McAfee and Skype Collaborate . . . On Paper, Anyway

McAfee and Skype claim to have formed a security alliance of sorts, but, if you read the press release announcing the relationship, it’s difficult to conclude that there’s anything of substance to announce.

The press release says McAfee’s Internet Security Suite 2006, VirusScan 2006, and Personal Firewall 2006 products have been "Skype Certified," which apparently means they meet Skype’s "strict standards for security, quality, and usability."

Okay, but how do the McAfee products add value, in the form of essential security, to a Skype user’s online experience? Well, it’s here that the two companies fail to make a persuasive argument. While one can imagine McAfee wanting to make a strong case for itself as a guardian of Skype communications, Skype is having none of it.

Reads the press release:

 . . . files sent using the Skype file transfer function can be easily scanned by the Skype certified McAfee products, adding an extra layer of protection to documents shared in an already secure environment. Skype calls and chats have always been and will remain private and protected using Skype’s encryption technology.

So, McAfee products provide additional protection to documents and files being shared in an environment that’s already secure? If the environment is secure, and the documents already are protected by Skype, why the need for the added protection? It sure reads as if McAfee’s value proposition, at least in relation to Skype traffic, is entirely superfluous. Skype even makes the additional point that its IP-based telephony and IM chats are protected by its own encryption technology, so there’s nothing for McAfee to add there, either.

For McAfee’s sake, I hope it has a stronger marketing hook for its products than the negligible security protection it offers to Skype users. As for the Skype Certified program, at least in relation to security, why bother? If Skype’s application traffic is as impregnable as the company claims, why establish security partnerships?

I think the marketing teams at both companies should have asked themselves some basic questions about the nature of the relationship and its objectives before they drafted and issued today’s press release.

Viisage Disappoints Wall Street . . . for Now

Viisage produced results that were shy of Wall Street’s expectations for revenues and earnings, but revenue still grew robustly and the company’s merger with Identix remains on track to close at the end of this month.

Despite the temporary slide in its stock price that these results are likely to occasion, the company remains well placed to become a leading vendor of biometric security solutions for defense, government, and enterprise customers. The company’s pedigree, the well-connected Beltway insiders who sit on its board of directors, and its extensive product portfolio, assembled through carefully considered and smartly executed acquisitions, make it a company to watch in the security space.

AOL’s Strategic Shift Forces Restructuring

More than one quarter of AOL’s worldwide wokforce, or about 5,000 employees, will be cut from the payroll as the online company recreates itself as an advertising-based font of free content rather than a subscription-based provider of Internet access and for-fee proprietary content and services.

The employees will be shed over the next six months, with the first notices to be delivered in October. As part of restructuring, AOL will attempt to sell its Internet-access businesses in France, Germany, and the UK.

Employees were informed of the impending cuts at a companywide meeting and webcast Thursday, one day after AOL announced its plans to bulldoze its walled garden and to offer its range of online services, including email and various types of content, free of charge.

Given what was announced yesterday, major changes were inevitable at AOL. Priorities have been reordered, and personnel and resources must be reallocated accordingly. Still, the company must be careful to carry out the changes with sensitivity and enlightened self-interest.

This is a major overhaul, and survivors within the company, as well as potential advertisers on AOL’s online services, will be watching closely to see how well the company handles it.

Stock-Option Backdating Cloud Hangs Over Blue Coat

Two developments today involving Blue Coat Systems raised serious questions about how severely the company might be compromised by potential fallout relating to its past practices in granting stock options to executives and other senior members of staff. 

First, Blue Coat received a stock-delisting warning from Nasdaq because the proxy-based security and application-acceleration company has failed to file its annual 10-K form for the fiscal year that ended on April 30. The company had 90 days in which to file the document. In a bid to avoid delisting, Blue Coat now will request an appeal hearing before a Nasdaq panel; the company’s stock will remain listed pending the panel’s decision.

As it that wasn’t bad enough, Blue Coat also was apprised by the Securities and Exchange Commission (SEC) that it is conducting an informal inquiry into the company’s past stock-option practices. Blue Coat says it is cooperating with the SEC investigation.

The company missed its 10-K filing date because it is conducting its own internal review into historical practices relating to stock-option grants. Blue Coat says it working diligently to complete the review and to file its 10-K form, but it did not specify a date for the resolution of either matter — all of which leaves its various stakeholders with more questions than answers.

