Thoughts on the Apple-Palm “Poaching” Controversy

I don’t know whether I would describe it as a tempest in a teapot, but I definitely think the red-hot controversy over a story published today by Bloomberg suggests that we’re in a slow news cycle.

I’ll recap quickly, and then make a few points.

Like a good reporter should, Connie Guglielmo gets right to the point in her opening paragraphs:

Former Palm Inc. Chief Executive Officer Ed Colligan rejected a proposal from Apple Inc.’s Steve Jobs to refrain from hiring each other’s employees two years ago, calling it wrong and “likely illegal,” according to their communications.

Colligan, who stepped down as CEO in June, discussed the matter with Jobs in August 2007, as the mobile-phone war heated up, according to the communications. Apple had introduced the iPhone two months earlier, just as Palm hired a former Apple executive, Jon Rubinstein, to develop new smart phones. Jobs, Apple’s CEO, told Colligan he was concerned that Rubinstein was recruiting Apple employees. “We must do whatever we can to stop this,” Jobs said in the communications.

This development builds on and feeds into reports in June indicating that the US Justice Department has begun investigating possible collusion in the hiring practices among technology companies.

Now, I’ll make a few observations and, as always, you can make of them what you will.

First, it’s pretty obvious that Ed Culligan was the source of the salient disclosure that formed the basis for Guglielmo’s story. Culligan comes off looking better than Jobs in the correspondence cited in the article, and Jobs isn’t exactly known for his openness and willingness to share with the press.

So, if you’re a curious sort, you have to ask: What’s Culligan’s motivation here? What does he hope to achieve? Is it simply that he’s continuing a vendetta with Jobs, or is something else at play? I would imagine he still has a whopping number of Palm shares, and that it would be in his interest to distract Apple as Palm fights for its commercial life in the savagely competitive smartphone market.

There are multiple possibilities as to what’s driving Culligan, lots of potential intrigue.

My second observation is that the alleged non-poaching collusion between and among technology companies is, well, pervasive. Anybody who’s worked at a senior level in the technology industry knows that.

Here’s how the dynamic typically works, though there are variations on the theme:

A senior staff member leaves a company to found a startup or join a competitor. He then hires another high-ranking staff member from his former firm, often a member of the team he led. Seeking to staunch a potential domino effect of personnel defections, the raided firm unambiguously conveys its displeasure to the raiding entity, seeking to find a rapprochement that protects it from further personnel losses while mollifying its rival.

Typically, they come to an understanding, if not a formal agreement. The understanding might look something like this: If you, upstart company, refrain from raiding our staff, we won’t take you to court on some pretext or conduct reciprocal on your staff. Employees, of course, can leave either firm of their own volition — they have the right to do so, after all — but poaching is considered bad form and shall be off limits.

Is it ethically wrong? Perhaps so. Is it illegal? I have no idea. Does it happen? It is endemic to the technology industry, and it’s said to be widespread in many other industries, too.

That’s why I can’t believe otherwise jaded observers are feigning surprise or shock. This isn’t exactly a new development, and it isn’t a recondite practice exercised by only a few Silicon Valley companies. This is a widespread practice, considered a form of self-defense by companies whose employees are raided.

Now I have one other observation to make, and then I’ll retreat to the shadows again.

It’s about Steve Jobs and Apple. In many ways, I think Jobs and Apple are reminiscent of the Nixon Administration.

No, I’m not referring corrupt practices, because I haven’t seen compelling, definitive evidence that Apple has broken the law in this particular matter or in others. Instead, I am referring to the intense paranoia that Jobs and his top lieutenants evince. I seem that as paranoid, and not in a good way, because their fear and loathing is out of proportion to the real-world threats they face.

Take Palm, for instance. Jobs clearly perceived Palm as a serious competitive threat, back in 2007 and probably even today.

