Monthly Archives: October 2006

MySpace Under Attack — In More Ways than One

In the aftermath of the Washington Post’s article about the allegedly waning appeal of MySpace, the youth-oriented social-networking site now is under siege from a growing array of security exploits.

According to a report at DarkReading, MySpace is now threatened by two new zero-day bugs that have been released in the form of proof-of-concept code. The new bugs arrive after a weekend in which MySpace had to counter a major phishing attack that had reportedly spread to around 3,000 pages on the site.

Lack of adequate privacy and security were among the factors MySpace defectors have cited — in the Washington Post story and elsewhere — for their moves to other sites such as Facebook, which seems to be benefiting, at least for the moment, from MySpace’s reputed loss of trendiness among the teenage crowd.

Merrill Lynch Analyst Continues to Tout Microsoft Acquisition of Yahoo

Merrill Lynch analyst Justin Post speculated about the appeal of Yahoo’s assets to Microsoft back in June, and he’s still persuaded, according to Barron’s Eric Savitz, that Microsoft could and should find Yahoo of compelling value.

I still don’t see it. Culturally, the two companies would go together like palm trees in the permafrost, and there simply are too many overlaps between Yahoo’s services and those Microsoft already offers with MSN and Windows Live. The integration of the two companies would be a nightmare, politically and otherwise.

By the time Microsoft sorted out the mess, Google would have lengthened and solidified its leads in search and advertising, and probably would have bolstered its YouTube-related dominance in online video.

Besides, as I’ve said before, Microsoft stands to derive better returns from its broadening forays into enterprise computing, where it can leverage its Windows and Exchange/Office assets more formidably, than it would if it continued attempting to fathom the capricious whims of a consumer market that it doesn’t seem to clearly understand.

Sourcefire Files for IPO, But Acquisition Possible

Even though Sourcefire, which develops and markets a commercial version of the open-source Snort intrusion-prevention software, has filed for an IPO, speculation persists that the company might be acquired before it trades under the NASDAQ ticker symbol "FIRE."

One potential acquirer of Sourcefire is Hewlett-Packard, which has been shopping for security purchases recently.

As reported by CRN, Sourcefire agreed to be acquired by Israel-based Check Point Software Technologies in October 2005, but the $225-million deal was aborted because of the US government’s regulatory concerns. Sourcefire’s Snort is used by the USA’s Department of Defense and other government agencies, as well as by several large corporations.

Cisco Margins Threatened More Today by Chinese Vendors, but Open Source Looms

Over at ZDNet, Dana Blankenhorn asks whether Cisco is threatened by open source, which typically compresses margins in every market it enters.

After considering Cisco’s still-robust net profit margin of 19.5 percent, Blankenhorn deduces the following conclusion:

If Cisco margins are being hit by open source, the impact is, at best, marginal.

So far most of the talk about Cisco being dumped for open source comes from open source vendors themselves. Or it’s anecdotal.

I suspect Cisco worries a lot more about Chinese competitors like Huawei, whose 2006 sales target is one-third Cisco’s, than it does about open source.

Blankenhorn is right about Cisco’s biggest margin squeeze coming from Chinese networking players such as Huawei and ZTE. Nonetheless, taking a longer view, I am disinclined to dismiss the threat that open-source IP PBX and routing technologies might represent to Cisco’s juicy margins.

There’s a real danger to Cisco in open-source networking technologies. We’re seeing it today in IP PBX and VoIP products and technologies, from vendors such as Digium and Fonality, and we’ll see it gain steam in routing, too, as represented by relative newcomers such as Vyatta, which is leveraging the eXtensible Open Router Platform (XORP).

It’s early days for Vyatta and others like it, but I think network managers at SMEs, educational institutions, and non-profit organizations gradually will respond to the value proposition of lower prices and more extensibility that XORP-derived routing can deliver. As the code becomes easier to deploy and manage — coming in form factors such as appliances, and with improved user interfaces and simplified configurability options — other customers will begin to take the open-source leap.

How soon with this happen? It could take a few years, and, even then, Cisco will still be a strong player, if not as dominant as it’s been heretofore. So, no, Cisco’s quarterly results aren’t about to impacted materially by open-source networking.

