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It was a matter of when, not if, that Amazon would launch a content delivery business in addition to its current suite of web services that include S3 storage service and EC2 on-demand computing. The Seattle-based company has announced its intention to offer a content delivery service that could shake the very nature of the industry and pose a serious challenge to not only dozens of CDN upstarts but also become a thorn in the side of existing giants such as Akamai Technologies and Limelight Networks.

In an email to its customers today, Amazon said that the service will be available later this year and will utilize the company’s points of presence in North America, Europe and Asia.

This new service will provide you a high-performance method of distributing content to end users, giving your customers low latency and high data transfer rates when they access your objects. The initial release will help developers and businesses who need to deliver popular, publicly readable content over HTTP connections.

Ironically, Amazon was beaten to the CDN punch by New York-based Voxel, which started offering CDN services based on Amazon’s S3 service. ”We are announcing this right now because we want to give a heads up to our customers,” said Adam Selipsky, VPr of product management and developer relations for AWS. It’s more like putting their competition on notice, but Adam was too polite to say that. “It is a more horizontal and broad offering.” In other words, while it is not going to replace Akamai tomorrow, it is going to make CDNs affordable even for the tiniest startup, without major cash outlays.

Why is this service disruptive? Amazon is going to bring a level of transparency to a business that has a sales model much like a brokerage firm in the 1980s. Amazon wants to make buying CDN services as simple as buying a book. Amazon executives told me that company is going to be charging its customers on usage instead of the long-term contracts current players foist on their clients.

In addition, the company will publish its prices on the web — most importantly it is going to be inexpensive. And that will make the service even more attractive to hundreds of small companies who are already using Amazon Web Services for their web operations, who don’t want to sign long contracts with CDN operators. When I asked Tal Saraf, general manager of the AWS Content Delivery Service, if the company expected the video-delivery to be one of the most used service, he said the company expected to delivery all sorts of content, including web objects (images, JavaScripts etc.)

You’ll start by storing the original version of your objects in Amazon S3, making sure they are publicly readable. Then, you’ll make a simple API call to register your bucket with the new content delivery service. This API call will return a new domain name for you to include in your web pages or application. When clients request an object using this domain name, they will be automatically routed to the nearest edge location for high performance delivery of your content. It’s that simple.

Amazon executives declined to talk about the pricing. “We will talk about the pricing when we launch the service,” Selipsky said. He declined to comment on the impact the pricing will have on their competitors -– nearly two dozen content delivery networks –- and how much their business is going to suffer. Dow Jones Venture Source estimates that from 2005 through the second quarter of 2008, almost $980 million was invested in content delivery companies.

If Amazon delivers what it is promising -– a simple, API-based CDN – then it would put then not only ahead of all CDN players, but also force rivals to meet the rules (and pricing) set by Amazon. There is a good chance that it’s going to drive weaker players right out of the game.

My final take on this news: Akamai is less likely to be impacted in the near term, but it further commoditizes the CDN business and forces a big shakeout in the industry, taking down the small and the weak. Akamai has been focusing on value-add services, as a way to stay ahead of the commoditization of the basic CDN services.

Read Amazon CTO Werner Vogels take on the news on his blog.

Enterprise software, which has gone from running on the computer to being hosted in a corporate data center, is now moving out to nebulous pools of servers called clouds. As computing clouds become part of the corporate information technology environment, making sure software hosted in the cloud is delivered as quickly and efficiently as possible will become increasingly important.

Whether it’s an external cloud such as those offered by Amazon.com or an internal cloud operated by a Wall Street investment bank, connecting the applications running on those pools of compute power to the employees using them is going to be an integral part of a company’s wide area network, or WAN. And that has venture firms taking a fresh look at an already mature industry known as WAN optimization.

There’s nothing terribly exciting about making sure the pipeline that delivers applications between various corporate branch offices and data centers keeps moving and the software gets delivered as quickly as possible, but it’s a multibillion-dollar area of spending for corporations intent on squeezing every bit of efficiency from their broadband connections. Players in the WAN optimization market include Riverbed, BlueCoat, and Packeteer, which BlueCoat agreed to buy back in April, as well as Citrix, Cisco and Juniper.

