Potential Fallout from Niall Kennedy Controversy

So, who’s the real Niall Kennedy?

Is he the guy whose departure from Microsoft was lamented by visitors to his blog as another serious defection by a star performer, a visionary technologist whose sprint to the exit after just a few months with the software behemoth provides yet another signal of potentially irreversible decline? Or is he the superficially clever, but otherwise ordinary product manager — who can talk a good game but usually fails to deliver the goods — that is portrayed in a series of occasionally scathing comments on Mini-Microsoft’s blog?

Those of us who don’t know Niall Kennedy are in no position to render a verdict. It does beg the question, though: Did Niall Kennedy become moderately well known because of his work as a self-proclaimed “feed syndication geek,” or was it because he blogged passionately about being one?

Here’s another question to ponder in the aftermath of the Kennedy controversy: Will vendors, such as Microsoft, exercise more caution in hiring notable bloggers in the wake of Kennedy’s pointedly critical explanation for his departure? The blogger giveth and the blogger taketh away. A prominent defection, especially by a disillusioned high-profile employee with an online megaphone, can result in considerable embarrassment. It is possible, but probably not likely, that what’s happened this week could lead to an unofficial, unstated blackballing of all but the most inoffensive bloggers by hiring managers at major technology companies.

Let’s hope it doesn’t come to that, but the watchful guardians of corporate and investor relations look to mitigate risks wherever they find them.

3Com Does CEO Shuffle, but H3C is What Matters

I wasn’t one of those who was enamored of 3Com’s choice of Scott Murray for its CEO, so I don’t think his departure, about eight months after his arrival, is a death blow to the company’s prospects.

Officially, Murray is leaving to find a job that allows him to spend more time with his family. That’s probably true. Murray was traveling regularly to and from China for visits to Huawei-3Com (H3C), the data-networking joint venture with Huawei in which 3Com holds a 51-percent majority interest. It was a lot of business travel, and it involved a lot of time away from his young family in Massachusetts. A good indication that Murray left on his own, and was not pushed out the door, is that he will not collect a severance package. By publicizing that fact, 3Com is intent on precluding speculation about whether somebody other than Murray had a hand in his departure.

Murray will be replaced by Edgar Masri, who filled several 3Com management roles during a previous 15-year tour of duty with the firm. He also served as a general partner with venture-capital firm Matrix Partners, which made the news on this site earlier today with its investment in Digium. Most recently, Masri filled the role of COO at Redline Communications, a broadband-technology firm based in Markham, Ontario.

Masri will take over from Murray on August 18, the same date that 3Com’s new executive vice president of corporate development, Bob Mao, will join the company. Based in China, Mao will focus on managing 3Com’s interests in the H3C joint venture. His last gig was as chief executive of Nortel’s China-based operations from 1997 until earlier this year. Mao will report directly to Masri, who will serve as chairman of the joint venture in addition to ruling the roost at 3Com.

That’s a bit curious, actually. If Mao could come aboard to assist Masri will on-the-spot management of H3C, why couldn’t he have joined the company with Murray at the helm, allowing the jet-lagged CEO to spend more time at home and less time in airports and Chinese boardrooms? Maybe somebody from 3Com will answer that question for us; then again, maybe not.

All things considered, though, the loss of Murray is far from fatal. Murray was a technology lightweight, but reputedly an operational wizard. He would have made a difference in the old 3Com, which had efficiencies to attain and its own products that channel partners and customers actually wanted. Notwithstanding the TippingPoint division of 3Com, which arguably has good technology and a competitive shot at holding its own in the intrusion-prevention market, 3Com is a shell of its former self. It has gone from an enterprise-networking vendor in the 90s to an SMB-networking player a few years ago, with an ill-advised jaunt into the carrier space thrown in for laughs and giggles.

Now 3Com is back again with pretensions to enterprise greatness. Strategic consistency has not been a strong suit for 3Com during the past decade.

But it does have this joint venture with Huawei going for it. That was a smart move, and one that 3Com finally is recognizing as an asset it can’t afford to neglect. Masri and Mao, with their mix of deal-cutting savvy and intimate familiarity with Chinese business culture, are a one-two punch that should fully exploit the H3C opportunity.

