IEEE ComSoc Technology Blog

Infonetics, now part of IHS Inc. (NYSE: IHS), released excerpts from its latest Global Telecom and Datacom Market Trends and Drivers report. In the report, Infonetics analyzes global and regional market trends and conditions.

TELECOM AND DATACOM MARKET TRENDS:
.    Macroeconomic indicators point to moderate global economic growth of 3 percent for the full-year 2014 due to persistent weaknesses in the Eurozone and a significant slowdown in Brazil and Russia
.    Global mobile service revenue barely budged in the first half of 2014 (1H14), up just 0.5 percent from the same period a year ago, badly dragged by Europe again
.    Mobile data services (text messaging and mobile broadband) rose again in every region in 1H14, driven by the increasing usage of smartphones
.   Mobil broadband services grew 26 percent year-over-year, enough to offset the decline of SMS revenue
.    Key trends affecting the enterprise networking and communication markets include the adoption of cloud services, the use of cloud architectures in enterprise data centers, and security becoming a part of every IT decision 

REPORT SYNOPSIS:

 Infonetics’ overall market trends and drivers report is published twice annually to provide analysis of global and regional market trends and conditions affecting service providers, enterprises, subscribers and the global economy. The report assess the state of the telecom industry, telling the story of what’s going on now and what’s expected in the near and long term, including spending trends, subscriber forecasts, macroeconomic drivers and key economic statistics (e.g., unemployment, OECD indicators, GDP growth). The 40 page report is illustrated with charts, graphs, tables, and written analysis.

“Overall, growth in telecom revenue continues to slow in every geographic region. Europe’s 5 largest service providers-Deutsche Telekom, Orange, Telecom Italia, Telefónica, and Vodafone-continue to experience declining revenue, though less pronounced than in the past 3 years. And in North America, AT&T and Verizon have signaled that the mobile services price war started by T-Mobile US is taking a bite,” said Stéphane Téral, principal analyst for mobile infrastructure and carrier economics at Infonetics Research.

Co-author of the report Matthias Machowinski, Infonetics’ directing analyst for enterprise networks, added: “After a weak 2013, enterprise networking and communication revenue growth accelerated in 2014 thanks to a resurging North American market and stepped-up investments in security infrastructure. We expect similar results in 2015, when strong end-user demand in North America and Asia Pac is likely to be offset by a slowdown in Europe.”

To purchase the report, contact Infonetics:

www.infonetics.com/contact.asp

RELATED RESEARCH (http://www.infonetics.com/market-research-report-highlights.asp)

.    Mobile broadband overtakes SMS as largest generator of mobile data revenue
.    Infonetics projects Cloud-RAN architecture market to top $10 billion by 2018
.    Ethernet switch market accelerating with 2.5G and 25G Ethernet speeds on horizon
.    iPhone 6 drives uptick in smartphone market
.    Nearly a quarter of all access points are now 802.11ac, shows WLAN market report

Comment & Analysis:

The strong mega trend of using commodity hardware has pressured all IT equipment vendors, especially telecom where there’s fierce global competition from Huawei, ZTE and other Asian equipment companies.  It’s not likely to reverse anytime soon.

Here’s a quote from Infonetics latest Broadcast and Streaming Video Equipment and Pay TV Subscribers report, which tracks pay-TV subscribers and video equipment sold to telco IPTV, cable and satellite TV providers.

“The cost of encoding and transcoding platforms continues to come down, pressuring video and broadcast equipment revenue as pay-TV providers move to generic hardware platforms and, ultimately, network functions virtualization (NFV) rather than dedicated platforms,” said Jeff Heynen, principal analyst for broadband access and pay TV at Infonetics Research.

Continued Heynen: “This is a long-term shift that will keep video revenue from growing more significantly, despite the fact that pay-TV providers must fundamentally alter their video processing environments to support linear, over-the-top (OTT) and multiscreen content that continues to grow exponentially.”

So with slowing revenue growth in almost all communications sectors it will certainly be a survival of the fittest battle amongst existing telecom/network equipment companies with profit margins under severe pressure.

Infonetics, now part of IHS Inc. (NYSE: IHS), released excerpts from its December 2014 2G, 3G, LTE Mobile Services and Subscribers market size and forecast report.

MOBILE SERVICES MARKET HIGHLIGHTS:

• Worldwide mobile service revenue barely budged in the first half of 2014 (1H14), up just 0.5% from the same period a year ago, to $385.5 billion

• Gains in the Caribbean and Latin America (CALA), Asia Pacific, and North America together offset a high double-digit decline in EMEA
• For the first time, voice usage slightly slowed, dragged by China where over-the-top (OTT) alternatives took their share, and mobile broadband overtook SMS as the largest revenue generator of mobile data
• Mobile broadband revenue rose 26% in 1H14 from 1H13 and continued to drive overall mobile services market growth

Despite the rise of mobile data, blended ARPU continues to fall, but at a much slower pace in every region, including developing Asia Pacific

“Europe continues to be the main drag on global mobile services revenue, but Europe’s BIG 5-Deutsche Telekom, Orange, Telecom Italia, Telefónica, Vodafone-see some light at the end of the tunnel, with looming consolidation that should ease the pressure on mobile services revenue,” notes Stéphane Téral, principal analyst for mobile infrastructure and carrier economics at Infonetics Research.

MOBILE SERVICE REPORT SYNOPSIS:

Infonetics’ mobile services report provides worldwide and regional market size, forecasts through 2018, analysis, and trends for voice, SMS/MMS, and broadband mobile service revenue, ARPU, and subscribers by technology. The report features a Mobile Broadband Service Tracker following operator deployments by country, technology and subscribers.

To buy the report, contact Infonetics: www.infonetics.com/contact.asp

GSMA has produced a free report on the 2014 Mobile Economy.  It’s available for download as a pdf at:

http://www.gsmamobileeconomy.com/GSMA_ME_Report_2014_R2_WEB.pdf

GSMA represents the interests of mobile operators worldwide. Spanning more than 220 countries, the GSMA unites nearly 800 of the world’s mobile operators with more than 230 companies in the broader mobile ecosystem, including handset makers, software companies, equipment providers and Internet companies, as well as organisations in industry sectors such as financial services, healthcare,media, transport and utilities. The GSMA also produces industry-leading events such as the Mobile World Congress (in Barcelona, Spain) and Mobile Asia Expo.

For more information, please visit the GSMA corporatewebsite at www.gsma.com

NOTE:  An update to this article is at:  

https://techblog.comsoc.org/2015/06/20/cuba-to-expand-internet-access-and-lower-price-of-wifi-connections

Introduction:

Recognizing the urgent need to improve its infrastructure and bolster the private sector economy, Castro & company felt the need to engage the U.S. in dialog to get U.S. companies to invest in the island, especially in telecommunications and information infrastructure.  

