Google’s China Problems Cause Motorola to Explore Smartphone Search Alternatives

Uncertain about how Google’s dispute with China will be resolved, technology partners who license Google’s search and other online services are making contingency plans for the Chinese market.

Given the robust growth of China’s mobile marketplace, it’s no surprise that handset vendors are at the front of the queue. Motorola, which licenses Google Android and offers other Google services on its new smartphones, established a search partnership with Baidu earlier this year and now it’s added one with Microsoft, according to a report in the Wall Street Journal.

Pursuant to terms of the deal, Motorola will offer Microsoft’s Bing search and map capabilities on its smartphones in China beginning this quarter.

When Google first devised its strategy for Android, I’m sure it didn’t envision a future in which its handset partners bundled Bing as their mobile search engine. Then again, I’m sure Google didn’t anticipate that its relationship with China would become so strained.

Resolution of Tax Issue Clears Path for Smart-Grid Projects

While the smart grid is endowed with a grand vision and considerable promise, it’s been honored more with words than with deeds until now.

The problem? According to the National Association of Regulatory Utility Commissioners (NARUC), electric utilities put their respective smart-grid projects on hold because they were concerned about the tax status of their government grants under the American Recovery and Reinvestment Act (ARRA) of 2009.

Additionally, there were reports of a dispute between the U.S. Department of Energy (DoE) and the Treasury Department over whether the grants should be subject to taxation.

Apparently the dispute has been resolved. The Treasury Department announced yesterday that companies that receive smart-grid grants will not have those funds taxed by the federal government. Also yesterday, the DoE announced that the Treasury Department’s Internal Revenue Service (IRS) will provide a “safe harbor” for utilities that qualify for the government’s $3.4 billion in smart-grid stimulus spending.

The news means the Energy Department can proceed with grant agreements in the coming weeks, according to a joint statement from the Treasury and Energy departments.

Katherine Hamilton, president of industry group GridWise Alliance, said Wednesday that most of the contracts for the $3.4 billion stimulus package could be in utility’s hands by the end of this month.

Said Hamilton:

“We are thrilled that the IRS has made this decision and that our advocacy efforts played a positive role in their decision.”

“Now these smart-grid technologies can be deployed and begin doing what they are intended for — stimulating the economy. These projects will make our electric grid more reliable, flexible and efficient, while creating much needed jobs in utilities, manufacturing and across the energy value chain.”

Reconsidering China’s Market Allure

We should know by now that Google’s conflict with China isn’t about censorship. Instead, it’s about intellectual property. Google wants to defend and protect its intellectual property, whereas hackers based in China seem intent on plundering it.

Questions remain as to whether and how the hackers are affiliated with China’s government. We might never get complete answers, though circumstantial evidence suggests official approval for, if not direct complicity in, the illicit exploits.

It’s worth noting that Google wasn’t the only company victimized. More than 30 other companies were similarly breached, including notable technology vendors such as Adobe, Juniper, Symantec, Yahoo, and Intel.

Intel claims it wasn’t severely affected by what transpired. A spokesman for the company said: “To the best of my knowledge, no intellectual property was lost,” Intel has downplayed the incident, even though the company admits it was subject to a sophisticated attack.

Other technology companies have acknowledged being attacked, but have been reticent to say whether they suffered losses of intellectual property. Google, for its part, has conceded that its intellectual property was stolen by the hackers, but it hasn’t specified what was taken.

We do know that theft of intellectual property, depending on what was purloined, could have serious consequences for victimized companies. All of the aforementioned companies face competition from Chinese vendors who already have home-field advantage in their native market. What’s more, Chinese vendors often develop and produce commodity products at lower prices than their foreign rivals. The lower prices can confer competitive advantage in export markets.

If Chinese vendors were to gain illicit access to trade secrets and intellectual property of their Western rivals, technological differentiation would be more difficult for Western vendors to maintain. The edge these companies have over their Chinese counterparts is predicated on intellectual property derived from capital-intensive research and development. If that edge is mitigated severely or, even worse, eliminated by theft of intellectual property, the potential repercussions are manifold and profound.

