Category Archives: Business models

Lessons for Cisco in Cius Failure

When news broke late last week that Cisco would discontinue development of its Android-based Cius, I remarked on Twitter that it didn’t take a genius to predict the demise of  Cisco’s enterprise-oriented tablet. My corroborating evidence was an earlier post from yours truly — definitely not a genius, alas — predicting the Cius’s doom.

The point of this post, though, will be to look forward. Perhaps Cisco can learn an important lesson from its Cius misadventure. If Cisco is fortunate, it will come away from its tablet failure with valuable insights into itself as well as into the markets it serves.

Negative Origins

While I would not advise any company to navel-gaze obsessively, introspection doesn’t hurt occasionally. In this particular case, Cisco needs to understand what it did wrong with the Cius so that it will not make the same mistakes again.

If Cisco looks back in order to look forward, it will find that it pursued the Cius for the wrong reasons and in the wrong ways.  Essentially, Cisco launched the Cius as a defensive move, a bid to arrest the erosion of its lucrative desktop IP-phone franchise, which was being undermined by unified-communications competition from Microsoft as well as from the proliferation of mobile devices and the rise of the BYOD phenomenon. The IP phone’s claim to desktop real estate was becoming tenuous, and Cisco sought an answer that would provide a new claim.

In that respect, then, the Cius was a reactionary product, driven by Cisco’s own fears of desktop-phone cannibalization rather than by the allure of a real market opportunity. The Cius reeked of desperation, not confidence.

Hardware as Default

While the Cius’ genetic pathology condemned it at birth, its form also hastened its demise. Cisco now is turning exclusively to software (Jabber and WebEx) as answers to enterprise-collaboration conundrum, but it could have done so far earlier, before the Cius was conceived. By the time Cisco gave the green light to Cius, Apple’s iPhone and iPad already had become tremendously popular with consumers, a growing number of whom were bringing those devices to their workplaces.

Perhaps Cisco’s hubris led it to believe that it had the brand, design, and marketing chops to win the affections of consumers. It has learned otherwise, the hard way.

But let’s come back to the hardware-versus-software issue, because Cisco’s Cius setback and how the company responds to it will be instructive, and not just within the context of its collaboration products.

Early Warning from a Software World

As noted previously, Cisco could have gone with a software-based strategy before it launched the Cius. It knew where the market was heading, and yet it still chose to lead with hardware. As I’ve argued before, Cisco develops a lot of software, but it doesn’t act (or sell) like software company. It can sell software, but typically only if the software is contained inside, and sold as, a piece of hardware. That’s why, I believe, Cisco answered the existential threat to its IP-phone business with the Cius rather than with a genuine software-based strategy. Cisco thinks like a hardware company, and it invariably proposes hardware products as reflexive answers to all the challenges it faces.

At least with its collaboration products, Cisco might have broken free of its hard-wired hardware mindset. It remains to be seen, however, whether the deprogramming will succeed in other parts of the business.

In a world where software is increasingly dominant — through virtualization, the cloud, and, yes, in networks — Cisco eventually will have to break its addiction to the hardware-based business model. That won’t be easy, not for a company that has made its fortune and its name selling switches and routers.

Fear Compels HP and Dell to Stick with PCs

For better or worse, Hewlett-Packard remains committed to the personal-computer business, neither selling off nor spinning off that unit in accordance with the wishes of its former CEO. At the same, Dell is claiming that it is “not really a PC company,” even though it will continue to sell an abundance of PCs.

Why are these two vendors staying the course in a low-margin business? The popular theory is that participation in the PC business affords supply-chain benefits such as lower costs for components that can be leveraged across servers. There might be some truth to that, but not as much as you might think.

At the outset, let’s be clear about something: Neither HP nor Dell manufactures its own PCs. Manufacture of personal computers has been outsourced to electronics manufacturing services (EMS) companies and original design manufacturers (ODMs).

Growing Role of the ODM

The latter do a lot more than assemble and manufacture PCs. They also provide outsourced R&D and design for OEM PC vendors.  As such, perhaps the greatest amount of added value that a Dell or an HP brings to its PCs is represented by the name on the bezel (the brand) and the sales channels and customer-support services (which also can be outsourced) they provide.