Well, I just don’t see it, not to the degree that Jobs does. I could just as easily envision Palm going out of business in the next two years as seeing it emerge as a meaningful number-three player behind Apple and RIM in the most lucrative realm of the smartphone market.

Jobs overreacted to Palm and probably overreacts to much else besides. He probably wastes cycles on imaginary demons. He must have a lot of cycles, though, because that particular peccadillo doesn’t seem to have cost him or his company much benefit.

My cavil takes nothing away from Jobs’ manifold accomplishments. Moreover, it’s quite possible that the paranoia is part of the whole Jobs package, an essential ingredient in his recurring and remarkable business successes.

Former Brocade CEO Greg Reyes Exonerated of Options Backdating

Since few others are inclined to provide the service for me, I sometimes feel compelled to pat myself on the back for having managed to get something right every now and again.

Admittedly, as I get older, I’ll probably conduct those self-congratulatory exercises more figuratively than physically, if only to avoid arthritic discomfort. Nonetheless, the practice gives me a fleeting sense of accomplishment and a reassuring confirmation that my powers of observation haven’t gone entirely to seed just yet.

So it was with a measure of satisfaction that I read Peter Burrows’ BusinessWeek piece on the exoneration of Greg Reyes, the former Brocade Communications CEO prosecuted for allegedly defrauding shareholders between 2000 and 2004 by regularly altering the grant dates (otherwise known as backdating) of stock options awarded to employees. He also had been accused of falsifying documents to cover up the scheme.

Here’s an excerpt of what I wrote about that particular backdating saga way back on July 9, 2007:

I am no legal expert, not even close, but I toiled professionally in the information-technology industry during the period in question. As such, I can tell you that what the defense is saying has more than a ring of truth to it. There was intense competition to sign and retain executive, managerial, and engineering talent during the frothiest years of the boom, and it was not unusual for the egos and remuneration packages of existing and prospective employees to expand dizzily during the height of the frenzy. For the best and the brightest talent on the market, it was as close to being a cosseted professional athlete as geeks would get. Ahh, those were the halcyon days.

Of course, for the vendors, such as Brocade in the storage-networking market, that meant having to make increasingly aggressive compensation offers to keep and attract top personnel. At the time, vendors really did believe that making such aggressive offers, which might include the practice now commonly understood as stock-option backdating, was in the competitive interest of the company and in the long-term interest of shareholders. It was endemic behavior. There was madness in the air, and nearly everybody contracted the contagion.

Yes, I would not be surprised in the least to see the case dismissed and Mr. Reyes go free.

Well, the case wasn’t dismissed, but Reyes eventually was exonerated, which belatedly clears his name. It turns out that Reyes might have been thrown under the bus by his own colleagues and company. I wish him luck as he leaves it all behind.

And, yes, it does feel strange quoting my own commentary. I feel like a professional athlete or an entertainer who habitually, and rather disturbingly, refers to himself in the third person. I promise not to do it too often.

More Layoffs at HP ProCurve?

I have received unconfirmed reports of layoffs at HP’s ProCurve Networking business.

I don’t know whether these layoffs are related to those reported earlier this year or represent an entirely new development. Clarification from HP or from those affected would be appreciated.

What Happens to Tech if Consumer Spending Doesn’t Rebound?

What happens to Silicon Valley, and to the technology world in general, if consumer spending doesn’t bounce back?

Despite hopeful pronouncements from economists and business media about a nascent economic recovery, American retailers still confront tapped-out consumers reluctant to spend the meager discretionary income they have at their disposal.

When they’re not being optimistic, economists will inform you that consumers account for 70 percent of expenditures in the US economy. In other western economies, the percentage of consumer spending is closer to 65%, which is still a lot.

Think intently about that reduced retail spending and consider that it might persist for a long, long time.

I hate to be the bearer of bad news — in certain societies, that distinction can occasion nothing but grief — but we’re not in a standard, factory-issue recession.

