Category Archives: Market Research & Intelligence

Addressing SDN Burnout

In the universe of staccato text bursts that is Twitter, I have diagnosed a recent exhaustion of interest in software defined networking (SDN).

To a certain degree, the burnout is understandable. It is a relatively nascent space, generating more in the way of passionate sound and fury than in commercial substance. Some Twitter denizens with a networking bent have even questioned whether an SDN market — involving buyers as well as sellers — actually exists.

On that score, the pointed skepticism has been refuted. SDN vendors, including Nicira Networks and Big Switch Networks, increasingly are reporting sales and customer traction. What’s more, market-research firms have detected signs of commercial life. International Data Corporation (IDC), for example, has said the SDN market will be worth a modest $50 million this  year,  but that it will grow to $200 million in 2013 and to $2 billion by 2016. MarketsandMarkets estimates that the global SDN market will expand from $198 million in 2012 to $2.10 billion in 2017, representing a compound annual growth rate (CAGR) of 60.43% during that span.  I’m sure other market measurers will make their projections soon enough.

But just what are they counting? SDN isn’t a specific product category, like a switch; it’s an architectural model. In IDC’s case, the numbers include SDN-specific switching and routing as well as services and software (presumably including controllers and the applications that run on them). MarketsandMarkets is counting  SDN “switching, controllers, cloud virtualization applications, and network virtualization security solutions.”

Still, established networking vendors will argue that the SDN hype is out of proportion with on-the-ground reality. In that respect, they can cite recent numbers from Infonetics Research that estimate global revenue derived from sales of data-center network equipment — the market segment SDN is likely to make most headway during the next several years — was worth $2.2 billion in the first quarter of 2012. Those numbers include sales of Ethernet switches, application delivery controllers (ADCs), and WAN-optimization appliances.

This is where things get difficult and admittedly subjective. If we’re considering where the industry and customers stand today, then there’s no question that SDN gets more attention than it warrants. Most of us, including enterprise IT staff, do not wish to live in the past and don’t have the luxury of looking too far into the future.

That said, some people have the job of looking ahead and trying to figure out how the future will be different from the present. In the context of SDN, those constituencies would include the aforementioned market researchers as well as venture capitalists, strategic planners, and technology visionaries. I would also include in this class industry executives at established and emerging vendors, both those directly involved in networking technologies and those that interact with networking infrastructure in areas such as virtualization and data-center management and orchestration.

For these individuals, SDN is more than a sensationalized will-o’-the-wisp.  It’s coming. The only question is when, and getting that timing right will be tremendously important.

I suppose my point here is that some can afford to be dismissive of SDN, but others definitely cannot and should not. Is interest in SDN overdone? That’s subjective, and therefore it’s your call. I, for one, will continue to pay close attention to developments in a realm that is proving refreshingly dynamic, both technologically and as an emerging market.

Bit-Business Crackup

I have been getting broadband Internet access from the same service provider for a long time. Earlier this year, my particular cable MSO got increasingly aggressive about a “usage-based billing” model that capped bandwidth use and incorporated additional charges for “overage,” otherwise known as exceeding one’s bandwidth cap.  If one exceeds one’s bandwidth cap, one is charged extra — potentially a lot extra.

On the surface, one might suppose the service provider’s intention is to bump subscribers up to the highest bandwidth tiers. That’s definitely part of the intent, but there’s something else afoot, too.

Changed Picture

I believe my experience illustrates a broader trend, so allow me elaborate. My family and I reached the highest tier under the service provider’s usage-based-billing model. Even at the highest tier, though, we found the bandwidth cap abstemious and restrictive. Consequently, rather pay exorbitant overages or be forced to ration bandwidth as if it were water during a drought, we decided to look for another service provider.

Having made our decision, I expected my current service provider to attempt to keep our business. That didn’t happen. We told the service provider why we were leaving — the caps and surcharges were functioning as inhibitors to Internet use — and then set a date when service would be officially discontinued. That was it.  There was no resistance, no counteroffers or proposed discounts, no meaningful attempt to keep us as subscribers.

That sequence of events, and particularly that final uneventful interaction with the service provider, made me think about the bigger picture in the service-provider world. For years, the assumption of telecommunications-equipment vendors has been that rising bandwidth tides would lift all boats.  According to this line of reasoning, as long as consumers and businesses devoured more Internet bandwidth, network-equipment vendors would benefit from steadily increasing service-provider demand. That was true in the past, but the picture has changed.