Major PC vendors many years ago decided to transfer manufacturing to third-party companies in Taiwan and China. Subsequently, they also increasingly chose to outsource product design. As a result, ODMs design and manufacture PCs. Typically ODMs will propose various designs to the PC vendors and will then build the models the vendors select. The PC vendor’s role in the design process often comes down to choosing the models they want, sometimes with vendor-specified tweaks for customization and market differentiation.

In short, PC vendors such as HP and Dell don’t really make PCs at all. They rebrand them and sell them, but their involvement in the actual creation of the computers has diminished markedly.

Apple Bucks the Trend 

At this point, you might be asking: What about Apple? Simply put, unlike its PC brethren, Apple always has insisted on controlling and owning a greater proportion of the value-added ingredients of its products.

Unlike Dell and HP, for example, Apple has its own operating system for its computers, tablets, and smartphones. Also unlike Dell and HP, Apple did not assign hardware design to ODMs. In seeking costs savings from outsourced design and manufacture, HP and Dell sacrificed control over and ownership of their portable and desktop PCs. Apple wagered that it could deliver a premium, higher-cost product with a unique look and feel. It won the bet.

A Spurious Claim?

Getting back to HP, does it actually derive economies of scale for its server business from the purchase of PC components in the supply chain? It’s possible, but it seems unlikely. The ODMs with which HP contracts for design and manufacture of its PCs would get a much better deal on component costs than would HP, and it’s now standard practice for those ODMs to buy common components that can be used in the manufacture and assembly of products for all their brand-name OEM customers. It’s not clear to me what proportion of components in HP’s PCs are supplied and integrated by the ODMs, but I suspect the percentage is substantial.

On the whole, then, HP and Dell might be advancing a spurious argument about remaining in the PC business because it confers savings on the purchase of components that can used in servers.

Diagnosing the Addiction

If so, then, why would HP and Dell remain in the PC game? Well, the answer is right there on the balance sheets of both companies. Despite attempts at diversification, and despite initiatives to transform into the next IBM, each company still has a revenue reliance on – perhaps even an addiction to — PCs.

According to calculations by Sterne Agee analyst Shaw Wu, about 70 to 75 percent of Dell revenue is connected to the sale of PCs. (Dell derived about 43 percent of its revenue directly from PCs in its most recent quarter.) In relative terms, HP’s revenue reliance on PCs is not as great — about 30% of direct revenue — but, when one considers the relationship between PCs and related related peripherals, including printers, the company’s PC exposure is considerable.

If either company were to exit the PC business, shareholders would react adversely. The departure from the PC business would leave a gaping revenue hole that would not be easy to fill. Yes, relative margins and profitability should improve, but at the cost of much lower channel and revenue profiles. Then there is the question of whether a serious strategic realignment would actually be successful. There’s risk in letting go of a bird in hand for one that’s not sure to be caught in the bush.

ODMs Squeeze Servers, Too

Let’s put aside, at least for this post, the question of whether it’s good strategy for Dell and HP to place so much emphasis on their server businesses. We know that the server business faces high-end disruption from ODMs, which increasingly offer hardware directly to large customers such as cloud service providers, oil-and-gas firms,  and major government agencies. The OEM (or vanity) server vendors still have the vast majority of their enterprise customers as buyers, but it’s fair to wonder about the long-term viability of that market, too.

As ODMs take on more of the R&D and design associated with server-hardware production, they must question just how much value the vanity OEM vendors are bringing to customers. I think the customers and vendors themselves are asking the same questions, because we’re now seeing a concerted effort in the server space by vendors such as Dell and HP to differentiate “above the board” with software and system innovations.

Fear Petrifies

Can HP really become a dominant purveyor of software and services to enterprises and cloud service providers? Can Dell be successful as a major player in the data center? Both companies would like to think that they can achieve those objectives, but it remains to be seen whether they have the courage of their convictions. Would they bet the business on such strategic shifts?