Uncomfortable questions arise, but we ignore them at our peril. Arguably the biggest question is whether Western technology companies could lose more than they stand to gain from direct involvement in the Chinese market. The Chinese market, with its vast promise, is as alluring as a Siren song, but one has to wonder whether Google, Juniper, and others will meet the same fate as the shipwrecked sailors in Greek mythology. Ironically, the draw of Chinese lucre could result in the pauperization of companies that pursue it.

Some might charge me with exaggeration on that point, but I would ask that you turn your attention not only to the recent rash of hack attacks but also to Chinese policies regarding domestic government procurement and industrial practices.

A recent Computerworld story spotlighted the policy straitjacket China is tailoring for foreign technology purveyors:

U.S. business associations this week wrote a letter to the Obama administration requesting its help on China’s recent intellectual property rules, which the letter said give significant preference for Chinese government procurement to products whose intellectual property is developed and owned in China. The rules run counter to Chinese pledges to avoid protectionism and mark “an unprecedented use of domestic intellectual property as a market-access condition,” said the letter, which was posted on the Web site of the Business Software Alliance.

The new requirements would make it virtually impossible for foreign companies to win Chinese government contracts, said Xiang Wang, a Beijing-based intellectual-property partner at law firm Orrick, Herrington & Sutcliffe. To comply with them, multinational companies would have to change their global model for managing intellectual property rights, transferring ownership of the rights to their Chinese subsidiaries rather than just licensing rights to them, he said.

Tough regulatory issues are likely to increase for foreign companies in China as the country keeps rising economically, Wang said.

A recent item in the Financial Times addresses many of the same issues.

Taken together, these measures amount to a disastrous scenario for a range of foreign companies, including software makers, semiconductor companies and producers of telecommunications gear, computers and smartcards.

“The stuff the Chinese government is asking for is stuff we don’t give to governments,” says a US executive. “If we were to comply and it became known that we disclosed our source codes to Chinese labs, it would damage our standing in other markets.”

One way or another, it seems, China will get the source code and intellectual property it craves. Once China has what it wants, impoverished Western companies will fail to reap commercial benefits from China and the country won’t require that they have a presence there.

The U.S. and other nations seem to have no answer for China’s “indigenous innovation” policies. As a Reuters story points out, Washington has difficulty mounting a legal challenge to China’s indigenous innovation policy because Beijing has not joined the World Trade Organization’s government procurement pact.

As Mike Elgan wrote in Datamation, it makes one wonder whether China is the market paradise Western technology companies believe it to be.

Patent-Licensing Companies Signal Interest in Nortel’s LTE Portfolio

Although debate rages about the approximate value of Nortel’s unsold LTE and other wireless patents, a market for those patents is sure to materialize when the insolvent former telecommunications giant finally decides how to dispose of them.

Nortel retains more than 3,000 (some reports say 4,000) patents, many relating to OFDMA, MIMO, and other key attributes of LTE. It now must decide whether it will auction the patents, fold them into a joint venture with a partner company, or keep them and pursue long-term licensing agreements with its former competitors and technology partners.

I have seen estimates of the patents’ worth ranging from $400 million to $1 billion. Ultimately the market will determine value. Nortel’s creditors, not inclined to draw out the process, would prefer to see the patents auctioned rather than consigned to a joint venture or an ongoing business.

Two patent-hoarding companies already have voiced interest in bidding on the Nortel patents.

One is Wi-LAN Inc., which has about 800 of its own patents and annual revenue in its latest fiscal year of C$35.4 million. To consummate a deal for the patents, Wi-LAN might have to create a separate company, with institutional investors providing the necessary capital. Unless there isn’t much of a market for the Nortel patent portfolio, I don’t think Wi-LAN will come away with the prize.

The other party that has expressed a strong public interest in the patents is Mosaid Technologies Inc. In a Reuters story published earlier today, Mosaid’s CEO said his company is prepared for a “highly competitive auction process” for Nortel’s patents.

Said John Lindgren, Mosaid’s CEO:

“The one that is getting the most market attention is the LTE patents and we certainly do have an interest in those.”

“There are some patents that we see as very attractive. We find diamonds in the rock quite a bit. We got our eyes on the specific areas.”

Mosaid has 1,915 patents, but none relating to LTE. Like Wi-LAN, Mosaid might not have the financial resources to prevail in a competitive auction. Like Nortel, Mosaid and Wi-LAN are headquartered in Canada.

