Musings on Windows 7

Well, Windows 7 hits the streets today, and I feel compelled to acknowledge the occasion with a post.

After the disappointment that was Windows Vista, Microsoft will seek to vindicate itself with this release of its flagship operating system. Technically, from what I’ve seen of Windows 7, I think Microsoft will be redeemed. I also believe the market will embrace Windows 7, giving Microsoft a boost in both credibility and revenue.

A Bloomberg story on Windows 7 got me thinking about a couple things. They’re somewhat connected, so please indulge my mental perambulations.

First, perhaps because of Apple’s successful television-advertising campaign that pits the laid-back personification of the Mac against the geeky Windows guy, the media is focusing unduly on how well Microsoft’s Windows 7 will fare against Apple’s OS X.

In my view, that’s just not a major issue for Windows 7.

From a Microsoft perspective, all Windows 7 must do is keep Windows users in Microsoft’s camp and generate some much-needed operating-system upgrades from the Windows XP installed base of enterprise users consumers. I really don’t think Microsoft, much less Apple, views Windows 7 as a serious danger to Macs and OS X.

The real drama in the operating-system space will play out in the developing world, where Apple isn’t a meaningful player. It’s in China, India, Brazil, Russia, Eastern Europe, and Latin America — all growing markets for computing and operating systems — that Microsoft will meet a critical test. In those jurisdictions, the threat to Microsoft will come from Google, with its lightweight web-oriented Chrome OS, and from similarly scaled-down operating systems, such as one China’s Baidu is developing.

Given that Windows 7, like its immediate predecessor, is somewhat bulky on netbooks and other low-end systems, Microsoft might find itself vulnerable to competitive incursions in the developing world.

That leads me into a related point, pertaining to periodic speculation as to whether Microsoft might decide to follow Apple’s example and produce its own Microsoft-branded PCs. I’ve written about this subject previously, a couple years back, and fundamentally I haven’t altered my position. For a variety of reasons, I just don’t see Microsoft attempting to roll out its own PC hardware.

In addition to all the reasons I adduced previously, a new one involves Google and Chrome OS. As we can see, Google will make its web-optimized operating system available to anybody that wants it. If the real threat to Microsoft isn’t high-end Apple but broadly focused Google, then it makes no sense for the braintrust in Redmond to alienate its established hardware ecosystem.

Remember, Microsoft might have slightly more than 90 percent operating-system market share in North America, but its worldwide market share is above 95 percent. That’s a huge percentage, and getting into a high-end slugfest with Apple by designing and producing its own PCs — which would compete with those of its hardware OEMs — just doesn’t make business sense.

In remarks he made last week, here’s what Microsoft CEO Steve Ballmer said:

“About 96 percent of the world’s computers are PCs and 4 percent are Macs, and thanks to their advertising I guess everybody kind of knows the difference. I like 96, they like 4, I guess. You can’t say they don’t have a good business. They actually have a good business, as do we.”

He’s right. Apple and Microsoft each have strong franchises, and each company should play to its strengths. Taking on Apple, to the extent of trying to follow the Apple business model, wouldn’t work for Microsoft. If Microsoft were to pursue that course, it would be incurring too much risk for too little reward.

That is particularly true when you think of emerging markets, where Apple isn’t much of a threat but others, including Google, are ready to pounce.

Despite Mixed Quarterly Results, Polycom Well Positioned

Polycom’s third-quarter results weren’t great.

Yes, the company’s revenue surpassed the expectations of analysts, and it gave relatively good guidance for its fourth quarter, but it seems to have lost share to Tandberg in the lucrative market for videoconferencing systems.

Polycom’s older voice-conferencing product portfolio picked up the slack, showing sequential improvement. But that’s not the growth market the company is targeting, and concerns about rising costs and competitive positioning, especially in light of Tandberg’s pending acquisition by Cisco, are warranted.

Nonetheless, Cisco’s Tandberg acquisition isn’t all bad news for Polycom. The company stands to benefit as Cisco competitors that are (or were) former Tandberg partners consider their strategic options. Microsoft, HP, and IBM are likely to gravitate toward Polycom in the months ahead.

I don’t necessarily see Polycom being snapped up in an imminent acquisition, but the company can benefit from partnerships with companies disinclined to continue working with Tandberg as it becomes assimilated into the Cisco corporate machine.

In the near term, HP will be partnering aggressively with Polycom, as the company’s CEO Robert Hagerty intimated in an interview with Reuters, excerpted as follows:

“We’re getting attention. There’s a lot of discussion going on,” Hagerty said. “We’re taking a lot more phone calls, a lot more people inbounding into Polycom, a lot more attention from strategic folks, like the forementioned Microsoft, IBM, Avaya-Nortel, HP.”