There’s something bigger happening here, and not everybody has recognized it, though consumers, to their credit, haven’t bought the blandishments from on high that it’s okay to go back to the free-spending habits that contributed to (but did not create) the bubbles of yore.

For years, the world worked on the basis of US consumption of Chinese-manufactured goods. The Chinese would underwrite that consumption by buying US treasuries. Banks kept the party going by extending cheap credit to everybody that needed it and many that didn’t. The party seemed as though it would go on forever.

But nothing lasts forever, as Roxy Music told us in “The Same Old Scene.” Even credit-fueled bubbles end, it turns out. And, as at the conclusion of many parties, nearly everybody wakes up the next day with a severe hangover.

American consumers cannot keep the party going. They are financially strapped, with less income than they had before, less job security, reduced-value assets in the form of securities and real estate (including their depreciated homes).

Credit doesn’t come easily anymore, either. Banks have become more stringent in lending policies. Even if many consumers wanted to spend, they wouldn’t be able to get the money to do so.

As noted above, this situation will be with us for a long time.

Here’s a question to ponder: With the US consumer no longer able to fuel economic growth with his spending — and with European consumers unlikely to pick up the slack — who’s going to buy all the goods that manufacturers will churn out to restock depleted inventories?

For the time being, it won’t be Chinese consumers. They’re not ready to take the baton. Even as they gradually assume that mantle, they’ll be inclined to buy Chinese-made goods rather than those made in America or Europe.

So, we find ourselves in an uncomfortable global economic transition, not a typical recession. We live in interesting times, and, as the Chinese proverb suggests, that’s not always a good thing.

What does it mean for the Valley and for information technology? It probably means all bets are off regarding a revival of IPOs on a grand scale. It probably means venture-capital spending will remain depressed and highly selective. It also means exits, even by acquisition, will be few and far between.

What’s more, many Web 2.0 companies predicated on robust spending by the American consumer will become lost causes. Paid content directed at consumers also will fail. (Hear that, Rupert Murdoch?) Consumers will be able to pay for their Internet connections, but they won’t have enough spare change to spend on for-pay online news content.

As unfulfilling as they have been for countless content purveyors, advertising-based business models will be the only game in Web 2.0 town. Consumers won’t have the discretionary income to spend on content. Regrettably, advertising spending will be constrained by the diminished pay off from enervated consumer spending.

It’s a world of diminished expectations.

There’s always opportunity, though, and one that I definitely see ahead is for anything that helps businesses and consumers cut costs, become more efficient, and do more with less. Just as so many technology companies have been slashing costs, often by jettisoning employees, consumers will be looking to reduce their overheads, too.

For the time being, as top-line fortunes recede from immediate view, the world will become all about reduction of operating expenditures.

Cost-Cutting Sonus Ponders Bid for Nortel VoIP

Even as it dumps employees in the USA and ramps up its lower-cost operations in India, Sonus reportedly is interested in pursuing Nortel’s carrier VoIP assets.

It makes sense, if only from a market-consolidation angle. Sonus could benefit from buying the accounts and pushing its own products into them. It would also benefit from gaining Nortel’s VoIP technologies, but not as much as some observers suppose.

Not surprisingly, price will be a critical determinant in whether Sonus’ ardor for Nortel’s VoIP assets will remain passionately hot or will go as cold as an investment banker’s heart.

I have read reports and heard scuttlebutt that Nortel’s VoIP assets might go at court-ordered auction for as much as $1 billion. Perhaps that’s just tremendously wishful thinking from Nortel’s stakeholders. Regardless of provenance, that sort of speculation should give Sonus pause. The company should not, and probably will not, pay such a prohibitive price.

If you read the transcript of Sonus’ recent conference call with investment analysts, you’ll see more ambiguity, evasion, and misdirection than you’d find in good murder-mystery novel. The company is struggling to remain foremost of mind with many of its carrier customers, and many of those customers aren’t as financially healthy as they’ve been in years past.