3Com’s immediate objective with H3C is to get an ever larger stake of the joint venture, preferably before Huawei begins thinking about whether and how it should approach other potential partners. 3Com will be able to submit a bid to buy some of its partner’s shares as of Nov. 15, but it will want to begin negotiations as soon as possible. There’s no question in my mind that Masri and Mao have a greater probability of emerging from those discussions with a favorable outcome than did Murray.

if the new executive tandem at 3Com can seal a bigger deal with Huawei, 3Com shareholders stand to benefit significantly.

As Bear Stearns analyst Matthew Shimao noted, in an article written by Peter Kang of Forbes:

The inherent value of the H3C story is not diminished by the CEO’s departure. Our thesis on 3Com is primarily based on H3C’s potential. In our view, 3Com is the best way for US investors to play tech growth in China and other emerging markets — where trends remain strong and the joint venture is taking share.

That’s essentially true. H3C is 3Com’s brightest hope.

Intel Unloads Another Business Unit

While AMD is buying companies — including a notable recent acquisition — Intel is divesting itself of business units that it once viewed as hugely promising.

Earlier today, we learned that Intel sold its media and signaling business unit, which includes voice and media processors, for an undisclosed amount to Montreal-based Eicon Technology. The deal will involve about 600 Intel employees, most of whom are expected to retain their jobs within Eicon.

Like the communications-chip business that Intel sold in June to the Marvell Technology Group, voice and telephony processing was once seen a major business opportunity by Intel executives. Neither the communications-chip business nor the media and signaling business unit fulfilled its promise, however, mostly because Intel lacked the commitment, dedication, and focus that success in those areas required. Many readers might remember that Intel spent a whopping $780 million in cash to acquire Dialogic, then a significant presence in telephony-communications processors, back in 1999. Oh, well, money came and went a lot easier in those days.

Given what became of both business units, and considering the competitive pressure Intel is under from AMD, the company made the right move in divesting itself of businesses that it could not longer afford to run methodically into the ground. Intel has been shedding employees as well as business units, looking to reduce costs, to increase efficiencies, and to make better and faster decisions. In that respect, today’s move fits within the broader push to focus on its core businesses.

Meanwhile, Eicon will look to pick up Intel’s broken pieces, piece them together with its own media processing hardware and software for voice, speech, conferencing, VoIP, and fax services. While Intel probably didn’t make out like a bandit on this deal, Eicon had to spend considerably more than private company had in reserve. In conjunction with the acquisition announcement, Eicon said that Investcorp Technology Ventures and Tennenbaum Capital Partners will invest in its business, with Investcorp serving as lead equity investor and Tennenbaum providing credit and serving as a secondary equity investor.

Parsing the Deal: Digium Accepts $13.8 Million in Venture Funding from Matrix Partners

Digium, the company founded by the software developer who gave the world the open-source Asterisk IPX, has accepted its first infusion of venture capital, a $13.8-million investment from Matrix Partners.

Although Digium’s president Mark Spencer, the creator of Asterisk, says his company is profitable and doesn’t strictly need outside investments, it took the money from Matrix Partners anyway. Matrix has experience in building business models and companies on open-source foundations, with its most notable success being Java-based, open-source application-server vendor JBoss.

David Skok, a general partner at Matrix Partners, will now the join the board of directors at Digium. He comes armed with ambitious growth plans that will see Digium pursue potentially lucrative markets across telecommunications carriers, large enterprises, small and mid-size businesses, and even consumers. That’s an audacious mandate for a company Digiums’s size, even with $13.8 million behind it, but Skok apparently believes the money will help Digium research, understand, and efficaciously attack each of the aforementioned target markets. Digium already has a large stable of channel partners spanning some of those markets, and Skok and Spencer are confident that the sky is the limit.

While it is a given that the transition from aging analog PBXes to digital IP telephony eventually will sweep enterprises of all sizes, Digium is not alone in targeting that market opportunity. Established vendors — Cisco, Avaya, Alcatel, Nortel among them — all develop and sell IP PBX systems based on industry-standard protocols as well as their own proprietary technologies. Moreover, more than 130 vendors are battling for the crown of Asterisk-based market leader. Included among that pack is Fonality, a Los Angeles-based company that aims its Asterisk-based products at SMEs, one of the markets Digium wishes to serve. Azure Capital Partners invested $5 million in Fonality earlier this year.

