Category Archives: 3Com

How Cisco Arrived at the Crossroads

As reports of Cisco’s impending layoffs intensify and spread, I started thinking about how the networking giant got into its current predicament and whether it can escape from it.

One major problem for the company is that the challenges it faces aren’t entirely attributable to its own mistakes. If Cisco’s own bumbling was wholly responsible for the company’s middle-life crisis, one might think it could stop engaging in self-harm, right the ship, and chart a course to renewed prosperity.

Internal Missteps Exacerbated by External Factors

But, even though Cisco has contributed significantly to its own decline — with a byzantine bureaucratic management structure replete with a multitude of executive councils, half-baked forays into consumer markets about which it knew next to nothing, imperial overstretch into too many markets with too many diluted products, and the loss of far too many talented leaders — external factors also played a meaningful role in bringing the company to this crossroads.

Those external factors comprise market dynamics and increasingly effective incursions by competitors into Cisco’s core business of switching and routing, not just in the telco space but increasingly — and more significantly — in enterprise markets, where Cisco heretofore has maintained hegemonic dominance.

If we look into the recent past, we can see that Cisco saw one threat coming well before it actually arrived. Before cloud computing crashed the networking party and threatened to rearrange data-center infrastructure worldwide, Cisco faced the threat of network-gear commoditization from a number of vendors, including the “China-out” 3Com, which had completely remade itself into a Chinese company with an American name through its now-defunct H3C joint venture with Huawei.

Now, of course, 3Com is part of HP Networking, and a big draw for HP when it acquired 3Com was represented by the cost-effective products and low-priced engineering talent that H3C offered. HP reasoned that if Cisco wanted to come after its server market with Unified Computing System (UCS), HP would fight back by attacking the relatively robust margins in Cisco’s bread-and-butter business with aggressively priced networking gear.

Cisco Prescience

HP’s strategy, especially in a baleful macroeconomic world where cost-cutting in enterprises and governments is now an imperative rather than a prerogative, is beginning to bear fruit, as recent market-share gains attest.

Meanwhile, Cisco knew that Huawei, gradually eating into its telecommunications market share in markets outside North America, would eventually seek future growth in the enterprise. It was inevitable, and Cisco had to prepare for the same low-priced, value-based onslaught that Huawei waged so successfully against it in overseas carrier accounts. In the enterprise, Huawei would follow the same telco script, focusing first on overseas markets — in its home market, China, as well as in Asia, the Middle East, Europe, and South America — before making its push into a less-receptive North American market.

That is happening now, as I write this post, but Cisco had the prescience to see it on the horizon years before it actually occurred.

Explaining Drive for Diversification

What do you think that hit-and-miss diversification strategy — into consumer markets, into home networking, into enterprise collaboration with WebEx, into telepresence, into smart grids, into so much else besides — was all about? Cisco was looking to escape getting hit by the bullet train of network commoditization, aimed straight at its core business.

That Cisco has not excelled in its diversification strategy into new markets and technologies shouldn’t come as a surprise. Well before it make those moves, it had failed in diversification efforts much closer to home, in areas such as WAN optimization, where it had been largely unsuccessful against Riverbed, and in load balancing/application traffic management, where F5 had throughly beaten back the giant. The truth is, Cisco has a spotty record in truly adjacent or contiguous markets, so it’s no wonder that it has struggled to dominate markets that are further afield.

Game Gets More Complicated

Still, the salient point is that Cisco went into all those markets because it felt it needed to do so, for revenue growth, for margin support, for account control, for stakeholder benefit.

Now, cloud computing, with all its many implications for networking, is roiling the telco, service provider, and enterprise markets. It’s not certain that Cisco can respond successfully to cloud-centric threats posed by data-center networking vendors such Juniper Networks as Arista Networks or by technologies such as software-defined networking (as represented by the OpenFlow protocol).

Cisco was already fighting one battle, against the commoditizing Huaweis and 3Coms of the world, and now another front has opened.

Sweet and High: The Bidding War for 3PAR

All signs suggest that Dell will fire a return volley in the bidding war between it and HP for ownership of 3PAR. Recent evidence can be found in a Bloomberg article that cites a person “familiar with the matter” who says Dell is preparing a sweetened offer for the apparently sough-after vendor of high-end storage.
A  sweetened offer? If the offers for 3PAR get any sweeter, investment bankers involved in the deal will suffer from diabetic shock.

$2 Billion?

Meanwhile, the market sends its own compelling signals that Dell isn’t done with 3PAR. On a down day, 3PAR shares are up, trading at a level that assigns the company a current market capitalization (as of 12:53 pm EDT) of $1.68 billion. HP’s proposal for 3PAR values the company at about $1.6 billion, so market sentiment suggests the tug of war will continue.

Could Dell go as high as $2 billion in its pursuit of 3PAR? It seems like madness, but that’s what some market watchers and Dell aficionados believe will happen.

Let’s say Dell does decide to trump HP’s counteroffer. What will HP do? Opinion on that question is split, with some saying HP will go even higher and others suggesting that HP would back away from the table, content to see Dell overpay spectacularly to win the duel.

Sincerity or Duplicity?

The thinking from one camp, in fact, is that HP is angling for that very outcome. If, after putting 3PAR on its corporate mantelpiece, Dell were to want to add, let’s say, network infrastructure to its data-center solution stack, its options would be restricted by what it spent to acquire and integrate 3PAR. Indeed, after closing a $2-billion deal for 3PAR,  Dell would be on notice to show investors that the gambit was more than a vanity purchase.

But I doubt that HP is playing a maniacally devious game of M&A brinkmanship. If one considers what HP spent to acquire 3Com and Palm, it’s a company that isn’t afraid of paying top dollar to obtain assets it wants to buy. My thinking is that HP is in the race for 3PAR because it wants to own the company, not because it’s trying to drain Dell’s piggy bank.