We were not surprised to read this section of President Obama’s new course for Cuba:

“Telecommunications providers will be allowed to establish the necessary mechanisms, including infrastructure, in Cuba to provide commercial telecommunications and Internet services, which will improve telecommunications between the United States and Cuba.”

Included in the list of products and services that the US will will now make available to Cuba are “certain consumer communications devices, related software, applications, hardware, and services, and items for the establishment and update of communications-related systems.”

Cuba is the largest island in the Caribbean and the closest to the U.S.  The island nation’s telecom system, is just starting to be upgraded, after more than five decades of aging and breaking down.  A revealing editorial in the December 15th Gramma (Cuba’s state owned and controlled newspaper) is titled The digitalization of society, a priority for Cuba:

“Steps have been taken at the administrative and enterprise levels to guarantee technological sustainability and sovereignty for the massive provision of Internet access services.  The trial balloon has been the opening of 154 Public Navigation Centers, distributed throughout the nation, as a prelude to the generalized availability of data services, which will allow the country to commercially offer broadband access (with greater speed and options), work on which is currently underway.”

Continuing……”other initiatives are under development, or in the start-up process, to facilitate the distribution of data via mobile phones and the development of platforms for university and institutional networks, which could extend their services to all of society.”

“The strategy additionally projects the creation of new wireless access capacity; and the integration and orderly use of institutional data networks, such as those in sectors such as public health, education and culture, which are well known by Cuban users. These will be hosted by high performance servers, which will facilitate their potential use. Also planned is the development of video games and multimedia with educational and historical content, as well as the updating of the regulatory framework governing the use of information and telecommunications technology.”

However, one critic is skeptical. Martyn Warwick writes in a blog post:

“Even those privileged enough to have access to a computer and an Internet connection pay through the nose for a very patchy service. Connectivity is a lottery for much of the time and system often falls over and lays dead for indeterminate periods. Hourly connection, when available can cost as much as 20 per cent of the minimum monthly wage. Almost all digital files are exchanged offline via USB sticks that are sold on the dollar black market.”

“Cuba desperately needs good, modern, efficient and inexpensive comms and although the US economic embargo remains in place for the moment, the monolith is cracked. Mr. Obama is using his executive power as President to permit infrastructure projects that will “promote civil society” in Cuba – and that means telecoms.”

http://www.telecomtv.com/#articles/policy-and-regulation/us-telcos-now-allowed-to-do-business-with-cuba-borr-n-y-cuenta-neuva-a-clean-slate-and-a-new-start-12051/

Bottom line:  Cuba seeks help from U.S. telecommunications carriers and equipment manufacturers to modernize it’s outdated telecom facilities in order to provide broadband access for the country’s industries, universities, and the public. The projects and strategies noted by Gramma can NOT be achieved without international assistance and investment to build out and overhaul/ upgrade Cuba’s telecommunications networks and information infrastructure.

Here are selected highlights of IEEE Globecom 2014:

1. 5G cellular:  5G is still in the development stage and not yet standardized by ITU-R.  However, there was lots of discussion about what it is and when it might come on line.  The consensus seems to favor millimeter wave bands (28, 38 and 72 GHz) using small cells and massive multi-user MIMO.  But as they say, the devil is in the details.  There is still lots to do in defining, developing and deploying 5G.  A good guess is that we won’t see this until 2020 and beyond.  Most carriers haven’t even started LTE Advanced which is the true ITU-R complaint 4G RAN.

2. Heterogeneous networks and small cells:  The small cell movement has been around a while but few have been deployed.  It is finally happening but there apparently are lots of options and some critical issues to solve.  Self-organizing networks (SONs) are a part of that effort.

3.  Internet of Things (IoT):  This mega-trend is already gaining market traction in many forms- mostly industry verticals.   Yet there is still some confusion over multiple standards.  Many wireless technologies are used including Wi-Fi, Bluetooth, ZigBee, ISM band and others.  The new Bluetooth 4.2 and ZigBee 3.0 standards will boost their use.

4.  Software-Defined Networking (SDN) and Network Function Virtualization (NFV): Multiple sessions attempted to define each and show how they will impact all future networks.  SDN/NFV seems to be one solution to the security problem as well as implementing 5G.  The transformation is just beginning but this appears to be a major shift in networking.  A fully programmable network is in our future.  Some other topics with multiple sessions were cognitive radio, Wi-Fi, sensor networks and fiber optics.

5.  Best Paper Award:   A team of researchers from Texas A&M University at Qatar, Texas A&M University and the University of Waterloo received a best paper award for “Semi-distributed V2V Fast Charging Strategy Based on Price Control.”  

http://www.qatar.tamu.edu/newsroom/2014/12/researchers-win-best-paper-aw…

There were few exhibits with only a few companies participating.  National Instruments of Austin, TX  made a significant announcement at the conference. NI introduced their LabVIEW Communications System Design Suite.  Dr. Truchard, NI CEO briefed the audience on this amazing new development platform uses a combination of hardware and software for prototyping software-defined radios and other new wireless systems.  It is already being used to test new modulation algorithms, 5G approaches and large MIMO systems.  Look for it to expedite 5G in the future.

Reference:

IEEE GLOBECOM 2014 Industry Program Overview

http://globecom2014.ieee-globecom.org/indforum.html#.VJB-9NLF92E

Infonetics Research released excerpts from its 3rd quarter 2014 (3Q14) Ethernet Switches report, which tracks unmanaged, web-managed, and fully-managed fixed and chassis switches by port speed (100ME, 1GE, 10GE, 40GE, 100GE).

3Q14 ETHERNET SWITCH MARKET HIGHLIGHTS.    

• Globally, Ethernet switch revenue grew 4% sequentially in 3Q14, to $5.6 billion;
• Year-over year growth stood at 5%, thanks to demand from the public and financial services sectors.    
• Web-managed and fully-managed fixed switches notched double-digit year-over-year revenue growth in 3Q14; unmanaged and chassis switches declined .    
• 10GE port shipments were up 26% year-over-year in 3Q14, falling short of expectations at this stage in the adoption cycle.    
• 40GE is taking over from 10GE as the new high-growth market segment: 40GE port shipments more than doubled year-over-year in 3Q14, with growth especially strong in the white box market.    
• 100GE took a breather after a strong 2Q, but its arrival on fixed switches and the introduction of lower-cost optics will drive growth in 2015

“Recent momentum in the Ethernet switch market carried through to the third quarter, and 2014 is on track for record revenue. Looking ahead, we expect growth to accelerate, thanks in part to the introduction of 2.5G and 25G Ethernet. These new Ethernet speeds will be a premium offering relative to 1GE and 10GE to address bandwidth constraints in data center and campus networks, and should provide an additional boost to revenue,” notes Matthias Machowinski, directing analyst for enterprise networks and video at Infonetics Research. 

