Monthly Archives: September 2011

Cisco Hedges Virtualization Bets

Pursuant to my post last week on the impressive growth of the Open Virtualization Alliance (OVA), which aims to commoditize VMware’s virtualization advantage by offering a viable open-virtualization alternative to the market leader, I note that Red Hat and five other major players have founded the oVirt Project, established to transform Red Hat Enterprise Virtualization Manager (RHEV-M) into a feature-rich virtualization management platform with well-defined APIs.

Cisco to Host Workshop

According to coverage at The Register, Red Hat has been joined on the oVirt Project by Cisco, IBM, Intel, NetApp and SuSE, all of which have committed to building a KVM-based pluggable hypervisor management framework along with an ecosystem of plug-in partners.

Although Cisco will be hosting an oVirt workshop on November 1-3 at its main campus in San Jose, the article at The Register suggests that the networking giant is the only one of the six founding companies not on the oVirt Project’s governance board.  Indeed, the sole reference to Cisco on the oVirt Project website relates to the workshop.

Nonetheless, Cisco’s participation in oVirt warrants attention.

Insurance Policies and Contingency Plans

Realizing that VMware could increasingly eat into the value, and hence the margins, associated with its network infrastructure as cloud computing proliferates, Cisco seems to be devising insurance policies and contingency plans in the event that its relationship with the virtualization market leader becomes, well, more complicated.

To be sure, the oVirt Project isn’t Cisco’s only backup plan. Cisco also is involved with OpenStack, the open-source cloud-computing project that effectively competes with oVirt — and which Red Hat assails as a community “owned”  by its co-founder and driving force, Rackspace — and it has announced that its Cisco Nexus 1000V distributed virtual switch and the Cisco Unified Computing System with Virtual Machine Fabric Extender (VM-FEX) capabilities will support the Windows Server Hyper-V hypervisor to be released with Microsoft Windows Server 8.

Increasingly, Cisco is spreading its virtualization bets across the board, though it still has (and makes) most of its money on VMware.

OVA Aims to Commoditize VMware’s Advantage

Although it’s no threat to VMware yet, the growth of the Open Virtualization Alliance (OVA) has been impressive. Formally announced in May, the OVA has grown from its original seven founding members — its four Governing Members (Red Hat, Intel, HP, and IBM), plus  BMC, Eucalyptus Systems, and Novel (SUSE) — expanding with the addition of 65 new members in June, finally encompassing  more than 200 members as of yesterday.

The overriding objective of the OVA is to popularize the open-source Kernel-based Virtual Machine (KVM) so that it can become a viable alternative to proprietary server-virtualization offerings, namely market leader VMware.  To achieve that goal, OVA is counting on broad-based industry support from large and small players alike as it works to accelerate the development of an ecosystem of KVM-based third-party solutions. In conjunction with that effort, OVA also is encouraging interoperability, promoting best practices, spotlighting customer successes, and generally raising awareness of KVM through marketing events and initiatives.

Give the People What They Want 

While VMware isn’t breaking out in a cold sweat or losing sleep over OVA, it’s clear that many members of OVA are anxious about the potential stranglehold VMware could gain in cloud infrastructure if its virtualization hegemony goes unchecked. In that regard, it’s notable that certain VMware partners — IBM and HP among them — are at the forefront of OVA.

If customers are demanding VMware, as they clearly have been doing, then that’s what IBM and HP will give them. It’s good business practice for service-based solution providers to give customers what they want. But circumstances can change — customers might be persuaded to accept alternatives to VMware — and IBM and HP probably wouldn’t mind if they did.

Certainly VMware recognizes that its partners also can be its competitors. There’s even well-worn industry phrase for  it: coopetition. At the same time, though, IBM and HP would welcome customer demand for an open-source alternative to VMware, which explains their avidity for and evangelization of KVM.

Client-Server Reprise?

An early lead in a strategic market can result in long-term industry dominance. That’s what VMware wants to achieve, and it’s what nearly everybody else — excluding VMware’s majority shareholder, EMC — would like to prevent. Industry giants IBM and HP have seen this script play out in the client-server era with Microsoft’s Windows, and they’re not keen to relive the experience in cloud computing.