That said, would HP go above $2 billion to claim the prize from Dell? Don’t ask me. I thought we’d hit nosebleed altitude on this transaction long before now.

A Hurd Conspiracy Theory

One of the conspiracy theories making the rounds about Mark Hurd’s forced departure from HP’s mahogany row is that at least some of the company’s board members set him up.

Yes, that seems outlandish, and I don’t put much stock in it. Still, let’s walk through the scenario, if only because it’s a Sunday morning and there’s not much else to do.

Exploring the Conspiracy Theory

According to the conspiracy theorists, a minority of HP board members had become convinced that Hurd had overstayed his welcome. They were concerned that Hurd had done all he could in implementing his unique brand of operational rigor, replete with “labor arbitrage” (that’s a bloodless description of shipping jobs overseas to low-cost jurisdictions), lean command-and-control hierarchies, relentless emphasis on efficiencies and cost cutting, and automation of any and all processes that could benefit from it.

Despite what the gullible business press tells you, Mark Hurd was no innovator. He wasn’t a strategic genius or a visionary. He didn’t really take HP into any new areas during his reign — they already had services before EDS, they already had networking before 3Com, they already had mobile devices before Palm. His proficiency was in making things run leaner and meaner, to the point where the company and its business units became carefully monitored, resource-maximized operations.

Not a Visionary

Hurd isn’t a creative man. He’s not Steve Jobs, looking to redefine product categories with striking new designs and far-reaching market vision. That’s not Hurd’s strength. Instead, his claim to fame was the ability to take charge of an organization and squeeze inefficiencies out of it. His preoccupation was the elimination of waste, which results in reduced operating expenditures, not the creation of new products and revenue streams.

The conspiratorial murmurs suggest that a minority of HP’s board members felt it was time for new leadership, that HP had executives in place who could carry on Hurd’s cost-control disciplines in his absence. What they felt they didn’t have, according to the theory, is a team of executives who could engender meaningful innovation at the company. Under Hurd, HP had become a company whose only innovations came in cost cutting.

Apparently the dissident shareholders didn’t have enough votes to oust Hurd, who was also the company chairman, without creating a catalyzing event, a pretext, for the change. Hence a setup and the scandal you’ve just read about in the news.

Other Factors

Now the conspiracy theory includes other background elements. As I mentioned yesterday, morale at HP, especially in the USA and Europe, is dangerously low. As you can see, Mark Hurd isn’t the most popular man in the world. At a certain point, especially if you have a company in which nobody below the executive level feels much like coming to work, you have a problem. There was also the matter of compensation. Hurd’s contract was coming to an end, and he apparently wanted to be paid like Alex Rodriguez.

Still, in my view, the conspiracy theory doesn’t hold. While I think we have yet to learn the truth about what really transpired between Mark Hurd and the mysterious marketing contractor, I don’t think a faction of HP’s board hatched a plot to fatally embarrass the company’s CEO. Anything could have happened, I suppose, but this scenario seems very unlikely.

The full story has yet to emerge, but I don’t think we’ll discover that a cabal of Hurd’s fellow board members engineered his downfall.

Questions Abound in Wake of Hurd’s Ouster

Not much happened this past week. Oh, except for the sudden resignation of Mark Hurd, HP’s now-former chairman and CEO, under mysterious circumstances and an obstinate cloud of suspicion.

I don’t think this story has played itself out. If the business press keeps digging, we’ll probably learn a lot more about the circumstances that precipitated Hurd’s abrupt ouster from the company he led for the last several years. The official story from HP,  as to what transpired and why Hurd had to go, doesn’t feel like the real story.

No Sexual Harassment

What we’ve been told is that an independent marketing contractor made sexual-harassment allegations against Hurd on or about June 29. HP’s board investigated the charges, and it found “numerous instances” in which Hurd submitted inaccurate expense reports intended to conceal Hurd’s “close, personal relationship” with the mystery woman, whom HP and her lawyer, Gloria Allred — yes, that Gloria Allred — refuse to identify.

At this point, I hasten to add that HP says it found no evidence of sexual harassment by the HP chieftain. What’s more, Allred wished “to make clear that there [had been] no affair and no intimate sexual relationship between our client and Mr. Hurd.”

What HP did find, according to the company’s general counsel, Michael Holston, was that Hurd’s behavior reflected a “profound lack of judgment” and violated HP’s standards of business conduct. Perhaps Holston is alluding exclusively to Hurd’s bogus personal expenditures on the company’s dime, which covered receipts for expenses ranging from $1,000 to $20,000 over two years, including meals and travel.

More Questions than Answers

As I mentioned before, though, it sure feels as though there’s a hidden dimension to this scandal. Questions abound.

Considering what HP has chosen to disclose about the matter, why didn’t it fire Hurd for cause instead of giving him a generous severance package? HP’s Omerta apparently is back with a vengeance. What about Allred’s client? Perhaps she’s walking away with a generous parting gift, too. Silence can be bought, though it doesn’t come cheap.

What was the nature of the relationship between Hurd and the mystery woman? It was’t sexual, evidently, but it was a “close, personal relationship.” Did it involve the disclosure of confidential, insider information by Hurd?

SEC Curiosity

This woman worked as a contractor on HP CEO forums that ran through the fall of 2009. If you will recall, the fall of 2009 was when HP acquired 3Com. Just before that acquisition was announced, some rather unusual trading in 3Com shares occurred, triggering the curiosity of the Securities and Exchange Commission (SEC). Did Hurd reveal anything to the mystery contractor that should not have been disclosed?

The SEC might wish to pursue that line of questioning.

There are other aspects to this story that I feel compelled to mention. Mark Hurd was lionized by shareholders and market analysts for increasing the market capitalization of HP during his reign. His actual accomplishments in that regard, however, might have been short-lived and overstated. That’s an argument that has been advanced repeatedly, including today, by Eric Jackson.