Alan’s comment:  Unknown to most is that 2.5G and 25G Ethernet is NOT being standardized by IEEE 802.3!  It is being specified by the “MGBase-T Alliance.”  The specification adopted by this Alliance leverages many of the fundamental technologies in Ethernet standards as defined in the IEEE 802.3 10GBASE-T, enabling faster time to market with minimal research and development efforts for ecosystem vendors. The specification is available royalty-free to all members.

The IEEE has formed a study group to understand the need for these new speeds that will meet the high demand for Ethernet between 1G and 10G, which are the only standard options available today for high-speed networking over UTP cables.

With advanced technologies in enterprise networks and increasing numbers of wireless computing devices connecting to next-generation cloud infrastructure, 1000BASE-T Ethernet is limited in bandwidth while 10GBASE-T Ethernet requires UTP Cat6a cabling, a costly upgrade to the install base of Cat5e and Cat 6 cables that constitutes the majority of the cabling installed base today. The addition of the 2.5G and 5G Ethernet link protocol speeds will enable the cost effective scaling of network bandwidth delivered to enterprise access points and provide IT professionals with more data rate options.

Top IEEE member discussion list contributor and former IEEE 802.3 chair Geoff Thompson wrote in an email:

More info at:  

http://www.mgbasetalliance.org/

http://tinyurl.com/mhzx2bx

http://www.ethernetalliance.org/blog/2014/06/23/tef-2014-the-rate-debate/

What about White Box Switches (AKA Bare Metal Switches)?

“White box (or bare metal) switches account for <1% of all Ethernet switch ports, but if you look at 10/40GE (where white box switches are used), its 12% of 10/40GE ports last quarter (3Q14),"  Matthias wrote in an email to this author.

ETHERNET SWITCH REPORT SYNOPSIS:

Infonetics’ quarterly Ethernet switch report provides worldwide and regional market size, vendor market share, forecasts through 2018, analysis, and trends for Ethernet switches, including: revenue and ports by port speed; unmanaged, web-managed, and fully-managed switches; fixed configuration and chassis switches; and PoE. Vendors tracked: Adtran, Alaxala, Alcatel-Lucent, Arista, Avaya, Brocade, Cisco, D-Link, Dell, Extreme, Hitachi Metals, HP, Huawei, IBM, Juniper, Netgear, Ruby Tech, TP-Link, ZTE, others.

To buy the report, contact Infonetics:

www.infonetics.com/contact.asp

RELATED REPORT EXCERPTS:   

• Enterprise router market improves in 3Q; Cloud, economic expansion drive growth in 2015.    
• Nearly a quarter of all WLAN access points are now 802.11ac.    
• Infonetics study: Security is #1 concern for enterprise access networks.    
• Tight battle for 2nd place after Cisco in Infonetics’ enterprise networking scorecard

Infonetics Research released excerpts from its 3rd quarter 2014 (3Q14) 2G, 3G, LTE Mobile Infrastructure and Subscribers report, which tracks more than 50 categories of equipment, software, and subscribers based on all existing generations of wireless network technology.

3Q14 MOBILE INFRASTRUCTURE MARKET HIGHLIGHTS:
. Operators are currently spending around $5.6 billion per quarter on LTE, and this has prompted Infonetics to raise its 2014 forecast for the global macrocell 2G, 3G, and 4G mobile infrastructure market to $45.4 billion, up from $43 billion the prior year
. Investments initially earmarked for 2015 have shifted to 2014, reinforcing Infonetics’ prediction that the LTE market will peak in 2015
. The worldwide macrocell 2G/3G/4G mobile infrastructure market totaled $11.2 billion in 3Q14, up 0.4% sequentially, and up 10% year-over-year
. Nokia Networks moved into the #1 spot for LTE revenue in 3Q14, propelled by strong performances in the U.S. and China
. China continues to push LTE through the roof, but the rest of the world is also moving fast to LTE, with 331 commercial networks launched as of September 2014, as per the GSA

“In the mobile infrastructure market, the third quarter of 2014 was almost a carbon copy of last quarter, and we are now reaching the peak of plain LTE rollouts, which are so brisk in China that they are overshadowing strong activity in Europe, the Middle East, and Russia,” notes Stéphane Téral, principal analyst for mobile infrastructure and carrier economics at Infonetics Research.

In an explanatory email to this author, Stephane wrote: “In our (Infonetics) reports, we explain why the LTE market revenues will peak next year: Simply it’s because we’re done with hardware deployments of eNodeB on this planet! I’ve been telling folks around the world for some time that they should enjoy the ride while they can because the market will start to go downhill in 2016.

One major factoid: China Mobile alone has deployed 570,000 eNodeBs this year.  No one else (i.e. other network operator) – not even a single country on this planet can match that rollout! This is 10x the size of an AT&T or Verizon footprint!

Once you have those eNodeBs in place, you need the LTE core network such as EPC (Evolved Packet Core) to start with and then IMS (IP Multimedia System) to implement VoLTE. That’s why VoLTE will keep growing.

LTE-A is mainly a software upgrade, involving some level of hardware but no way near the magnitude of those plain LTE rollouts.

Bottom line: get on Virgin Galactic and go to another planet to roll out eNodeBs or move fast to software! 

That’s the story.

Cheers,  Stéphane

MOBILE REPORT SYNOPSIS:
Infonetics’ quarterly 2G, 3G, LTE mobile infrastructure report provides worldwide and regional market size, vendor market share, forecasts through 2018, deployment trackers, analysis, and trends for macrocell mobile network equipment, software, and subscribers. The report tracks more than 50 subsegments of the market, including radio access networks (RANs), base transceiver stations (BTSs), mobile softswitching, packet core equipment, and E-UTRAN macrocells. Vendors tracked: Alcatel-Lucent, Cisco, Datang Mobile, Ericsson, Fujitsu, Genband, HP, Huawei, NEC, Nokia Networks, Samsung, ZTE, others.

To buy the report, contact Infonetics:www.infonetics.com/contact.asp

VOLTE WEBINAR AND Free Report:

Join Infonetics analyst Stéphane Téral Dec. 9th at 11:00 A.M. ET for Improving the VoLTE Experience: Best Practices from Early Launches, a live event discussing the increasing importance of user experience measurement and analysis in live networks. Attendees receive an Infonetics companion report titled The State of VoLTE.

Attend live or access the replay:http://w.on24.com/r.htm?e=872675&s=1&k=64BD39225EC39496AAB3F16091F3FB04

 Meanwhile, Research & Markets predicts a very bright future for VoLTE.  In a new report titled ““Voice over LTE Market by Long-Term Evolution, by Technology, and by Geography – Analysis & Forecast to 2014 – 2020,” the market research firm states:

“The overall voice over LTE market is expected to increase at a CAGR of 64.40% from 2014 to 2020.”

Rich communication services, reduced latency, and increased revenue per user are the main reasons behind the increased adoption of the voice over long term evolution services.