VMware’s customer appeal and market differentiation derive from its dominance in server virtualization, a foundation that allows it to extend up and out into areas that could give it a stranglehold on cloud computing’s most valuable technologies. Nearly every vendor with a stake in the data center is keeping a wary eye on VMware. Some, such as Microsoft and Oracle, are outright competitors seeking to cut into VMware’s market lead, while others — such as HP, IBM, and Cisco — are partnering pragmatically with VMware while pursuing strategic alternatives and contingency plans.

Commoditizing Competitor’s Edge

In promoting an open-source alternative as a means of undercutting a competitor’s competitive advantage, IBM and its OVA cohorts are taking a page from a well-worn strategic handbook. This is what Google unleashed against Apple in mobile operating systems with Android, and what Facebook is trying to achieve against Google in cloud data centers with its Open Compute Project. For OVA’s charter members, it’s all about attempting to commoditize a market leader’s competitive differentiation to level the playing field — and perhaps to eventually tilt it to your advantage.

IBM and HP have integration prowess and professional-services capabilities that VMware lacks. If they can nullify virtualization as a strategic asset by commoditizing it, they relegate VMware to a lesser role. However, if they fail and VMware’s differentiation is maintained and extended further, they risk losing a great deal of long-term account control in a burgeoning market.

KVM Rather than XenServer

Some might wonder why the open-source server virtualization alternative became KVM and not, say, XenServer, whose custodian, XenSource, is owned by Citrix. One of the reasons could be Citrix’s relatively warm embrace by Microsoft. When Gartner released its Magic Quadrant for x86 Server Virtualization Infrastructure this summer, it questioned whether Citrix’s ties to Microsoft could result in XenServer being compromised. Microsoft, of course, has its own server-virtualization entry in Hyper-V.

In the end, the OVA gang put down its money on KVM rather than XenServer, seeing the former as a less-complicated proposition than the latter. That appears to have been the right move.

Clearly OVA has experienced striking growth in just a few months, but it has a long way to go before it meets the strategic mandate envisioned by its founders.

Can Dell Think Outside the Box?

Michael Dell has derived great pleasure from HP’s apparent decision to spin off its PC business. As he has been telling the Financial Times and others recently, Dell (the company) believes having a PC business will be a critical differentiator as it pulls together and offers complete IT solutions to enterprise, service-provider, and SMB customers.

Hardware Edge?

Here’s what Dell had to say to the Financial Times about his company’s hardware-based differentiation:

 “We are very distinct from some of our competitors. We believe the devices and the hardware still matter as part of the complete, end-to-end solution . . . . Think about the scale economies in our business. As a company spins off its PC business, it goes from one of the top buyers in the world of disk drives and processors and memory chips to not being one of the top five. And that raises the cost of making servers and storage products. Ultimately we believe that presents an enormous opportunity for us and you can be sure we are going to seize it.”

Well, perhaps. I don’t know the intimate details of Dell’s PC economies of scale or its server-business costs, nor do I know what HP’s server-business costs will be when (and if) it eventually spins off its PC business. What I do know, however, is that IBM doesn’t seem to have difficulty competing and selling servers as integral parts of its solutions portfolio; nor does Cisco seem severely handicapped as it grows its server business without a PC product line.

Consequences of Infatuation

I suspect there’s more to Dell’s attachment to PCs than pragmatic dollars-and-cents business logic. I think Michael Dell likes PCs, that he understands them and their business more than he understands the software or services market. If I am right in those assumptions, they don’t suggest that Dell necessarily is wrong to stay in the PC business or that it will fail in selling software and services.

Still, it’s a company mindset that could inhibit Dell’s transition to a world driven increasingly by the growing commercial influence of cloud-service providers, the consumerizaton of IT, the proliferation of mobile devices, and the value inherent in software that provides automation and intelligent management of “dumb” industry-standard hardware boxes.

To be clear, I am not arguing that the “PC is dead.” Obviously, the PC is not dead, nor is it on life support.