Hagerty suggested that Polycom was talking to HP. HP is also a key Tandberg partner and because of its rivalry with Cisco, analysts think Polycom could gain.

“We sure think it’s a huge opportunity and we believe we can capitalize on it. At least we certainly hope we can.”

If Cisco can mollify Tandberg’s dissident shareholders and close the acquisition — which I believe will happen in the next couple weeks — the networking giant clearly looks poised to solidify its status as a dominant player in the telepresence and videoconferencing-systems markets.

Still, Polycom is far from a lost cause. It stands to solidify its position as a strong and capable number-two player, and it will be an acquisition target for a strategic partner that decides it must have a direct stake in the action.

F5 Delivers Strong Quarter, with Another on the Way

Despite difficult economic headwinds, F5 Networks sails ahead smoothly.

The application-delivery network specialist — whose competitors include Cisco Systems, Citrix Systems, and Juniper Networks — announced fourth-quarter financial results last night that surpassed market expectations. It also gave strong first-quarter guidance that ran ahead of analyst projections.

Fourth-quarter net income increased to $28.4 million, or 36 cents per share, from $19.7 million, or 24 cents per share, a year earlier. Revenue grew about 2 percent to $175.1 million, up from $171.3 million in the same quarter last year

The impressive results buoyed F5′s share price in after-hours trading last night, and the company’s share price has more than doubled during the past year.

F5 wrote the book on how to beat Cisco at its own game. The two companies originally fought it out in the load-balancing market, which then morphed into the application-traffic management space. F5 now calls what it does “application-delivery networking,” which is all about ensuring the secure, reliable, and fast delivery of applications.

Like any good technology company, F5 never stops innovating. It keeps adding software-based functionality to its product portfolio, looking to deliver more value to existing and prospective customers. The modular architecture of its flagship BIG-IP product family allows it to offer extensible solutions that can accommodate evolving requirements. The company is well placed, for example, to benefit from increased data-center virtualization and cloud computing.

File virtualization is a relatively new area for the company. The F5 Data Manager is in a nascent market, not contributing much to F5′s current revenue or profitability; but it’s a good example of how the company tries to anticipate where its customers might want to go next.

F5 also has a strong executive team, and a well-developed channel strategy worldwide. It wasn’t always that way, as the company’s veterans will tell you, but F5 reached a point where it understood that channel quality counts for more than channel quantity. Channel partners that are committed to F5 receive a commensurate and reciprocal level of support from the company.

It seems F5 always is the subject of acquisition rumors. That’s certainly been the case recently, with many observers speculating that the company might be acquired in an impending wave of data-center consolidation. It’s possible, but bear in mind that this company has resisted acquisition on at least a few occasions.

I have no doubt that F5 would be an attractive target for one or two prospective buyers, but I wonder whether the ardor would be requited.

Microsoft Acquires Opalis for $59 Million

Following up on news first reported by Brenon Daly of The 451 Group, sources say that Microsoft has acquired Toronto-based Opalis for approximately $59 million.

Opalis provides single-console process-automation (also known as run-book automation) software that orchestrates and automates IT processes such as incident, problem, configuration, and change management across IT infrastructure.

The company, which deems itself the “privately held market leader in IT process automation,” announced earlier this month that it had achieved its best-ever quarterly license revenue, with new license bookings growing 104% compared to results in the same period last year.

Daly reports that Opalis was running at about $10 million in annual revenue. It had raised approximately $25 million in venture capital from backers that included Sierra Ventures, VenGrowth, BDC Venture Capital, and Roynat Capital.

Rumors of Layoffs and CEO Departure at Extreme Networks

A couple rumors are intensifying regarding Extreme Networks, a company I’ve identified as a potential candidate for acquisition.

One rumor involves layoffs at the company. The other involves the potential departure of president and CEO Mark Canepa. Formerly an executive VP at Sun Microsystems’ Network Storage Products Group, Canepa has been in the big chair at Extreme since the summer of 2006.

A couple weeks back, Extreme warned that financial results for its first quarter, which wrapped up on September 27, would fall short of expectations. Instead of revenue of $80.4 million, which is what analysts had been forecasting, Extreme expects to report revenue of $66 million.

The company blamed its first-quarter woes on “supply-chain constraints,” but some analysts thought Extreme was victimized by its own poor execution as well as intensifying competition.

In a press release that accompanied the revenue warning, Canepa said:

“. . . . We and our Board of Directors are committed to addressing the issues that produced these results. I look forward to giving a complete update on our earning release conference call. Further, we are anticipating giving guidance for our second quarter on the call.”