The voice over LTE market report analyzes the ecosystem of the network technologies; and the key market, by technology, includes VoIMS, CSFB and dual radio/SVLTE; by LTE market includes LTE and voice over LTE subscriptions, network launches, LTE network modes and end user devices. The report also provides the geographic view for major regions such as the Americas, Europe, Asia Pacific (APAC), and the Rest of the World (ROW). This report also discusses the burning issues, market dynamics, and winning imperatives for the voice over LTE market.

Voice over LTE is garnering more value due to its various features and technologies that are used in the voice over LTE market. The advantages provided by VoLTE such as High Definition (HD) voice, Rich Communication Services (RCS), faster call setup times, and true device interoperability, integration of voice over LTE with voice over Wi-Fi service, and improved battery life over other network technologies have attracted the new users towards it. The CFSB technology held the highest market share in 2013 but the VoIMS technology is estimated to experience a better growth in the near future.

The report provides a detailed view of the VoLTE and LTE market with regard to the subscriptions, LTE and VoLTE network launches, and LTE and VoLTE technologies market; and also presents detailed market segmentation, with qualitative and quantitative analysis of each and every aspect of the segmentation; done by technology, LTE end user devices, and on the basis of the LTE and VoLTE market, by geography. All the numbers in terms of the volume and revenue, at every level of report, are forecasted from 2014 to 2020.

For more information:  

http://www.researchandmarkets.com/research/vzx2lx/voice_over_lte

Infonetics Research released vendor market share and analysis from its 3rd quarter 2014 (3Q14) Service Provider Routers and Switches report.  Author & Infonetics co-founder Michael Howard writes that Carrier Ethernet Switches had a terrific quarter and year:  

“…Carrier Ethernet switches (CES) had an unprecedented quarter, with global revenue up 32% from the previous quarter and up 14% from a year ago, driven by ZTE in China and Cisco in North America.  Fundamental changes are on the horizon as the market transitions from hardware-driven to software-driven, but no doubt routers must be fitted with higher-capacity blades to accommodate growing traffic, and there is intensifying focus on content delivery networks (CDNs) and smart traffic management across routes to make routers and optical gear cooperate more closely.”

“The ‘SDN hesitation’ we first identified four quarters ago remains in effect, slowing router spending in the third quarter of 2014 as carriers remain cautious about investing in equipment and software that might need to be replaced in the future,” Howard added.

3Q14 CARRIER ROUTER AND SWITCH MARKET HIGHLIGHTS:

 . Combined, service provider routers and switches-including IP edge and core routers and carrier Ethernet switches-totaled $3.7 billion worldwide in 3Q14, down 3% from the previous quarter
. All regions except CALA (Caribbean and Latin America) were down sequentially in 3Q14
. However, the market is up 3% from the year-ago 3rd quarter, reflecting the long-term slow growth trend Infonetics has been tracking
. Infonetics expects the global carrier router and switch market to slowly grow to $17 billion by 2018, a five year (2013-2018) compound annual growth rate of just over 3%
. Looking at rolling 4-quarter router market share, Huawei increased its share the most of any vendor (+4.6 points) from 3Q12 to 3Q14, as edge and core router revenue stayed
relatively flat

ROUTER/SWITCH REPORT SYNOPSIS:

Infonetics’ quarterly service provider router and switch report provides worldwide, regional, China, and Japan market share, market size, forecasts through 2018, analysis, and trends for IP edge and core routers and carrier Ethernet switches. Vendors tracked: Alaxala, Alcatel-Lucent, Brocade, Ciena, Cisco, Coriant, Ericsson, Fujitsu, Hitachi, Huawei, Juniper, NEC, UTStarcom, ZTE, others.

To buy the report, contact Infonetics: www.infonetics.com/contact.asp

What is Carrier Ethernet used for?

We’ve asked this question many times and the answer seems to be “something other than a Carrier Ethernet service.” For example, it’s the “last mile” or last few meters access to triple play service offerings that include IP TV.  AT&T’s U-verse is a good example of that.  It’s also used to access IP-MPLS VPNs which may terminate at a company’s or cloud service providers point of presence.

 XO Communications Chief Operating Officer Don MacNeil said at MEF14 (see below) that networks increasingly will consist of Carrier Ethernet connections feeding into an MPLS core. That matches an observation from Bob O’Brien, vice president of network and OG&M solutions for the Americas for global network operator Orange, who noted that customers’ preferred method of accessing the company’s MPLS offerings is via Carrier Ethernet.    That’s in contrast to Carrier Ethernet as a private line, virtual private line, or private LAN over WAN service.

Role for SDN?

Rob Tompkins believes that SDN will boost Carrier Ethernet Services.  He wrote that SDN will change carrier Ethernet and its services in three significant ways:

• Cost: A key objective for both SDN and carrier Ethernet is to reduce overall costs. SDN has the potential to lower operational expenditures through increased network automation and network optimization. This will also reduce capital expenditures. Carrier Ethernet is proven to significantly reduce network costs and in many cases reduce solution complexity. Coupling SDN with carrier Ethernet to reduce costs just makes sense.

• Control: SDN leverages a logically centralized control model to enable deterministic, dynamic, on-demand services that comply with strong service-level agreements. Carrier Ethernet, when coupled with SDN, provides an agile and flexible network for network virtualization and dynamic bandwidth services.

• Ubiquity: Ethernet has become a ubiquitous networking technology. It dominates the marketplace as the interface for IP networking, whether in its wired forms or as Wi-Fi. It does not rely on Layer 1 or optical technologies to carry it over fiber, but can be used over any of today’s optical technologies to gain enhanced distance, even trans-Pacific submarine links. SDN’s tight coupling with Ethernet strongly positions carrier Ethernet coupled with SDN to be critical in next-generation service and content provider networks. Currently, the Optical Transport working group of the Open Networking Foundation (ONF) is working on standards that will allow SDN controllers to manage or direct optical networks.

At last week’s MEF14 conference in Washington, DC:

• Rob Rockell, vice president of regional engineering for Comcast Business, noted that software defined networking (SDN) is reversing the common wisdom often followed by network operators to “distribute what you can and centralize what you must.”  That assumes the version of SDN implemented uses a centralized controller which computes paths (i.e. Control plane) for many packet/frame forwarding engines (Data planes).

• The U.S. Defense Information Systems Agency sees SDN as a way of simplifying its network which in turn is viewed as a means of making the network more secure by “reducing the attack surface,” commented Cindy Moran, director of the Network Services Directorate for the agency. Plans also include “collapsing” 1,000 peering points to a smaller number and establishing different procedures for exchanging traffic that is internal and external to the DoDI.

• Tata Communications Vice President of Managed Network Services James Walker sees customers increasingly seeking deterministic connectivity between data centers.

• Craig Drinkhall, CTO for Lumos Networks, said  it a priority to co-locate in as many data centers as possible so that they will be well positioned to provide connectivity to cloud providers located in those data centers.