No Tears to Cry

While some shareholders might mourn Hurd’s passing, a large number of HP employees, past and present, won’t be shedding any tears for their former strongman. Hurd was reviled by many of them. It was’t for nothing that he had his own high-priced security detail and equipped HP’s executive entrance at its Palo Alto headquarters with the latest in physical-security gadgetry as well as a healthy dollop of old-school barbed wire.

Fear and loathing were palpable at Hurd’s HP. The CEO liked it that way. As recounted by the Los Angeles Times earlier today, Hurd made the following statement to the Wall Street Journal when he came aboard as HP’s CEO:

“As I’ve cut costs, I’ve seen some employees crying [when they've been laid off] and even brought to their knees. It’s painful — but as CEO these days, you face relentless pressure from shareholders.”

Should I say what I think here? In this case, I’ll keep my counsel. It’s better than having to hire one.

For Huawei, U.S. M&A Door Remains Closed

Huawei Technologies felt it would be different this time.

Back in 2008, Huawei was thwarted in its ambition to become a minority owner of 3Com, tagging along on an $2.2-billion acquisition bid by Bain Capital that ultimately was discouraged on national-security grounds by the Committee on Foreign Investment in the United States (CFIUS).

After that embarrassment, which caused a Huawei executive to term the American national-security concerns “bullshit” — if only because Huawei would have owned just 16.5 percent of 3Com if the Bain-led purchase had been approved — the Chinese network-gear company assumed a lower profile, licking its wounds and biding its time.

Better Luck This Time?

Huawei was strong in its home market, after all, and it was gaining momentum and customer patronage in Europe and in developing markets in Asia, Africa, and South America, too. It would have other opportunities to crack North America. Time was on its side.

In recent months, Huawei felt now was the time to step from the shadows again. The company believed circumstances had become more favorable, perhaps because of the worldwide economic downturn, perhaps because if felt that old doubts and reservations about its ties to the People’s Liberation Army (PLA) and China’s rulers had faded under a new presidential administration in the U.S.

Whatever the case, Huawei earlier this year got ready to take another high-profile plunge into M&A activity on American shores, this time without the cover of a private-equity partner. (One concern, which nobody uttered publicly back in 2008, was that Bain might have been acting as a temporary beard for Huawei, taking the majority share of 3Com up front only to sell it back to Huawei, which had a joint venture with 3Com called H3C, in increments. Was it true? We’ll probably never know.)

Lobbyists, Lawyers, and Investment Bankers

Just a few months back, according to sources quoted by Bloomberg, Huawei pulled out all the stops. It hired lobbyists, investment bank Morgan Stanley, and high-priced law firms such as such as Sullivan & Cromwell LLP and Skadden, Arps, Slate, Meagher & Flom LLP.

Even with all that well-connected hired help, and even though it outbid its rivals by a wide margin in two different acquisition forays, Huawei went home empty-handed. Again.

Indeed, as Bloomberg reported, Huawei outbid Nokia Siemens Networks (NSN) for Motorola’s telecommunications-networking unit and it offered more than Pace PLC put forward to close its purchase of 2Wire. In the case of the Motorola division, Huawei’s bid surpassed the one offered by NSN by more than $120 million.

In each case, the seller was concerned that a Huawei acquisition would be delayed or rejected on U.S. national-security concerns. As such, the sellers in both transactions sought to negotiate the simplest, surest deal rather than the one that offered the biggest payday. For its part, NSN got creative in negotiating an agreement with Motorola that indirectly boosted the value of its offer, allowing Motorola to argue that it had done its fiduciary duty in negotiating the best deal possible under the circumstances.

Motorola might even have gilded the lily by suing Huawei in the middle of July, alleging that the Chinese vendor had wrongfully obtained Motorola’s trade secrets relating to cellular-networking gear.

Back to the Stop Sign

Well, no matter how you cut it, Huawei has been rebuffed again. This time it had a coterie of well-heeled dealmakers in its corner, and it still was unable to overcome its own political radioactivity. Motorola and 2Wire, as well as their agents, were concerned that deals with Huawei might not be approved. Rather than take that risk, they went in a different direction.

What can Huawei do now? Short of an explicit announcement from the U.S. government that it will look favorably on Chinese network-equipment companies’ acquisitions of U.S. technology concerns — an unlikely scenario. to be sure — Huawei will remain at the same impasse that stopped it cold in 2008.

IBM Reorganization Prompts Questions

IBM announced its latest quarterly results yesterday, but it did something else, too: It reorganized itself, shuffling some executives upward and changing the reporting structure for others.

On the surface, it’s not a big deal. It goes on all the time, especially at large companies besieged by changing markets, technological advances, bureaucratic inertia, and intracompany politics. Reorganizations help to shake things up, to keep the generals and the troops focused externally, on customers and markets rather than on solipsistic careerism (not that there’s anything wrong with that) and departmental intrigue.

But I’m wondering whether the IBM move portends more than that. In disclosing the changes to IBM staff in an email, the company’s president, CEO, and chairman Sam Palmisano wrote the following about the most significant aspect of the change, the integration of IBM’s formerly independent Systems and Technology Group (STG) into the company’s Software Group:

“We know that IT infrastructure performance is greatly enhanced when every element – from microprocessors and storage through operating systems and middleware – is designed and brought to market as tightly integrated, optimized systems.”

It’s a straightforward observation, as well as a decent rationale for the change, but it might hint at something more. In recombining its hardware and software under the same executive management — and in acknowledging the enhanced infrastructure performance of “tightly integrated, optimized systems” — IBM’s move causes  one to wonder whether the company might consider becoming a purveyor of other presumably valuable pieces of optimized infrastructure.

Until now, for example, IBM has been willing to stay out of the network-infrastructure business. First, it had a partnership with Cisco, which it still invokes occasionally for mutual benefit, and more recently it has partnered with Brocade and Juniper Networks. Through those partnerships, IBM covers the networking gamut, able to offer its customers extensive solutions that reach from the network edge to the core.