In citing market research suggesting that two billion of them will be sold in 2014, Michael Dell is right to argue that there’s still strong demand for PCs worldwide.  While tablets are great devices for the consumption of content and media, they are not ideal devices for creating content — such as writing anything longer than a brief email message, crafting a presentation, or working on a spreadsheet, among other things.  Although it’s possible many buyers of tablets don’t create or supply content, and therefore have no need for a keyboard-equipped PC, I tend to think there still is and will be a substantial market for devices that do more than facilitate the passive consumption of information and entertainment.

End . . . or Means to an End?

Notwithstanding the PC market’s relative health, the salient question here is whether HP or Dell can make any money from the business of purveying them. HP decided it wanted the PC’s wafer-thin margins off its books as it drives a faster transition to software and services, whereas Dell has decided that it can live with the low margins and the revenue infusion that accompanies them. In rationalizing that decision, Michael Dell has said that “software is great, but you have to run it on something.”

There’s no disputing that fact, obviously, but I do wonder whether Dell is philosophically disposed to think outside the box, figuratively and literally. Put another way, does Dell see hardware as a container or receptacle of primary value, or does it see it as a necessary, relatively low-value conduit through which higher-value software-based services will increasingly flow?

I could be wrong, but Michael Dell still seems to see the world through the prism of the box, whether it be a server or a PC.

For me, Dell’s decision to maintain his company’s presence in PCs is beside the point. What’s important is whether he understands where the greatest business value will reside in the years to come, and whether he and his company can remain focused enough to conceive and execute a strategy that will enable them to satisfy evolving customer requirements.

Discouraged in US, Huawei Invests Heavily in European Enterprise Push

As we watch Huawei invest heavily and ramp up for a sustained enterprise-networking push in Europe, the Chinese network-equipment provider, which made its name and fortune in telecommunications gear before expanding to mobile devices and enterprise infrastructure, remains conspicuous by its relative absence in the USA.

That’s not how Huawei planned it, of course. The company has made successive bids to establish a meaningful beachhead in the US, and each time it was turned back on national-security grounds.

Thwarted at Every Turn

There was its joint $2.2-billion takeover bid, as a minority player, with Bain Capital for 3Com, its former joint-venture partner in H3C, an acronym for Huawei 3Com. That came to naught when the Committee on Foreign Investment in the United States (CFIUS) discouraged the prospective buyers from pursuing the deal because of concerns about Huawei’s potential access to Tipping Point and 3Com security technologies. Concerns about the US government’s disposition to Huawei also torpedoed the Chinese company’s efforts to acquire Motorola’s wireless-network business and software vendor 2Wire, even though Huawei reportedly bid at least $100 million more than the successful acquirer in each case.

Since then, Huawei was warned off an acquisition of assets belong to 3Leaf, a cloud-software provider. Last, but perhaps not least from Huawei’s perspective, it has been effectively prevented from making headway in its sale of wireless base stations and other telecommunications infrastructure to America’s leading wireless operators, including Sprint Nextel.

While Huawei has made sales to smaller US service providers, it seems effectively locked out of sales to top-tier wireless operators. Understandably, that limits its growth in the US market, making displacement of incumbent vendors impossible.

Aiming for Enterprise Revenue of $7 Billion Next Year

As such, it’s no wonder Huawei looks to other parts of the world as it rolls out an aggressive plan to grow its new enterprise business to sales of $7 billion next year, from just $2 billion last year and $4 billion this year. By 2015, Huawei sees its enterprise business generating revenue of $15 billion to $20 billion.

That’s a heady growth target, and Huawei clearly is focusing on its domestic market in China, as well as emerging economies in Asia and South America, as well as strong growth in Australia and Europe, the Middle East, and Africa (EMEA).

I wouldn’t want to say that Huawei has given up on the US market — I don’t think Huawei gives up on anything — but it clearly recognizes political reality and will focus elsewhere for the time being.

For Cisco, Good News and Bad News

For Cisco and other enterprise-networking vendors with significant market share in the United States, that’s good news. The news might not be as good in Europe, where Huawei clearly is girding for intensive engagement with customers and channel partners, including those now in other camps.