Those circumstances explain why Sonus is cutting staff and transferring engineering work to India, where it can benefit from lower costs.

With that in mind, can Sonus really afford to splash out relatively big money for a piece of Nortel that won’t give it a lasting game-changing advantage?

Dell’s Listless Smartphone Debut

I can see why Dell wants to enter the smartphone market. The reasons are obvious: The market segment, unlike so many others in information technology, is growing robustly, and it offers relatively big margins to vendors that can differentiate their products from the pack.

What I don’t understand is why Dell’s initial foray into the market, as represented by the Dell mini3i for China Mobile, is so diffident and tentative. Dell isn’t entering the market with confidence and determination. Instead, it appears to be cautiously dipping its toes into the market waters, as inclined to return to its PC shed on the shores as to jump in and commit to the new venture.

Nothing about this first handset will create expectant buzz among consumers in China or elsewhere. It’s an undistinguished entrant, and it is easy to understand now why wireless operators in North America and Europe reportedly were indifferent to a smartphone Dell was said to have demonstrated for them a few months ago.

Maybe it’s unfair to expect design sparkle and aesthetic elegance from a Dell product. The company made its bones on bringing standardized products, such as PCs and file servers, to market cheaply and efficiently, not on redefining market segments or defining new ones with innovative features and unique product design.

Still, Dell must know that if it desires the market share and margins that the smartphone realm offers, it must do more than follow its standard formula of churning out me-too products at lower costs.

Or is that Dell’s game here? Does it think that the market will cleave into a high-end elite represented by Apple, RIM, and perhaps Palm (though I’m not convinced Palm is a confirmed long-term stayer) at the top and a welter of bargain-priced, lower-end vendors — employing commoditized operating systems such as Google’s Android and Microsoft Windows Mobile — competing for the affections of those who can’t afford or are disinclined to pay for higher-end alternatives?

If that’s Dell’s plan, how it defines itself as a player in the smartphone market, it can perhaps hope to ride some of the market’s growth, but it won’t be feasting on attractive margins. It will just be boxing itself into the same role it has played in the PC market, but with dimmer prospects for meaningful success.

IBM Claims Linux Gains with Sun Solaris Customers

Solaris advocates — some of whose comments you can read below a commentary by CNET’s Dave Rosenberg — will argue that Linux permutations cannot match the technological breadth and virtualization capabilities of their favorite operating system.

That may be so, but are any of those people actually controlling enterprise buying decisions? It would appear not.

For business reasons having to do with Sun’s previously precarious corporate status, and now the drawn-out approvals process relating to its acquisition by Oracle, IBM has adduced further data indicating that it Linux servers are displacing Sun’s Solaris in a growing number of customer accounts.

What Will Apple Do with Its Cash Mountain?

As of June 27, Apple had cash and investments totaling $31.1 billion, up 27 percent from the previous year.

Brian Marshall, an analyst at Broadpoint AmTech, contends that Apple’s cash position is the strongest among all technology companies. Whereas Cisco and Microsoft — at $35 billion and $31.4 billion, respectively — each possesses more cash, both companies have debt that takes them below the net cash position of debt-free Apple, according to Marshall.

So, what will Apple do with its mountain of cash?

If past performance is any guide to future behavior, Apple won’t do anything drastic. What it has been doing — with the iPhone, the iPod family, and its Mac computers — obviously is working quite well, driving revenue growth that remains the envy of the industry.

Unlike Cisco and Microsoft, Apple doesn’t find itself in the urgent position of having to go outside its wheelhouse to find rivers of new revenue.

Moreover, Apple is not known for ostentatious acquisitions. The largest acquisition it ever made was its $400-million purchase of NeXT, whose OpenSTEP provided a foundation for OS X and with which current Apple CEO had more than a fleeting attachment.

So Apple likely will use its cash reserves tactfully and tactically, not making many waves in the process.