It doesn’t own the gear it sells, though. And it might not feel the need to offer its own gear, even now. But circumstances have changed since it first partnered with Cisco. Back then, Cisco wasn’t trying to sell servers, and it wasn’t aggressively pushing storage from EMC, an IBM “coopetitor.” Moreover, during the same intervening period, HP has gotten more serious about network infrastructure, buying 3Com to complement its HP ProCurve business and to form HP Networking.

Even Oracle is making sounds about getting into the networking game via an acquisition. That would make IBM think twice, if not three times, about whether it needed to change tack. In fact, it’s probably giving ample thought to the matter now.

I don’t presume to know what Palmisano and his inner sanctum are saying after they pad into the boardroom on IBM’s mahogany row. But I do know that this reorganization, entirely logical and justified in its own right, makes me wonder whether the stage has been set for a different sort of move.

HP Keeps UCC Options Open

When it comes to unified communications and collaboration (UCC), HP isn’t ready to bet the house on a single partner. It has struck UC-related partnerships with Microsoft, Avaya, and Alcatel-Lucent, and it also has the capability, through products obtained as a result of its 3Com acquisition, to develop a home-grown alternative.

It isn’t surprising that HP’s channel partners and customers, as well as neutral observers, are confused by HP’s seemingly promiscuous approach to UCC solutions. I’ll try to shed a bit of light on the situation, but I suspect nothing is carved in stone and that HP’s strategy will be subject to change.

HP’s latest UCC-related move involves Avaya.  The two companies announced a three-year alliance in which HP will sell and service Avaya UC and contact-center products as part of HP’s UCC enterprise-level services portfolio. The deal was inked in the aftermath of a similar 10-year accord that HP struck with Alcatel-Lucent.

Avaya and Alcatel-Lucent struck their deals with HP’s services business, which will act as a system integrator in bundling and delivering solutions to customers. It’s worth noting that HP also has a video-collaboration and UC partnership with Polycom.

The partnership with Microsoft is a bit different. That relationship primarily involves HP’s product and marketing groups, and it entails ongoing product integration and joint-marketing programs that stemmed from  the companies’ Frontline Partnership. Another difference is that Microsoft is taking a desktop-oriented approach to delivering unified communications whereas HP’s other partners, Avaya and Alcatel-Lucent, are addressing it from the IP PBX.

HP has decided to play the field for a couple reasons. First, the UCC space remains an underdeveloped market whose best days remain ahead of it. Despite years of hype, unified communicaitons has yet to fulfill its potential. To be fair, the reasons for that underachievement have more to do with industry politics and macroeconomic circumstances than with technological factors. Nonetheless, the market is one that has seemed perpetually on the cusp of better times.

Another reason that HP has cast a wide net with its UCC partnering efforts is that the predilections of the market, both with regard to vendors and architectural approaches, have yet to be revealed. Neither the PBX approach from Avaya and Alcatel-Lucent nor the desktop gambit from Microsoft has been declared a definitive winner. Moreover, the possibility exists that hosted UCC solutions might prove attractive to a significant number of enterprise customers. HP is getting into the game, but it’s spreading its bets across a number of leading contenders until the odds shift and one vendor establishes a clear market advantage.

As for why HP is getting into the game, well, the answer is partly that the company detects improving fortunes for UCC and partly that it feels compelled to respond to Cisco. One thing that HP and all its UCC partners have in common is competition against Cisco. HP needs an enterprise alternative to what Cisco is offering, and these partnerships provide it with various options.

Even though HP focused on the SME space with its latest Microsoft UCC announcement, I can’t see clear horizontal- or vertical-market delineation in HP’s partnering strategy.

Consequently, HP’s technology partners can’t feel overly secure. Any of these deals could fall apart, in real (revenue-generating) terms, without much warning. HP will follow its customers’ money. At the same time, it might be tempted to build or buy its own alternative. Further chapters in this story are sure to written.

HP’s Converged-Infrastructure Story Gets Better, but Customers Understandably Wary

Earlier this week, Hewlett-Packard took further strides toward the realization of its vision for converged infrastructure. The occasion was HP’s TechForum 2010 event in meretricious Las Vegas, where nothing is as it seems and sensory overload is a state of mind.

HP announced a raft of products and product enhancements, including new server, storage, and data-center offerings. The prominent themes were automation, cost-reduction, efficiency, simplification, and — lest we forget — convergence.

HP’s message was one of coherence and symmetry. You can see where it’s going and how these product announcements — which brought HP up to speed with its competitors in some areas (rack-mount and blade servers) and arguably ahead in others (simplified application provisioning and server energy-effiency management) — advance the company, and perhaps some of its customers, toward an all-HP converged data center.

Still, HP hasn’t delivered a knockout punch, with this announcement or any that preceded it. Instead, it has fleshed out a narrative, telling a better story as it goes along. Gaps remain, especially in networking, where HP has yet to fully integrate 3Com and its product portfolio into its grand scheme for converged infrastructure. That story will come, I’m sure.

A bigger concern, though, is whether customers will buy what HP is selling. Early indications suggest customers are understandably wary about getting boxed into HP’s self-contained world of converged servers, storage, networking, management tools.

HP will cavil here, protesting that what it offers isn’t proprietary. It will say, as it does, that HP’s converged infrastructure is built on open standards, and that customers “can change out whatever they like.”

Well, HP is being disingenuous. It knows that’s not entirely true, and so do savvy customers.

Yes, much of HP’s hardware products are based on industry standards that make them functionally interoperable with gear from other vendors. That said, HP includes proprietary management software with its servers and storage boxes that feature special hooks for optimized performance on HP systems. Once customers buy into HP’s infrastructure-management software — for application provisioning, automation, energy efficiency, and so forth — HP hopes they’ll be disinclined to accept any potential performance trade-offs inherent in a mixed-vendor environment.

