Monthly Archives: December 2009

Happy Holidays to All

I wish all of you the very best of the holiday season.

That said, I’ll probably find time for a post or two before we cross the threshold into 2010.

Avaya Wraps Deal for Nortel Enterprise Business, Prepares for Post-Merger Challenges

Now that Avaya has closed its acquisition of Nortel’s enterprise business, it must figure out how to meet new challenges as a bigger company with weightier expectations.

Owned by private-equity concerns Silver Lake and TPG capital, which bought the company for approximately $8.2-billion in 2007, Avaya now has paid $900-million for insolvent Nortel’s enterprise assets and $15 million for employee retention.

The pressure now will be on Avaya CEO Kevin Kennedy, a former Cisco executive who left to pursue his personal quest for a big chair after concluding that John Chambers wasn’t prepared to vacate his gilded throne. It will fall to Kennedy and his team to plot a course toward exit for the Nortel-engorged Avaya.

Kennedy might be on the clock, but he’s playing for time, too. In an interview with Reuters, he said an eventual exit for the company was contingent on external factors, mainly the global economy, as well as on his company’s strategy and execution.

The Avaya chief thinks the economy is recovering, but he said customers remain wary of making big investments and are targeting projects that provide near-term returns.

Said Kennedy:

“They speak as though there will be growth. But they are preparing for sometime during the calendar year for a setback. So they tend to be committing to projects that can be completed within six months rather than 12 to 24 months.

We believe that the economy will be some place between flat and up, cautiously up, I’d say. But we are also managing the company as though there could be a setback.”

Setback. He used that word twice in the two preceding paragraphs. A setback for the global economy would be a setback for Avaya’s customers, and that would represent a setback for Avaya and for its exit-seeking investors. (For those of you keeping score, I just used the word “seback” four times — five, if you include the reference in this parenthetical sentence — in this paragraph, thus trumping Kennedy in a competition in which he is an unwilling, unknowing participant.)

Kennedy prepared his company’s financial backers for a potentially long haul well before he spoke with Reuters last week, but it’s interesting that he is working so hard to temper expectations outside the Avaya boardroom.

Unwary industry observers, who are good at simple arithmetic but fail to take context into account, will add Nortel’s IP PBX market share to Avaya’s and conclude that the merged entity will have a combined 25 percent of the enterprise telephony space. They’ll excitedly point to that number and say that the Avaya-Nortel colossus will overwhelm Cisco, which holds about 16 percent of the market.

What they must remember, however, is that it won’t play out that way. Even though the Cisco of today doesn’t seem as invincible as the Cisco of yore, enterprise telephony and unified communications — the latter with its bandwidth-hogging video traffic — are areas where the computer-networking leader is unlikely to get lackadaisical.

More to the point, Avaya has to eliminate product overlaps with the Nortel portfolio. It also must deal with daunting channel-integration issues. A lot of customer confusion and uncertainty will result.

Taking all that into account, the keen industry watcher will realize that one plus one, in the case of post-merger market share, will not always equal three. Sometimes, as in this case, it doesn’t even equal two. When the dust settles about six to nine moths from now, Avaya will have done well to keep a market-share edge over Cisco.

Avaya has said it plans to sell and support all Nortel lines for 12 to 18 months. The company also said it will provide a migration plan for any products that it decides to phase out. With the Nortel brand not being part of the acquired bounty, future product releases from the Nortel side of the family will carry the Avaya name.

After closing its deal to acquire Nortel’s enterprises, Avaya now prepares for the heavy lifting.

Diverging Prospects for RIM and Palm

Research In Motion (RIM) and Palm both reported their latest quarterly results yesterday. RIM produced third-quarter results and guidance that were better than what the market expected; Palm disappointed.

As the smartphone market becomes more fiercely contested, these sets of results were analyzed for more than their immediate trading utility. Analysts and pundits carefully scrutinized them for clues as to how each vendor is faring in its bid for long-term prosperity in the smartphone market.