Still, as evidenced by the growing success of Asterix IP PBXes, there is a precedent for inroads having been made against Cisco, Avaya, Nortel, and other vendors of proprietary networking technologies. With its fat margins built on a well-understood, maturing market, Cisco is — as Forbes’ Daniel Lyons has said — a target of the "cheap revolution."

Wondering About Microsoft’s Commitment to the Browser

I’m not surprised to see that the release of IE 7 has been tarnished by the discovery of two pop-up security flaws in its first two weeks of availability.

I realize that there’s been considerable buzz around the renewed browser battle between the latest iterations of Microsoft’s Internet Explorer and the Mozilla Foundation’s Firefox. It’s true that both browsers are improving, gaining functionality, features, extensibility, privacy, security, stability.

But I wonder how committed Microsoft is to the browser. It took a long time for Microsoft to move from IE 6 to IE 7, and Microsoft must be conflicted about the increasing shift of applications from bloated desktop clients to relatively thin, web-based front ends.

With or without Microsoft, the browser will become capable of support a growing array of interactive, rich applications. Even the offline problem — how to access and use web-based applications when disconnected from the Internet — is being tackled by Google and Adobe, among others.

I don’t think Microsoft is intentionally undermining its own browser development. Microsoft is doing its best to compete in the browser space. However, it is doing so under the philosophical constraint of envisioning the browser in a narrower, more dependent sense than its competition at Mozilla, Apple, Google, and elsewhere.

That leads to a compromised product, with weaknesses — security-related and otherwise — that might not have surfaced had Microsoft viewed the browser more expansively.

Radware Falls Further Behind

Radware once was a top-tier player in application-traffic management, back in the late 1990s when the first wave of Internet prosperity flooded technology-industry coffers.

Like F5 Networks and other load-balancing startups of the era — including Alteon WebSystems and Arrowpoint Communications, which were bought for multibillion-dollar amounts by Nortel and Cisco, respectively — Radware was reaping revenue rewards by providing high-availability solutions for busy web-based storefronts.

Radware, though, neither kept pace with F5 nor experienced a spectacular acquisition-based exit, as did Alteon and Arrowpoint. Instead, Radware muddled along, with poor marketing, hit-and-miss channel programs, and weak technology partnerships.

Radware muddles along to this day, as its latest quarterly results attest. The company missed analysts’ revenue and earning expectations, and its revenue growth lags far behind that of F5 and the other major players in what has evolved into the application-delivery space. While F5′s market capitalization is about $2.7 billion, Radware’s sits at less than $277 million. The fortunes of the two companies have diverged sharply.

So, what will happen to Radware? Not much will change. It will continue to shuffle forward, failing to capitalize fully on the markets it enters and only partly seizing the opportunities that come its way.

Is Youth-Market Social Networking a Solid Investment?

Consumer-market trends invariably are moving targets, so it’s difficult to anticipate what the next big fad will be, how long it will last, and when it will recede into oblivion. Youth markets are especially difficult to pin down, with trends in fashion, music, and other manifestations of popular culture emerging and fading from view in what seems like the blink of an eye.

So, is it good business practice for media corporations and web powerhouses to pay hundreds of millions of dollars — and perhaps more — to acquire social-networking sites with such ephemeral youth appeal? That’s the implicit question that runs through an article in today’s edition of the Washington Post.

The article, written by Yuki Noguchi, presents anecdotal evidence that MySpace is in the process of becoming passe with today’s teens. She quotes teens who have grown tired of spending time on MySpace, and who have been alienated by its lax security and privacy controls.

Writes Noguchi:

To a youth market composed of teens like Kim and Birnbaum, MySpace is just the latest online fad. Before MySpace, the place to be was Xanga, and before that, Friendster, MiGente and Black Planet.

"They’re not loyal," Ben Bajarin, a market analyst for Creative Strategies Inc., said of the youth demographic. Young audiences search for innovative and new features. They’re constantly looking for new ways to communicate and share content they find or create, and because of that group mentality, friends shift from service to service in blocs.