HP’s challenge, then, is to convince customers that the value inherent in its converged infrastructure is sufficiently attractive to compensate for the perceived or real cost of proprietary lock-in. HP must show that it has a sustainable edge, that it will continue to innovate, that its approach really does deliver compelling ROI and superior cost savings from all that automation, simplification, and — yes — convergence.

It’s a daunting challenge. Customers and resellers aren’t certain they want to take the ride. The former have products and systems that already work from vendors with which they’re comfortable, and many of the latter aren’t sure they want to bet the farm on HP.

For HP, conceiving and articulating the big-picture vision for converged infrastructure was the easy part. Getting the rest of the world to buy into the master plan will involve a lot of hard work. It’s too early to render a definitive verdict, but HP might have to reconcile itself to a world in which customers continue to subscribe to the vendor diversity and system interoperability HP claims to espouse.

Dell Reloads in Mid-Market Data Center

Last week, Dell announced a fusillade of products for small- and medium-sized enterprises looking to benefit from converged, virtualized data centers.

Depending on one’s vantage point, Dell proactively announced the products to offer its mid-sized enterprise customers interoperable solutions that will allow them to derive efficiencies from data-center automation;  or it made the announcement reactively, in a bid to preclude incursions into its installed base by Cisco, IBM, HP, and perhaps even Oracle, which has yet to play the data-center-hardware hand that it was dealt in its marathon acquisition of Sun Microsystems.

In receiving an update yesterday from Brian Payne, director of Dell PowerEdge servers, and Mike Roberts, senior manager of Dell PowerEdge servers, I was struck by how much emphasis the Dell spokesmen placed on two key themes: openness and innovation.

For Dell, architectural openness is defined by interoperability, adherence to industry standards, and customer freedom from proprietary lock-in. Dell draws a distinction between its interoperable approach to data-center networking and the proprietary offerings of Cisco and, increasingly, HP. Dell contends that customers that adopt  converged data-center solutions from HP or Cisco — encompassing servers, storage, networking, and virtualization — could find themselves tied to a vendor that stops innovating. For those customers, the result could be competitive disadvantage, especially if their counterparts patronize vendors  — for instance, Dell — that offer an interoperable, open model.

This leads to a discussion of innovation. Dell is at pains to stress that it has innovated and continues to innovate in the data center. Indeed, while there’s nothing revolutionary or dramatically disruptive in Dell’s new slate of product announcements, the company is making noteworthy advances in its server architectures, its storage offerings, its management software, and its support for virtualization. It’s also innovating, through its Dell Business Ready Configurations, in offering preconfigured solution bundles to mid-size enterprises in target vertical markets.

Although Dell suffers from a brand-image hangover that has proven difficult to shake,  the company has escaped from the ghetto of white-label box vendors. To be sure, Dell still has chapters to write in its data-center narrative, but it is proving adept at devising and deploying viable technical architectures and business solutions for its target markets.

In that respect, what Rob Enderle, principal analyst at the eponymous Enderle Group, told Channel Insider rings true:

“The market likes choice and specialization. No one vendor, since IBM owned this market, has been able to be expert enough at all business sizes and types providing room for each vendor to specialize and carve out a market.”

“Dell tends to favor firms who want to do much of the work themselves, aren’t particularly interested in global services, and want a hardware vendor who is at arm’s length from software to avoid lock-in. There appear to be enough of those folks to sustain Dell.”

I generally agree. Moreover, I think a case can be made that those customers, once they’ve made a significant data-center buying decision, are unlikely to switch vendors unless they’re given a compelling reason to do so. Usually, though not necessarily, that impetus would involve their incumbent vendor falling woefully behind the innovation curve over a sustained period.

Dell is cognizant of the risk, which explains why the company is pushing the innovation theme so forcefully. It wants customers to understand that its interoperable converged data center doesn’t involve an innovation tradeoff in relation to alternatives from IBM, HP, and Cisco.

Accordingly, Dell draws attention to the fact that its new blade-server hardware features the latest industry-standard microprocessors from Intel (in the PowerEdge M710HD) and AMD (in the PowerEdge R715), not to mention an interesting utilization of general-purpose GPUs in its PowerEdge M610x.

Similarly, Dell cites automated data tiering and performance improvements in its EqualLogic PS6000XVS and PS6010XVS storage arrays. It also talks up the performance advances in its PowerVault MD3200 and PowerVault MD3200i storage arrays.

On the networking side, with the release of PowerConnect-J series of products, the first offerings derived from Dell’s OEM agreement with Juniper, Dell emphasizes that its customers can rely on Dell’s networking partnerships to ensure that they don’t suffer from Cisco envy. There is a similar message in Dell’s extension of the PowerConnect B-Series of chassis-based switches OEMed from Brocade. which recently gave its own notice that it has its head and heart back in the enterprise-networking fight.

Dell also draws attention to energy-efficiency enhancements delivered in its M1000e blade-server chassis, and it notes systems-management updates to its Lifecycle Controller, Chassis Management Controller, and Integrated Dell Remote Access Controller (iDRAC). Yes, a lot of this is rustic meat and potatoes, but it’s all part of the data-center buffet, and Dell needs to demonstrate that it hasn’t forgotten to provide  a full menu.

When I spoke with Dell, I got the feeling that it fears Cisco most of all. IBM plays upmarket, mostly out of Dell’s neighborhood, and HP is a known commodity — in more ways than one — perhaps with a reputation for enterprise innovation that is no longer warranted under the grim cost-cutting scythe of Mark Hurd’s technocrats of doom.

Cisco, though, seems to command Dell’s full attention. There appears to be a belief within Dell that Cisco won’t be content to spread its Unified Computing System (UCS) for data centers exclusively to high-end enterprises and cloud-based service providers. That assumption is probably correct. Dell has reason to be concerned.