Paradoxical Service

It’s easy to understand why the shift has occurred. Tom Nolle, president of CIMI Corp., has explained the phenomenon cogently and repeatedly over at his blog. Basically, it all comes down to service-provider monetization, which results from revenue generation.

Service providers can boost revenue in two basic ways: They can charge more for existing services, or they can develop and introduce new services. In most of the developed world, broadband Internet access is a saturated market. There’s negligible growth to be had. To make matters worse, at least from the service-provider perspective, broadband subscribers are resistant to paying higher prices, especially as punishing macroeconomic conditions put the squeeze on budgets.

Service providers have resorted to usage-based billing, with its associated tiers and caps, but there’s a limit to how much additional revenue they can squeeze from hard-pressed subscribers, many of whom will leave (as I did) when they get fed up with metering, overage charges, and with the paradoxical concept of service providers that discourage their subscribers from actually using the Internet as a service.

The Problem with Bandwidth

The twist to this story — and one that tells you quite a bit about the state of the industry — is that service providers are content to let disaffected subscribers take their business elsewhere. For service providers, the narrowing profit margins related to providing increasing amounts of Internet bandwidth are not worth the increasing capital expenditures and, to a lesser extent, growing operating costs associated with scaling network infrastructure to meet demand.

So, as Nolle points out, the assumption that increasing bandwidth consumption will necessarily drive network-infrastructure spending at service providers is no longer tenable. Quoting Nolle:

 “We’re seeing a fundamental problem with bandwidth economics.  Bits are less profitable every year, and people want more of them.  There’s no way that’s a temporary problem; something has to give, and it’s capex.  In wireline, where margins have been thinning for a longer period and where pricing issues are most profound, operators have already lowered capex year over year.  In mobile, where profits can still be had, they’re investing.  But smartphones and tablets are converting mobile services into wireline, from a bandwidth-economics perspective.  There is no question that over time mobile will go the same way.  In fact, it’s already doing that.

To halt the slide in revenue per bit, operators would have to impose usage pricing tiers that would radically reduce incentive to consume content.  If push comes to shove, that’s what they’ll do.  To compensate for the slide, they can take steps to manage costs but most of all they can create new sources of revenue.  That’s what all this service-layer stuff is about, of course.”

Significant Implications

We’re already seeing usage-pricing tiers here in Canada, and I have a feeling they’ll be coming to a service provider near you.

Yes, alternative service providers will take up (and are taking up) the slack. They’ll be content, for now, with bandwidth-related profit margins less than those the big players would find attractive. But they’ll also be looking to buy and run infrastructure at lower prices and costs than did incumbent service providers, who, as Nolle says, are increasingly turning their attention to new revenue-generating services and away from “less profitable bits.”

This phenomenon has significant implications for consumers of bandwidth, for service providers who purvey that bandwidth, for network-equipment vendors that provide gear to help service providers deliver bandwidth, and for market analysts and investors trying to understand a world they thought they knew.

Microsoft Loses Patience with China

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

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

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

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

Said Ballmer:

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

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

Explaining Cisco’s Slowing Pace of Acquisitions

In terms of making acquisitions of venture-backed companies, Cisco led all other industry behemoths during the lachrymose decade known as the “oughts.”

According to a post at the Wall Street Journal’s Venture Capital Dispatch, quoting figures compiled by Dow Jones’ VentureSource, Cisco acquired 48 venture-backed companies from 2000 through 2009. Also reaching the medal podium for acquisitions were IBM, which closed 35 such transactions, and Microsoft, which consummated 30 deals.

In recent years, particularly the last two, Cisco’s acquisitive pace has slackened considerably. The networking giant made only two purchases of VC-backed startups in both 2008 and 2009. This past year, in fact, Cisco wasn’t among the foremost acquirers of VC-backed companies. Instead, Oracle finished at the head of the 2009 table, with five deals; EMC bought four companies to rank second.

You might wonder, as did I: Why is Cisco slowing down? I think several factors are at play.

For one thing, there aren’t as many compelling VC-based startup companies entering Cisco’s ecosystem as there were a few years ago. In general, VC backing for early-stage IT startups has fallen off the charts, and the same holds for startup companies in networking and many of the “market adjacencies” of most interest to Cisco. The lake has been fished, and nobody is restocking it with healthy specimens.