On that score, too, RIM emerged the better of the two. Not all the questions about RIM have been answered, but the company has a coherent strategy, ample resources, a credible brand, strong carrier relationships, and a track record of proving its detractors wrong. Palm doesn’t rate nearly as well on those counts.

As for RIM’s latest quarterly results, as reported by Dow Jones, revenue rose 11% to $3.92 billion, surpassing the company’s guidance of $3.60 billion to $3.85 billion as well as the Thomson Reuters estimate of $3.78 billion.

The company said it added about 4.4 million net new BlackBerry subscriber accounts in the third quarter, bringing the total BlackBerry subscriber account base to about 36 million at quarter-end.

Looking immediately ahead, RIM is forecasting fourth-quarter revenue of $4.2 billion to $4.4 billion and gross margin of roughly 43.5%, resulting in net earnings of $1.23 to $1.31 a share, all outpacing expectations of market watchers.

Unfortunately, where RIM is surging, Palm is treading water. Sales of its new smartphones, the Pre and the Pixi, are already starting to decline. Palm said it shipped a total of 783,000 smartphones during its fiscal second quarter, a drop of 5% from 823,000 smartphone units during the first fiscal quarter. (Palm’s year-to-year comparisons are irrelevant, with its smartphone overhaul occurring this year.)

Another area where RIM is doing well and Palm is not involves market coverage. RIM is pushing forward in China and everywhere else besides, whereas Palm is not. Breaking its dependence on North America, RIM reported that 37 percent of revenue is derived from overseas and approximately 35 percent of the BlackBerry subscriber base is now located outside North America.

Areas RIM is targeting for future growth include small- and mid-size businesses and China, where RIM has been building key partnerships lately. For example, a week after reaching a deal with China Mobile, RIM announced a similar partnership with China Telecom. Before that, RIM had inked a distribution partnership with China’s largest IT services provider, Digital China Holdings Ltd.

RIM is looking at doing more than selling its products in China. Said RIM co-CEO Jim Balsillie:

“To further support our efforts in China, RIM is also exploring opportunities to manufacture and conduct R & D activities in the region.”

Such a move would make sense. China is a burgeoning market, and RIM will have to commit to it, not only in terms of providing product localization, but also with regard to doing valuable R & D there. Perhaps, like McAfee in the security-software space, RIM will establish a wholly owned subsidiary in China.

While international expansion was a key contributor to the company’s success in the third quarter, RIM also is helping its cause with a more diversified product portfolio and gains in consumer patronage. Even though its installed base remains strongly represented by business customers, RIM said 80 percent of its new subscribers in the third quarter were non-corporate customers.

That’s all good news for RIM, but I still think the company will need to overhaul the look and feel of its BlackBerry software if it has aspirations of continued consumer gains amid intensifying smartphone competition.

The smartphone market is growing briskly, but it will consolidate. At that point, the leaders will reap the largest rewards, with the laggards failing or getting acquired, sometimes cheaply. That’s why maintaining and gaining share are so important, and why RIM’s latest solid results and bullish guidance are encouraging signs for the company.

Meanwhile, again, Palm isn’t looking so good. One can downplay Palm’s disappointing quarter by arguing that the company remains a work in progress and that it will have occasional stumbles as it goes all in as a smartphone player. Some apologists, with arguable justification, also will point to Palm’s early dependence on Sprint for sales of its webOS-based Pre and Pixi models. Nonetheless, Palm is losing momentum, doesn’t have the resources of its larger rivals, and the competition it faces in the space will only intensify.

Palm had an early chance to carve out a growing niche for itself, but its window of opportunity is closing rapidly. While RIM has gained ground and positioned itself well for the future by expanding in markets outside North America with a diversified product portfolio, Palm is something of a one-trick pony, still focused primarily on North America with a narrow product line and an overwhelming dependence on getting and keeping the favor of fickle consumer who are bombarded by the heavier and slicker brand advertising of Palm rivals such as Apple, the Google Android mafia (Motorola and Verizon with Droid, for example), RIM, HTC, Nokia, and others.

It’s too early to perform last rites – how many times has RIM proved doomsayers wrong? – but Palm’s prospects are dimming.