That call is slated for October 26. We’ll have to see whether the company uses the occasion to address not only second-quarter guidance, but also layoffs and a potential CEO departure.

Safra Catz Meets with EU Competition Commissioner as Opposition to Oracle’s Sun Buy Grows

Oracle CEO Larry Ellison must feel under siege.

From the inception of Oracle’s announced $7.4-billion acquisition of Sun Microsystems last spring, he’s had to contend with staunch opposition to the deal coming from the usual suspects, including Microsoft and SAP.

Now, though, others are jumping into the fray to express their resistance to the merger amid sullen rumblings that regulators at the European Commission (EC) are in a truculent mood, ready to push Oracle to the wall for substantial concessions.

Those concessions would involve Oracle spinning off or otherwise divesting MySQL, the open-source database property it hopes to inherit in the Sun acquisition.

That’s the prescribed course of action Michael ‘Monty’ Widenius, the creator of open-source database MySQL and founder of the namesake company, would like Oracle to follow. It’s also the path that entrepreneur and EU strategist Florian Mueller would like Oracle to trod. Open-source activist Richard Stallman and the non-profit organizations Knowledge Ecology International (KEI) and Open Rights Group (ORG) have also issued a strongly worded letter to EU competition commissioner Neelie Kroes, demanding that Oracle not be allowed to gain ownership of MySQL through its pending acquisition of Sun.

As we all know by now, the EC has subjected Oracle’s Sun acquisition to an extended regulatory review that could last until January 19, though some are speculating that the regulatory body will give Oracle a strong indication of which way the wind is blowing well before then.

We also know that Ellison has spoken publicly and forcefully of his desire to own and retain MySQL. He says he sees it as an open-source bulwark against IBM, but savvy observers think Oracle actually intends to use MySQL as a competitive cudgel against Microsoft in the world’s fast-growing developing markets and among small- and -mid-size businesses. In both those markets, Oracle’s proprietary databases have limited exposure, too expensive for most buyers.

According to Evans Data, Microsoft SQL Server is the most popular database in the emerging markets of China, India, Eastern Europe, and Latin America, but MySQL isn’t far behind. Evans says more than 50 percent of developers in emerging-market countries said they are using Microsoft’s SQL Server, but 46 percent said they are using MySQL. Microsoft’s SQL Server leads in China and Latin America, and MySQL is slightly stronger in India and Latin America.

Those markets are largely untapped for Oracle. It would stand to gain a lot from having a reasonably priced database offering that could generate revenue and profitability from fast-growing overseas markets expected to outpace North America and Europe for the foreseeable future.

Thus, opponents of the Sun deal who claim that Oracle wishes to eradicate MySQL are wrong. MySQL fills a gaping hole in Oracle’s product strategy.

A relevant question is whether Oracle will hobble or technically impair MySQL so that it never develops into a scalable, large-enterprise threat to its proprietary database franchise. That would be a difficult balancing act for Oracle to manage: doing enough to keep MySQL in a price-performance battle with Microsoft for patronage in developing markets but not going so far as to transform it into a danger to Oracle’s establish products. Then again, Oracle relishes those sorts of complex challenges and complicated games.

Oracle’s plans for MySQL could be a moot point if the European regulators decide that a worldwide database market carved up among Oracle, IBM, and Microsoft — a troika that currently holds about 85-percent of the space — would be deleterious to competition and to buyers of the technology.

Ultimately, then, the big question is whether the European Commission will approve Oracle’s Sun acquisition. With opposition mounting, Oracle decided the best defense is a good offense. Accordingly, company president Safra Catz met earlier today with European Union Competition Commissioner Neelie Kroes to discuss objections to the pending deal.

Initial reports on the meeting suggest Oracle has some work to do.

Said Jonathan Todd, a spokesman for Kroes:

“Kroes expressed her disappointment that Oracle failed to produce, despite repeated requests, either hard evidence that there were no competition problems or a proposal for a remedy to the competition concerns identified by the commission. Kroes reiterated to Catz the commission’s willingness to move quickly towards a decision but underlined that a rapid solution lies in Oracle’s hands.”

A reasonable extrapolation is that Oracle has failed to demonstrate that its ownership of MySQL will result in healthy database competition. Oracle can, and probably will, take another crack at making its case. At some point, though, as time drags and Sun’s losses of $100 million per month accrue — and as the company is forced to shed staff to reduce costs — Oracle might be forced to consider the unthinkable: a climbdown, a retreat.

Yes, there’s a possibility it might be forced to surrender MySQL to get this deal done. At the beginning of the regulatory-review process, I didn’t think it would come to that, but indications now suggest the EC position has hardened rather than softened.