Cisco obviously benefits, though it is not alone, if Huawei remains constrained or otherwise discouraged from moving aggressively into the US domestic market. Conversely, however, there is a danger that China, which seems to be influenced at least in part by Huawei and ZTE’s strategic imperatives (see recent developments in Libya), might make life more difficult for Cisco in China if Huawei’s hardships in the US persist.

Although Cisco seems to have stayed on the good side of Chinese authorities hitherto, circumstances and situations are subject to change. These developments, like so many others in a networking market that is now surprisingly fluid, bear watching.

Intel-Microsoft Mobile Split All Business

In an announcement today, Google and Intel said they would work together to optimize future versions of the  Android operating system for smartphones and other mobile devices powered by Intel chips.

It makes good business sense.

Pursuit of Mobile Growth

Much has been made of alleged strains in the relationship between the progenitors of Wintel — Microsoft’s Windows operating system and Intel’s microprocessors — but business partnerships are not affairs of the heart; they’re always pragmatic and results oriented. In this case, each company is seeking growth and pursuing its respective interests.

I don’t believe there’s any malice between Intel and Microsoft. The two companies will combine on the desktop again in early 2012, when Microsoft’s Windows 8 reaches market on PCs powered by Intel’s chips as well as on systems running the ARM architecture.

Put simply, Intel must pursue growth in mobile markets and data centers. Microsoft must similarly find partners that advance its interests.  Where their interests converge, they’ll work together; where their interests diverge, they’ll go in other directions.

Just Business

In PCs, the Wintel tandem was and remains a powerful industry standard. In mobile devices, Intel is well behind ARM in processors, while Microsoft is well behind Google and Apple in mobile operating systems. It makes sense that Intel would want to align with a mobile industry leader in Google, and that Microsoft would want to do likewise with ARM. A combination of Microsoft and Intel in mobile computing would amount to two also-rans combining to form . . . well, two also-rans in mobile computing.

So, with Intel and Microsoft, as with all alliances in the technology industry, it’s always helpful to remember the words of Don Lucchesi in The Godfather: Part III: “It’s not personal, it’s just business.”

Talk of CEO Succession at Cisco

As Cisco has struggled to adapt to the protracted global market downturn and the “recoveryless” recovery — it’s been going on so long, perhaps we should just call it the Information-Age Depression — the company’s CEO, John Chambers, has been subject to unfamiliar criticism from investors and industry observers alike.

Then again, Cisco’s shares have stagnated for much of the last decade, leading some to contend that Chambers and his thinning bench of executive talent were long overdue for reproach.  Indeed, it’s a measure of Cisco’s great success under Chambers, especially during the hypergrowth 90s, that he was spared the scrutiny that other executives would have received under similar circumstances. Cisco’s blazing growth and industry dominance in its earlier incarnation gave Chambers and crew protective cover from criticism — until now.

Glory Days Fade

One can only feast on the glory deals for so long. Cisco still dominates enterprise networking, but its market share is receding gradually. The company hasn’t been able to find the growth it expected from Chambers’ “market adjacencies,” and it was forced to abort an ill-considered foray into the consumer space, shutting down Pure Digital Technologies and its Flip video camcorders earlier this year.

What’s more, the company’s inorganic growth-by-acquisition model, which served it so well in the 1990s and into the last decade, seems to be sputtering, with Cisco making fewer acquisitions and not batting its formerly exalted average on the ones it does make. Cisco executives who directed and executed some of its most successful acquisitions — Charlie Giancarlo and Mike Volpe among them — no longer are with the company, which might partly explain Cisco’s faltering M&A pace.

Hoisted on Its Own Petard

However, Cisco also has put itself into a box of its own devising, having parked most of cash overseas to avoid US taxation. Until that money is repatriated, whether through a “tax holiday” or otherwise, Cisco will be forced to evaluate acquisitions partly on where its money resides rather than exclusively on the basis of strategic requirements. It’s a perverse dilemma, but ultimately Cisco was the author of its own misfortune.