Aye, there’s the rub. Each is holding onto a commoditized, low-margin PC business not because they like being there, but because they’re afraid of being somewhere else.

Amazon’s Advantageous Model for Cloud Investments

While catching up with industry developments earlier this week, I came across a Reuters piece on Amazon’s now well-established approach toward investments in startup companies. If you haven’t seen it, I recommend that you give it a read.

As its Amazon Web Services (AWS) cloud operations approach the threshold of a $1-billion business, the company once known exclusively as an online bookshop continues to search for money-making opportunities well beyond Internet retailing.

Privileged Insights

An article at GigaOM by Barb Darrow quotes Amazon CEO Jeff Bezos explaining that his company stumbled unintentionally into the cloud-services business, but the Reuters item makes clear that Amazon is putting considerably more thought into its cloud endeavors these days. In fact, Amazon’s investment methodology, which sees it invest in startup companies that are AWS customers, is an exercise in calculated risk mitigation.

That’s because, before making those investments, Amazon gains highly detailed and extremely valuable insights into startup companies’ dynamic requirements for computing infrastructure and resources. It can then draw inferences about the popularity and market appeal of the services those companies supply. All in all, it seems like an inherently logical and sound investment model, one that gives Amazon privileged insights into companies before it decides to bet on their long-term health and prosperity.

That fact has not been lost on a number of prominent venture-capital firms, which have joined with Amazon to back the likes of Yieldex, Sonian, Engine Yard, and Animoto, all of whom, at one time or another, were AWS customers.

Mutual Benefits

Now that nearly every startup is likely to begin its business life using cloud-based computing infrastructure, either from AWS or another cloud purveyor, I wonder whether Amazon’s investment model might be mimicked by others with similar insights into their business customers’ resource utilization and growth rates.

There’s no question that such investments deliver mutual benefit. The startup companies get the financial backing to accelerate its growth, establish and maintain competitive differentiation, and speed toward market leadership. Meanwhile, Amazon and its VC partners get stakes in fast-growing companies that seem destined for bigger things, including potentially lucrative exits. Amazon also gets to maintain relationships with customers that might otherwise outgrow AWS and leave the relationship behind. Last but not least, the investment program serves a promotional purpose for Amazon, demonstrating a commitment and dedication to its AWS customers that can extend well beyond operational support.

It isn’t just Amazon that can derive an investment edge from how their customers are using their cloud services. SaaS cloud providers such as Salesforce and Google also can gain useful insights into how customers and customer segments are faring during good and bad economic times, and PaaS providers would also stand to derive potentially useful knowledge about how and where customers are adopting their services.

Various Scenarios

Also on SaaS side of the ledger, in the realm of social networking — I’m thinking of Facebook, but others fit the bill — subscriber data can be mined for the benefit of advertisers seeking to deliver targeted campaigns to specific demographic segments.

In a different vein, Google’s search business could potentially give it the means to develop high-probability or weighted analytics based on the prevalence, intensity, nature, and specificity of search queries. Such data could be applied to and mined for probability markets. One application scenario might involve insiders searching online to ascertain whether prior knowledge of a transaction has been leaked to the wider world. By searching for the terms in question, they would effectively signal that an event might take place. (This would be more granular than Google Trends, and different from it in other respects, too.) There are a number of other examples and scenarios that one could envision.

Getting back to Amazon, though, what it is doing with its investment model clearly makes a lot of sense, giving it unique insights and a clear advantage as it weighs where to place its bets. As I said, it would be no surprise to see other cloud providers, even those not of the same scale as Amazon, consider similar investment models.

The Politics of OpenFlow

“There’s something happening here, but what is ain’t exactly clear.”  —  Buffalo Springfield, “For What It’s Worth.”

Software-defined networking (SDN) and its protocol of choice, OpenFlow, have been in the news for the past couple weeks, and I suspect we’ll have to get used to it. I feel quite comfortable claiming that neither is a fad, and the salient question is not whether they will take off but how far and how fast they will go.