Andreessen Backs Likely Facebook Spin-In Company

I don’t have much to say on the subject because I think Facebook gets far more favorable attention that it deserves, but Marc Andreessen, who sits on the Facebook board of directors, has invested in what I would classify as a likely Facebook spin-in company developing a specialized Facebook browser.

Enough said.

Dark Portents for Palm and Pre

If what two market analysts are reporting today is true, Palm might have to return to the equity markets for financial sustenance earlier than it had hoped.

The analyst reports suggest the Pre could fall woefully short of the much-hypted, sky-high expectations that greeted its debut earlier this year.

First, Morgan Joseph analyst Ilya Grozovsky downgraded Palm from “hold” to the dreaded “sell” recommendation. He sharply lowered his price target for the stock, too.

As reported by Eric Savitz at Tech Trader Daily:

Grozovsky writes in a research note that his checks find Pre sales in July were down to about 100,000 units, from 200,000 in June – and that August is tracking to be even lower than July. He cut his estimate on Pre untis for the August quarter to 350,000 from 400,000, which already was low relative to Street expectations. He also contends that non-Pre shipments in the quarter were lower than expected due to cannibalization by the Pre.

The analyst reduced his forecast on sales for the May 2010 fiscal year to $580 million, from $920.5 million; his EPS forecast drops to a loss of 91 cents, from a loss of 56 cents. For FY 2011, he now sees revenue of $630 million, down from $860.8 million, with a loss of 92 cents a share, from a loss of 68 cents.

As Palm lurches toward the holiday season with excess inventory, Grozovsky foresees price cuts on the horizon. If his sales checks are accurate, that’s a reasonable assumption to make.

After that figurative poke in the eye from Grozovsky, Palm might have been forgiven for seeking comfort elsewhere. It didn’t receive any from Collins Stewart analyst Ashok Kumar, who proceeded to give it another drubbing.

In a separate news item from Mr. Savitz at Tech Trader Daily, Kumar is reported to have noted that the Pre, despite being positioned as a flagship product at Sprint, did not ship in expectedly high volumes in May and June.

Moreover, Kumar says that the Pre’s market “momentum appears to have peaked,” with “weakening demand” resulting in a 500,000-unit cut in production for the remainder of the year.

Savitz notes that Kumar doesn’t say how, or on what basis, he tabulated that estimate. A healthy dose of skepticism is always good policy, of course, but Palm has not been on a roll lately.

Its marketing campaign included execrable television commercials, and the company has had its knuckles rapped by more than a few commentators and critics this week for privacy transgressions relating to location-based information the Pre surreptitiously sends back to Palm headquarters.

Cisco’s Eos Spawns Questions, Few Answers

As Cisco expands further into relatively unfamiliar markets and solutions, I believe it is fair to ask whether the company is overextended and playing a high-stakes game well beyond the confines of its comfort zone.

Has it reached a point where its zealous pursuit of continuous growth has taken it into foreign markets where it possesses neither the cultural sensitivity nor the language skills to flourish? Does Cisco have a mandate to be in these places?

I’m not talking about geographies, and I’m not asking these questions rhetorically.

I don’t think the jury, as represented by the abstraction of the marketplace (with its less-abstract buyers and sellers) will be able to return a definitive verdict for a while. For Cisco, these new markets are works in progress.

One of the many new businesses Cisco has launched involves its EoS online social-entertainment platform, which Cisco believes it can grow into a major technological enabler (and a billion-dollar business) for beleaguered entertainment companies — purveyors of music and movies, respectively, but also potentially professional sports leagues — trying to brand and monetize their artists and properties.

Toward that end, Cisco Systems announced today an expansion of an existing relationship with Warner Music Group (WMG) Corp., the world’s third-largest music company. As a result of the deal, Cisco will allow Warner Music Group to use the web-based Eos platform as a fulcrum on which the recording company will design and develop customized, interactive sites — replete with social-networking features — for a growing number of its musical artists and their fans.