Presuming that to be true, what does Oracle do? Some presupposed that MySQL wasn’t even an afterthought in Oracle’s calculations ahead of the Sun acquisition. We now know MySQL was more than a secondary consideration. What we don’t know is whether Oracle will want to pay $7.4 billion for a Sun Microsystems that doesn’t include MySQL.

If the EC remains unmoved by Oracle’s blandishments and protestations, we might get an answer to that question.

Sun Sheds 3,000 Employees

Weakened and under sustained competitive attack from HP and IBM while its acquisition by Oracle goes through an extended regulatory review at the European Commission (EC), Sun Microsystems will slash 3,000 employees during the next 12 months.

Oracle CEO Larry Ellison has said the ongoing delay in the consummation of the acquisition is costing Sun $100 million per month.

According to an SEC filing from Sun today:

Effective October 20, 2009, the Board of Directors of Sun Microsystems, Inc. (the “Company”), in light of the delay in the closing of the acquisition of the Company, approved a plan to better align the Company’s resources with its strategic business objectives, including reducing its workforce across the North America, EMEA, APAC and Emerging Markets regions by up to 3,000 employees over the next 12 months (the “Restructuring Plan”). The Company expects to incur total charges ranging from $75 million to $125 million over the next several quarters in connection with the Restructuring Plan, the majority of which relates to cash severance costs and is expected to be incurred in the second and third quarters of the fiscal year ending June 30, 2010.

Layoffs at Fortinet?

Fortinet, a vendor of security appliances and a market leader in unified threat management (UTM), is rumored to be shedding staff. The company’s website says it has more than 1,000 employees.

As I learn more, I’ll provide an update.

Fortinet filed for an IPO during the summer. At the time, the company disclosed neither the price range of the offering nor how many shares it would issue. According to Morgan Stanley, a lead underwriter for the offering, the IPO prospectus is not yet available.

What’s Gartner Saying?

As I perused Gartner’s press release announcing its “top 10 technologies and trends that will be strategic for most organizations in 2010,” two of the listed items annoyed me, though for slightly different reasons.

At the top of Gartner’s list of top 10 strategic technologies is cloud computing, that much-discussed but nebulous technological phenomenon that is reputedly taking hold in the minds and planning processes of enterprises worldwide.

I am not going to take the position that cloud computing isn’t important, or that it doesn’t have a potentially lucrative future, but I am going to take the position, alongside Oracle CEO Larry Ellison, that it is ambiguously and poorly defined by most of those who like to talk about it.

Alas, Gartner is no exception to that rule. Gartner, coming down the mountain with its tablet of 10 strategic technologies, says the following on the subject:

Cloud computing is a style of computing that characterizes a model in which providers deliver a variety of IT-enabled capabilities to consumers. Cloud-based services can be exploited in a variety of ways to develop an application or a solution. Using cloud resources does not eliminate the costs of IT solutions, but does re-arrange some and reduce others. In addition, consuming cloud services enterprises (sic) will increasingly act as cloud providers and deliver application, information or business process services to customers and business partners.

Could that have been more muddled? Does anybody understand what Gartner is on about? Shouldn’t we expect a modicum of clarity and cogency from a research firm that is paid so richly to tell enterprises and IT vendors what to think?

Yes, my apoplexy is in full-tilt boogie. But I feel my cause is righteous. So-called thought leaders should express their thoughts articulately and clearly. Coherence and intelligibility should not be negotiable.

Further down the list, Gartner says the following about another allegedly strategic technology, social computing:

Workers do not want two distinct environments to support their work – one for their own work products (whether personal or group) and another for accessing “external” information. Enterprises must focus both on use of social software and social media in the enterprise and participation and integration with externally facing enterprise-sponsored and public communities. Do not ignore the role of the social profile to bring communities together.

Again, the sentence structure and wording leave something to be desired, but I’ll put that objection aside. What I will not put aside, however, is my complaint that Gartner has not put forward a compelling reason for enterprises to countenance their employees spending time on social-networking sites while at the office, presumably during business hours.

Really, what’s the business case for untrammeled Facebook access at work? Shouldn’t employees who report to the office, you know, actually work there? Does Gartner realize that Facebook owns the content posted to it? How does that adhere to corporate or government policies relating to information confidentiality?

What’s the ROI-related business case for allowing employees to spend time on Facebook or MySpace? It’s impossible to know, because Gartner has stated no clear business argument for opening the social-networking floodgates.

I’m taken aback that Gartner has issued this press release. Not enough thought has gone into the substance and presentation of its content. That should be a worrying sign for the clientele that pay the company for its research and opinions.