Those, by the way, are good questions. To get answers, I think we first have to understand the technology and its applicability — as many are doing — and we also have to understand who’s behind the SDN curtain, why those particular entities are driving change, and how serious they are about realizing their objectives.

Strange as it might seem, we can benefit from an understanding of the political economics of OpenFlow. By political economy, I refer to the industry politics that are the driving force behind the economics of OpenFlow-based SDNs.

New Industry Dynamics

I’m pondering this subject increasingly because, apologies to Buffalo Springfield, something is happening here that is new and strange. It is happening because the industry — its technologies and markets — is evolving toward new business structures and away from old ones.

I’ll try not to bore you, but let’s briefly set the context. In the old client-server and even in the first wave of the Internet or the Web-based era of distributed computing,  the vendors were in the catbird seats. To varying degrees, everybody — service providers, enterprises, SMBs — looked to them for direction and guidance, not to mention solutions. If the vendors weren’t exactly trusted by their customers, they were needed and valued.

Enterprises Lacked Political Clout

Enterprises come in all shapes and sizes, and they span numerous vertical markets. For that reason, they tend not have overwhelming commonality of interests, and they don’t organize themselves in common cause.  As we have seen, that’s not the case with today’s largest cloud service providers. They are similar to one another in many operational and business respects, they have common interests, and they are working in concert to pursue shared business objectives.

Today we all talk about cloud computing, which has been hyped to death, but one factor that perhaps hasn’t been appreciated fully is that it is a major political change agent for the industry. With cloud computing, power shifts from the vendor community to the service-provider community. As applications and services move to the cloud, market value accompanies them. As Google and Facebook and various other cloud-service providers gain scale, they also gain economic and political power within the industry.

So, what does that mean? Well, it can mean many things, but what it means for the networking industry is that the game is changing, and in ways that must be unnerving to the boards of directors at companies such as Cisco Systems.

Google as Pioneer and Extreme Example

Let’s take Google as an example, albeit an admittedly extreme one. Google tends to make its own technology infrastructure rather than buy it from vendors. It makes it own servers, and it was one of the first service providers (as Andrew Schmitt uncovered a few years ago) to design and build its own switches. As I think about the likely origins of the Open Networking Foundation (ONF), the current manifestation of software defined networking, and the development of OpenFlow as a mechanism for realizing the business benefits of SDN, I believe we need to look back to Google’s pioneering efforts to build its own networking infrastructure. In retrospect, that was a watershed moment, and it resulted in what we’re seeing today with SDNs and OpenFlow. It was doubtless motivated by the same business and technology considerations.

To reiterate, as cloud computing rises, technology’s hierarchy of power also changes. As mentioned above, as SMBs and enterprises increasingly move applications to the cloud, where they can be delivered as services by operators such as Google and others of its ilk, two things happen: enterprise-oriented vendors find potentially themselves with a smaller market to serve, and the cloud-service providers begin to assert themselves in a number of ways, which includes setting the technology agenda for the industry.

The Open Network Foundation (ONF), for example, is run by and for service-provider community. Networking vendors do not control or drive that organization, and they never will. It is controlled by the six founding members, and they’re all major service providers. Make no mistake, the organization was constructed that way for a reason, with a clear purpose in mind. Those who politically control an organization necessarily set its agenda. The agenda of the ONF, and certainly the development of OpenFlow, is skewed definitively toward their interests. At this point, the ONF’s conception of software-defined networking is not concerned with enterprise needs or requirements. It might get there some day. I know the investors behind Big Switch Networks are hoping it does. But it’s not there now.

Inexorable Cloud Drivers 

I said earlier that Google, in this context, was an extreme example of a service provider. Not every cloud purveyor will design and deliver its own switches, and few and far between would try to tackle the challenge of core routing, as Google seems to be doing now. Still, Google and others behind the ONF have evinced enlightened self-interest. They know that the more they can move the world toward a model of highly efficient and effective cloud-based IT infrastructure (servers, storage, networking), predicated on bare-bones industry-standard hardware and orchestrated by an application-driven software-management layer, the more they will drive down their cost of production and operation. As that is achieved, they won’t just lower their own cost structures, but they will hasten the shift of consumer and enterprise applications and services to the public cloud. It’s a matter of scale, cost, and market dynamics.