Another Canadian company, with considerably more resources at its disposal, already has expressed clear interest in Nortel’s LTE patent portfolio. That company, Research In Motion (RIM), could easily outgun Wi-LAN or Mosaid in an auction. Nortel’s creditors obviously will prefer the highest bid.

If Wi-LAN and Mosaid are RIM’s only competition for Nortel’s LTE patents, you’d have to like the BlackBerry vendor’s chances.

Picking the Carcasses of the Startups VCs Deserted

Startup companies continue to be left in the lurch as venture-capital firms retrench, but established technology vendors aren’t complaining. Instead, they’re benefiting from the situation, seizing the opportunity to pick off capital-starved, distressed startups at fire-sale prices.

A post at the Wall Street Journal’s Digits blog recounts how Silicon Graphics International (SGI) — a company that knows distress when it sees it — spent just $2 million to acquire Copan Systems, a vendor of data-storage hardware that had raised more than $107 million in venture capital since it was launched nearly a decade ago.

Mark Barrenchea, president and CEO of SGI, says his company’s acquisition of Copan represented “great value,” and it’s easy to see why. Still, I wonder what SGI got for its money. Copan had exhausted its operating capital, and one of its creditors had placed it in foreclosure and appointed a receiver.

Probably long before that point, most employees with survival skills and marketable talent would have bolted for the exits. They would not have waited around for last rites to be administered.

Given the circumstances, SGI was practically picking at Copan’s carcass. Then again, Copan had a technology-patent portfolio and an installed-base of customers. Even if it was operating more in word than in deed near the end of its venture-funded existence, its patents and customers gave it significant residual value.

SGI will continue to shop for deals among abandoned and forlorn startup companies. Others are doing likewise. It’s an advantageous time to be shopping for shards of value among the ruins.

Thoughts on HP-3Com, MOFCOM, and China’s Smart Grid

As China’s Ministry of Commerce (MOFCOM) continues its review into HP’s pending acquisition of 3Com, I am attempting to get more information on how the MOFCOM process works and what conclusion the ministry might reach.

After doing some digging, I know more about how MOFCOM operates, what its current priorities seem to be, and how it has resolved previous acquisition reviews. Still, I would not want to wager heavily on the outcome of HP’s 3Com purchase. It should go through, but MOFCOM remains a significant wildcard, consistent in some respects but seemingly arbitrary in others.

If you care to learn more about MOFCOM, how it’s handled recent cases, and how it has become more assured and ambitious in its rulings, I direct you to the MOFCOM website. a recent article on MOFCOM from law firm Sidley Austin, another from law firm Allen & Overy LLC, and a third article (which appeared at The Deal’s website) by lawyers in the employ of Weil Gotshal.

None of those law firms was involved in the HP-3Com deal. That transaction was handled by Cleary Gottlieb Steen & Hamilton, which represented HP, and by Wilson Sonsini Goodrich & Rosati, which acted on behalf of 3Com.

Separate from the deliberations of MOFCOM, another piece of news surfaced this week that might have implications for HP and 3Com. According to a Reuters report that quotes market researcher Zpryme, China will invest $7.3 billion on smart-grid technology and services this year. Moreover, China could spend more than $100 billion upgrading its power-infrastructure in the next decade, according to Yuanta Securities analyst Min Li.

Why, you ask, is that relevant to HP and 3Com? As Cisco knows, realization of the smart grid involves deployment of two-way communications and network infrastructure. Meanwhile, in an IDG News Service story that hit the wires just after HP and 3Com announced the acquisition, we learned that 3Com has a strong presence in Chinese energy sector. To wit (quoting from the aforementioned IDG story):

One area where HP may increase its focus after the 3Com deal is China’s energy sector, said Adam Jura, a senior analyst at Ovum. Gear from H3C is used in Chinese backbone networks including those for its energy and transportation sectors, giving 3Com strong ties in those areas, said Jura. HP could benefit, for instance, from potential smart power grid projects in China spurred by government funding, he said.

If 3Com can hold off Huawei, its former H3C partner, and repel Cisco’s push into China’s smart grid, 3Com and HP could benefit significantly from China’s energy-related splurge.

EU Makes Cisco Wait for Tandberg

Despite protestations to the contrary, Cisco is not having an easy time closing its $3.34 billion Tandberg deal.

