cannot hold. The telcos see the dollars flowing over their networks into someone else’s pocket, and they want a piece of that action. And the outfits that don’t own networks, including Netflix, are restless, always wanting to make sure the experience of their end users is top-notch, so as to ensure more ad dollars and subscriptions. At some point, both of these powerful parties will fight for control of a Super Network and what it can deliver.

Nearly 14 years ago, the U.S. tried an experiment in networking competition. Known as “facilities unbundling,” it saw upstart companies such as Covad Communications and Rhythms NetConnections sharing the Internet access lines of the phone companies by fiat of the Federal Communications Commission. The experiment was a miserable failure. Rhythms and Covad went bankrupt, and competition dried up.

But a new era of competition may be at hand. This time around, Facebook and Netflix could control the phone network without installing a single piece of equipment or renting any access lines from the phone network. “There is a big war that we will see in coming years,” says John Cioffi, the CEO of start-up Assia, based in Redwood City, Calif. Cioffi, who is widely credited with inventing the high-speed networking technology digital subscriber line, or DSL, has received $55 million from venture firms, but also telcos including AT&T.

Cioffi sees so-called over-the-top service providers such as Netflix wanting to control the network over which the bits of video transmission run—not just to rent bandwidth but to define the precise quality of the user experience.

One can imagine Netflix serving up video in ultra-high-definition format, known as 4K. All streaming, but especially 4K, is very demanding of bandwidth—one reason that industry observers believe it is years from being a reality, even though TV sets for it are already on the market. Netflix chief Reed Hastings recently remarked on CNBC that 4K is the most interesting technology that he has seen.

One can also imagine Facebook replacing simple images and text with high-definition, immersive video chat. Either kind of application could benefit from precise control of a telco network as if it were Netflix’s or Facebook’s own. Cioffi says the new style of service providers like Facebook “want to differentiate the quality of the experience they deliver.”

In the case of Covad and Rhythms, the goal of selling a better service required battling or bullying telcos for use of equipment. Today, though, “an alternative service provider doesn’t have to possess facilities,” says Cioffi. “Everything that was done before by unbundling equipment and lines can be done in software.”

Cioffi has a vested interest. His company’s software helps telcos improve transmission on high-speed connections. (The name Assia stands for Adaptive Spectrum and Signal Alignment.) But some industry observers concur with his notion of a broad transformation. “What Google knows, and Netflix knows, is that a bit of the quality of experience is out of their control,” says Julie Kunstler, a telecom analyst with Ovum who has known Cioffi for several years. “They can do a lot of things to ameliorate a connection, but the quality of Netflix on my computer is dependent on the quality of bandwidth into my home.”

Adds Kunstler, “If they could control some of the physical attributes of the network, they could have better control over the quality of experience.”

“We’re headed toward a programmable network,” says Gartner analyst Akshay Sharma, whose vision squares with Cioffi’s. Sharma sees over-the-top providers, even in partnership with telcos, using new tools to reach deep into networks, down to the bits traveling on a high-speed line to the home, to control and customize the bandwidth each subscriber receives.

F5 is among the companies developing the new tools. A year ago it bought a start-up called Traffix Systems, which makes something called the “diameter router,” a piece of network software that can “profile” a network subscriber and tell what quality of bandwidth they should have—gold, silver, or bronze, say. Oracle is another. The company has bulked up on telco suppliers this year, buying Tekelec and Acme Packet. The purpose of the acquisitions, asserts Sharma, has been to own a key technology called a “policy server,” which can assign unique privileges on the network to each user. It’s another great use for the big database software Oracle sells.

Ciena, too, sees a future in software-controlled networks, even though its customer base today is principally the phone companies. “You’re basically talking about the virtualization of the network,” Ciena CEO Gary Smith tells me. “The lines will be blurred between whether you’re a carrier in a historical fashion, or a service provider who owns the apps, and owns the customer.”

This battle will take years to play out, but watching the arms merchants—Ciena and F5 and Cisco and Oracle—is one place to start looking for investments.