NTT sees it, so do all the others. Even those who haven’t joined the Open Networking Foundation, such as Rackspace, are seeking to leverage OpenFlow.

It’s not that these service providers dislike Cisco or Juniper. As I said before, it’s just business. What Cisco and Juniper do, how they work and what they do, might have sufficed before, but it that is not an optimal model for these service providers now — or in the future.

I’m not a stock-market prognosticator, but I realize this scenario has implications for investors in networking companies. Some vendors are more exposed than others to this shift and to these developments. I will deal with those companies and their changed circumstances in subsequent posts. I don’t want to muddy the waters by delving into company-specific fortunes at this time. Suffice it to say, there’s a reason why Juniper Networks and Cisco Systems, both of which have significant exposure to the service-provider community, are scrambling to get on the OpenFlow bandwagon. It’s better to part of this parade than to be left behind, and maintaining a presence in major service-provider accounts is better than having no presence at all.

Nobody Dies, but Some Get Hurt 

Don’t get me wrong. I realize that the enterprise is a big networking market — still the biggest of all — and that the cloud and its technological agenda won’t vaporize that market overnight. Nobody is going to get “killed” or fatally disabled in the next few months, or even probably in the next few years. (I hate that “killer” talk people throw around on the Interwebs. It’s hype, and it doesn’t advance any sort of meaningful discourse or understanding at all.)

For that reason, I think it’s entirely relevant to discuss the current shortcomings of OpenFlow-based SDNs for enterprise networks. Along those lines, Ethan Banks offered some cogent thoughts yesterday on the topic after taking in the Open Flow Symposium.

As for me, I see what the progenitors of the ONF are trying to achieve. I understand why they are doing it, and I think it’s a big deal in a number of respects. As we move increasingly to the cloud, the major service providers, as represented by the demographics of the ONF board members, are moving to the fore, asserting their growing power.

ONF Deadly Serious About OpenFlow-Based SDNs

Yes, I’m back for further cogitation on software-defined networking (SDN) and OpenFlow.

As I wrote in my last post, relating to Cisco’s recent support for OpenFlow, I wasn’t able to attend the Open Networking Summit held last week at Stanford University.  I have, however, been reading coverage of the conference, and I am now convinced of a few fundamental SDN market realities.

Let’s start with who’s steering this particular SDN ship. The Open Networking Foundation (ONF) has been the driving force behind OpenFlow-based SDN. As I’ve written before, perhaps to the point of mind-numbing redundancy, the ONF is controlled not by networking vendors, but by the behemoths of the cloud service-provider community.

Control and the Power 

Networking vendors can be (and are) ONF members, but one needs to appreciate their place in the foundation’s hierarchy.  They are second-class citizens, and they are not setting the agenda. One more time, I will list the “founding and board members” of the ONF: Deutsche Telekom, Verizon, Google, Facebook, Microsoft, and Yahoo. Microsoft is there by dint of its status as a cloud service provider, not because it is a technology vendor.

Any doubts about where control and power reside within ONF were put to definitive rest in a recap of a third day of the Open Networking Summit provided by Dell’s Art Fewell on the NetworkWorld website:

“ . . . . Open Networking Foundation (ONF) Director Dan Pitt gave an excellent presentation that demonstrated that the ONF put a lot of thought into how they designed and structured the organization to incorporate lessons learned from older standards bodies, software communities and from the devops and open source movements. He noted that the ONF’s charter would not allow technology vendors to serve on the board of directors, but rather it should be governed by the network operators who have to live with the results. Working group chairs are assigned by the board, and a system of checks and balances has been put into place to try to prevent the problems that some standards organizations have become notorious for.”

It’s All About the Money

The message is clear. The network operators know what they want from SDN and OpenFlow, and they believe they know how to get it. What’s more, they don’t want the networking vendors compromising, subverting, or undermining the result.* (*Not that they’d do that sort of thing, of course.)

