Monthly Archives: May 2010

HP’s Cautious Integration of 3Com’s H3C

As discussed in a previous post, many observers are curious as to why HP’s integration of 3Com will take another 18 months (or thereabouts) to complete.

In investigating the matter, I have learned that some parts of 3Com will be easier for HP to digest than others. The assimilation of 3Com into HP will occur at varying speeds, depending on the geographic and operational jurisdictions involved.

One major part of 3Com that will be slower to digest than others is H3C, the former China-based joint venture between 3Com and Huawei that evolved into 3Com’s R&D engine. H3C was a prime attraction for HP in its pursuit of 3Com, both for its relatively inexpensive engineering personnel and for its account presence and market share in China.

One reason for H3C’s success in China was that it was viewed as a Chinese company by China’s government. In China, that distinction is not insignificant. As China continues to pursue a policy of “indigenous innovation” that will see it favor companies and products of demonstrably Chinese provenance, HP’s ownership of a “Chinese company” might prove critical in allowing it to compete effectively for customer patronage in the country and to qualify for cost-saving government programs.

How does this affect HP’s integration of 3Com? Obviously, H3C is a big, important part of 3Com. HP will not want to do anything that compromises H3C’s status as a Chinese entity. Membership in that club has its privileges.

H3C’s market share and sales in China have faltered as Huawei has gone from partner to competitor. Meanwhile, Cisco and others are increasingly establishing R&D facilities in China to curry favor with the country’s authorities. Given the context, HP will not want to lose what made H3C and 3Com so attractive to it in the first place.

Just for fun, go to the H3C website. At first, set your location as North America. You’ll be directed to a page that sets H3C’s product portfolio firmly within the context of HP Networking. Now, go back to the H3C start page and set your location as Asia Pacific (English). You’ll now notice that there’s scant mention of HP Networking; it’s all H3C.The site even offers a promotional tagline that must make HP Networking’s U.S.-based marketing executives cringe: “H3C — IToIP Solutions Expert.”

H3C will continue to run its own show in China and in the Asia Pacific region for the foreseeable future. It is one of the reasons the 3Com integration will not proceed as fast as many observers think it should.

Apple Vaults Past Microsoft in Market Cap, but Markets Never Sleep

There was considerable discussion last night, continuing through this morning, about Apple supplanting Microsoft as the technology company with the largest market capitalization.

The discussion is warranted. When a changing of the guard occurs at the top of the heap — even if it’s a heap built on ever-shifting market valuation  — people will notice and try to invest great meaning in the event.

At a basic and literal level, of course, it means that the market ascribes greater value to Apple than to Microsoft. In terms of mindshare and brand, Apple has been outgunning Microsoft for some time, and the market now believes that, based on where the two companies stand today, Apple is a more valuable company that Microsoft.

What you need to remember about markets, however, is that they’re dynamic. Every day, they rise and fall, twist and turn. They never stop. They aren’t like the World Cup, for example, where a tournament is played, teams are gradually eliminated and one eventually claims the title, all its own until the next World Cup in four years.

On the market, nothing is ever fully settled. There’s no time to celebrate a milestone, because any milestone achieved is arbitrary and fleeting.

So, while I think it’s interesting that Apple has surpassed Microsoft in market capitalization — and while I agree that it says much about both realities and perceptions of both companies in the recent past and in the here and now — I also realize that the market is not finished taking its snapshots and making its sometimes capricious determinations.

Today is another day, and tomorrow will be another. Considering all the ferment and volatility we’ve witnessed in the technology sphere during the last couple months, one arguably could make the case that neither Apple nor Microsoft will necessarily accrue more relative strength during the next several years.

Obviously, Microsoft’s past-performance chart, as well as its current struggles, looks worse. It’s by no means certain that Microsoft can remake itself as its core franchises — Windows and Office — are threatened by a broad-based transition to cloud computing.

Similarly, though, the snapshot the market took yesterday might have captured Apple at its peak.  Apple is under attack for its App Store policies and practices, and its ascendant iPhone is likely to meet stiffer competition in the smartphone market from Google Android-based handsets, RIM’s BlackBerry (still a force in enterprise accounts, despite what you might have heard), HP’s Palm, Nokia (though that’s less certain), and even Microsoft, which is in the process of reanimating its moribund mobile business yet again.

Let’s not forget, too, about the Chinese handset players, who are likely to be major forces in their home markets and might not be content to play the comparatively passive role of software licensees.

Clearly news of Apple usurping Microsoft as market-capitalization king was deserving of notice and commentary. We need to remember, though, that it’s only a snapshot in time, and that markets — the public markets in which stocks are traded and those in which products and services are bought and sold — never sleep.