Obviously, the marketplace cannot sustain more than 130 vendors trying to build profitable businesses on sales, service, and support for Asterisk PBXes. There will be a few winners, but there be hundreds of losers. Even if one accepts that there is a genuine possibility, perhaps even a probability, that cleverly positioned, professional supported IP PBX systems can claim a significant chunk of the IP-telephony market for SMEs, it’s logical to conclude that one or two vendors will rise above the crowd to grab the lion’s share of the spoils.

There will be a massive market-share land grab, which undoubtedly is one of the reasons Spencer chose to embrace venture capital and why Matrix Partners decided to inject $13.8 million, rather than $5 million, into Digium.

Skok brings the experience he has gained from working closely with JBoss. He’s seen what works and what doesn’t when it comes to positioning open-source software for enterprise buyers, and some of those lessons can be applied gainfully at Digium. Still, telephony and application servers aren’t identical products; they have different buyers with different mindsets. That doesn’t mean Digium can’t account for those differences and adapt its tactics accordingly, but it still presents a challenge that Skok and the Digium team have yet to encounter.

Something that concerns me about the professed strategic plan of Digium is the broad focus on multiple target markets. The hot spot, I think, for open-source IP telephony is SMEs that possess neither the budget nor the requirement for more expensive offerings from the likes of Cisco Systems. Digium might have longer-term dreams of world domination across every imaginable market for IP telephony, but it needs to resist the impulse to go big and broad, at least initially.

A focused, structured approach to becoming the biggest and best provider of complete IP-telephony solutions for SMEs is the right prescription for the company to follow initially. Digium needs to look at what it can learn from JBoss’ experience in open-source software, but it also should study what Fonality and others have done right and wrong in the IP PBX space. With all that data and understanding in hand, it then should provide its channel partners and customers with everything they need to prosper and succeed.

Go Daddy Decides Not to Go Public

Following in the footsteps of Alien Technology, the Go Daddy Group announced today that it has withdrawn the registration statement it filed with the Security and Exchange Commission (SEC) for an initial public offering.

While clearly there were company-specific issues that dissuaded Alien Technology from taking the IPO plunge, Go Daddy goes to great lengths to put the blame for this decision on external factors.

Said the domain-registration and web-hosting company’s CEO and founder Bob Parsons:

Go Daddy has decided not to proceed with an IPO at this time due to adverse market conditions. With a war and escalating hostilities throughout the Middle East, skyrocketing oil prices and technology stocks once again taking a beating on Wall Street — now just isn’t the right time for us.

It’s true the conditions aren’t ideal. In fact, IPO-conducive conditions for technology concerns haven’t been in evidence for a long time. Oh, a Google can pull off an IPO, but how many of those are around at any given time?

On his blog, Parsons explains his reasons for pulling the plug on the IPO in greater detail. He claims the company is on top of its game at the moment, and he cites revenue and cash-flow numbers to support his point. He acknowledges criticisms that the company has never generated a profit, but he says those are irrelevant cavils, and that the company’s positive cash flow, market-share gains against its primary competitors, and strong growth are setting the stage for future profitability.

That might be true, but Parsons inadvertently reveals another reason why he, as founder and CEO of Go Daddy, might not want the company to go public. Go Daddy, he says, doesn’t need to go public. Writes Parsons on his blog:

The Go Daddy Group, Inc. has one investor: Me. The tech companies we have witnessed complete the IPO process and actually go public during this difficult time have all depended on venture capitalists, both on their board and as their investors. The principals in these companies have made it no secret that given the choice, they would have much preferred not to go public. They proceeded with their offerings only because these venture capitalist investors made them to do it.

Why would venture capitalist investors do such a thing? It’s quite simple. They need to flip their investment to show a gain for whatever fund it is they are managing. If the underlying company takes it on the chin as a result, then so be it.

That’s not going to happen to Go Daddy.

To date, Go Daddy has been completely self-funded –we have been cash flow positive since October 2001, and – whether anyone has noticed or not — continue to generate healthy cash flow from operations. We’ll manage just fine without the IPO money — thank you.

I know what Persons is saying, and he’s not without justification in saying it. Still, one gets the feeling he likes being the big dog at Go Daddy. He’s got complete control, and that’s something he enjoys. Like a lot of founder CEOs, he believes his interests and the company’s are identical.