• Colt has made substantial progress in implementing a vision shared by many other network operators – givingcustomers the ability to turn up network bandwidth at the same time they turn up a cloud service or virtual machine. Colt calls that capability Dedicated Cloud Access, noted Matthias Hain, director of data services for Colt Technology

• Large companies that are customers of Lumos Networks also are seeking that capability – they want to use a “best of breed” approach to cloud services, which means they want that capability for multiple cloud providers. In order for that to happen, the customers are looking for Lumos to allow some back office functions to be triggered by other back office systems. The question then, he said, is whether to let business systems run network systems, which is “very scary to the network people” or whether to let the network systems run the business systems, which is “very scary” to the IT people.

• What Lumos’ Drinkhall described was a theme that came up repeatedly at GEN14: in order to meet the vision of a nimble network that so many companies seem to share, network operators will need to open their operations support and business support systems not only to other internal systems but also to customer and those of other network operators.  It remains to be seen if that will actually happen.  The NOC is the heart and soul of a network operator’s services and the info therein has never been made directly available to outsiders.

Infonetics Research released excerpts from its latest Service Provider Deep Packet Inspection Products report, which tracks deep packet inspection (DPI) software solutions and related hardware deployed in wireless and fixed-line networks.

DPI MARKET HIGHLIGHTS:
. The global deep packet inspection (DPI) market is forecast by Infonetics to grow at a 22% CAGR from 2013 to 2018
. Sandvine maintained its leading market share position in the overall DPI market, while Cisco narrowly took the lead in mobile DPI
. Traffic management remains the primary driver behind DPI deployments, particularly in markets such as Asia where video traffic is growing exponentially
. There is a growing interest in leveraging DPI to support more innovative service plans and content bundles, particularly in markets where net neutrality is an issue
. LTE is driving spending on DPI in developed markets, where the additional bandwidth is igniting more video consumption
. DPI suppliers are capitalizing on the demand for analytics solutions by providing tools and dashboards that analyze the data their products derive, allowing operators to gain insight into network, service, application, device, and subscriber behavior

“The path that network functions virtualization (NFV) will take remains a bit uncertain as standards crystallize and operators develop their strategies, but we believe that NFV will ultimately have a significant impact on the deep packet inspection (DPI) market,” notes Shira Levine, directing analyst for service enablement and subscriber intelligence at Infonetics Research.

Rebuttal: We think NFV is years away from having an impact on any market.  There are no standards for protocols, interfaces, APIs, management & orchestration, service chaining, etc.  Therefore, all NFV solutions will be proprietary and may not be able to effectively communicate with legacy equipment with the same functionality as the “virtual appliance” using NFV which is software running on an off the shelf compute server.  There is also the issue of NFV performance, particularly if there’s no hardware assists/accelerators built into the server or NICs.  And performance is crucial for DPI support of real time/streaming video traffic which requires low latency and jitter.  For more info see:

http://viodi.com/2014/11/18/sdn-and-nfv-takeaways-from-light-readings-network-components-conference-in-santa-clara/

http://viodi.com/2014/09/25/light-readings-nfv-and-the-data-center-operator-keynotes-security-summary-part-2/

Levine continues: “As DPI functionality becomes decoupled from the underlying hardware, operators will be able to extend it further out into the network more cost effectively, driving continued market growth. As this occurs, the line between DPI platform vendors and suppliers of DPI components will begin to blur, creating a shift in the vendor landscape.” 

DPI REPORT SYNOPSIS:
Infonetics’ biannual DPI report provides worldwide and regional market size, vendor market share, forecasts through 2018, analysis, and trends for deep packet inspection products used in wireless and fixed-line service provider networks. Companies tracked: Allot, Arbor, Cisco, Huawei, Procera, Qosmos, Sandvine, and others.

To buy the report, contact Infonetics: www.infonetics.com/contact.asp

RELATED REPORT EXCERPTS (http://www.infonetics.com/market-research-report-highlights.asp)
. Infonetics forecasts carrier SDN and NFV market to reach $11 billion by 2018
. US$1 trillion to be spent on telecom and datacom equipment and software over next 5 years
. Network expansions driving convergent charging market, dominated by Asia Pacific
. Data brokering is next frontier for subscriber data management
. Huawei, Ericsson top Infonetics policy management scorecard; Oracle, Amdocs in hot pursuit

RECENT AND UPCOMING RESEARCH (http://www.infonetics.com/research.asp?cvg=NextGenOSSandPolicy)
Download Infonetics’ 2014 market research brochure, publication calendar, events brochure, report highlights, tables of contents, and more at www.infonetics.com/login.
. Infonetics’ 2015 Market Research Lineup
. Analyst Note: Service Delivery Innovation Wrap-Up: Connected Cows, the Death of the Long Tail, and Deep Thoughts about SDPs (Sept.)
. Analyst Note: Oracle OpenWorld: All about NFV (Oct.)
. Subscriber Intelligence Strategies: Global Service Provider Survey (Nov.)
. Subscriber Data Management Software and Services Forecast (Nov.)
. Policy Management Strategies and Vendor Leadership: Service Provider Survey (Dec.)

Infonetics Research released vendor market share and forecasts from its 3rd quarter (3Q14) Service Provider VoIP and IMS Equipment and Subscribers report and it’s 3rd quarter 2014 (3Q14) Enterprise Unified Communications (UC) and Voice Equipment report (Full analysis to be published Dec. 2nd).
 

VOIP AND IMS MARKET HIGHLIGHTS:   

• Globally, the service provider VoIP and IMS market grew 5% in 3Q14 from 3Q13, to $1 billion.    
• The only product segments to post year-over-year growth in 3Q14 were softswitches, voice application servers, CSCF servers, and session border controllers (SBCs).    
• 11 operators across the globe-in the U.S., South Korea, Hong Kong, Japan, and Singapore-have launched commercial VoLTE services .    
• Infonetics expects additional operators in Asia Pacific and Europe to launch VoLTE services in 2015; Apple’s support of VoLTE and voice over WiFi (VoWiFi) has accelerated activity .    
• On a regional basis, EMEA (Europe, Middle East, Africa) and CALA (Caribbean and Latin America) notched revenue gains in 3Q14 from the year-ago quarter, North America was down slightly, and Asia Pacific declined after a strong Q2.    
• The top 4 revenue leaders in the carrier VoIP and IMS market in 3Q14 are, in alphabetical order, Alcatel-Lucent, Ericsson, Genband, and Huawei.

“We expected growth in the service provider VoIP and IMS equipment market to slow this year as large operators such as AT&T, Verizon, and NTT DoCoMo commercially launch voice over LTE (VoLTE) and utilize capacity on IMS networks.  Following a tremendous 2013, revenue growth has tapered in 2014, though is still positive, with the market up 5% in the third quarter from a year ago,” notes Diane Myers, principal analyst for VoIP, UC, and IMS at Infonetics Research. “VoLTE deployments will remain the most important driver, though wireline is still making strong contributions.” she added.