New figures from AdMob, measuring worldwide smartphone Internet traffic, demonstrate how quickly the market might be consolidating. With traffic attributable to the iPhone and Google Android-based handsets dominating and on the rise, respectively, everybody else is struggling to hold market share.

RIM is positioning itself for future growth in China and other foreign markets, while maintaining its hold on its sizable installed base of enterprise-messaging customers, means it is likely to stay the course, though it’s anybody’s guess how the situation might look three years from now.

RIM has the resources to play a game of attribution, however. Palm doesn’t. Unlike RIM, Palm doesn’t have the luxury of a lucrative, money-spinning installed base of corporate mobile-email customers. It doesn’t have option to reinvent itself one more time.

If Palm’s smartphone unit shipments continue to slip sequentially from quarter to quarter, it won’t remain in the race much longer. Time isn’t on Palm’s side.

McAfee Commits to China, Establishes Wholly Owned Subsidiary

As I’ve discussed previously in venerable forum, security-software vendors face unique challenges in trying to crack the potentially lucrative Chinese market.

Notwithstanding those challenges, security-software market leaders such as Symantec, McAfee, and Trend have every intention of pursuing opportunities in China. To do so, they must find the right mix of product offerings (including localization), positioning, pricing, and channel partners.

To succeed in China, though, vendors must commit to China. Responding to that imperative, McAfee said yesterday that it would establish a new wholly owned subsidiary in China.

In Beijing to make the announcement, Dave DeWalt, McAfee’s president and CEO, issued the following statement:

“China offers compelling opportunities for McAfee. China has great potential as a center for manufacturing, research and development for McAfee and is also a significant burgeoning market for our products. McAfee has continuously strengthened its presence in China over the last decade and we are planning to expand our investment in the near term to take full advantage of the opportunities China presents.”

McAfee estimates that its potential addressable market in China will grow from about $390 million in 2009 to $1.09 billion in 2013.

In a press release accompanying the announcement of its new Chinese subsidiary, McAfee explained that its Chinese expansion also would include the following:

• A new call center planned to open in Beijing in February 2010 to service the mid-market segment, particularly in smaller cities across China.

• Additional headcount in functions including sales, sales engineering, marketing, support and research and development (R&D), including a planned doubling of the field sales organization in 2010.

• Recently signed reseller partnerships with both Neusoft and CS&S (China National Software and Services) who have become premier partners for McAfee products in China.

• A partnership with Lenovo to market McAfee VirusScan products through Lenovo retail outlets across China, opening up a significant retail channel for McAfee and contributing to our position as the world’s largest dedicated security technology company. McAfee products ship on more than 50% of the PCs shipped by the top 10 PC OEMs.

• A partnership with Dell to offer China consumers 15 month subscriptions on all their retail and direct systems with a Microsoft Windows preinstalled.

McAfee also plans to strengthen existing partnerships in the Chinese market and to establish new ones. Prior to the announcement, McAfee operations in China included sales, manufacturing of the McAfee Unified Threat Management Firewall, and an R&D team focused on mobile security, localization, and security research.

The cornerstone of this move, though, is the establishment of the wholly owned subsidiary. As DeWalt explained to PCWorld, McAfee’s formation of the subsidiary will give the company greater flexibility and more options relating to its China-based manufacturing and to the regulatory approval of its products.

Those considerations are significant. In China, McAfee not only competes against its traditional rivals, such as the aforementioned Symantec and Trend, but also against domestic Chinese software companies that have benefited from home-field advantage in more ways than one.

Cisco’s Chambers Says Tandberg Acquisition Went According to Plan

Come on, John. Just admit you were temporarily flummoxed. We all make mistakes, take a wrong step from time to time, and you and your boys got knocked back on your heels before regaining your balance on this one.

That was my reaction when I read a few days back that Cisco CEO John Chambers tried to persuade visiting financial analysts that his company’s turbulent $3.4-billion acquisition of videoconferencing-vendor Tandberg went pretty much according to plan.