Microsoft Loses Patience with China

It wasn’t too long ago that Microsoft’s Craig Mundie, the company’s chief research and strategy officer, offered a public lecture to Google on how it should have been more patient and flexible in its dealings with China.

Mundie’s commentary was condescending, patronizing, self-serving — and an utterly obsequious ploy by Microsoft to curry favor with Chinese authorities. Rather than chortle at Google’s apparent misfortune, Microsoft should have kept its counsel and stuck to its coding.

Now we learn that Microsoft’s own patience with China is wearing thin. Earlier today in Singapore, Microsoft CEO Steve Ballmer said China’s weak enforcement of copyright laws has hurt his company’s revenues and compelled it to focus on other markets in Asia.

An Associated Press (AP) report containing Ballmer’s remarks also noted that China — destined to become the world’s biggest computer market this year when it overtakes the U.S. — accounts for 15 to 20 percent of global PC sales, but just one (as in 1) percent of Microsoft revenue.

Said Ballmer:

“Intellectual property protection in China is not just lower than other places, it’s very low, very, very low. We see better opportunities in countries like India and Indonesia than China because the intellectual property protection is quite a bit better.”

When Ballmer returns to head office, he might want to share that insight with Mundie.

Facebook Croons New Tune, But Song Remains the Same

Bruce Nussbaum, a former assistant managing editor at Business Week who now serves as a professor at Parsons School of Design, makes the argument that some of Facebook’s current privacy-related woes stem from its inability to remain attuned to cultural changes affecting its audience.

I’m not sure whether I buy the argument in its entirety, partly because Facebook long ago left behind its singular focus and dependence on college and high-school kids. Still, two brief sentences in Nussbaum’s blog post at Harvard Business Review are undeniably true:

At the moment, it (Facebook) has an audience that is at war with its advertisers. Not good.

No, it’s not good. But, as I argued early last year, Facebook was destined to be in conflict with its audience. The outcome was inevitable, resulting from Facebook’s inability or unwillingness to be transparent about the specifics of its business model and its exploitative relationship with its audience.

Facebook was neither forthcoming nor honest. Then, as now, Facebook continues to play a cynical game with those who use its service. It continues to lead them to believe they incur no downside for using a nominally free service. Then, as subscribers drop their guards, Facebook exacts a price, furtively dismantling privacy protections and trading on the sorts of sliced and diced demographic data that advertisers crave.

Now, as Facebook goes through another privacy overhaul, promising to make amends for what has become a pattern of deception and dishonesty, subscribers to the service ought to recall a hackneyed admonition about violated trust: Fool me once, shame on you. Fool me twice, shame on me. (George W. Bush emphasized a variation on this theme, you might remember.)

The truth is, Facebook can’t change. It’s too late. It’s caught in the bind I described in that blog post back in early 2009. Still, even though Facebook is ensnared in a trap of its own design, its audience doesn’t have to go along for the ride.

Cisco Announces Ruggedized Gear for Smart-Grid Substations

Until now, Cisco has done more talking than doing on the smart grid.

Yes, Cisco has made investments, including a notable stake in GridNet, and it has been involved in some prominent smart-grid projects and trials. But those efforts have been tentative, and they haven’t involved Cisco introducing new products specifically built for utility customers pursuing smart-grid deployments.

Earlier today, though, Cisco rectified that situation, announcing a hardened, ruggedized router and a similarly hardened, ruggedized switch, both of which are designed for deployment in utilities’ electricity substations. The new Cisco IP-based smart-grid products — the Cisco 2000 Series Connected Grid Router (CGR 2010) and the Cisco 2500 Series Connected Grid Switch (CGS 2520) — are adaptations of existing Cisco gear.

As reported by Network World, the CGR 2010 is based on Cisco’s Integrated Services Router (ISR), whereas the SGS 2520 is based on Cisco’s Catalyst 2000 and 3000 series products. The SGS 250 comes in two four-slot versions, with speeds and feeds similar to those of ruggedized switches from smaller players that have been active in the market well before Cisco’s arrival on the scene.

Like those competing offerings from the likes of RuggedCom and GarrettCom, Cisco’s smart-grid networking gear adheres to IEEE 1613 and IEC61850-3 standards for utility substation environments, including the capacity to withstand extreme temperatures. The devices also provide enhanced protection against electrical surges and electromagnetic interference.

Although smart meters and advanced metering infrastructure (AMI) receive a lot of media coverage because of their consumer-facing orientation, smart-grid products and technologies — such as substation networking gear — built for utilities’ distribution networks could possess a greater likelihood of achieving near-term commercial success.

While nobody seems sure whether or when consumers will want to fiddle about with smart meters and home-energy management systems to derive potentially modest savings on their electricity bills — consumers’ willingness to subject themselves to demand-response initiatives also remains unknown — utilities will have a need to upgrade and overlay their electricity-distribution systems with two-way communication networks. Those networks will provide efficiency savings by capturing and transmitting data from multiple intelligent electronic devices in the substation back to utility data centers for analysis.