ENTERPRISE TELEPHONY MARKET HIGHLIGHTS:
. The worldwide PBX market – including TDM, hybrid, and pure IP – dipped 7% year-over-year in 3Q14, but is up 5% sequentially
. In 3Q14, PBX license shipments are down 2% from 3Q13
. The Asia Pacific region typically posts growth in Q3, and it didn’t disappoint, notching a double-digit revenue gain in 3Q14 from a year ago
. Leading global PBX revenue market share in 3Q14 are Avaya, Cisco, and NEC (in alphabetical order), with Microsoft the forerunner in unified communications
(UC) applications
. UC applications continue on a steady upward trajectory, rising 21% in 3Q14 from 3Q13

“The enterprise telephony market continues to struggle as businesses hold off new PBX purchases. Companies are evaluating cloud alternatives and investing in unified communications (UC) applications instead of PBXs, and purchase cycles are getting longer,” notes Diane Myers, principal analyst for VoIP, UC, and IMS at Infonetics Research. “There is competitive pressure as well, but not as much as in the past.” 

Myers adds: “North America again had the toughest quarter of all the regions, with a double-digit decline from the year-ago third quarter.”

VOIP AND IMS REPORT SYNOPSIS:

Infonetics’ quarterly carrier VoIP and IMS report provides worldwide and regional market share, market size, forecasts through 2018, analysis, and trends for trunk media gateways, SBCs, media servers, softswitches, voice application servers, HSS, CSCF, BGCF, MGCF, IM/presence application servers, and subscribers. Vendors tracked: Alcatel-Lucent, BroadSoft, Dialogic, Ericsson, Genband, Huawei, Mavenir, Metaswitch, NEC, Nokia Networks, Oracle, Radisys, Sonus, ZTE, and others.

ENTERPRISE TELEPHONY AND UC REPORT SYNOPSIS:

 Infonetics’ quarterly enterprise telephony report provides global and regional market size, vendor market share, forecasts through 2018, analysis, and trends for TDM PBXs, hybrid and pure IP PBXs, IP PBXs by system size, VoIP gateways, unified communications, and IP desk phones and softphones. Vendors tracked: Alcatel-Lucent, Audiocodes, Avaya, Cisco, Ericsson-LG Enterprise, Microsoft, Mitel, NEC, Polycom, Samsung, ShoreTel, Toshiba, Unify, Yealink, others.

To buy the reports, contact Infonetics: www.infonetics.com/contact.asp

RELATED REPORT EXCERPTS (http://www.infonetics.com/market-research-report-highlights.asp)
. Infonetics’ latest Enterprise Voice, Video, and UC research brief: http://www.infonetics.com/2014-newsletters/Enterprise-Voice-Video-UC-December.html

. SIP trunking services market expected to top $8 billion by 2018
. Over 3/4 of N. American businesses surveyed plan to use SIP trunking by 2016
. Shift to software and services in enterprise videoconferencing market tamps revenue growth
. Enterprise session border controller (eSBC) market up 8% in 2Q14
. PBX market struggles linger in first half of 2014; UC market up 31% from year ago
. Cloud PBX and unified communication services a $12 billion market by 2018

RECENT AND UPCOMING VOICE, VIDEO, AND UC RESEARCH:
Download Infonetics’ 2014 market research brochure, publication calendar, events brochure, report highlights, tables of contents, and more at www.infonetics.com/login.

. Infonetics’ 2015 Enterprise Voice / Video / UC Market Research Lineup
. SIP Trunking Services Forecast (Oct. 6)
. Analyst Note: Unify in Transition, Launches Circuit (Oct. 28)
. Analyst Note: Vonage Solidifies Cloud UC with Telesphere (Nov. 6)
. Enterprise Unified Communications and Voice Equipment Market Analysis (Dec. 2)
. Enterprise Session Border Controllers Forecast (Dec. 9)
. Enterprise Telepresence and Video Conferencing Equipment Forecast (Dec. 12)

by David Dixon,  – FBR Capital Markets [edited by Alan J Weissberger]

Backgrounder:

The FCC has long sought to impose rules requiring Internet providers to offer “net neutral” treatment to all Web traffic but has faced  litigation over its legal authority at every step. The FCC’s next move  following Verizon’s successful appeal of the FCC’s Open Internet Order has implications for the evolution of the Internet and, potentially, the 2016 presidential race. Stakeholders are fighting hard to  influence Congress, the White House, and the FCC. A Title II-based ruling on fixed broadband appears likely, as are efforts to expand FCC  oversight to wholesale interconnection. Litigation is likely for years  to come.  [Please see Addendum for history and definition of terms]

Regulatory uncertainty comes at a difficult time for the  telecom sector, which is facing multiple challenges:

(1) increased  wireless competition;

(2) improved cable network competitive  positioning due to the extensive fiber-based network reach and  WiFi-based wireless network potential;

(3) continued erosion of value  up the stack to more innovative application service providers; and

(4)  a necessary (but net present value negative) increase in wireline fiber network platform investment to support the ever-increasing bandwidth requirements of the less regulated wireless segment.

Irrespective of  the regulatory outcome, with major wireless networks out of spectrum in many major markets, significant cell site densities and fiber-to-the-home investments are needed to improve competitive  positioning, relative to cable, and to address poor indoor wireless coverage and capacity challenges.

The market is pricing in a  continuance of a light regulatory touch in the wireless and wireline  broadband segments. Importantly, it is not pricing in upside from  higher interconnection revenues, specialized services, or specific  content-distribution agreements. We expect the FCC to maintain a light  regulatory touch (expanded to interconnection and WiFi networks), but  it may decide to maintain this position in the fixed-broadband segment  through the introduction of a heavy-handed legacy framework that  provides flexibility to immediately withdraw regulatory oversight in  areas such as rate regulation. This decision, along with expanded  regulatory scope and uncertainty regarding litigation outcomes, is  likely to negatively affect sentiment toward the sector.

What’s at stake?

The regulatory outcome for broadband services will shape the Internet’s future direction. Proponents of net neutrality argue that paid prioritization will divide the Internet between the “haves” and “have nots”; opponents claim this would   prompt infrastructure upgrades. Furthermore, opponents argue that Title II reclassification will (1) stymie innovation and investment and (2) impede broadband adoption.

Regulatory oversight to incorporate wholesale interconnections (e.g. paid peering):

From a cable and content sector perspective, the FCC would like to establish greater regulatory oversight on interconnection  agreements between last-mile providers and content providers (the major issue for Comcast/TWC and, therefore, a likely merger  condition), but legal authority is unclear.

The FCC is not seeking to end direct-paid peering agreements  or regulate wholesale interconnection pricing. Our FCC checks suggest content providers must be prepared to pay a reasonable amount for carriage. There is more evidence of wholesale arbitrage from content players than monopolistic behavior. Last-mile providers want the flexibility to charge appropriate  interconnection rates (and to seek to increase these rates over time). The FCC will seek legal authority to keep rates just and reasonable. The consent decree for CMCSA/TWC will likely include      such a requirement.

