Monthly Archives: February 2010

Further Detail on Juniper’s Venture-Fund Strategy

Pursuant to my previous post on Juniper Networks’ $50-million Junos Innovation Fund, I’ve received additional information regarding the company’s venture-capital strategy.

First off, Juniper will not restrict its investments exclusively to companies with existing development efforts or products connected to the Junos network-operating system. Quoting an email reply from a Juniper spokesperson:

“Juniper will look at companies with favorable investment profiles that are building innovative products or services complementary to Juniper’s growth strategy (company forecast for +20% revenue CAGR over the next 3 to 5 years) and can benefit Juniper’s customers by improving the experience and economics of networking.”

That broadens Juniper’s investment possibilities, providing fund managers with a greater degree of choice and flexibility.

Not surprisingly, Juniper’s preference is to follow VCs rather than take the lead in the investments it pursues. That said, the company says it “will lead if it makes sense.”

Regarding the average stake Juniper intends to take in target companies, and whether it has floors and ceilings to which it will adhere in its investment strategy, the company says its typical initial investment will range between $1 million and $5 million, with participation in future rounds occurring on a pro-rata basis.

Thoughts on Juniper’s Venture Fund

Yesterday Juniper Networks announced a $50-million venture fund. Called the Junos Innovation Fund, it will primarily target VC-backed early and growth-stage startups offering products and technologies that run on or with Juniper’s Junos network-based operating system.

Juniper will make fund investments during the next two years, focusing on networking technologies, applications, and services that further the development and deployment of security infrastructure, advanced mobility and video solutions, virtualization, network automation, optical technology, and green networking.

Juniper has pre-existing investments in 11 companies, including (but not limited to) Blade Network Technologies Inc., Packet Design Inc., and Ankeena Networks.

I sent some questions about the fund to Juniper’s PR and IR representatives, but I have yet to receive a reply. For the record, what follows are slightly modified versions of the questions I emailed to Juniper:

1) Will the investments focus exclusively on companies with existing development efforts connected to Junos?

My assumption is that Juniper will use the funding as an inducement to get intriguing startup companies to port compelling applications from other environments to Junos.

2) Will Juniper take the lead on some investments, or will it always look for a VC to take the lead position in a new round? (I am presuming that Juniper’s target companies will already have released product and been brought to the commercialization stage by earlier investments.)

3) What is the average investment stake Juniper is willing to make in target companies? Does Juniper have floors and ceilings in mind for its investment stakes?

4) What’s the typical equity position Juniper intends to take in its portfolio companies, and will that position come with strings attached, such as prohibitions against target companies working with Juniper competitors such as Cisco?

From the announcement and the coverage, I assume Juniper’s objectives are primarily strategic, but I suppose it would like to make money on its investments, too. That said, given the strategic imperative, I think the company will take a long view with the bets it makes.

Many startup companies in telecommunications and enterprise networking have struggled to raise money during the last couple years, so Juniper’s market intervention might give it leverage.

Latest Market Data Prompts Questions on Cisco Dominance

New data on the state of the Ethernet-switching market surfaced yesterday and today.

First, Dell’Oro Group reported that the Ethernet-switching market grew sequentially at a 20-percent clip in the fourth quarter of 2009. As a result, Cisco, HP, and Juniper were said to have added $600 million in incremental revenue.

Said Alan Weckel, director of research at Dell’Oro:

“Year-end budget spending and supply constraints from the previous quarter helped propel market growth in the fourth quarter. We expect the market to continue to expand in 2010, especially as 10-Gigabit Ethernet continues to grow not only as a server connectivity technology but also as an aggregation technology within the data center.”

Indeed, growth in the Ethernet-switch market is being driven exclusively by adoption of 10-GbE in data centers.