IBM to Wrap Services Around Latest Software Acquisitions

Of the 16 acquisitions IBM executed in 2005, ten of them involved software companies.  With software and services, and preferably software that requires services, being its most profitable businesses, IBM has made no secret of its intention to continue buying software companies.

Two more software acquisitions came this week, and more will follow.

On Tuesday, IBM bought Austin-based Webify Systems, whose products provide a service-oriented architecture (SOA) that enables its customers — mainly insurance firms, banks, and healthcare companies — to share data among otherwise disparate software silos. Terms of the transaction were not disclosed, but IBM will inherit 120 Webify employees in Austin and Mumbai, India.

One can easily envision IBM’s army of salespeople being able to bundle the Webify products into deals alongside, or integrated with, IBM’s WebSphere application-server product family. In fact, the products already are integrated as part of a pre-existing partnership between the two companies.

Meanwhile, today IBM spent $740 million in cash to acquire Bedford, Mass.-based MRO Software, which develops and sells software and consulting services that allow its corporate customers to buy, maintain, and retire assets such as production and transportation equipment, facilities, and information-technology hardware and software.

IBM, which paid a 19-percent premium over the acquired company’s market capitalization as of Wednesday night, said MRO’s technology and consulting services will be encompassed within IBM Software and IBM Global Services, respectively. On the software side, MRO’s asset-management capabilities will be integrated  into IBM’s Tivoli systems-management framework, providing an asset-management dimension to the Tivoli suite.

Both acquisitions fit into IBM’s model of developing and buying enterprise software around which professional services, from pre-sales consulting all the way through to deployment and post-sales management, can be wrapped.

VC Shakeout Imminent?

An article by Rebecca Buckman in today’s edition of the Wall Street Journal (yes, subscription required) illustrates just how daunting the business of venture capital has become.

Buckman writes that VCs have entered an era of diminished returns, weighed down by a nervous stock market, a surfeit of investment capital, and decelerating growth in many technology sectors that were previously lucrative for investors. I would add that the maturity of the information-technology industry has resulted in its own law of diminishing returns, with a dwindling number of meaningful business opportunities for startup companies to exploit.

Paul J. Ferri, founder of Matrix Partners, says the VC trade “will never be the business it was in the mid 1990s,” when the dotcom boom found its stride. More damningly, Ferri says, “I know what we have distributed to our investors over the last six years, and it’s damn little.”

Ferri adds:

“I thought by now investors would have figured out that our industry is not an economically viable business model.”

Buckman notes that cumulative returns on VC investments during the past six years remain negative, obliterated by the dotcom implosion. In 2005, US venture capitalists posted a mean return, including realized and unrealized gains, of 7.9 percent, according to research firm Cambridge Associates. For the year ended March 31, returns were 13.8 percent, just ahead of the 11.7-percent gain delivered by the Standard & Poor’s stock index.

Too much money chasing too few promising startup companies is a problem for VCs, and it’s exacerbated by a lack of viable exit strategies. The public markets are wary, even inimical, to IPOs — there were just 56 venture-backed IPOs in the US last year, a quarter as many as in 1995, and many of those involved larger, more-established concerns — and the acquisitions game has become a buyer’s market, with technology titans and private-equity buyout firms alike finding bargains among the glut of companies (and their investors) seeking refuge in consolidating market segments.

This results in VC-backed companies remaining private longer than the VCs would prefer, delaying the return on VC investments while requiring more investment to avoid outright failure. Still, many VC-backed companies are failing.

Says John Denniston, a partner at Kleiner Perkins Caufield & Byers:

“We’re in a position where almost one in two venture-backed companies will fail…It’s hard to see how the industry gets around that basic math.”

My guess is that the industry, and the institutional investors that fund it, are coming to grips with those stark numbers. Institutional investors, in particular, are being increasingly selective about the VC funds in which they invest, wanting to place their bets with a small number of prominent VC firms rather than spreading their investments broadly within the sector. The resulting deluge of incoming capital has led the top VC firms to restrict and even refuse money from new investors.

It all portends a significant thinning of the VC herd. Only a few will have the connections and the expertise to follow the big-money VCs into emerging geographic markets such as India and China, and the they’ll be unable to compete for the most attractive investments prospects in North America.

Hard times are coming to the VC patch. What effect will they have on the number and variety of technology companies that rely on VC funding today?