Our position on Net Neutrality Net neutrality has become a high-profile topic, particularly after the White House tossed its hat into the ring. While the issue will likely become even more politicized in the lead-up to the FCC’s decision, we see FCC Chairman Wheeler attempting to thread the needle between the White House’s positions despite his appointment by President Obama.  We think a pragmatic approach by the FCC could with stand challenges in court.

In fixed broadband, Title II, with forbearance, appears likely, and this will be met with litigation.  The hybrid approach is an interesting alternative that could gain industry support over time. In this scenario, Internet traffic would be classified as either “wholesale” or “retail,” but this would not preclude paid prioritization. Data exchange between content originators and ISPs (wholesale) would be governed under Title II, and traffic between ISPs and end users (retail) would be regulated under Section 706. Given market competitiveness, the FCC would likely forebear additional requirements, in our view. Moreover, we believe interconnection fees will garnerfurther scrutiny as the FCC is sensitive to access abuses but still favors a light regulatory touch, providedthe ISP industry maintains a fair and just fee basis for network traffic imbalances with intermediaries.

While less favorable, other approaches under FCC consideration include:

(1) full Title II reclassification,

(2) full Section 706 implementation, and

(3) Title II reclassification but with Section 706 application.

The FCC willcontinue to push for clarity on three fronts, and its rules will vary by service. These thrusts include:

(1) Capital Hill legislation, which would likely be a four- to six-year cycle.  The FCC has always been responsive to Congress, but long cycles are problematic. A contentious FCC position could accelerate Republican efforts on the Hill and slow FCC progress at the same time.

(2) The courts: the FCC understands it must provide rules that are legallydefensible and, as such, is biased to Title II–based rules.

(3) Merger conditions will expand on the Comcast/NBC Universal consent decree to include oversight of wholesale interconnection and WiFi networking.

Rules will likely vary by service: (1) fixed broadband, (2) mobile broadband, (3) interconnection, (4) special services, and (5) WiFi.

We expect a decision on fixed broadband rules in 1Q-2015 followed by rules on mobile broadband and interconnection in mid 2015, coincident with regulatory approval and merger conditions imposed on Comcast/Time Warner Cable.

From a fundamental perspective, while there was a substantial valuation shift in the 2000s from the cable sector to the content sector due to higher payments for broadcast content distribution rights, and the table stakes are high for ISPs in the Internet interconnection domain, it is too early to determine the extent of any potential valuation shift in favor of ISP carriage over content.

Addendum:  A Brief History of Net Neutrality and FCC Efforts to Regulate Broadband Services

In 2002, the FCC issued the Cable Modem Order, which established broadband service as a lightly regulated(Title I–based) information service, versus a heavily regulated (Title II–based) telecommunications service.This Order was unsuccessfully appealed by Brand X to the Supreme Court, which was seeking wholesaleaccess to high-speed Internet access services.

The Supreme Court ruled in 2008 that administrative agencies(such as the FCC) have the authority to interpret ambiguous statutes. Specifically, the Court found that,if a statute (e.g., Telecom Act of 1996) is ambiguous, and if the implementing agency’s constructionis reasonable, precedent requires the Court to accept the agency’s construction of the statute, evenif the agency’s reading differs from what the Court believes is the best statutory interpretation. This interpretation trumped precedent established by the Court of Appeals unless the Court found the statuteto be unambiguous.

In 2004, FCC Chairman Powell introduced an unenforceable Internet policy statement, known as the“four Internet freedoms,” to encourage broadband deployment and preserve and promote the open andinterconnected nature of the public Internet:

(1) Freedom to Access Content: consumers should haveaccess to their choice of legal content;

(2) Freedom to Use Applications: consumers should be able to runapplications of their choice;

(3) Freedom to Attach Personal Devices: consumers should be permitted toattach any devices they choose to the connection in their homes; and

(4) Freedom to Obtain Service Plan Information: consumers should receive meaningful information regarding their service plans.

Although the FCC did not adopt rules in this regard, it planned to incorporate these principles into its ongoing policy making activities.In 2005, FCC Chairman Martin adopted a wireline broadband report and order and notice of proposed rulemaking that classified wireline broadband Internet access services as information services.

This brought these services, including DSL service, out from under the Title II regulatory regime and in line with theTitle I–based regulatory treatment of cable modem services.  The determination was sought by the major telecom service providers that were investing capital to deploy DSL service in an effort to catch the market leadership position established by the cable sector.

In 2007, the U.S. Court of Appeals denied a petition forreview of the FCC’s Wireline Broadband Order. FCC Chairman Martin responded, saying, “I am pleased that the Court affirmed the FCC’s decision to remove outdated, decades-old regulations from today’s broadband services. By removing such regulations, the Commission encouraged broadband investment and fostered competition. As a result of the Commission’s deregulation policies, broadband adoption has increased and consumers have benefited in the form of lower prices and improved broadband service.”

The FCC also released an Internet Policy Statement in 2005 that endeavored to ensure that broadband consumers would have access to all lawful internet content and that all lawful applications could be used on the networks. Similarly to Chairman Powell’s four Internet freedoms, the Statement outlined four principlesto encourage broadband deployment and preserve and promote the open and interconnected natureof the public Internet:

(1) Consumers are entitled to access the lawful Internet content of their choice;

(2) consumers are entitled to run applications and services of their choice (subject to the needs of lawenforcement);

(3) consumers are entitled to connect their choice of legal devices that do not harm thenetwork; and

(4) consumers are entitled to competition among network providers, application and serviceproviders, and content providers.

These principles were limited by the needs of broadband providers toreasonably manage their networks. The FCC applied one of the agreed-upon conditions to the October 2005 approval of both the Verizon/MCIand the SBC/AT&T mergers. The companies agreed to commit, for two years to conduct business in a way thatcomported with the Internet policy statement. In a further action, AT&T included in its concessions to gain FCC approval of its merger to BellSouth to adhering, for two years, to significant net neutrality requirements.

Under terms of the merger agreement, which was approved on December 29, 2006, AT&T agreed to notonly uphold, for 30 months, the Internet Policy Statement principles, but also committed, for two years (expired in December 2008), to stringent requirements to maintain a neutral network and neutral routing in its wireline broadband Internet access service.

In 2005, Vonage, a voice-over-IP (VoIP) service provider, complained to the FCC that MadisonRiver Communications, a small North Carolina–based rural telephone company also operating as anInternet service provider (ISP), had inserted filters into its ISP network to block VoIP traffic. Madison River Communications was the former Mebane Home Telephone Company that fought Carterfone, the 1968 decision that first allowed subscribers to attach their own equipment to telephone lines.

Although it was the”poster child” for anti-competitive behavior, blocking VoIP traffic meant that it was impossible for Vonageto offer competitive VoIP service to customers of Madison River’s Internet service. Madison River and the FCC agreed to a consent decree that said that Madison River Communications would not block VoIP trafficfor at least 30 months. The consent decree was backed up by an FCC order. The consent decree said that theinvestigation into Madison River regarded its compliance with section 201(b) of the Communications Actof 1934, but it did not provide any legal finding that Madison River had actually violated the Act.