Cisco Will Dip a Bit Deeper into Foreign Cash to Secure Tandberg Deal

Although I doubt a rival bidder will attempt to wrestle Cisco Systems for the ultimate ownership of Tandberg, I think the networking giant will graciously but grudgingly acquiesce to the dissident Tandberg shareholders who want Cisco to pay a higher premium for the Norway-based videoconferencing-systems vendor.

How much higher than the standing $3-billion offer will Cisco have to go to capture 90-percent approval from Tandberg’s shareholders by November 9, the date on or before which the transaction must go through?

My guess is that Cisco won’t have to boost the offer all that much. It won’t, for example, have to raise the bid by another billion dollars. It might end up paying another $400 million, give or take $100 million drawn from Cisco’s gigantic foreign cash reserves, which accounted for $29 billion of its $35-billion cash hoard as of the beginning of October.

What you ought to bear in mind is that the recalcitrant Tandberg shareholders are under a lot of pressure to meet Cisco halfway. Tandberg’s board members unanimously endorsed the Cisco takeover proposal, and it doesn’t appear that a “white knight” acquirer is waiting backstage to make a dramatic late entrance. The restive Tandberg shareholders have a little leverage — Cisco really wants this deal to happen, as it provides valuable synergies for a Cisco telepresence product portfolio that has been decidedly top heavy — but they don’t want to overplay their hand.

At the end of the day, cooler heads will prevail on both sides of the divide. Cisco will offer a bit more of its prodigious foreign cash, and enough of the refusenik Tandberg shareholders will respond favorably to the sweetened bid to get the deal done.

Nokia and Siemens Both Want Out of NSN

Yesterday I wrote that joint venture Nokia Siemens Networks (NSN) wasn’t in a position to contend for insolvent Nortel’s optical- and Ethernet-networking assets, which have received a stalking-horse auction bid of $521 million in cash and stock from Ciena.

Previously, I had wondered whether the joint venture’s two parent companies, especially Siemens, would remain committed to the struggling spinoff endeavor. Both parents have said they would incur massive goodwill writedowns on the joint venture, but they made encouraging noises about keeping it going and getting it back on track.

Behind the scenes, however, both companies are thinking long and hard about whether NSN warrants further expenditures of time, effort, and — most important of all — money.

If a report in Financial Times Deutschland, as referenced by Reuters, is correct, Nokia and Siemens would like to sell their stakes in the joint venture, but they are hard pressed to find a buyer for the tarnished asset.

Said sources familiar with the situation:

“Siemens has been wanting to get out for some time, Nokia now (wants out) too.”

“I cannot imagine that NSN in its current state could be of any interest to a financial buyer.”

Beaten like a drum by competitors Ericsson and Huawei in the wireless-networks market, Nokia Siemens Networks has been losing market share and money. In the July-September quarter, the joint venture sustained an operating loss of 53 million euros ($78.88 million), with losses expected to extend through the current quarter and likely beyond.

The joint venture is cutting costs wherever possible, including through outsourcing of managed application services, but the prospects for near-term revenue growth aren’t bright.

Not particularly enamored of its IT-related investments lately, engineering conglomerate Siemens AG apparently would like a complete exit from telecommunications.

Timing Doesn’t Favor NSN Bid for Nortel MEN Assets

Now that the $521-million stalking-horse bid from Ciena has been approved and the date has been set for the auction of Nortel’s Metropolitan Ethernet Networks (MEN) assets, attention has turned to which companies might challenge Ciena for the prize.

The auction will take place November 13, and vendors have until November 9 to tender counterbids.

In my view, there still is a strong possibility that Ciena’s bid will go unopposed. Of the likeliest contenders, Ericsson has the means, but probably not the inclination; Alcatel-Lucent’s CEO seems averse to growth by acquisition; Fujitsu is seen as a dark-horse candidate by some; and joint-venture Nokia Siemens Networks (NSN) has become a seemingly bottomless sinkhole for goodwill writedowns by its two owners, Nokia and Siemens AG.

Given the vast impairment charges NSN’s parent companies have incurred, I doubt either parent feels particularly inclined to ante up to the auction table. In all likelihood, NSN’s parent companies will take stock (literally and figuratively), try to staunch the joint venture’s hemorrhaging losses, and then decide whether and how to move forward. Now probably is not the time for NSN to ponder an acquisitive expenditure of more than half-a-billion dollars — perhaps more if Ciena raises the stakes.

Ericsson could get involved, and Alcatel-Lucent might reverse course, but one could make a persuasive and plausible case that Ciena will be the only company with a bid filed by November 9.