What, then, is the overriding objective these big network operators have in mind? Well, it’s to save money, as I explained in my previous post. SDN, and especially SDN enabled by an industry-standard protocol such as OpenFlow, is perceived by the major service providers as a means of substantially reducing network-related capital and, more to the point, operating expenditures. Service-provider executives, especially the mahogany-row bean counters, get excited about that sort of thing.

As Stacey Higginbotham notes, recounting an Open Networking Summit address given by a representative of Verizon:

“Stuart Elby, VP and network architecture & technology chief technologist for Verizon Digital Media Services, laid out how the promise of software-defined networking could make the company’s cost curve match its revenue by cutting down on the need for expensive gear that is costly to buy and even more costly to operate. In a conversation before his presentation, Elby explained how Verizon’s network can view every single packet on the network, but how keeping track of those packets is both a big data problem and expensive from a network management perspective.”

Verizon’s Compelling Chart

Verizon is not alone. Every one of the founding players in ONF sees the same business value in OpenFlow-enabled SDN. In the eyes of the ONF’s most powerful players, conventional network infrastructure is holding back substantial business benefits. It’s not personal, but it is business. And it is how and why major tectonic shifts in this industry come about.

Along those lines, Elby presented a visually powerful illustration that makes clear just how big an issue network-related costs are for Verizon. The chart is reproduced in Higginbotham’s article at GigaOM and in Fewell’s piece at NetworkWorld. If you haven’t seen it, I suggest you take a look. It really is worth a thousand words, but I’ll summarize as follows: Verizon’s network operating costs soon will surpass its revenues, resulting in what Verizon quaintly calls a “non-sustainable business case.” Therefore, there is an urgent need for a solution that lowers network-equipment expenditures, through utilization of off-the-shelf hardware, and enables a business case that better aligns operating costs with revenues. Verizon sees SDN and OpenFlow as the ticket to “inexpensive feature insertion for new services and revenue uplift.”

Verizon is not alone. It’s safe to say the others on the ONF board are dealing with variations of the same problem and are seeking similar solutions.

Google Goes Further

Google, for one, isn’t stopping at switches. As Higginbotham explored in an earlier post at GigaOM last week, Google is a fervent proponent of Quagga and the Open Sourcing Routing Project. The search giant’s goals are practical, namely  “cheaper, highly programmable routers it can use in its (core) network.” Called the Open LSR, Google’s router, as Higginbotham writes, is “an open-source router that consists of a switch made with merchant silicon and running Open vSwitch that talks to a server that has an OpenFlow-based controller and uses Quagga to generate the routing tables and forwarding information.”

As if the theme needs further belaboring, it’s all about taking cost out of network infrastructure. Google is working with others in the service-provider community to make its low-cost routing dream a reality.

It is clear, then, that the largest service providers, and perhaps may smaller ones besides, want to gain more control over their networks and with the costs associated with them. They have constructed the Open Network Foundation with a clear purpose in mind, they see SDN and Open Flow as solutions to a clearly articulated business problem, and they seem determined to see it through to fruition.

What About the Enterprise?

What remains to be seen is how willing enterprises will be to go along for the SDN ride. This is a point that was hammered home by Peter Cristy of the Internet Research Group, who, as reported by Fewell, told the audience at the Open Networking Summit that SDN and OpenFlow are likely to face significant challenges in cracking the enterprise market. Cristy’s points were valid. His most salient observations were that there have been few OpenFlow “killler apps,” and that enterprises do not favor “reproducing the same thing with new technology,” especially if that technology is new and complicated.

He’s right. But we have to remember that the ONF is captained by service providers, and they are not leading their particular SDN charge because they are motivated by altruistic concern for enterprise networks and their stewards. No, for now at least, the ONF’s conception of SDNs will be applicable to the demographic represented by the composition of the ONF board. Enterprises will have to wait, it seems, and that’s probably good news for the established order of networking vendors, especially for Cisco Systems.