The FCC stepped in to stop an ISP from blocking the ability of its customers to purchase Internet-based services from whomever they wanted.  

(1) There was no legal finding that blocking VoIP is wrong meant that a betterfunded provider not compromised by an IPO could test the precedent;

(2) the resolution was VoIP specific:Madison River could block anything else;

(3) the decree was limited to 30 months, after which Madison Rivercould start blocking again; and

(4) the Act that the FCC referred to may not cover Internet service providersthat are not part of a telephone company.

In 2006, the two major trade associations representing both the cable sector (National Cable and Telecommunications Association) and telecom sector (United States Telecom Association) publicly committed to the Internet Policy Statement at a Senate Commerce Committee Hearing on net neutrality in February 2006.

In 2008, the FCC ordered Comcast to stop interfering with BitTorrent traffic. ISPs had been throttling BitTorrent traffic for years. Specifically, Comcast was actively disconnecting BitTorrent seeds. FCC Chairman Martin noted that BitTorrent throttling was “arbitrary” and that the company had violated the FCC’s Internet Policy Statement. Chairman Martin said that Comcast slowed down BitTorrent users independently of theamount of traffic they use, and that the company failed to communicate its network management practices to consumers.

Comcast appealed the FCC decision, saying that the agency’s order was outside the scopeof its authority. In 2010, a unanimous decision by the Federal Appeals Court ruled that the FCC lacked the authority to force Internet service providers to keep their networks open to all forms of content.

The U.S. Court of Appeals for the D.C. Circuit found that the FCC lacked the power to stop Comcast from slowing traffic to BitTorrent,a popular file-sharing site. The decision focused on the narrow principle of whether the FCC had the right to regulate Comcast’s network principles. The opinion was written so narrowly as to prompt the former legal counsel for the FCC, Sam Feder, to classify it as the worst of all worlds for the F.C.C. In his estimation,the Court case made it all but impossible for the FCC to expect an appeal victory, but it also opened upenough alternatives for the FCC to accomplish its same goals.

Thus, the Court’s decision prompted the FCC to review ways to more concretely establish the agency as a regulator of Internet services. The Court ruled that the FCC relied on laws that give it some jurisdiction over broadband services but not enough to make theaction against Comcast permissible: “For a variety of substantive and procedural reasons, those provisions cannot support its exercise of ancillary (Title 1) authority over Comcast’s network management practices.”

The decision came as Comcast pursued FCC approval of its proposed $30 billion merger with NBC Universal, which put a library of content under the control of the nation’s largest cable provider. In a consent decreeas part of the merger approval for Comcast/NBC Universal, Comcast promised to support the FCC’s Open Internet Order and to keep the Internet “neutral” until 2020. Comcast agreed not to block its customers’ability to access lawful Internet content, applications, or services. Throttling would still be an option as longas it was part of standard network management procedure, or targeted at unauthorized transfers.

In December 2010, the FCC adopted its Open Internet Order, which was law from 2010–2014. Prior to 2010,the principles of an open Internet encapsulated net neutrality from 2005 until the establishment of the Open Internet Order; but these standards were unenforceable. The Open Internet Order created two classes of Internet access: one for fixed-line providers, and the other for wireless providers.

The net neutrality stance towards fixed-line broadband providers was more stringent than the approach towards wireless providers. Wireless carriers were less regulated because these companies were much more constrained than fixed-lineconnections. The Open Internet Oder followed three specific rules:

■ Transparency. Fixed and mobile broadband providers must disclose the network management practices, performance characteristics, and terms and conditions of their broadband services

■ No blocking. Fixed broadband providers may not block lawful content, applications, services, or nonharmfuldevices; mobile broadband providers may not block lawful Web sites or block applications thatcompete with their voice or video telephony services.

■ No unreasonable discrimination. Fixed-broadband providers may not unreasonably discriminate intransmitting lawful network traffic.

In mid 2014, in Verizon v. FCC, the United States Court of Appeals for the District of Columbia Circuit vacated the “no blocking” and “no unreasonable discrimination” rules of the Open Internet Order. The Court upheld the “Transparency” rule in the same ruling. The FCC has continued to encounter difficulties in its efforts to establish an open Internet policy. The court’s decision emphasized the FCC’s distinction between information services (broadband providers) and telecommunications services, which are treated as common carriers.

Because the FCC had previously chosen not to classify broadband providers as a telecommunications service, the court ruled them exempt from treatment as common carriers. More specifically, the non-blocking andnon-discrimination violated the Telecommunications Act of 1996’s ban imposing common carrier obligationson ISPs, which the FCC refused to classify as common carriers. The FCC did not appeal the ruling but planned to reissue rules under Section 706 of the Telecommunications Act.

Section 706 focuses on the FCC’s role to oversee the virtuous circle of innovation, with innovation from edge providers driving increased demand for broadband, driving network improvement, and driving further innovation from edge providers.  In Verizon v.FCC, the Court found in favor of the FCC in the following areas:

• Section 706 is an independent grant of authority to the FCC.

• The FCC reasonably interpreted section 706 as empowering it to regulate broadband access providers.

• There is substantial evidence supporting “virtuous circle” justification for rules.

Title II versus Section 706 of the Telecommunications Act of 1996 Under Title II, consumer broadband would be reclassified as “common carriers” and entail all of the rights and responsibilities that it implies. Title II offers both anti-blocking and anti-discrimination protection forconsumers, while ISPs are provided greater protection regarding copyright content being transmitted acrosstheir networks, compared to the Digital Millennium Copyright Act (DMCA).  However, it also burdens ISPs with additional obligations. Furthermore, many believe potential Title II reclassification would also lead to additional government requirements that neither proponents nor opponents would like to see, such as universal broadband access at the same price, or FCC-set pricing and rules around access and peering.

While burdensome, the FCC does have the authority to forebear these additional responsibilities. Given the FCC’s track record, it is likely the FCC would choose to forebear if consumer broadband is reclassified under Title II. The FCC appears to have the most solid legal case to implement Title II–based regulation, but this is the most politically difficult solution, which will be subject to intense Congressional pressure on the FCC.

In contrast, Section 706 requires the FCC to promote (not regulate) broadband use in the U.S., and it does not mandate onerous requirements on ISPs (i.e., tariffs and set prices on peering). While many ISPs would favor this approach, it also comes with fewer protections. For example, under the Section 706 scenario, an ISP would be permitted to negotiate rates directly with individual content providers/originators (i.e., Netflix) for faster, prioritized access while limiting other providers to the standard (and slower) service. However, ISPs would not be protected from anti-discrimination rules.

© 2014 FBR CAPITAL MARKETS & CO. Institutional Brokerage, Research, and Investment Banking