The next piece of market data came from Nikos Theodosopoulos, research analyst with UBS Research. Om Malik reports that Theodosopoulos combed through the Dell’Oro data, did some analysis, and made a few observations of his own. Salient among them is that Cisco is suffering market-share erosion — albeit not of the vertiginous sort — across many of its core switching and routing product groups, among both carrier and enterprise customers.

As reported by Jim Duffy of Network World, Theodosopoulos found that, while Cisco lost share in 2009, vendors such as HP, 3Com, Juniper, Brocade gained ground in the market for Layer 2 and 3 switches. Higher up the stack, F5 Networks and Citrix captured share in the Layer 4-7 segment.

On the routing side of house, Alcatel-Lucent and Juniper advanced relative to Cisco in carrier edge routing. In core routing, Huawei increased its share by nearly two percent while Cisco lost a touch of ground. Meanwhile, Cisco’s share was unchanged in 2009 in enterprise routing.

So, is this the beginning of a steady decline in Cisco’s mainstay businesses? It’s far too early to say. It could be nothing more than a short-term anomaly conditioned by severe recessionary conditions (though Cisco has gained share in previous downturns). Besides, Cisco’s switching and routing franchises are so entrenched that meaningful deterioration in the company’s business fundamentals would be unlikely to occur for some time.

Steady commoditization is the biggest threat CIsco faces in its switching and routing redoubts, and the company saw that threat coming long before now. Confronting low-priced, good-quality, standardized gear from Huawei and 3Com (among others), Cisco knew it had to diversity its product portfolio, not just into higher-end hardware — where it hasn’t done as well against F5, for example, as it might like — but also into software and services.

Just take a look at all the emerging market adjacencies Cisco has entered, including (but not limited to) forays into home networks and home-network management; telepresence, videoconferencing, and video-based collaboration; web-based collaboration and unified communications; mobile video cameras (the Flip); networked digital signage and video-based surveillance; and smart-grid infrastructure. Cisco isn’t stopping there, either. It will continue to push into other markets where data networking confers a feasible mandate.

The challenge for Cisco comes in growing these emerging markets, with their sustainable margins, while coming under mounting commodity pricing pressure in its established switch and router markets. Analysts should closely monitor how quickly these emerging spaces gain substantive traction for Cisco.

Now, you might reasonably ask, where does Cisco’s Unified Computing System (USC) fit? Some people think it was a mistake for Cisco to move into blade servers, that the networking giant made an ill-considered move when it encroached on the territory of erstwhile partner HP and others, such as IBM and Dell.

However, I think Cisco felt it had no choice. The future vendor value in data centers will derive from convergence and integration, which means software and services will be essential to success. The hardware, whether represented by servers or switches, will become commoditized.

Today, that hardware still provides revenue and some margin, but it can also serve as a platform for account consolidation. Fist, though, it’s essential to consolidate the hardware, which is exactly what Cisco and HP are doing. They’re using consolidated hardware to create integrated data-center solution stacks, effectively trying to lock out other players and manage account presence. They’re using hardware for initial leverage, but that’s not the end game.

IBM is taking a different tack, having made the transition to relatively sophisticated data-center software and accompanying services well before its two big rivals altered their courses. Some think IBM will buy a networking vendor, such as Juniper, but I’m not so sure. I think IBM views the underlying hardware as an interchangeable commodity, just the underlying plumbing above which orchestration and management software will run the show.

This battle is just beginning, though, so the vendors — and this humble observer — reserve the right to change tack.

Probing Logical Disconnects in Google’s Chinese Standoff

At the outset, I want to say that what follows is largely conjectural. It’s difficult to know exactly what happened and continues to happen between Google and China’s authorities.

Still, it’s a fascinating drama and a good mystery, and I can’t help trying to untangle it. It’s a case where only the tip of the iceberg is visible, and one wonders about what’s unexposed.

If we make a chronological and logical examination of Google’s ongoing stalemate with China, though, we quickly discover that appearances are deceiving.