Then again, healthy paranoia never hurt anybody. If concern about Cisco keeps Dell focused on delivering solutions to its core customers in the middle market, the preoccupation will have been a positive stimulus.

As a company, though, Dell might have a better chance defending its turf if it put more resources into its SME and enterprise strategies and product portfolios and proportionally fewer resources into consumer markets, where it seems destined to lose market share and squander brand equity.

Learning from F5’s Success Against Cisco

Earlier today while perusing the morning chatter on Twitter, I learned via Brad Reese that market-research firm Infonetics says F5 Networks has opened a commanding nearly 20-point lead over Cisco Systems in the market for application-delivery controllers (ADCs).

Citing the Infonetics data, which reaches as far as the first quarter of this year, Reese professes astonishment that F5 has surged so far ahead of Cisco after being in a neck-and-neck battle with the networking giant as recently as the fourth quarter of 2008.

I can’t say that I’m surprised at F5’s success. Despite Cisco making several acquisitions over the years in the load-balancing and application-delivery markets, it never has been able to find the silver bullet to smite F5.

We can see now that load balancing and its descendants were markets that got away from Cisco. If you look back into the ancient history of networking — yes, let’s go back as far as 1996, shall we?  — we see that Cisco first tossed its  LocalDirector into the ring to dispose of F5.

After LocalDirector was discontinued in 2003, Cisco turned to technology it had obtained as a result of its extravagant acquisition of ArrowPoint Communications, for a whopping $5.7 billion, in 2000. Before the discontinued of LocalDirector, Cisco went through an uncomfortable period where LocalDirector, technology from ArrowPoint, and other in-house technologies jostled for dominance in Cisco’s load-balancing portfolio. It wasn’t pretty, and it was confused for field-sales representatives and channel partners alike.

At this point in my narrative, I will digress, but stay with me.

In retrospect, Cisco might claim, given the obscene valuations of public and private companies back then, that its ArrowPoint purchase wasn’t as crazy as it looks from our current perspective. To support its point, Cisco might cite Nortel’s acquisition of Alteon WebSystems, an ArrowPoint competitor, for stock initially valued at $7.8 billion (but which was worth less by the time the deal closed).

But citing Nortel’s acquisitions as a rationalization for one’s own corporate debauchery probably isn’t the strongest defense. As a loquacious lawyer would say, that sort of rationalization might explain one’s actions, but it does not excuse them. Besides, Nortel eventually sold its Alteon assets to Radware for $17.65 million, which tells you all you need to know about why Nortel is a defunct company.

Returning from my historical perambulations, I want to draw a couple of inferences from the trip down memory lane. First, all those companies — not just Cisco, but Radware, ArrowPoint, Alteon (and later Nortel) — were F5 competitors. Second, once upon a time, given the erstwhile valuations of the likes of ArrowPoint and Alteon, the market attached whopping value to the space and felt it was ripe for big-vendor consolidation and a changing of the market-leadership guard.

But it didn’t happen. Despite all the big vendors buying companies around it — Intel also acquired a company called iPivot, for $500 million in 1999, that was trying to solve server-bottleneck problems — F5 more than held its own. And it continued to do so, even though Cisco has kept taking runs at it.

So, considering the big picture, why has F5 succeeded against Cisco where so many others have failed?

One of the reasons, and I have seen and heard others mention it, is focus. Unlike some vendors who’ve failed miserably against Cisco over the years — Nortel, the pre-Chinese incarnation of 3Com, Cabletron and its scattered progeny — F5 had market discipline, focus, and unswerving resolve. It was not blinded by hubris or delusions of grandeur. The company went deep rather than wide, stuck to what it knew best, and worked hard at staying close to its customers and building the best products on the market.

When F5 has chosen to expand into new markets, it has not done so hastily. The company has taken a measured approach, adding products purposefully and making acquisitions (most of the time) of the tuck-in variety, ensuring that such purchases are accretive in the near term. This was all part and parcel of F5’s business and market discipline.

What else? I think the company’s channel-sales structure was carefully planned and well built, drawing from best practices in networking and other sectors. After learning some hard lessons, F5 stressed quality over quantity (as in number of) partners. F5 constructed a sales-support apparatus that could scale effectively, providing all the necessary backing that channel partners needed to prosper.

In technology partnerships, F5 has been similarly focused. Look, for example, at its application-related partnerships with Microsoft, SAP, and Oracle. F5 knows where BIG-IP plays in those application environments, and it has derived considerable value from providing proven and innovative solutions that help customers run those applications more productively.  Again, discipline has been key. The same holds true for the company’s other technology partnerships across areas such as infrastructure, management, security, telecommunications, and virtualization.

Its solution sets and vertical-market programs have grown in a similarly deliberate manner.

Another important consideration — and, again, it’s something others have mentioned — is its community outreach to customers, IT professionals, and developers. In that regard, F5’s DevCentral has been indispensable. A lot of attention and resources are invested in DevCentral — and it shows. The site went through a refresh earlier this year, but it invariably has provided a welcoming forum for collaboration and discussion not only relating to F5’s products but also to some of the broader data-center challenges faced by IT professionals.

F5 demonstrates that it’s possible to compete and win against Cisco. As Cisco extends itself into market adjacencies, it is advancing into areas that are new to it but that often already have incumbent vendors. Those companies — in the smart grid, in next-generation IP video services, in digital signage, and in many other areas besides — should study the F5 playbook. It offers practical guidance on how to keep the giant at bay.

Motivations and Machinations Behind Brocade One

Well, I’m finally getting around to commenting on the Brocade One announcement earlier this week. To understand the present, however, it often is necessary to have an appreciation of the past. Brocade’s recent history was the precursor to its announcement this week, and recounting that history will help us understand what the company is trying to accomplish.