By making their distribution networks smart, utilities will be able to quickly and accurately identify, isolate, diagnose, and perhaps even automatically repair network faults. They’ll also be able to reconfigure networks on the fly to circumvent trouble spots and keep electrons flowing.

For Cisco, the kingpin of Internet routing and switching, these new products represent a logical entry point into the smart-grid marketplace. Cisco already is a market leader in switching and routing. To get into the smart-grid space, all it had to do was adapt existing products to the specific requirements of substation deployment.

Cisco is hoping to benefit from the inherent conservatism of the utility sector. Utilities prize reliability — and hence risk mitigation — above all else. Utilities prefer to go with the tried and true over the conceptually interesting but unproven; and they also tend to favor established, well-known vendors over startups. Cisco is hoping its Internet market leadership, in enterprises and service providers, carries over to the utility industry, allowing it to tap an opportunity that it believes could be a hundred to a thousand times the size of the Internet, representing a $20-billion market in just five years.

The networking giant’s success isn’t assured, though. While Cisco is the top dog of enterprise networking, it’s a newcomer to the utilities. Even though its brand is known, it’s not known directly by many utility customers. It will have to build a base, as well as relationships and credibility.

In an email message to Forbes, Forrester analyst Doug Washburn discussed the challenge Cisco faces:

“It’s going to be critical for Cisco to forge partnerships with smart grid solution providers, the Accentures and ABBs of the world. Those companies] specialize in the utility industry and can engage the utilities at a business and strategic level, not just the IT and operational level.”

In talking with EE Times, Washburn elaborated further:

“I did not hear much from Cisco on this topic, and it’s an important one since these players (Accenture and ABB, and the like) help utilities determine their smart gird strategy which ultimately drives technology and vendor decisions.”

But Cisco has drawn Accenture’s support. In a press release announcing its hardened networking gear, Cisco includes a salutary quote from David M. Rouls, managing director of Accenture Smart Grid Services:

“Accenture and Cisco have a shared Smart Grid vision. We believe that the inherent value in moving toward a Smart Grid is derived from securely transporting, integrating and analyzing the vast amount of information that results in the transformation from analog to digital. Accenture is particularly excited to enable the data management, event processing, and analytics functionality delivered with the Accenture Intelligent Network Data Enterprise (INDE) and leverage the advanced networking capabilities of the Cisco CGR 2010 for our utility clients.”

Besides, when it comes to entering new markets, Cisco knows the drill, even though this challenge might be qualitatively different from those that have preceded it.

Internet historians will remember that Cisco was once new to carriers. It had to develop domain expertise, develop and acquire new skills, and build and nurture new contacts and long-term relationships. It was largely successful in that endeavor, and it will follow a similar blueprint in attacking the smart-grid opportunity in the utility sector.

The company already is following the well-worn playbook, hiring utility insiders to join and lead its smart-grid team, obtaining essential skills and valuable customer contacts in the bargain. It’s building relationships with early customers, too, including three utilities that will use its new products  in substation automation trials.

Network World reported that both Cisco products, the router and the switch, start at about $6,000, with the router available in July and the switch available in August. Meanwhile, EE Times reported that the router starts at a list price of $7,800, with the switch prices starting at $5,300.

Cisco has taken a while to make a product splash on the smart grid. This first tangible foray might not have the superficial glamor of a home-energy management play, but it’s a logical first step that allows Cisco to build a bridge from its successful past into a potentially lucrative future.

HP’s Hurd Vague on 3Com Integration

In a previous blog post, I cited a Computing (UK) story suggesting that HP could take another 18 months to fully digest its acquisition of 3Com. Subsequently, many observers were interested in learning whether the post-acquisition integration would actually take that long. A few intrepid journalists even went to HP directly with questions on the matter.

By all accounts, HP has offered ambiguous answers. Even HP CEO Mark Hurd wasn’t particularly helpful when he was asked about the 3Com integration during his company’s earnings conference call earlier this week. What follows is an excerpt, borrowed from Seeking Alpha, of that exchange:

Richard Gardner – Citigroup

I was hoping you could give us an update on the 3Com integration just in terms of your plans and your progress with sales specialist hiring, getting the sales force trained on the new product portfolio and getting the product in front of customers in the U.S. and Europe and any color on early customer reception to the portfolio and how many customers are willing to take a look at it now that it’s under the HP umbrella.

Mark Hurd

Let me give you a quick trip through HP networking so I can try to give you context and fit 3Com into it.

Again, we have a continuation of strong performance in what we call pro curve HP networking. Edge products, wireless products saw 31% in the quarter. That’s organic, obviously very strong for us.