Despite the relative maturity of the market, venture dollars are still coming in, with two fundings in August alone. On Aug. 18, Ipanema Systems, whose tactic of selling to service providers could be used to offer WAN optimization to providers of computing clouds, said it raised $7 million from Noble Ventures. About a week later, Expand Networks said it raised $8.5 million from Intel Capital, one of several rounds of funding the company has raised since its 1998 formation. On Wednesday, Expand purchased software provider NetPriva, a move that will deepen Expand’s visibility into data networks.

Both Expand and Ipanema are smaller players, says Tracy Corbo, an analyst with Gartner. She says these firms have niche products but aren’t likely to take a lot of market share away from the existing vendors. Meanwhile, there is also venture interest in creating and finding startups that might use the building blocks of WAN optimization as a launchpad for better cloud utilization and pricing. As Ryan Floyd, a general partner with Storm Ventures, says, “There are opportunities in this space for connecting two types of compute clouds and using WAN optimization to ensure reliability so outages don’t happen.”

What’s so interesting for venture firms (and eventual corporate customers) is the type of knowledge some WAN optimization startups have on hand. That visibility into a network and the servers running applications make it possible to track the delivery of cloud-based services and offer service-level agreements. Many offer compression that could reduce the costs of delivering data from a cloud. For consumers it means Twitter may become more reliable while for corporate users, it means one less strike against cloud computing. It’s also why Expand bought NetPriva and why David Asprey is starting a new company called Cloud Nines.

Asprey plans to launch within six months and doesn’t yet have venture backers, but as a veteran of Citrix, Akamai and Exodus, he’s familiar with some of the problems facing cloud providers. “The reason people care so much about WAN optimization now is that cloud computing is coming up, and clouds remove the barriers and policies an IT department has in place. So now visibility of the network traffic has become very important,” Asprey says.

Being able to measure the availability and costs associated with delivering every byte of data will benefit corporate users, but it should help the providers of clouds squeeze the lowest costs and most utilization out of their networks as well. Google has talked about such network-aware pricing, as have other service providers. Given that providing the basic pools of servers that comprise a computing cloud is a fairly low-margin business, finding pricing models that can take into account cheaper routes for data is a compelling way to shave costs.

Since you have to be able to see the network — a capability some of these WAN optimization firms have — in order to determine the best way to traverse it, expect older players to try to enhance their visibility across the network and newer players to try to usurp their dominance with a cloud-specific model.

This article was also published on BusinessWeek.com.

Telecom giant AT&T announced its version of a cloud computing service today, called Synaptic Hosting, but to make things horribly unclear (and perhaps keep enterprise customers happy) it decided it should call the effort everything from utility computing to a hosting solution. I’m not sure if the entire service counts as a cloud, but AT&T does say that it will “support large-scale computing and applications on demand via virtualized servers and deliver services across AT&T’s Internet Data Center hosting infrastructure.”

So it does seem that despite the continued use of the words hosting and utility computing peppered throughout the announcement, that somewhere there is a cloud. My guess is there are a whole range of services being offered here, all with an AT&T service-level agreement. That could interest cloud-leery enterprise customers.

The key advantage to AT&T’s service is that it controls not just the servers and the cloud, but it also owns the network that those bits of data must traverse to get from the cloud to your computer. That’s a powerful proposition because it gives AT&T one more potential point of failure that it can guarantee and control. It also could lead the way for some interesting pricing options given that AT&T will know exactly how much it costs for each byte of storage and each compute cycle, but it also has the wholesale costs of bandwidth.

Want to define the cloud? Check out these posts for some help:

• How Cloud and Utility Computing Are Different
• Defogging the Cloud

During its second- quarter earnings call earlier this morning, telco gear maker Alcatel-Lucent said its chairman, Serge Tchuruk, and its CEO, Patricia Russo, would step down. Both said they were stepping down because consolidation after the 2006 merger was complete, and now the company needed someone to take it in a new direction. Russo will leave at the end of the year or sooner if the board finds a replacement, and Tchuruk will leave Oct. 1. Russo especially had faced demands for her departure as the newly combined company lagged.

Demand is falling for Alcatel-Lucent equipment, while its carrier customers contemplate the slow migration to 4G technologies such as LTE and WiMAX. The next-generation networks are coming but are still several quarters out,with LTE networks coming online in 2010 and full deployment closer to 2012. WiMAX is growing now, but it’s a smaller market. Another wrinkle is that some carriers such as Vodafone in the UK are content with their 3.5G networks and don’t plan to move to LTE for even longer.