Other shareholders might not share that view, and they might offer criticisms as to how the company could be run more efficiently or blaze a different strategic course than the trajectory it is on today. Parsons would still have control, but the control would no longer be absolute. He’d have to explain and justify his decisions and rationalizations to other people.

I’m guessing he decided that wasn’t something he wanted to do. Market conditions provided a defensible reason to retreat from an IPO that Parsons probably would have been reluctant to take to fruition even under more auspicious circumstances.

Cisco Says It’s On Track, Taking Share from Major Rivals

Cisco’s financial results for its latest quarter and fiscal year hit the wires last night, and the response of analysts and investors was uniformly positive.

Although Cisco’s stock price had been stagnant throughout much of this year, it rose appreciably, by nearly 10 percent, after it posted its fiscal fourth-quarer and year-end results for 2006. Those results undeniably were good, handily beating the consensus earnings and revenue forecasts of analysts. Cisco did well across nearly all geographies, with the exception of a tepid Europe, and hiring blitz of account managers in Asia paid off, with strong sales execution in key Asian markets, including a 40-percent increase in sales in China.

CEO John Chambers boasted that Cisco took market share from most of its major rivals. The numbers — not only Cisco’s, but those issued recently by Lucent and Juniper, among others — support that assertion. Chambers was particularly effusive regarding the benefits that have accrued from the acquisition of cable set-top box manufacturer Scientific Atlanta, which, he claimed, has helped Cisco position itself as an integral, trusted partner of service providers rather than as merely another vendor of products and technologies. Chambers noted that Scientific Atlanta gained competitive ground on set-top box market leader Motorola during the quarter.

While that news was all good, it was Chambers’ sunny guidance that left analysts and investors in a good mood. Cisco is projecting a quarter and year ahead that should allow it to make further market-share gains against its primary competitors in prominent service-provider markets. At the same time, it should track with or better than network-equipment spending by enterprises. It’s hard to believe that Cisco could become more dominant in the enterprise space, but that seems to be what the company is suggesting.

For the 2007 fiscal year, Cisco forecasts revenue of as much as $34.2 billion, compared with $28.5 billion in fiscal 2006. It is setting expectations for revenue growth of 15 to 20 percent during fiscal 2007, and it expects revenue growth of 19 percent to 21 percent in the current quarter. Interestingly, even excluding revenue from sales of products from Scientific Atlanta, Cisco is projected revenue growth in the year ahead of approximately 10 percent to 15 percent.

Taken together, the guidance matches or exceeds the expectations of analysts.

Sensing weakness and looking to exploit it further, Chambers and his Cisco colleagues emphasized that the company’s CRS-1 router did especially in competition against Juniper Networks. With Juniper one of the companies embroiled in the ever-widening stock-option backdating scandal and having serious difficulty putting together a compelling enterprise strategy after apparently bungling the post-acquisiton integration of NetScreen, Cisco realizes that Juniper could suffer a severe setback if its service-providing routing business erodes to any appreciable degree.

On the subject of stock-option practices, incidentally, Cisco claimed a clean bill of health. That’s another piece of good news, and one that analysts and investors were pleased to hear.

Mobile Internet Still Stuck in Neutral

An article published yesterday at British site The Register suggests that the mobile Internet, as provided by wireless operators, remains a frustrating experience that is shunned more than it is embraced.

Is anybody honestly surprised?

The Register quotes a survey of 1,500 British consumers, commissioned by hosting firm Hostway. The survey found that 73 percent of respondents don’t bother accessing the Internet at all from their mobile phones. Among the alienating and prohibitive problems with the mobile Internet: slow-loading pages, difficult navigation, and a large number of sites that aren’t accessible from a handset.

The study suggested that survey respondents weren’t averse to the idea of the mobile Internet. It’s the practice and reality of it that’s putting them off. About 90 percent of respondents said they’d use mobile Internet services at least occasionally if they could be sure that content would load faster and they could avoid high charges.

Well, imposing high charges on their subscribers is what gets the executive class of wireless operators up every morning, so the disaffected survey respondents probably can forget about avoiding them.

The harsh truth is, there is no technical reason why the mobile Internet couldn’t be a far better experience than it has been for a wide range of services, especially for email, maps, and other types of communications and basic information-related content. The problem isn’t the technology.

If you’re looking for something or someone to blame, look no further than the wireless operators. They could offer a better deal and a better experience to their subscribers, but they just don’t care enough to do so.