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Hi Fools,

On June 29 a few weeks back, I hit my 14th workplace birthday. It’s been an interesting decade-and-a-bit as I’ve been fortunate enough to spend the entire time in an industry that’s enjoyed exponential growth, specifically, mobile telephony. Furthermore, innovation and change lie at the heart of area where I’ve specialised: the network. Since ’96 I’ve overseen a complete analogue network systems’ replacement with GSM, managed the departments concerned with the design and roll-out of 3G and 3.5G, and now have my business unit’s sights set on 4G. As you can imagine, I’ve spoken to countless vendors and attended global telephony forms around the world (I even had the pleasure of working in New Zealand and NYC; alas the vast majority of my life has been spent here in Dublin, Ireland).

In basic terms the likely evolution of how you’ve used mobile telephone is as follows: pre-1998, voice only. ’98 to ‘00ish, voice and tiny amounts of data in the form of text messaging. ’00 to ’06 a little more data in the form of increased texting as well as WAP if you were a bit of a sophisticate with a Hollywood smile. Between ’06 to ’09 you may have gotten a thingy to plug into the side of your notebook for mobile broadband [unlikely, though]. Maybe even a Crackberry in the same period, upping the amount of data you consumed. Finally, you may have recently gotten your hands on a smart phone, or at least intend doing so in the year or two ahead. It’s this latest chapter that’s turning networks on their heads – majority cell phone usage is rapidly switching from voice to data. It’s highly likely that in the foreseeable future voice will be free in mature markets, so in other words, future revenue streams for telephony lies in data.

This was brought home to me recently when I saw a graph of network usage for the entire iPhone handset pool on a UK network. On *average* data usage immediately rose 20 fold when users moved to the iPhone from older “ordinary” devices (thanks Apple!). These phones no longer simply imply voice and text; at the heart of smart phone usage today lies Facebook + Twitter + YouTube + email + apps + IM + a bunch of other data intensive stuff. Whatever mobile networks can build, handsets are ready to consume.

So, what’s critical to mobile networks going forward is managing the capacity that they have built at massive capital cost. Just like English mustard, the profit in data lies not in what people consume, but rather what’s washed off the plate and down the sink. For example, if a provider charges $40 for 20G/month and a consumer uses all 20G month-in month-out, then they’re quite likely unprofitable customers. If they use 7G/month they’re great customers! They pay for more than they need.

To my point. Ireland, for whatever reason, has always been at the very forefront of telephony usage. For 10+ years the Irish use more minutes talk per person, more text messages, more mobile data, than anywhere else – everyone is stuck to their phone. So, one of my challenges is to innovate within the network to ensure that there is some profit in the game! To extend the example above, a network could raise a customer’s bundle from 20G/month to 30G, increase the monthly charge from $40 to $45, however throttle them to lower speeds when they hit, say, a 15G limit – this being one of dozens of shades of traffic management and shaping. From where I sit, my One Up On Wall St. observation is that traffic shaping will be one of the most important things for telephony providers to perfect in the years ahead, both in fixed and mobile. Also, I see a business who is carving out a nice niche in this area, providing the products and services to empower telcos to apply intelligence to usage per customer.

Company: Allot Communications
Country: Israel
Market Cap: $111M
Ent. Value: $69.5M
Cash / Debt: $42M / $0
Insider Ownership: 18%
Short interest: 0.1%!! (implying to me that the company is more hidden than any HG – am I wrong?)

Just the other day Allot reported that their YOY Q2 revenue had increased 36% as well as a $4.5m order from a Tier 1 operator. I suspect that this is very much the thin end of the wedge and that we’ll see the company turn the profit corner in the next four quarters or so. When I look at their entire product range on the website I know as fact that they have covered off the most important things data networks will need to implement in the future. Allot’s DPI (Deep Packet Inspection) technology enables operators to identify, classify, prioritize, and shape network traffic, ultimately resulting in enhanced performance and profitability. New competitors will always emerge, but for now these guys are in a great position.

Finally, my wife runs a fixed line broadband operation and agrees with me that DPI is probably the most important thing in the industry over the medium term (3 years and beyond). Just another opinion from another corner of the broadband world.

I do hope you can take the time to apply your own judgment to this suggestion.

Comments welcome,


GG Home Fool

P.S. Disclosure: I will probably buy shares in these guys over the days ahead.
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