Given its main customers’ plans around network build-outs, plus the lackluster economic environment, Alcatel-Lucent has been seeking alternatives to telco networking gear, including outfitting electric utilities with smart-grid equipment. It’s a shame that the Alcatel-Lucent deal is faring so poorly, because more consolidation is still needed in this sector.

If the Internet is a highway, then the companies responsible for maintaining the roads are increasingly at odds with the ones producing a lot of the traffic. Comcast throttling BitTorrent traffic as a way to protect network integrity (or so it says) is one example. Another can be found in the arguments of a British ISP that’s seeking to get the BBC to pay for network upgrades, claiming the broadcaster’s iPlayer is hogging too much bandwidth.

I’m not going to get into the insanity happening in the UK right now, but what is worth talking about is how networks can handle the increasing amount of traffic going through their pipes. The request for funding to build more robust networks made by Simon Gunter, chief of strategy at ISP Tiscali, is akin to asking car companies to pay a tax for building more roads. It’s one way to address the issue, but there are other options, among them better traffic management, which would decrease the distance cars need to travel.

Now that I’ve thoroughly beaten that metaphor into the ground, let’s talk network management. It’s an evil phrase, but necessary in a world in which backhaul is limited and fiber to the home is still a luxury. Recall that the FCC had no problem with Comcast engaging in network management practices, but rather that Comcast “managed” a specific application without disclosing that fact to consumers. And the application attacked was competing with Comcast’s own cable offerings.

Many of these media files are delivered via peer-to-peer networks. They’ve long been the most efficient way to get large amounts of data across a network, and now they’re working hard to be even more efficient. Nine months ago, Verizon and Pando Networks stepped up to create the Peer 4 Peer working group, which is trying to create a standardized protocol through which P2P firms and ISPs could work together. The idea was that sharing an ISP’s network topology would help P2P companies route traffic in ways that are advantageous to both the ISP and the end user. Results included a 235 percent increase in delivery speeds in the U.S. and keeping more traffic inside an ISP’s own network.

The other way to reduce traffic involves each P2P company making tweaks to their software. In October of 2007, BitTorrent launched a function called BitTorrent DNA that recognizes when a network point is too congested and shunts the traffic flow through different areas. Jay Monahan, general counsel for Vuze, says his P2P company started paying more attention to congestion within the last few months as well.

At some point new roads will have to be built. But in the meantime, there are ways to prevent network congestion that don’t involve kicking certain cars off the road.

After losing an infringement case brought against it by fellow content delivery network Akamai, Limelight Networks is going all out to reassure its customers that the $45.5 million judgment against it was merely a flesh wound.

In a letter posted to the company’s web site (and sent around to the media), Limelight notes its $197 million in cash on hand and explains why it’s waiting to file an appeal. All fine, but the admission that it’s working on a way to operate without infringing the Akamai patent means that this flesh wound is more akin to having a leg chopped off.

“Further, we are actively exploring alternatives that would enable us to continue to provide the same level of service that we always have and eliminate any issue of infringement, if such is determined with finality by the courts. Additionally, there are many aspects of our business that were either not accused of infringing or we believe are clearly outside the scope of what was litigated.”

The very existence of the letter indicates that customers are concerned. Shares in Limelight have dropped more than 35 percent since the Feb. 29 verdict, so now might be a good time for a deep-pocketed buyer with a fearsome legal team to step in.

Technology moves faster than I can sometimes believe, but generally we take the view that speed is an opportunity rather than a problem. However, as connectivity becomes more ubiquitous and stretches beyond people to things, rapid obsolescence can make life difficult.

A recent example was the shutdown in February of U.S. analog networks that left subscribers to GM’s OnStar systems whose cars were sold after 2004 unable to upgrade their radios. In the Midwest, Illinois Valley Cellular is keeping their analog network running because wind turbines in the service area have radios that rely on it to communicate.

For a much bigger potential problem, look to Europe, where companies are using the current GSM/GPRS network for wireless backhaul on meter-reading systems. In 2001, Italian utility ENEL deployed more than 27 million smart meters, creating a two-way communication between the meters and the home that enables demand-response programs, automatic turn on/shutoff, and remote meter fault detection. Other European utilities followed this model.

According to a report from ABI Research, GPRS is the cellular technology used for backhaul on these systems, raising obsolescence fears among some utilities concerned that GSM/GPRS will be phased out as 3G networks are deployed. ABI Research believes GSM/GPRS networks will be widely available for at least the next 10 years, but at the 15-year mark, prospects get much more uncertain.