Cast your mind back to last fall. You might recall that a neon “for sale” sign had been placed in front of Brocade’s corporate logo. The company was being shopped aggressively by its investment-banker agents. Its executives appeared to have concluded that the company would be better off under the auspices of a bigger industry player than it would be as an independent vendor. Rumors abounded that somebody — HP, IBM, Oracle, Dell, even Juniper — might take the company off the market for copious riches that would keep Silicon Valley’s luxury-car dealers from having to carry lower-end models. Of course, the rumored deal never happened, and Brocade’s CEO protested that he wasn’t shopping the company.

That non-event still reverberated, primarily within Brocade’s installed base. Customers don’t like hearing their vendors are for sale. When customers buy products, they invest in relationships with vendors that sell the products. Amid all the heated hype and careless whispers about Brocade’s rumored sale, customers got nervous. Who would buy the company, and what would the new owner, when on materialized, do with Brocade’s product portfolio?

Investment bankers might have stopped talking about a Brocade acquisition, but many Brocade customers couldn’t and didn’t forget about it. They wanted to know whether Brocade had thrown in the towel, whether the company remained committed to them and dedicated to the markets it served. These were valid questions, and just having field sales representatives provide stock answers wasn’t enough.

In the period preceding the acquisition chatter, Brocade was struggling to integrate its own $3-billion acquisition of Foundry Networks, an Ethernet-switch vendor that, like so many before it, tilted quixotically at Cisco’s enterprise windmill. Brocade, which made its name in storage networking, didn’t seem to know what to do with Foundry, whose morale and sales suffered in the deal’s aftermath. Pulling the companies together under a shared vision and unified product strategy proved exceedingly difficult for Brocade’s executives.

When it became clear that Brocade wasn’t about to find a buyer, that it had to solve the Foundry problem on its own, the company changed gears. It brought aboard some seasoned executive talent, including John McHugh, who had extensive experience battling Cisco in Ethernet switching, and it sought to craft a new narrative stressing reinvention and a bright future.

So, that’s the context for the announcement that took place earlier this week. Brocade’s challenges were threefold: calm a nervous customer base concerned about the company’s direction and future viability; demonstrate that it had righted the foundering Foundry ship; show some thought leadership on the future of data-center networking, with due consideration given to rampant virtualization and increasing adoption of cloud computing.

In announcing Brocade One, the company addressed all those issues. Brocade showed it had the necessary chops for vision and strategy, it illustrated that it finally had harnessed and integrated the Foundry portfolio into a cohesive solution set (at least on paper), and it demonstrated to customers that it was ready to provide new collapsed network fabrics for evolving data centers.

Well played, Brocade, well played. You turned an existential corporate crisis into an opportunity for triumphant reinvention. The company deserves credit for recognizing its dilemma and climbing out of the hole it had dug for itself.

Not surprisingly, Brocade is taking a partnering approach to providing solutions for the next-generation data center. In this case, though, necessity is the mother of invention. Unlike Cisco, but like Juniper, Brocade has chosen the partnering path because it’s the only one available to it. That doesn’t mean that path isn’t the right one, or that it won’t lead to a pot of gold, but Brocade didn’t have much choice in the matter. Against Cisco or HP, it wouldn’t win in a competition based on resources and vertical scale.

All the big networking players are emphasizing virtualization, cloud computing, and convergence. Brocade is no exception. Theoretically, they’re all in agreement about the need to abstract (hide) complexity from customers through automation, and they’re all seemingly committed to simplifying and flattening network architectures. All networking vendors are saying today’s networks won’t adequately support increasing virtualization, but some beat the drum more fervently than others. Obviously, Cisco — as the enterprise networking behemoth — has more to lose than its competitors from a jarring or sudden market transition away from the status quo.

Clearly that transition presents a once-in-a-lifetime opportunity for Cisco’s competitors. An awareness of that opportunity was implicit in much of the message Brocade delivered this week.

Meanwhile, Cisco, Juniper, and Brocade are taking different architectural approaches to redesigning the data-center networks, whereas HP, for now, seems content to position itself as the vendor who will commoditize the hell out of them. Cisco is pushing its Nexus switches, its Unified Computing Systems (UCS), VMWare virtualization technologies, and EMC storage. HP is coming at the market with a similar one-stop-shopping approach, though it will play the field on virtualization, pushing a cheap-and-cheerful approach to low-priced, standards-based networking gear. For HP, at least at this point, networking is where it will pound away at Cisco’s margins rather than where it will innovative its way to market leadership.

Juniper, as we know, has laid out its 3-2-1 strategy, on the road to Stratus. It’s a partner-intensive formula, with IBM and Dell critical to the company’s success.  Juniper has spent a lot of time formulating a JUNOS strategy that looks relatively well baked. The more substantive value it can deliver to its customers and partners through JUNOS, the more likely Juniper will prosper. It’s a good plan, albeit one that remains, like much of the next-generation networking architectures, a work in progress.

An interesting sidebar will be HP’s partnership with Brocade. Now that it owns 3Com, HP has Ethernet switches that span the enterprise gamut. Those will compete against Brocade’s Foundry portfolio, even though HP still carries Brocade’s storage-networking products.

Some observers believe Brocade remains for sale, and that the company chose to pursue a strategic makeover for the sake of appearance, to make it look both more attractive and more threatening to potential acquirers. If that’s  true, HP remains a company whose attention Brocade would want to draw. Oracle has yet to play its networking cards, too, and Dell is at a crossroads, unsure of whether to follow the path of HP or of IBM.

In any good story, the reader can’t wait to see what happens next. As data-center networking gets redefined by pervasive virtualization and cloud computing, we’ll all be closely monitoring events.

For the first time in years, and to a far greater extent than in recent history, customers will hold nearly all the cards in enterprise networking. Incumbency has its privileges, obviously, but it’s no guarantee of indefinite rule. Change is coming, vendors are staking positions and making claims, but customers ultimately will decide which vendors will lead them into a brave new world.