That’s been doubly unfortunate because Cisco had become dependent on acquisitions to provide its innovation. Years ago, competitors alleged that Cisco couldn’t innovate organically, and I also felt that accusation was harsh and unfair. Now, though, it’s difficult to contend that Cisco is providing enough value-bestowing innovation to drive top-line growth or to support its traditionally robust profit margins.

Finally, Cisco has seen scores of talented executives, and their intellectual capital, leave the company in recent years. This summer thousands of employees were shown the door. Others, some with reserves of institutional memory and hard-won experience, took early retirement.

Chambers Reportedly Leaving

Cisco has seen better days, and it’s no wonder that shareholders are demanding a change of leadership. A Reuters news item reports that John Chambers might be about to relinquish the big chair, with discussion inside and outside the company intensifying about Cisco’s CEO succession plans.

Some sources say Chambers might announce his departure imminently while others say he’ll want to leave on a high note, perhaps after an expectation-smashing quarter. Timing aside, it seems all but certain that Chambers will be gone before long.

Reviewing the Field of Candidates

That has occasioned rampant speculation about who will succeed him. Candidates have been proposed from inside and outside Cisco, and some apparently are campaigning for the job, lobbying shareholders and board members for support.

The current consensus is that Cisco will look externally for its next CEO rather than promote from within.  That view implicitly questions the depth of the executive bench strength currently at Cisco.

Potential external candidates mentioned by Reuters include former Hewlett-Packard CEO Mark Hurd and former Cisco executives Charles Giancarlo, Mike Volpi, Gary Daichendt, and James Richardson. Other industry executives cited as possible contenders include Juniper Networks Inc CEO Kevin Johnson, former McAfee CEO Dave DeWalt, and HP executive David Donatelli.

Hurd Worst Fit

Some dark-horse candidates undoubtedly will surface, too, but of those mooted by Reuters, I think Mark Hurd perhaps is the worst fit. Hurd’s specialty is operational efficiency and relentless cost-cutting. As Cisco’s latest layoffs and austerity attest, operational discipline isn’t necessarily the company’s most urgent requirement.

What Cisco really needs is somebody who knows how to identify, nurture, and lead the next wave of growth. I respectfully submit that Mark Hurd is not that candidate. It’s probably a moot point, because Hurd has a pretty cushy sinecure as co-president at Oracle.

Of the others, one or more of the former Cisco executives might be good candidates, including Daichendt and Richardson. Presuming Cisco can repatriate its mountain of overseas cash, Volpi or Giancarlo might be able to resuscitate Cisco’s growth-by-acquisition model.

Casting an eye at those who’ve never been at Cisco,  I question whether Donatelli is the right fit, and I suspect that Kevin Johnson will remain at Juniper. Former McAfee CEO Dave DeWalt is an interesting possibility. He has a mix of operational, sales, and M&A aptitude that Cisco’s board might find compelling.

Perhaps the good folks at Betfair should establish a “market” on the next Cisco CEO.

Bad and Good in Avaya’s Pending IPO

We don’t know when Avaya will have its IPO, but we learned a couple weeks ago that the company will trade under the symbol ‘AVYA‘ on the New York Stock Exchange.

Long before that, back in June, Avaya first indicated that it would file for an IPO, from which it hoped to raise about $1 billion. Presuming the IPO goes ahead before the end of this year, Avaya could find itself valued at $5 billion or more, which would be about 40 percent less than private-equity investors Silver Lake and TPG paid to become owners of the company back in 2007.

Proceeds for Debt Relief

Speaking of which, Silver Lake and TPG will be hoping the IPO can move ahead sooner rather than later. As parents and controlling shareholders of Avaya, their objectives for the IPO are relatively straightforward. They want to use the proceeds to pay down rather substantial debt (total indebtedness was $6.176 billion as of March 31), redeem preferred stock, and pay management termination fees to its sponsors, which happen to be Silver Lake and TPG. (For the record, the lead underwriters for the transaction, presuming it happens, are J.P. Morgan, Morgan Stanley, and Goldman Sachs & Company.)