Sure, that’s eons away in innovation years, but as that time frame comes up against the investment and amortization schedules used by utility companies (which can leave meters in homes for decades), it’s important to think about the technology you’re installing today. Does the technology match the life cycle of the device?

Need an example closer to home? What about in-home wiring? How many of you paid thousands to run cables and even Ethernet (!) throughout your home to connect speakers, computers or whatever, only to see advances in wireless devices negate the investment? Or (more recently) upgraded your wireless network only to realize 802.11g isn’t backward compatible with 802.11a? That’s not as bad as having to pay to keep an analog network operating so electricity is still generated, or watching a section of your dashboard turn into a useless lump, but it’s galling nonetheless.

Assuming that we don’t buy new cars every few years, or want to dig up the newly connected sprinkler system in our lawn every decade, what can be done? I thought about hooking home appliances or sprinkler systems into a Wi-Fi network, where you could just change the router when the backhaul technology changed. But that depends on the chips in the actual devices being backward compatible with whatever version of Wi-Fi is on the new router.

Utilities have the market power to sign contracts with cellular providers to keep networks up and running for their use. For consumers, however, although it may not be a problem today, as more things (especially things that cost more than a handset or laptop) connect to the Internet, figuring out how to keep them connected through the long life of the product and short life of technology will become an issue.

Like a ballet, a patent lawsuit has dozens of carefully orchestrated steps, and today’s judgment against Limelight Networks marks the beginning of the exciting part of the show, which could drag on for years, or get cut short by a settlement. Earlier today a jury in the U.S. District Court of Massachusetts found Limelight guilty of infringing four of claims in one of Akamai’s patents, and awarded the wronged content delivery network $45.5 million in damages.

Akamai also said it would seek an injunction to stop Limelight from continuing to sell infringing services. Limelight issued a release saying it was disappointed and would appeal the verdict, which means a trip to Washington’s U.S. Court of Appeals. For a program guide to how this may play out, see our previous coverage of the Verizon/Vonage patent lawsuit.

Google is buying a piece of a new transpacific fiber optic cable, according to research firm TeleGeography. This will be yet another piece of what can be loosely described as GoogleNet, a fiber network built and leased by the search engine and advertising giant to meet its ever-growing bandwidth requirements. Google is one of the six investors in the “Unity” undersea cable that will connect the U.S. and Japan. The new cable is going to be built by Tyco Telecommunications and NEC for about $300 million.

TeleGeography says that Google has been trying to buy a piece of a transpacific cable for a while now. Google CEO Eric Schmidt had admitted to as much a few months back. I have written about how Google is using its infrastructure (including network) as a strategic advantage, and this latest move is an extension of that philosophy. It has been buying dark fiber to grow its network, as I had first reported back in 2005.

TeleGeography estimates that transpacific bandwidth is eight times higher than transatlantic routes. Google can now get capacity at cost, and it can also squeeze more out of its infrastructure. Our good friend Alan Maudlin, TeleGeography research director, doesn’t think this is going to start a trend.

“While Google is the first non-telecom company to take an active role in ownership of a submarine cable, it’s not likely that this is the beginning of a new trend,” commented TeleGeography Research Director Alan Mauldin. “Although many non-telecom companies have high bandwidth requirements, few will venture into owning submarine cables anytime soon.”

Update: Google’s manager of network acquisitions, Francois Sterin, on their blog writes about why they chose to invest in the Unity cable.

As more and more people conduct online searches and interact with applications like Gmail, Google Earth and YouTube, we’ve had to think outside the box to create a more scalable, affordable and easy to manage network that meets our users’ needs worldwide. One of the biggest challenges we face is staying ahead of our broadband capacity needs, especially across Asia.

This is the first time Google has admitted to building and buying fiber to build their own network. I have often received denials from their PR folks, but I guess my sources were better.

If you’re wondering whether we’re going into the undersea cable business, the answer is no. We’re not competing with telecom providers, but the volume of data we need to move around the world has grown to the point where in some cases we’ve exceeded the ability traditional players can offer. Our partnership with these companies is just another step in ensuring that we’re delivering the best possible experience to people around the world.

Update #2: Google press release has some details about the Unity Cable.