Let’s review: Before the alleged hacking incident, reputedly undertaken by parties with the express consent or official mandate of the Chinese authorities, Google operated a censored, filtered search engine within China. It might have chafed under the state-ordered constraints, but it acquiesced to China’s dictates.

Then, of course, Google and others were subject to the hacking episode. We still don’t know all the answers about what the hackers wanted, what they got, or why they did it. We might never know all the answers.

Evidence suggests that the hacks originated in China, and there’s a strong intimation that Chinese authorities sanctioned or commissioned the digital skullduggery.

What doesn’t make sense, though, is Google’s reaction.

Think it through: Prior to the hacking attacks, Google is content to abide by China’s censorship regime. Like nearly every other Western company that does business in China, Google heeded the decrees and regulations of Chinese authorities. Censorship, and Google’s opposition to it, wasn’t the issue. How did it suddenly become the issue after a hacking attack?

If Google were upset about the hacking, it could simply withdraw from China. It would be justified to do so. Why should a company subject itself to what it believes is state-sponsored espionage and possible theft of trade secrets and valuable intellectual property? If that’s what’s been happening, Google would be right to take its colored balls and go home.

But linking censorship to hacking and espionage, well, it makes no sense. There’s no causal connection, there’s no direct link. These are discrete issues, and they’ve been brought together arbitrarily, for reasons about which we can only wonder.

My supposition is that Google invoked the censorship card because the Chinese authorities are sensitive to the charge. Sure, China censors its Internet, and much else besides, but it doesn’t like foreigners highlighting the issue. China censors, but nobody from outside the country that does business there is supposed to draw attention to the fact.

Google did just that, hitting a raw nerve in the process. But if censorship isn’t the real issue, if Google was willing to play under those rules before and would probably play under them again, what’s really happening?

Clearly, Google is infuriated by the hacking. While it’s the market leader in web search practically worldwide, it’s a relatively remote second to Baidu in China. The fact is, the Chinese authorities favor an aggressively mercantilistic trade strategy and many Chinese people are staunchly nationalistic. This results in Chinese-vendor dominance in China’s home markets.

From Google’s perspective, it’s bad enough that it must fight a skewed battle, against an opponent benefiting from home-field advantage and government support. (Government support counts for a whole lot in China.) At the same time, Google must defend itself from incursions on its intellectual property and trade secrets. And at least some of the hacking was directed at Google intellectual property.

My assumptions is that harassment and industrial espionage probably pushed Google over the edge, leading to its censorship charges and to its threat to withdraw from China. Google concluded that there was no way it would ever assume the leadership position in the Chinese market. Worse, it concluded that, if it stayed, it would suffer losses of intellectual property that could bolster competitors in China (and then perhaps in other emerging markets).

Now, what’s being negotiated between China and Google? I think Google is demanding that hacking, spying, and plundering of IP come an abrupt and permanent halt. If China doesn’t agree, Google will withdraw from the country. The company might even publicize its full reasons for making the retreat.

Needless to say, such a setback wouldn’t be good for China. If Western technology companies don’t continue to set up shop in China, the country won’t be able to learn from them and to facilitate technology transfer that will result in China’s technological leadership.

Still, does China need to worry? No matter what indignities China visits upon Western corporations, the companies seem more than willing to submit to the impositions. In the near term, maybe the gambit pays off for these firms, but — if I’m right about what’s happening between Google and China — long-term gains are far from assured.

In China, the odds favor the house. Given the current dynamics, it’s difficult to see how the situation will change.

Dell at the Crossroads

As I read the news coverage of Dell’s fourth-quarter financial results, I noticed a salient question from Shannon Cross of Cross Research:

“You have higher revenue but we didn’t see it on the bottom line. The question is, what is the potential profitability of their model?”

That’s a good question. I don’t have the answer, and I’m not sure Dell does. Which begs another question: Just what is Dell’s strategic focus?

The company is caught between a rock and a hard place. When Michael Dell returned to the company, he said he would boost gross margin and find a way to bring back the balanced profitability and growth for which Dell was known in its halcyon days.