Really, John? What sort of plan was that? Is that the one that includes needless digressions, unnecessary distractions, high-stakes gamesmanship, and take-it-or-leave-it ultimatums?

If so, then you must have too much time on your hands. Hey, I understand the desire to inject a little excitement into the acquisition process, but the Tandberg takeover was like the trajectory of a runaway roller-coaster. It was, well, a little out of control.

Yet we’re supposed to believe that Cisco foresaw every stage of the process and that the deal went down just like it was drawn up?

I have no idea whether Chambers made these claims with a straight face or with tongue firmly planted in cheek. Nor do I know whether the analysts reacted by rolling their eyes or putting down their notepads, refusing to play along with the charade. Perhaps, as guests, they felt that wasn’t an appropriate response.

Said Chambers of the takeover drama and of Tandberg itself:

“We went into it knowing the exact challenges that we would face. … It unfolded much like we anticipated. . . .

“Their leadership team may be the best total leadership team we’ve had since the acquisition of Crescendo in 1993.”

Crescendo, as industry historians will recall, brought Cisco a wealth of engineering and executive talent, including Mario Mazzola, Luca Cafiero, and Jayshree Ullal.

That just makes me wonder even more about how the tortuous Tandberg deal went down. If Tandberg has such great executive talent, and it was so strategically valuable to Cisco as a linchpin of its video strategy, then why not get the deal done faster, without the diversions and the shuck-and-jive tactics? Time is money, as the lawyers involved in this deal with attest.

As I said at the top of this piece: Come on, John.

CommVault CEO Says Company Not Interested in Being Acquired

Rumors abound that Dell is poised to acquire a software company, most likely of the enterprise variety.

CommVault Systems, a Dell partner and data-management software firm that had been mentioned as a Dell acquisition candidate, apparently will not be subject to a takeover.

In a recent interview with Bloomberg, CommVault CEO Robert Hammer said the following:

“We can create more shareholder value over time than having someone acquire us. We are not interested in being acquired.”

Technically, of course, not having interest in being acquired is not the same as being adamantly and unalterably opposed to being acquired. By playing hard to get, CommVault might make itself more attractive to a prospective buyer.

Anything is possible, but Hammer seems to be preparing shareholders and the market for a long-term growth story predicated on CommVault’s ongoing independence.

Glassdoor Compiles List of Best and Worst Technology Employers

Glassdoor.com, the online career and workplace community, has polled employees across America and compiled its second annual list of the best and worst companies for which to work.

Om Malik has listed the highest-rated and lowest-rated technology companies. Juniper Networks ranks at the top among technology employers, though technically it finishes in a dead heat with National Instruments, Google, and NetApp. Apple, Qualcomm, Novell, Adobe, EMC, and Rackspace round out the top ten.

Although Adobe finishes in the top ten, it slides down the charts from last year.

At 91 percent, Apple’s Steve Jobs captures the top employee-approval rating of tech CEOs. Eric Schmidt of Goole ranks second among technology CEOs in employee approval, with James Truchard of National Instruments taking the bronze medal.

The lowest-rated technology company for which to work? That dubious honor goes to Xilinx. Affiliated Computer Services noses out Hewlett-Packard for second.

HP CEO Mark Hurd might have some friends on Wall Street, but he’s not winning friends and influencing people within his own company, where he earns a CEO approval rating of 22 percent. It might be time for him to hire an executive “food taster” for those boardroom lunches.

Rounding out technology’s bottom ten are Avaya, Real, NVIDIA, Infosys, Nortel Networks, Perot Systems, and Dell. Considering that Dell just acquired Perot Systems, it probably won’t have undue difficulty meeting the workplace expectations of post-integration Perot personnel.

All things considered, it’s surprising that Nortel didn’t fare worse than it did. After all, the company went from bad to worse — and then to utter dissolution — this year.

Former Nortel CEO Mike Zafirovski received an approval rating of just 2 percent, far worse than any other corporate kingpin running the lowest-rated companies. Even then, one wonders whether he had relatives working at the company to provide even that modest degree of approbation.