Related to that first point is the fact that the IT industry, including the networking segment, has matured. It’s moved into a slower-growth stage, replete with consolidation and fewer leading players. In its core markets, Cisco runs the numbers and often concludes that the right business decision involves building rather than buying. That wasn’t always the case, as amateur historians of networking’s heyday will tell you.

The slow growth, maturation, and consolidation in Cisco’s legacy markets of enterprise and carrier switching and routing have driven it toward a major diversification effort, with some of the forays into new spaces seeming more adjacent than others. Some of these new markets will bring Cisco back into acquisitive fervor, but it hasn’t happened yet, perhaps because Cisco hasn’t fully committed to some of them. (An area where I think you’ll see Cisco eventually make some interesting purchases is smart-grid technologies.)

Cisco’s acquisition juggernaut has slowed for another reason, too. If you examine the composition and distribution of Cisco’s vast cash reserves, you’ll discover — as I have discussed previously — that most of the money is located overseas. If that foreign cash were repatriated, Cisco would have to pay taxes on it. With the US government refusing to relent on that point, Cisco has chosen to leave the money overseas. As a result, that cash cannot be used for domestic acquisitions. If Cisco wishes to use those funds, rather than stock, to consummate deals, it must identify, pursue, and execute transactions in foreign markets.

Effectively, because of its cash allocation and the increasing reluctance of prospective takeover candidates to accept stock in lieu of hard cash, Cisco is geographically constrained in making deals over a certain size. Given Cisco’s tax strategies and the growing internationalization of its business, the ratio of foreign-to-domestic cash reserves isn’t likely to change markedly. Cisco will spin more cash through quarter-to-quarter operations, but most of it will land in the foreign pool.

At least in the near term, for the reasons adduced above, I don’t foresee Cisco returning to its acquisitive frenzies of the late 90s or the early to mid oughts, when it took advantage of the dot-com implosion to consolidate power through strategic acquisitions. Cisco remains a big, old dog, but it is being forced to learn some new tricks.

Valley IPOs Likely to Remain Few and Far Between

Not many companies based in Silicon Valley have gone public in recent years, and we shouldn’t expect the pattern to change. The trend is your friend, except when it isn’t.

In 2009, as reported by the Wall Street Journal, eight venture-capital-backed companies went public, according to research compiled by VentureSource. In 2008, only seven venture-backed companies reached the public markets.

Interestingly, though, only two of the companies that went public in 2009 were based in Silicon Valley. Those firms were online-reservations company OpenTable Inc. and Fortinet, the Internet-security specialist.

Talk percolates about the prospect of a few Valley-based IPOs materializing in 2010, but we’re more likely to see a trickle of activity, not a tsunami.

There are many reasons for the sustained torpor, and most of them have been discussed extensively here and elsewhere. Among the factors are the generally inhospitable macroeconomic conditions; the slow-growth maturity of the IT industry with which Silicon Valley is closely identified; the unappetizing prospects for big-money exits; the relative paucity of new venture-backed upstarts; and a structural realignment that is shifting money to emerging global markets and nascent industries outside the scope of the Valley’s traditional wheelhouse.

Does that mean the Valley is dead? No, it doesn’t. But it does mean that it, like the rest of the world, will have to adapt to changing circumstances and a new reality. As the late Warren Zevon intoned in a song with an expletive-laced title that I can’t cite in polite company, “The stuff (euphemism in effect) that used to work, won’t work now.”

Oh, Happy New Year!

Diverging Prospects for RIM and Palm

Research In Motion (RIM) and Palm both reported their latest quarterly results yesterday. RIM produced third-quarter results and guidance that were better than what the market expected; Palm disappointed.

As the smartphone market becomes more fiercely contested, these sets of results were analyzed for more than their immediate trading utility. Analysts and pundits carefully scrutinized them for clues as to how each vendor is faring in its bid for long-term prosperity in the smartphone market.

On that score, too, RIM emerged the better of the two. Not all the questions about RIM have been answered, but the company has a coherent strategy, ample resources, a credible brand, strong carrier relationships, and a track record of proving its detractors wrong. Palm doesn’t rate nearly as well on those counts.

As for RIM’s latest quarterly results, as reported by Dow Jones, revenue rose 11% to $3.92 billion, surpassing the company’s guidance of $3.60 billion to $3.85 billion as well as the Thomson Reuters estimate of $3.78 billion.