He’s struggled to recreate the old magic, but it’s not because he’s doing things differently from how he and his team did them previously. In fact, the problem is that Dell hasn’t adapted enough to current circumstances. Dell needs to make some hard choices, and that means answering some difficult questions.

For example, should it continue to play in the consumer-PC market? I think the answer to this question depends primarily on whether it has the wherewithal to succeed in the market, and secondarily on whether the company can reduce its component and production costs to the point where it makes decent margins on sales. As things stand, Dell isn’t getting it done, and one has to wonder whether the situation will change. As it slides down the PC market-share charts, its economies of scale won’t improve.

The company also has a branding problem in the consumer space, and that exacerbates the situation. The tarnished brand can be burnished, but that will take sustained effort and resources, both of which might be more gainfully employed in other areas of the business.

Recently, Dell has added a smartphone and a five-inch tablet PC to its consumer-product portfolio. I understand the motivations. Dell wants to get a piece of the relatively high-margin smartphone market, and it’s also keen to ride the iPad wave in the seemingly resurgent tablet space. However, does Dell have a market mandate to play in these spaces? Does it have a reasonable expectation of being anything more than a non-medal contender in those areas?

A given market segment might be attractive, for reasons of margin or other considerations, but not every company should try to compete in it. The dynamics of the aforementioned consumer segments overwhelmingly favor the top market-share players, and I don’t think Dell can become a leader in smartphones or tablets, especially with products that seem compromised, inspired by calculations of margin percentage rather than by an implicit understanding and appreciation of consumer interest.

On the other sides of Dell’s business, there’s promise. In the SMB and enterprise markets — as well as in verticals bolstered by its acquisition of Perot Systems — Dell can compete effectively and win. It has a decent brand, it has the customer relationships, it has a reasonably attractive product and services portfolio, it’s growing its profile in the emerging BRIC economies (though I wonder whether any technology company that is not of China can truly thrive for long in the Chinese market).

In those business-oriented markets, the company also possesses a good appreciation of what the customers want today and what they might want tomorrow. As some news coverage suggests, Dell might be discounting more than is necessary to maintain presence in SMB, enterprise, and government accounts. But, with careful calibration, that problem can be readily fixed.

Another area that Dell needs to reconsider, on the product side, is its networking strategy. I think this is an area where it cannot be ambiguous. Dell can follow HP’s lead, and go all in against Cisco as a direct competitor, or it can to take a software-based, services-led approach that is agnostic toward network infrastructure, responding impartially and objectively to customer needs. Sometimes that will mean working with Cisco and its gear and sometimes not, but it doesn’t entail the same stark dynamics as an unambiguously antagonistic relationship.

Here’s the question that should drive that decision: In all honestly, and without the reality distortion that comes form wearing one’s own marketing goggles, does Dell believe that enterprise customers want the integrated, proprietary data-center pitch of Cisco’s Unified Computing System (UCS)? If Dell believes that’s what enterprise customers want, and that HP will follow suit once it has integrated 3Com into its full-service offerings, then Dell probably has no choice but to acquire and own the necessary networking assets to play the same game.

If Dell doesn’t believe that UCS is what customers want, that customers will seek an open, interoperable approach to data-center integration, then the company ought to take an IBM-like, integrator’s approach to the market. It can leverage Perot, focus on extending its software portfolio in areas such as data-center management and orchestration, build value at the application layer, investing in the glue that brings everything together rather than in the underlying plumbing.

Dell knows what its customers are telling it. The company just has to listen to what’s being said.

Status of HP’s 3Com Acquisition

I’ve gotten some questions about what stands in the way of HP’s pending 3Com acquisition.

We might hear more on the matter from HP when it reports its quarterly financial results tomorrow, but my understanding is that the primary obstacle to the formal consummation of the deal is the second-phase of a review undertaken by China’s Ministry of Commerce (MOFCOM).