The Unity consortium is a joint effort by Bharti Airtel, Global Transit, Google, KDDI Corporation, Pacnet and SingTel. The name Unity was chosen to signify a new type of consortium, born out of potentially competing systems, to emerge as a system within a system, offering ownership and management of individual fiber pairs. This new 10,000 kilometer (km) Trans–Pacific cable will provide connectivity between Chikura, located off the coast near Tokyo, to Los Angeles and other West Coast network points of presence. At Chikura, Unity will be seamlessly connected to other cable systems, further enhancing connectivity into Asia.

Given its proximity to the Broomfield, Colo., headquarters of Level 3, there’s always a good chance that the Silicon Flatirons telecom conference will get a visit from Jim Crowe, Level 3’s CEO. He made the short drive up Hwy. 36 on Monday afternoon for a well-reasoned talk about long-term trends in communications that had several key takeaways, among them:

• Internet video use is here to stay, and will only increase going forward
• Bundling services with devices is yesterday’s strategy
• Legislators and regulators are right to be concerned about the potential for monopolistic practices by AT&T, Verizon and cable companies
• Net Neutrality violations could be handled better by the FTC than the FCC

According to Crowe, between 60 and 70 percent of the IP backbone provider’s traffic is currently video, a trend that he thinks will only increase, perhaps even substantially should applications like Cisco’s Telepresence take off. “It’s kind of a full employment act” for backbone providers, he joked.

While it’s not too hard to say Internet video will be more popular, Crowe did take a somewhat divergent tack by forseeing a future in which communications services, devices and applications will separate into different markets, much like they already have in the PC arena. The popularity of the tightly bundled iPhone aside, Crowe said that standard interfaces and operating systems for wireless devices will eventually produce more innovation by the best of each market breed, putting bundled plans “on the wrong side of economics.”

On Net Neutrality — a topic practically invented at the Silicon Flatirons conference — Crowe said that when it comes to possible monopoly abuses by the big carriers, “you ought to be worried” since the Bell companies “have a long history of abusing” their facility-based advantages. And while cable companies might have “a far less colorful legal history, competition is not in their DNA,” Crowe said.

However, that doesn’t mean Crowe is in favor of pre-emptive legislation, which most Net Neutrality proponents prefer. Instead, Crowe (like many other speakers at the conference) said abuses could be better monitored by the Federal Trade Commission, under existing anti-trust laws.

“I just think after 10 or 15 years of getting everything they want, consumers will not tolerate” anyone blocking or limiting their access to applications and content, he said. If there are violations, then “anti-trust courts are only a few lawyers away, and may be a lot more efficient than regulatory bodies, who have to react to politics.”

Paul Kapustka, former managing editor for GigaOM, now has his own blog at Sidecut Reports.

DigitalBridge Communications, a provider of WiMAX-based broadband-to-rural communities, announced a $20 million Series B round of financing Monday, showing that some investors believe there might be gold to mine in them thar rural broadband markets. The new funding (which PE Hub says is closer to $23 million) joins the $17 million or so the company had raised previously. DigitalBridge CEO Kelley Dunne, contacted via phone Monday night, said the latest round should let the company “fully fund” its planned rollout to 15 markets, beyond its current list of served communities that includes the Idaho locales of Rexburg and Pocatello, along with Missoula, Mon., and Washington, Ind.

Dunne, a telecom veteran who spent time both at a CLEC and at Verizon, said that capital expenditures for a WiMAX provider today are “about one-tenth” of the costs that a wireline CLEC might need. Combining WiMAX with low-cost fiber agreements and easy-to-install customer-premise gear from Alvarion is a recipe that is already producing cash-flow-positive results in Rexburg, Dunne said.

What will be interesting is to see how smaller, more focused WiMAX upstarts like DigitalBridge and Towerstream perform in comparison to bigger players like Clearwire or the ailing Sprint Nextel, which is reportedly close to unveiling another round of layoffs. Dunne acknowledged that DigitalBridge’s strategy is to “build around Clearwire and Sprint,” aiming at underserved markets with 150,000 residents or less.

According to DigitalBridge, the latest funding round was led by Paladin Capital Group, and includes previous investors Redshift Ventures, CNF Investments and Novak Biddle Venture Partners. Though DigitalBridge is based in Ashburn, Va., the company is targeting underserved rural areas in many geographical markets, especially in Montana, Idaho and Wyoming, where the company owns licenses or leases to 193 MHz of spectrum.

Paul Kapustka, former managing editor for GigaOM, now has his own blog at Sidecut Reports.