If Bajarin is correct about the inconstant loyalties of teens — and the fates of countless pop-music icons of years past suggest he’s right on the mark — how is it possible for News Corp. to keep its MySpace brand hot? More to the point, is it wise for Yahoo, or anybody else, to spend more than $1 billion to acquire Facebook, which, if the Post article is correct, is becoming the flavor of the month with teens?

News Corp. hopes that new technological features will keep MySpace in favor with the youth demographic, but will that work? A teen hangout, whether in the virtual or the physical world, is defined by the caprice and presence of other teens, not by a rational calculation of features and functionality.

Traders Increase Buying of 3Com Call Options, Expecting Stock Gains

The Wall Street Journal reports today that traders were buying call options in 3Com shares at heavier-than-usual volumes yesterday.

The WSJ quoted Stacey Briere Gilbert, chief options strategist at Susquehanna Financial Group, who said traders were picking up options that allow them to buy the stock for $5, but with no apparent timeline in mind. Traders bought large amounts of calls that expire in November, December, and January.

Since 3Com isn’t due to report earnings again until December, the relative call-buying frenzy likely is related to the private-equity bidding war for the H-3C joint venture owned by 3Com and China’s Huawei Technologies Co.

Bids for H-3C, in which 3Com holds a 51-percent stake, have reached $1.5 billion to $2 billion, according to people familiar with the matter.

Originally, three private-equity firms were involved in bidding for H-3C, but the WSJ reported yesterday that Texas Pacific Group had withdrawn from the competition. Silver Lake Partners and Bain Capital Inc. are still in the running, with Bain said to be offering the higher bid.

3Com would like to buy out the balance of H-3C that it doesn’t own, but it doesn’t have the financial resources to compete against the financial heft of Silver Lake or Bain. Accordingly, 3Com has begun discussions with other private-equity firms in a bid to seek financial backing for its plan to take complete control of the joint venture.

HP Executive Resignation Raises Questions

It appeared as though Hewlett-Packard was recovering remarkably well from the self-inflicted public-relations catastrophe related to its ill-advised and legally dubious investigation into leaks from its board of directors to trade journalists and business reporters.

Perhaps HP remains well on its way to public rehabilitation, but two recent executive-level defections have made the news lately, and one of them might have been related to the corporate-espionage fiasco that saw HP proxies commit identity theft against board members and journalists.

Earlier this month, according to a report on MarketWatch.com, Todd DeLaughter, the former head of HP’s $1-billion OpenView software business, resigned from the company to become chief executive and president of Canadian business software company Opalis. DeLaughter had no known connection to the HP spying controversy, and his departure appears driven by a desire to be the CEO at an entrepreneurial startup rather than serve as head of a business unit within one of the technology industry’s largest players.

The other executive departure occurred this past Wednesday. It involved Steve Smith, senior vice president and general manager of HP Services, a $15.5-billion business unit that provides technology consulting, support, and outsourcing. According to an HP source, Smith, who joined HP in January 2005, resigned for "personal reasons."

When asked whether Smith’s sudden resignation was related to the company’s boardroom scandal, which has seen the departure of several high-profile HP executives, including General Counsel Ann Baskins, a company spokeswoman refused to comment.

If Smith’s departure had nothing to do with the boardroom scandal, HP should have replied with a simple "no" to that question. By issuing a terse "no comment," HP has assured that journalists will keep digging.

Should Market Researchers Declare Potential Conflicts of Interest?

I have been wondering lately whether market researchers at firms such as Gartner, IDC, and Forrester should have to declare conflicts of interest when speaking for attribution with the trade press and business journalists about vendors with whom they have business relationships.

Market analysts at investment banks often are asked by journalists to disclose whether their firms have current or prospective business ties to technology vendors on which they pass comment. By revealing whether a relationship exists, the analyst provides the journalist and his or her readers with additional context in which to judge the objectivity of the commentary. It is a form of disclosure that adds to the credibility of both the article and the sources quoted in it.

I think the same practice should be applied to technology’s leading research houses. Journalists and their readers have a legitimate right to consider, for example, whether a business relationship Gartner or IDC has with Cisco, Oracle, or Microsoft might inhibit or otherwise color commentary and opinions that might be offered regarding a vendor’s product strategy, launch campaign, or prospects for continued success.