First, Cisco had to endure a protracted period of haggling and negotiation with recalcitrant Tandberg shareholders. Eventually, after the gamesmanship and ultimatums receded, Cisco sweetened tis offer and persuaded the Tandberg resistance movement to acquiesce.

Everybody thought it was a done deal. Now, though, regulators at the European Union have extended their review of Cisco’s pending Tandberg acquisition so that they can more closely examine redress of competitive concerns.

Even though Betfair doesn’t yet run a market on whether Cisco’s deal for Tandberg or HP’s pending bid for 3Com will go through, I’d have to think the odds remain heavily in favor of Cisco getting a somber nod of approval from the EU regulators when the review expires on March 29.

Still, Cisco could hardly have known that its pursuit of Tandberg, a videoconferencing vendor of considerable strategic value to the networking titan, would become a Nordic melodrama.

Meanwhile, potential acquirers of Polycom might wait until the end of this month before deciding whether the time is right to close their deal.

Railing Against Cloudspeak

I readily concede that I can be as obtuse as the next guy — maybe a lot more obtuse if the next guy is exceptionally bright. Try as I might, sometimes I just can’t comprehend what others are trying to say.

I suffered a severe onset of this condition in the late 90s when the “next big thing” materialized on a weekly basis and typically vaporized just as suddenly.

Back then, evanescence was portrayed as apotheosis. We had niggling questions about the cliches and impenetrable jargon that were deployed by marketers to describe the next big thing. But we didn’t want to be seen as dim and uncomprehending, so we refrained from demanding clear, transparent definitions and explanations. It was our loss.

Well, now we’re faced with cloud computing. It seems like a simple concept to me, but one with potentially serious implications, likely to result in further industry consolidation and sustained deflationary pressure. For the record, I define it, broadly speaking, as application services provided on demand, as needed, on a subscription basis. Google does it today, as do others.

Don’t get me wrong, though. I’m not a Luddite. I’m not trying to halt the march of progress (as if that were possible). I’m just asking for some candor, clarity, and honesty from those trying to sell us their particular interpretation of the cloud.

Maybe that’s too much to ask in an era of financial chicanery, dubious business ethics, and the utter disintegration of any semblance of a social compact (or community) in most Western nations. Still, ask I will. It’s a stubborn holdover from civics lessons I received in school.

Before we talk about something, we should be able to define it. Socrates might have been a layabout and a carouser, but he got it right when he told students: “If you would speak with me, you must define your terms.”

I wish he were around today as a scribbler in the business press or a trade journalist. He’d force cloud-computing proponents to speak clearly, explain what they mean, and work through the implications and ramifications, if only because that’s what is owed to an audience.

A few months ago, in an address to the Churchill Club, Oracle’s redoubtable Larry Ellison railed against misty, murky cloudspeak. Referring to cloud computing, he said:

“Cloud? Clouds are water vapor. My objection to cloud computing is the fact that cloud computing is not only the future of computing, it is the present and the entire past. Google’s now cloud computing. Everybody’s cloud computing. … All it is, is a computer attached to a network. What are you talking about? What do you think Google runs on? It’s databases and operating systems and memory and processors! What are you talking about?”

Ellison asked that plaintive question back in September, and we’re still getting either too many different answers or none at all.

If you can answer the question — if you can give me a clear, relatively unambiguous definition of cloud computing — I ask that you do so. Please help me see the light through the darkening clouds.

Brocade’s McHugh Takes Aim at HP ProCurve and Cisco

Formerly a senior executive at HP ProCurve, John McHugh found himself at Nortel Networks, trying vainly to breathe life into the doomed company’s chronically neglected Enterprise Data Solutions (data networking) division.

As he told NetworkWorld last summer, McHugh dreamed of hauling the desiccated husk of Bay Networks from the Nortel mausoleum and bringing it back to life, like a long-disbanded, superannuated rock band pursuing a reunion tour.

Said McHugh, then vice president and general manager of Nortel Enterprise Data Solutions:

“The more independently I can run this business and take it back to its roots and make Bay Networks exist again, the more effective and focused we are going to be. I would like Nortel to reincarnate Bay Networks.”