Today’s announcements builds upon an existing relationship the two companies announced at the Consumer Electronics Show (CES) in January.

Neither company has provided a wealth statistical data on how the relationship is faring commercially, nor on what sort of financial arrangement Cisco has with Warner Music. It isn’t clear, for example, whether or to what degree Cisco shares in advertising revenue or in revenue generated from music and merchandise sales that occur on the sites.

PaidContent.org reports that WMG has seen scaling in traffic per site and in the number of sites built on Cisco Eos. The major label sees four potential revenue streams: an enhanced site experience, ticketing with enhanced experience, subscriptions, and advertising/sponsorships.

It’s very early yet, for Cisco Eos and for its partnership with Warner Music. As mentioned above, Cisco Eos was announced in January, and Warner remains Cisco’s only Eos account. Nonetheless, Dan Scheinman, senior VP and general manager of Cisco’s Media Solutions Group, says his company plans to announce partnerships with other entertainment concerns in the months ahead.

With that in mind, Jennifer Martinez at GigaOm believes Cisco’s incursion into media and entertainment will put it on a collision course with MySpace, which is trying to position itself — at least partly — as a venue for interactive music and entertainment communities.

Cisco, however, refutes the notion that it will compete with MySpace, Facebook, or with other social-networking sites. We’ll see how it plays out.

To be sure, there are many unanswered questions connected with Cisco’s EoS.

Seeking More Money from Google, On2 Shareholders File Suits

It’s worth remembering that before Google announced its acquisition bid for video-comopression specialist On2 Technologies earlier this month, the latter was listed as a veritable penny stock, with the types of shareholders those listings tend to attract. On2 was a volatile stock, getting yanked upward and pulled downward with the emotions and machinations of its stockholders.

During the last six months, the company’s listing closed trading days as low as 20 cents per share and as high as 60 cents per share. Most observers would concede that’s a pretty wide range, with plenty of peaks and valleys. The stock chart looks as though it could serve as the design blueprint for a decent roller-coaster.

At least some of On2′s shareholders have formally objected to Google’s $106.5-million offer for On2. They want more money, and they’ve gone to court, with an injunction, to press their case.

Their two suits, as reported by Reuters and others, were filed against On2′s board of directors and Google in Delaware Chancery Court on Monday. They seek class-action status, as well as a permanent injunction blocking the deal. The suits also called on the defendants, Google included, to account for all damages caused.

Google could make the issue go away, of course, by tossing more filthy lucre at the litigants and freeing the On2 board from these allegations of breaching their fiduciary duty. In fact, it’s extremely likely that this matter will be settled out of court.

Still, looking at that six-month chart, I have to wonder how far these dissatisfied On2 shareholders want to go with this matter. The stock had not closed above 60 cents in any trading day during the last six months, and it had ended two trading days near 20 cents per share.

On2 announced strong quarterly results the day after the announced acquisition. Those results served as the ostensible catalyst for the shareholder revolt.

According to the Reuters report:

Google’s offer of 60 cents a share represents a 57 percent premium from the closing price of On2′s stock on the last trading day before the announcement. According to the suit, however, the price is well below the level where On2′s stock traded in the few months prior to the proposed transaction.

The suit alleges that, on May 13, On2′s stock traded at 65 cents. The shares reached $1.16 in 2008, according to the suit.

According to Reuters data, On2′s shares began the second quarter at about 30 cents and ended it at above 40 cents.

So, with the favorable results factored into the equation, the disgruntled shareholders contend that On2′s board of directors should have cut a better deal. That’s a subjective opinion, not a dispassionate analysis, and I’m not sure those who filed the suit will want to roll the dice in a court of law. Then again, as noted above, it likely won’t get that far.

As usual, the lawyers will emerge with some gains from their endeavors as sideshow impresarios.