At the very least, such a practice would provide full disclosure to readers, so that they could more completely evaluate the pronouncements of the technology industry’s pundits. What do you think?

Nortel CTO Gives Uninspiring Interview

In an interview with CNET’s News.com, Nortel’s CTO John Roese, who joined the company in June, suggests, perhaps with some justification, that the company was hopeless adrift before he came aboard.

Roese seems to think he can set the right course singlehandedly, but, when asked where and how Nortel will re-establish itself as a market leader, he offers hackneyed, unconvincing, or vague replies.

According to Roese, Nortel will emerge as a leader in 4G wireless — even though he defines that market ambiguously — and in enterprise networking, where he foresees "hyperconnected" networks.

He says Nortel is second to Cisco in enterprise networking today, which is correct, but he fails to make a compelling case that Nortel will be the benefactor of potential Cisco missteps. From my vantage point, I can see Foundry, HP ProCurve, and perhaps even Extreme Networks picking up more share from Cisco in the next two years than will Nortel. From a marketing standpoint, Nortel has fallen off the enterprise-networking map.

When discussing his biggest challenge since joining Nortel as CTO, Roese says the following:

We really have to change the culture of the company. As CTO, I need to establish a technology vision and then evangelize that vision to create a market for the technology. I’ve been trying to drive the R&D folks to think about what they do in terms of creating products. That hasn’t been the way people at Nortel have thought in the past.

I’m not sure Roese has the process right. Not once in the above paragraph does Roese mention customers. In fact, he says the word "customers" once in the entire interview. He doesn’t seem to recognize that developing compelling products and solutions involves more than the genius of a CTO. It involves primary market research, lots of time spent understanding what customers are trying to accomplish and why, and then it requires the creativity and innovation to define and develop products that solve their problems.

The CTO’s vision should be distilled and communicated only after he understands the company, its customers, and its markets. Judging by the text of this interview, I’m not sure Roese has gone through that process.

In the same interview, Roese mentions that Nortel is putting more emphasis on partnerships, and he cites the company’s unified-communications partnership with Microsoft as an example of how the company will work in concert with other vendors. I’m not sure that was the best example, particularly since Microsoft’s ultimate intent is to benefit and learn from Nortel so that it can eventually embed its own VoIP technology into Office Live Communications server. Over the long haul,  I don’t see Nortel getting reciprocal value from that relationship.

I think Nortel and Roese need to deliberate further before they decide where to place their bets. Before they make those choices, they should think about spending more time with customers and channel partners, getting a clearer idea of what sort of mandate the market is willing to extend to a remade Nortel.

McAfee Beats Street Estimates for Q3, but Analysts Wary

McAfee posted strong third-quarter results, but market analysts remain wary about the company’s future prospects, especially in its core antivirus market.

As reported by the Associated Press, McAfee yesterday reported a preliminary adjusted profit of $58.2 million, or 36 cents per share, on $287.70 million in revenue. Analysts were expecting the company to earn 36 cents per share on $275.7 million in revenue, according to a Thomson Financial poll.

Despite the good results, most market analysts and industry pundits believe the company’s best days might be behind it — and they don’t expect McAfee to surpass expectations again in the near future.

Said Jeffries analyst Katherine Egbert:

The beat was an encouraging sign and brought some welcome relief from recent negative news regarding stock options and management turnover. . . .The persistence of weakening long-term fundamentals in consumer antivirus, an uncertain margin trend, and the ongoing stock option review are all significant risks.

Egbert also noted strong competition from Microsoft and Symantec.

McAfee’s stock-option review already has claimed the company’s chairman and CEO George Samenuk and its president Kevin Weiss. Before and since the executive shuffle, McAfee has been rumored to be an acquisition target.

Other market analysts, including AG Edwards’ Kevin Buttigieg and Morgan Keegan’s Chris Hovis, were similarly skeptical of McAfee’s ability to experience continued prosperity, with Hovis noting the company’s "muted" fourth-quarter guidance.