Assessing Market Implications

Still, I have to wonder. Cristy is correct to note that the enterprise accounts for the “biggest part of the networking market.” Nonetheless, times are changing. As more applications move to the cloud, and to cloud service providers, SDN and presumably OpenFlow are likely to increasingly affect the top and bottom lines of networking vendors.

Those companies — Cisco, Juniper, and all the rest — have to keep a wary eye on SDN developments. Even if networking vendors eventually lose a chunk of business at network service providers, they’ll still have the enterprise, presuming they can position themselves correctly and anticipate change rather than react belatedly to it.

There’s a lot at stake as this story plays out in the months and years ahead.

PC Market: Tired, Commoditized — But Not Dead

As Hewlett-Packard prepares to spinoff or sell its PC business within the next 12 to 18 months, many have spoken about the “death of the PC.”

Talk of “Death” and “Killing”

Talk of metaphorical “death” and “killing” has been rampant in technology’s new media for the past couple years . When observers aren’t noting that a product or technology is “dead,” they’re saying that an emergent product of one sort or another will “kill” a current market leader. It’s all exaggeration and melodrama, of course, but it’s not helpful. It lowers the discourse, and it makes the technology industry appear akin to professional wrestling with nerds. Nobody wants to see that.

Truth be told, the PC is not dead. It’s enervated, it’s best days are behind it, but it’s still here. It has, however, become a commodity with paper-thin margins, and that’s why HP — more than six years after IBM set the precedent — is bailing on the PC market.

Commoditized markets are no place for thrill seekers or for CEOs of companies that desperately seek bigger profit margins. HP CEO Leo Apotheker, as a longtime software executive, must have viewed HP’s PC business, which still accounts for about 30 percent of the company’s revenues, with utter disdain when he first joined the company.

No Room for Margin

As  I wrote in this forum a while back, PC vendors these days have little room to add value (and hence margin) to the boxes they sell. It was bad enough when they were trying to make a living atop the microprocessors and operating systems of Intel and Microsoft, respectively. Now they also have to factor original design manufacturers (ODMs)  into the shrinking-margin equation.

It’s almost a dirty little secret, but the ODMs do a lot more than just manufacture PCs for the big brands, including HP and Dell. Many ODMs effectively have taken over hardware design and R&D from cost-cutting PC brands. Beyond a name on a bezel, and whatever brand equity that name carries, PC vendor aren’t adding much value to the box that ships.

For further background on how it came to this — and why HP’s exit from the PC market was inevitable — I direct you to my previous post on the subject, written more than a year ago. In that post, I quoted and referenced Stan Shih, Acer’s founder, who said that “U.S. computer brands may disappear over the next 20 years, just like what happened to U.S. television brands.”

Given the news this week, and mounting questions about Dell’s commitment to the low-margin PC business, Shih might want to give that forecast a sharp forward revision.

Divining Google’s Intentions for Motorola Mobility

In commenting now on Google’s announcement that it will acquire Motorola Mobility Holdings for $12.5 billion, I feel like the guest who arrives at a party the morning after festivities have ended: There’s not much for me to add, there’s a mess everywhere, more than a few participants have hangovers, and some have gone well past their party-tolerance level.

Still, in the spirit of sober second thought, I will attempt to provide Yet Another Perspective (YAP).

Misdirection and Tumult

It was easy to get lost in all the misdirection and tumult that followed the Google-Motorola Mobility announcement. Questions abounded, Google’s intentions weren’t yet clear, its competitors were more than willing to add turbidity to already muddy waters, and opinions on what it all meant exploded like scattershot in all directions.

In such situations, I like to go back to fundamental facts and work outward from there. What is it we know for sure? Once we’re on a firm foundation, we can attempt to make relatively educated suppositions about why Google made this acquisition, where it will take it, and how the plot is likely to unspool.

Okay, the first thing we know is that Google makes the overwhelming majority (97%) of its revenue from advertising. That is unlikely to change. I don’t think Google is buying Motorola Mobility because it sees its future as a hardware manufacturer of smartphones and tablets. It wants to get its software platform on mobile devices, yes, because that’s the only way it can ensure that consumers will use its search and location services ubiquitously; but don’t confuse that strategic objective with Google wanting to be a hardware purveyor.