Toward an Understanding of the China Problem

In this post, I will attempt to pull together some interrelated and overlapping observations (which I have touched on previously) and synthesize them into what I hope will be a rough framework for understanding some of what’s been happening to the global technology industry.

This is a blog, however, and not a book, so I’ll be painting in broad brushstrokes. Some generalizations will be closer to the mark than others, and for that I readily apologize. Still, I thought it was time to write this particular piece. Let’s get on with it.

The very thing that the helmsmen of market-based capitalism wanted most of all might have sewn the seeds of its decline.

Transnational corporations obviously wanted globalization. It would give them access to new sources of growth in foreign markets; it also would provide access to new investment opportunities, new supply-chain relationships, and new pools of low-cost labor. If you were a corporate chieftain, what was not to like about globalization?

But perhaps they forgot about the enduring, immutable law of unintended consequences.

In some ways, globalization has undermined market-based capitalism’s formula for success. For years, as global markets were regulated and protected, corporations struck a tacit pact, or a socioeconomic contract, with the governments and peoples in their home markets and their primary sales territories.  Corporations would generate returns for their shareholders, governments would benefit from corporate tax revenue, and the people would benefit from jobs at the corporations as well as from the infrastructure and services that taxation funded.

But, with globalization – especially in the context of the aftermath of the global financial crisis and China’s rise as an industrial hegemonic power – the old models and verities are unraveling. Many transnational corporations, who serve shareholders before all others, might be compelled by circumstance to reassess their accommodations of enlightened self-interest with governments, employees, and other secondary stakeholders in their home markets.

What I am suggesting here, in a roundabout way, is that globalization set the stage for China – with its massive domestic market and its command-and-control state-based capitalism — to steal a march on market-based capitalism’s standard bearers.  While the social compact in developed markets seemingly has broken down, China has fashioned an impressive alignment of interests between its political rulers, its people, and its geopolitical industrial strategy.

Keenly attuned to history, China’s rulers recognize that it’s easier to run an immense country with the implicit consent of the population than without it. China’s political masters have been careful to ensure that China’s people benefit from the country’s economic growth and industrialization. That’s why we see policies like “indigenous innovation,” designed to ensure that homegrown Chinese companies, products, and technologies are favored domestically over their foreign counterparts. The Chinese market is a big market, and if Chinese companies can dominate there, they will have the economies of scale to compete successfully, in many market segments, on the global stage.

China’s authorities recognize, at a fundamental level, that their long-term political control is inextricably linked to how well they pacify and placate the Chinese population. Providing people with jobs, rising income, and improving standards of living will be essential to the long-term rule of China’s political elite. This is why China will not allow itself to remain in the relative ghetto of commodity-product manufacturing. The Chinese authorities have devised an intricate, sophisticated plan that envisions the country and its people ascending the technological value chain, moving up from low-cost manufacturing to higher-end innovation and research and development (R&D). That transition won’t be easy to achieve, but it has begun.

Look at what is happening in many renewable-energy markets, such as photovoltaics and wind power, where Chinese companies are trying to advance from the manufacture of cheap knockoff products to the development of innovative breakthroughs. They have a lot of work to do, especially on wind turbines, but the plan clearly is in place.

In computer networking, Huawei went from, um, emulating the likes of Cisco Systems and Alcatel to developing its own standards-based networking products that now compete nearly as much on quality as on price against products from longtime market leaders. Cisco CEO John Chambers has said Huawei increasingly is his biggest global competitor, and he is not flattering to deceive.  It’s no coincidence that HP bought 3Com, which had transformed itself into a Chinese company with an American façade.

Meanwhile, the information-technology industry is commoditizing, a process intensified by what HP terms “labor-market arbitrage” – a euphemistic phrase denoting a transfer of jobs across international boundaries to where they can be done cheapest – and increased automation of functions that formerly were delivered by humans. At the same time, the global economy is undergoing a major realignment, as tapped-out consumers (and many governments and businesses, as well) in Western markets can no longer fulfill their role as consumption catalysts. Growth is occurring elsewhere – in the BRIC nations and beyond – and jobs are moving with it.

When the developed-world’s consumers could still buy more stuff than they actually needed, China – the world’s manufacturer – was more than content to buy U.S. treasuries to sustain a mutual relationship of convenience. Now , though, as the U.S. consumer engine sputters, China is reassessing its options. Already, we’ve heard Chinese officials say the U.S. and Europe are “less indispensable” to China’s strategic aspirations than they were in the past. Chinese has begun cultivating its own consumer economy, but it’s doing so under a state-controlled capitalism that espouses “indigenous innovation,” under which Chinese companies will keep most spoils and benefits at home.

Many Western technology companies are banking on growth derived from sales of products and services in China. As long as China pursues policies of nationalist mercantilism and indigenous innovation, those growth expectations are unlikely to be realized.

The only way Western companies will be allowed to derive big contracts from China’s biggest customers, most of which are owned or affiliated with the Chinese government, will be by moving their core R&D efforts and initiatives to China, which will make them subject to that country’s intellectual-property rights (IPR) and laws. This strategy amounts to a very different type of labor arbitrage from the one to which transnational companies have subscribed.

Fear not, though, because Chinese regulations and laws pertaining to intellectual property will become more effective and protective as China gains the upper hand in innovation and R&D. As HP has figured out, China doesn’t so much care that a company is Chinese as long as it plays by China’s rules, which will entail doing an increasing percentage of innovation and R&D in China, and not elsewhere.

Think about that.  It might be a beneficial arrangement for corporate shareholders – though that remains to be seen – but it’s not so good for engineers, researchers, and many other knowledge workers in Western economies.

I think this dynamic, the zero-sum rise of China at the direct expense of many of us in the developed world, is a problem that needs to be recognized and addressed. What China is pursuing is not your father’s market-based capitalism, in which the benefits of trade presumably would be widely shared worldwide. This is a different model, one guided primarily by geopolitical considerations. As it gains ground, it will have major repercussions worldwide.