That quixotic dream went unrealized, but McHugh hasn’t finished tilting at windmills. He’s now at Brocade Communications, where he serves as vice president and chief marketing officer, reporting directly to CEO Michael Klayko.

Encouraged by Brocade’s acquisition of Foundry Networks, and its partner-friendly approach to the data center, McHugh told Channel Insider that he believes his current employer is well placed to repel what he terms the monolithic, proprietary data-center architectures offered by Cisco and HP.

Actually, McHugh is at least as critical of HP, his former employer, as he is of Cisco. Speaking on what he perceives as HP’s weakness, McHugh did not mince words in passing judgment on HP’s 3Com acquisition:

“During my time at HP I pushed hard on moving up on the credibility side to make it less of a commodity play at the low end and to make it more strategic and enterprise class. The [3Com] acquisition celebrated the old roots. HP found the one company that is barely in the enterprise space, and that is even lower priced and more value oriented. I was surprised they went and spent so many dollars on products that are about the lowest price per port… It was a bottom-feeding move.”

But wasn’t that the point of the entire exercise?

As noted previously, I think HP’s aim in buying 3Com was to get low-cost engineering talent that could deliver low-priced, reasonable-quality networking gear. The goal was to leverage cost-effective Chinese networking engineers to commoditize as much of the network as possible, thereby putting price and margin pressure on Cisco and transferring relative value to software and services, areas where HP believes it can maintain competitive advantage over the networking giant in the data center.

If you had a scale with technology innovation at one end and technology commoditization at the other, you’d have to say HP has been gravitating toward the latter for some time, for at least as long as Mark Hurd has been in the big chair. I’m surprised McHugh didn’t see the signs.

Cisco’s Quiet Exit from WiMAX RAN Business

Cisco apparently has decided to leave the WiMAX radio-access networks (RAN) market. Many observers question why the company got into the space in the first place.

Cisco entered the WiMAX RAN business with its $330 million acquisition of Navini Networks in 2007. It was considered an odd move, because Cisco traditionally had focused on the IP networks for wireless operators rather than on radio base stations.

Evidently Cisco has decided to revisit its former strategy. In an email message to FierceBroadbandWireless, Cisco spokeswoman Jennifer Buchhalter wrote the following:

“After careful review, our mobility strategy is to focus on providing a radio-agnostic IP end-to-end mobile multimedia services network. Cisco will continue to focus on the packet core and to also focus on investment in radio technologies such as femtocells and WiFi. As part of this decision, we have decided to discontinue designing and building new WiMAX base stations. We believe the best way for Cisco to serve our customers is by delivering value at the edge and the core of our customers’ networks.”

Well, yes, that makes sense; but, again, it makes one wonder why CIsco pursued the digressive strategy that saw it acquire Navini for more than chicken feed back in 2007.

Was it just to jumpstart 4G RAN adoption, which now will be taken forward by LTE rather than WiMAX deployments? Cisco benefits from sales of IP cores that support 4G networks, and it’s conceivable that Cisco thought the market needed a push. (Intel has a well-established pattern of serving as a catalyst in nascent technology segments that it sees as integral to the sales growth of its own products, and Cisco is not averse to taking a similar tack.)

Nonetheless, it’s interesting that the Cisco spokesman doesn’t specifically address LTE. One might reasonably assume that Cisco has no need to get into turf wars with well-established LTE RAN vendors. It wouldn’t play to Cisco’s strengths, and that market doesn’t seem to need any pump priming.

Moving IP-based content, including video, across wireless operators’ networks should be enough for the data-networking colossus.

Will HP Pursue Database and Router Acquisitions?

In his column this week at MarketWatch, John C. Dvorak muses about potential acquisitions that Hewlett-Packard might pursue.

Seizing on recent comments from HP CEO Mark Hurd regarding intensifying competition with Cisco and Oracle — proud owner of Sun Microsystems and all of its hardware and software technologies — Dvorak posits that HP might acquire a router vendor and a database vendor to counter its rivals.

The pundit then goes on to cite Sybase as a potential HP database acquisition. He mentions Juniper Networks as a router vendor HP might like to purchase.

My view is that HP doesn’t have to buy either company. Anything can happen (and usually does), but, presuming that HP feels a need to own routers and database software, it has other options. It might not even need to pursue acquisitions to fill the perceived gaps.