Patent Considerations 

So, working back from what we know about Google, we now can discount the theory that Google will be use Motorola Mobility as a means of competing aggressively against its other Android licensees, including Samsung, HTC, LG, and scores of others.  There has been some fragmentation of the Android platform, and it could be that Google intends to use Motorola Mobility’s hardware as a means of enforcing platform discipline and rigor on its Android licensees, but I don’t envision Google trying to put them out of business with Motorola. That would be an unwise move and a Sisyphean task.

Perhaps, then, it was all about the patents? Yes, I think patents and intellectual-property rights figured prominently into Google’s calculations. Google made no secret that it felt itself at a patent deficit in relation to its major technology rivals and primary intellectual-property litigants. For a variety of reasons — the morass that is patent law, the growing complexity of mobile devices such as smartphones, the burgeoning size and strategic importance of mobility as a market — all the big vendors are playing for keeps in mobile. Big money is on the table, and no holds are barred.

Patents are a means of constraining competition, conditioning and controlling market outcomes, and — it must be said — inhibiting innovation. But this situation wasn’t created by one vendor. It has been evolving (or devolving) for a great many years, and the vendors are only playing the cards they’ve been dealt by a patent system that is in need of serious reform. The only real winners in this ongoing mess are the lawyers . . . but I digress.

Defensive Move

Getting back on track, we can conclude that, considering its business orientation, Google doesn’t really want to compete with its Android licensees and that patent considerations figured highly in its motivation for acquiring Motorola Mobility.

Suggestions also surfaced that the deal was, at least in part, a defensive move. Apparently Microsoft had been kicking Motorola Mobility’s tires and wanted to buy it strictly for its patent portfolio. Motorola wanted to find a buyer willing to take, and pay for, the entire company. That apparently was Google’s opening to snatch the Motorola patents away from Microsoft’s outstretched hands — at a cost of $12.5 billion, of course. This has the ring of truth to it. I can imagine Microsoft wanting to administer something approaching a litigious coup de grace on Google, and I can just as easily imagine Google trying to preclude that from happening.

What about the theory that Google believes that it must have an “integrated stack” — that it must control, design, and deliver all the hardware and software that constitutes the mobile experience embodied in a smartphone or a tablet — to succeed against Apple?

No Need for a Bazooka

Here, I would use the market as a point of refutation. Until the patent imbroglio raised its ugly head, Google’s Android was ascendant in the mobile space. It had gone from nowhere to the leading mobile operating system worldwide, represented by a growing army of diverse device licensees targeting nearly every nook and cranny of the mobile market. There was some platform fragmentation, which introduced application-interoperability issues, but those problems were and are correctable without Google having recourse to direct competition with its partners.  That would be an extreme measure, akin to using a bazooka to herd sheep.

Google Android licensees were struggling in the court of law, but not so much in the court of public opinion as represented by the market. Why do you think Google’s competitors resorted to litigious measures in the first place?

So, no — at least based on the available evidence — I don’t think Google has concluded that it must try to remake itself into a mirror image of Apple for Android to have a fighting chance in the mobile marketplace. The data suggests otherwise. And let’s remember that Android, smartphones, and tablets are not ends in themselves but means to an end for Google.

Chinese Connection?

What’s next, then? Google can begin to wield the Motorola Mobility patent portfolio to defend and protect is Android licensees. It also will keep Motorola Mobility’s hardware unit as a standalone, separate entity for now. In time, though, I would be surprised if Google didn’t sell that business.

Interestingly, the Motorola hardware group could become a bargaining chip of sorts for Google. I’ve seen the names Huawei and ZTE mentioned as possible buyers of the hardware business. While Google’s travails in China are well known, I don’t think it’s given up entirely on its Chinese aspirations. A deal involving the sale of the Motorola hardware business to Huawei or ZTE that included the buyer’s long-term support for Android — with the Chinese government’s blessing, of course — could offer compelling value to both sides.