Quoting from a Form 8-K submitted by 3Com to the US Securities and Exchange Commission (SEC):

Under the Anti-Monopoly Law of the People’s Republic of China, the parties are required to submit a filing to the Ministry of Commerce (“MOFCOM”). The parties made a joint filing on December 4, 2009. MOFCOM formally accepted the filing on December 28, 2009, commencing the 30-day Phase I review process. On January 25, 2010, MOFCOM notified the parties it would not complete its review by January 27, 2010, the end of the Phase I review period, and that a Phase II review would be initiated. The initial Phase II review period is up to 90 days and can be extended by MOFCOM by up to an additional 60 days.

The parties continue to target completion of the merger by the end of April 2010, however the exact timing cannot be predicted. The closing of the merger is subject to the satisfaction or waiver of specified closing conditions, including, without limitation, the expiration or termination of waiting periods, and obtaining of requisite approvals or clearances, under specified antitrust and competition laws (including, without limitation, in China and the European Union, among others).

The acquisition was approved by the European Union, so the Chinese regulatory review stands as the last barrier to the deal’s completion.

HP as Embodiment of IT-Industry Commoditization

In a post on why he was partly wrong about Carly Fiorina’s reign as CEO of Hewlett-Packard, Joel West accurately describes not only what happened to HP, but also what’s happened to most of the IT industry in the last decade.

West argues, quite convincingly, that the industry has been commoditized relentlessly. Riding economies of scale, the IT industry increasingly prizes operational leanness and systematic cost containment over innovation and technology-based differentiation. Yes, there are some areas where innovation and differentiation still matter — smartphones are cited as an example by West — but they are fewer and farther between as the industry advances into maturity.

Quoting an article written on the weekend by Chris O’Brien of the San Jose Mercury News, West notes that HP has dismissed 75,505 employees during the last decade. That number is staggering, but why it came about is equally instructive.

As West contends, HP changed because it felt it had no choice. Once commoditization strikes an industry, companies either ride the wave or get drowned by it.

Quoting West:

In 2000-2002, I thought Fiorina was destroying HP’s traditional business model and turning it into a commodity, low-innovation company. As both an engineer and an academic researcher, I felt she was destroying the great engineer-driven culture of the founders and replacing it with a by-the-numbers, penny-pinching, bean-counting mentality.

It turned out that I was right, because that’s what Fiorina (and then Hurd) did: end what had made HP great.

The problem with my argument was that I assumed that HP had a choice. In retrospect, it didn’t: Fiorina saw this and I didn’t.

During its heyday created the HP 35, various minicomputers, workstations, calculators and other innovative products. (That’s not counting the test instruments that Fiorina’s predecessor dumped into Agilent in 1999). There were many opportunities for innovation, and HP exploited them.

However, the reality is that overall IT industry growth ended with the NASDAQ peak of March 2000, and since then the industry’s revenues have been about replacing existing products rather than growing its overall share of the economy.

West concludes his piece as follows:

The IT industry has become a slow/no-growth mature industry where commoditization is the unescapable reality. Economies of scale and scope are the only hope for even successful differentiated companies like Google to maintain their lead.

Now I admit it: Commodities are HP’s future, and recently it’s been working well. Today, the only alternative seems like more of the same — good for shareholders, but bad for employees.

Indeed. That’s where we stand today in much of the IT industry, unfortunately. If one accepts the argument West makes, one can see why HP’s strategy of relentless commoditization led not only to the transformation of its corporate culture but also to many of its acquisitions, including its purchase of 3Com, with its vast team of low-cost Chinese engineers and its extensive product portfolio.

This isn’t about slagging HP, though. There would be no point in that.

I would just like us to understand that we need to start seeing the IT industry for what it is today rather than for what it was more than a decade ago. Industries evolve and circumstances change, often beyond our control. Looking through the prism of IT’s past won’t help us understand what’s happening to it today.