Simultaneously, it’s important to note that we’ve been building software capabilities in ESN. We talk about this product call Virtual Connect. It is nothing more complicated that – most of the networking market is sold by number of ports. Those ports aren’t always fully utilized. Virtual Connect actually virtualizes those ports.

So as a rudimentary example, if a customer is usually buying 10 ports, we can virtualize them and perhaps reduce that by 30% to 40% so they now need six ports. Our strategy is then to come in with the best performing products and the best TCO in the industry to then actually work with the customer on those ports.

Historically, we’ve been on the edge of wireless. Now with 3Com, we can do the exact same thing in the data center. So for us, we’ve had a very good start with 3Com. We have been aggressive in hiring, hiring has started, and hiring is ramping.

In the quarter, 3Com, we closed two fortune logo accounts with 3Com products in the data center. We also had a number of very significant wins on what you would think of as the traditional pro curve line, and had a very strong virtual connect quarter as well.

So the reason I bring that up to you is to give you context that our networking strategy isn’t a 3Com strategy. It’s not a pro curve strategy. It’s not a virtual connect strategy. It’s an all of those capabilities brought together across the HP portfolio and it’s why we talk about this converged infrastructure; that the ability to leverage IT from the server family, the storage family and the networking family became so integral to our overall story.

So we think a very good start, we’re very excited about it. We’ve installed products. The 3Com technology is now in our data centers and is now performing our networking tasks. We plan to do more and more of that and so we feel very excited about it, and specialist hiring is ramping.

Hurd says a lot but he doesn’t provide a detailed answer to the specific question that was asked. From Hurd’s reply, we can conclude . . . what, exactly? Well, things are off to “a very good start,” and HP is “very excited about it.”

Beyond that, however, we don’t get a lot of detail on how the integration is going, whether it has gone more smoothly in some areas  as opposed to others, and whether the field-sales teams have been integrated and properly trained to bring combined 3Com-ProCurve HP Networking solutions to customers.

We can only assume that Hurd is being intentionally vague. We’ll have to get the straight goods elsewhere. Meanwhile, we can speculate, which is what I’ll be doing in a subsequent post.

Components Shortages Affecting Vendors Worldwide

At the moment, components shortages seem to be pervasive in the technology industry. Vendors large and small, throughout most of the world, have been affected by them to greater or lesser degrees.

The problem appears to be with us for a while. To be best of my knowledge — and I will concede at the outset that my research hasn’t been definitive — vendors everywhere in the world are having difficulty sourcing adequate numbers of many types of components. The only exception is China, where vendors in telecommunications, cleantech, and other fields have not reported that same component-sourcing difficulties that have hobbled their counterparts in Europe, North America, and other parts of Asia.

That doesn’t necessarily mean that Chinese companies aren’t affected by components shortages. All it means is that they haven’t reported them, at least in the English-speaking media I’ve perused. Still, it’s a development that bears watching. In that China does not ascribe to the tenets of unfettered capitalism, it sometimes operates according to a unique set of rules.

Today’s component shortages span various semiconductor types, including but not limited to DSPs, FETs, diodes, and amplifiers. Vendors of solar inverters, particularly those based in Europe, also have been affected.

Meanwhile, Reuters reports that a shortage of basic electrical components could last into the second half of 2011, limiting the ability of telecommunications-equipment manufacturers to respond to improving market demand.

Reuters reports that memory chips and other fundamental components such as resistors and capacitors are in short supply after their makers slashed output, fired staff, put equipment purchases on hold or went out of business during the recession.
The shortages already have been blamed for weaker-than-expected results last quarter at telecommunications-equipement vendors Alcatel-Lucent and Ericsson, which really don’t need the added grief.

Alcatel-Lucent blamed components shortages for a large loss that it posted in its first fiscal quarter. Alcatel-Lucent’s CEO Ben Verwaayen said the said the shortages involved “everyday” low-cost components. He explained that most components come from China, where the manufacturing industry hasn’t been revamped since major cuts that followed the severe global downturn. 

We already know that the supply-chain issues that afflicted Cisco’s channel partners and customers were blamed partly on component shortages.
What’s more, Dell partly blamed shortages and higher costs of components, including memory, for its inability to maintain gross margins during its just-reported quarter.

And AU Optronics, Taiwan’s second-ranked LCD manufacturer and a supplier to Dell and Sony, reported that an LCD panel shortage is likely to last into the second half of this year.

By no means are those the only vendors affected. You only have read the recent 10-Qs or conference-call transcripts of companies involved in computer networking, telecommunications gear, personal computers, smartphones, displays, or cleantech hardware to understand that components shortages are nearly everywhere.

I just wonder — and I make no accusation in doing so — whether Chinese manufacturers are as affected by the shortages as are their competitors in other parts of the world.