In filing for the IPO, Avaya has come clean not only about its debts, but also about its losses. For the six-month period that end on March 31, Avaya recorded a net loss of $612 million on revenue of $2.76 billion. It added a further net loss of $152 million losses the three-month period ended on June 30, according to a recent 10-Q filing with the SEC, which means it accrued a net loss of approximately $764 million in its first three quarters of fiscal 2011.

Big Losses Disclosed

Prior to that, Avaya posted a net loss of $871 million in its fiscal 2010, which closed on September 30 of 2010, and also incurred previous losses of $835 million in fiscal 2009 and a whopping $1.3 billion in fiscal 2008.

Revenue is a brighter story for the company. For the one months ended June 30, Avaya had revenue of more than $2.2 billion, up from $1.89 billion in the first nine months of fiscal 2010. For the third quarter, Avaya’s revenue was $729 million, up from $700 million in the corresponding quarter a year earlier.

What’s more, Avaya, which bills itself as a “leading global provider of business collaboration and communications solutions,” still sits near the front of the pack qualitatively and quantitatively in  the PBX market and in the unified-communications space, though its standing in the latter is subject to constant encroachment from both conventional and unconventional threats.

Tops Cisco in PBX Market

In the PBX market, Avaya remained ahead of Cisco Systems in the second quarter of this year for the third consecutive quarter, according to Infonetics Research, which pegged Avaya at about 25 percent revenue share of the space. Another research house, TeleGeography, also found that Avaya had topped Cisco as the market leader in IP telephony during the second quarter of this year. In the overall enterprise telephony equipment  market — comprising sales of PBX/KTS systems revenues, voice gateways and IP telephony — Cisco retains its market lead, at 30 percent, with Avaya gaining three points to take 22 percent of the market by revenue.

While Infonetics found that overall PBX spending was up 3.9 percent in the second quarter of this year as compared to last year, it reported that spending on IP PBXes grew 10.9 percent.

Tough Sledding in UC Space

Meanwhile, Gartner lists Avaya among the market leaders in its Magic Quadrant for unified communications, but the threats there are many and increasingly formidable. Microsoft and Cisco top the field, with Avaya competing hard to stay in the race along with Siemens Enterprise Networks and Alcatel-Lucent. ShoreTel is gaining some ground, and Mitel keeps working to gain a stronger channel presence in the SMB segment. In the UC space, as in so many others, Huawei looms as potential threat, gaining initial traction in China and in developing markets before making a stronger push in developed markets such as Europe and North America.

There’s an irony in Microsoft’s Lync Server 2010 emerging as a market-leading threat to Avaya’s UC aspirations. As those with long memories will recall, Microsoft struck a valuable UC-centric strategic alliance — for Microsoft, anyway — with Nortel Networks back in 2006. Microsoft got VoIP credibility, cross-licensed intellectual property, IP PBX expertise and knowledge — all of which provided a foundation and a wellspring for what Microsoft eventually wrought with  Lync Server 2010.

The Nortel Connection

What did Nortel get from the alliance? Well, it got some evanescent press coverage, a slippery lifeline in its faltering battle for survival, and a little more time than it might have had otherwise. Nortel was doomed, sliding into irrelevance, and it grabbed at the straws Microsoft offered.

Now, let’s fast forward a few years. In September 2009, Avaya successfully bid for Nortel’s enterprise solutions business at a bankruptcy auction for a final price of $933 million.  Avaya’s private-equity sponsors saw the Nortel acquisition as the finishing touch that would position the company for a lucrative IPO. The thinking was that the Nortel going-out-of-business sale would give Avaya an increased channel presence and some incremental technology that would help it expand distribution and sales.

My feeling, though, is that Avaya overpaid for the Nortel business. There’s a lot of Nortel-related goodwill still on Avaya’s books that could be rendered impaired relatively soon or further into the future.  In addition to Nortel’s significant debt and its continuing losses, watch out for further impairment relating to its 2009 purchase of Nortel’s assets.

As Microsoft seeks to take UC business away from Avaya with expertise and knowhow it at least partly obtained through a partnership with a faltering Nortel, Avaya may also damage itself through acquisition and ownership of assets that it procured from a bankrupt Nortel.