Let’s consider database-management software. It’s mostly a mature, slow-growth market in the developed world, where competitive displacement is a daunting proposition. Meanwhile, open-source databases and Microsoft SQL Server are the ascendant offerings in fast-growing developing markets.

Oracle salesmen give prospective customers in China and India — and many other countries besides — a toxic case of sticker shock. Not coincidentally, one of the reasons Oracle was so keen on owning MySQL was so that it could have a cudgel with which to beat Microsoft in developing markets.

Does HP — with its significant professional-services presence — really need Sybase? I don’t think it does. Instead of plunking down good money for database vendor, why doesn’t HP just sell OpenSQL the way it and IBM sell Linux for servers? No muss, no fuss. And it gets a product offering that can be priced affordably, with services as part of the package, for the fast-growing developing world.

More likely, HP could just partner aggressively with Microsoft, bundling Microsoft SQL Server into its solution portfolio, confounding Oracle and IBM in the process. Don’t dismiss this possibility. HP and Microsoft already partner extensively in this area and in others.

With regard to routers, does HP really need Juniper? I think HP would only buy Juniper if it wanted to go head to head against Cisco at carriers and wireless operators as well as in enterprise — and I’m not sure that’s HP’s game. If HP is focused primarily on enterprises, then it’s already (presuming China okays the purchase) got 3Com, which produces a range of cost-effective enterprise routers and could develop higher-end extensions to that product portfolio if given the corporate mandate to do so.

HP doesn’t need routers. It already has them.

Rumor Musings: Avaya Acquisition of Polycom Plausible

Rumor buzz this week has intensified, and at least some it involves a mooted acquisition by Avaya of videoconferencing vendor Polycom.

Unless one is an insider — which, in this instance, I am assuredly not — one never knows whether rumors of these deals represent anything other than an optical illusion of smoke without fire. Insiders know what’s happening behind the scenes, but they’re not supposed to tell anybody, notwithstanding apparent evidence to the contrary as exemplified by the scandal involving Galleon Investments and others.

So, we’re left to play Sherlock Holmes in the technology markets, looking for clues and employing deductive reasoning to ascertain whether a given rumor possesses anything more than surface plausibility.

As it turns out, a case can be made for an Avaya acquisition of Polycom. It could happen. That doesn’t mean it will happen, and I am not advising anybody to bet the farm on such an outcome. It’s just that looking at Avaya’s strategic ambitions and how Polycom could further them, I could envision a scenario in which Avaya takes an acquisitive shine to its longstanding business partner.

The partnership, while not evidence that a closer relationship will ensue between the companies, represents coincident interests and a history of working together.

Additionally, let’s remember that Polycom might be amenable to a takeover in the wake of Cisco’s purchase of its primary videoconferencing rival, Tandberg. Polycom could continue to stand alone, but shareholders and other major stakeholders might be thinking that the timing and circumstances favor a sale.

Let’s also consider Avaya. The company bought insolvent Nortel’s enterprise business for more than $900 million at auction last fall. It’s still assimilating that purchase, dealing with product overlaps, roadmap questions, and channel issues. Still, when one considers the searing ambition that drove that acquisition and that continues to power the strategic thinking in Avaya’s executive suites, it would be folly to completely dismiss the potential for Avaya to make further M&A moves.

Avaya’s CEO is Kevin Kennedy, a former Cisco executive who subscribes to the same GE-inspired mantra as John Chambers regarding market focus, specifically the part about aiming to be first or second in every market a company enters.

Cisco and Avaya go head to head for market leadership in enterprise VoIP and unified communications. Meanwhile, video-based communication and collaboration are seen as the next major wave, with Cisco betting heavily on the space and Polycom moving into a prominent market position in videoconferencing on the back of its voice-conferencing franchise. Avaya could see ownership of Polycom as both a competitive necessity and a natural adjunct to its existing business.

Remember, too, that Avaya is a private company, richly backed by the munificence of private-equity houses Silver Lake and TPG. Being private, Avaya has more liberty than most public companies to devise and pursue a long-term strategy. Having the backing of Silver Lake and TPG potentially gives Avaya the means to swing for the fences.

There are reasons, perhaps many, why an Avaya-Polycom deal won’t transpire. This rumor, though, seems to have more plausibility than most I hear during an average week.