The company said it added about 4.4 million net new BlackBerry subscriber accounts in the third quarter, bringing the total BlackBerry subscriber account base to about 36 million at quarter-end.

Looking immediately ahead, RIM is forecasting fourth-quarter revenue of $4.2 billion to $4.4 billion and gross margin of roughly 43.5%, resulting in net earnings of $1.23 to $1.31 a share, all outpacing expectations of market watchers.

Unfortunately, where RIM is surging, Palm is treading water. Sales of its new smartphones, the Pre and the Pixi, are already starting to decline. Palm said it shipped a total of 783,000 smartphones during its fiscal second quarter, a drop of 5% from 823,000 smartphone units during the first fiscal quarter. (Palm’s year-to-year comparisons are irrelevant, with its smartphone overhaul occurring this year.)

Another area where RIM is doing well and Palm is not involves market coverage. RIM is pushing forward in China and everywhere else besides, whereas Palm is not. Breaking its dependence on North America, RIM reported that 37 percent of revenue is derived from overseas and approximately 35 percent of the BlackBerry subscriber base is now located outside North America.

Areas RIM is targeting for future growth include small- and mid-size businesses and China, where RIM has been building key partnerships lately. For example, a week after reaching a deal with China Mobile, RIM announced a similar partnership with China Telecom. Before that, RIM had inked a distribution partnership with China’s largest IT services provider, Digital China Holdings Ltd.

RIM is looking at doing more than selling its products in China. Said RIM co-CEO Jim Balsillie:

“To further support our efforts in China, RIM is also exploring opportunities to manufacture and conduct R & D activities in the region.”

Such a move would make sense. China is a burgeoning market, and RIM will have to commit to it, not only in terms of providing product localization, but also with regard to doing valuable R & D there. Perhaps, like McAfee in the security-software space, RIM will establish a wholly owned subsidiary in China.

While international expansion was a key contributor to the company’s success in the third quarter, RIM also is helping its cause with a more diversified product portfolio and gains in consumer patronage. Even though its installed base remains strongly represented by business customers, RIM said 80 percent of its new subscribers in the third quarter were non-corporate customers.

That’s all good news for RIM, but I still think the company will need to overhaul the look and feel of its BlackBerry software if it has aspirations of continued consumer gains amid intensifying smartphone competition.

The smartphone market is growing briskly, but it will consolidate. At that point, the leaders will reap the largest rewards, with the laggards failing or getting acquired, sometimes cheaply. That’s why maintaining and gaining share are so important, and why RIM’s latest solid results and bullish guidance are encouraging signs for the company.

Meanwhile, again, Palm isn’t looking so good. One can downplay Palm’s disappointing quarter by arguing that the company remains a work in progress and that it will have occasional stumbles as it goes all in as a smartphone player. Some apologists, with arguable justification, also will point to Palm’s early dependence on Sprint for sales of its webOS-based Pre and Pixi models. Nonetheless, Palm is losing momentum, doesn’t have the resources of its larger rivals, and the competition it faces in the space will only intensify.

Palm had an early chance to carve out a growing niche for itself, but its window of opportunity is closing rapidly. While RIM has gained ground and positioned itself well for the future by expanding in markets outside North America with a diversified product portfolio, Palm is something of a one-trick pony, still focused primarily on North America with a narrow product line and an overwhelming dependence on getting and keeping the favor of fickle consumer who are bombarded by the heavier and slicker brand advertising of Palm rivals such as Apple, the Google Android mafia (Motorola and Verizon with Droid, for example), RIM, HTC, Nokia, and others.

It’s too early to perform last rites – how many times has RIM proved doomsayers wrong? – but Palm’s prospects are dimming.

New figures from AdMob, measuring worldwide smartphone Internet traffic, demonstrate how quickly the market might be consolidating. With traffic attributable to the iPhone and Google Android-based handsets dominating and on the rise, respectively, everybody else is struggling to hold market share.

RIM is positioning itself for future growth in China and other foreign markets, while maintaining its hold on its sizable installed base of enterprise-messaging customers, means it is likely to stay the course, though it’s anybody’s guess how the situation might look three years from now.

RIM has the resources to play a game of attribution, however. Palm doesn’t. Unlike RIM, Palm doesn’t have the luxury of a lucrative, money-spinning installed base of corporate mobile-email customers. It doesn’t have option to reinvent itself one more time.

If Palm’s smartphone unit shipments continue to slip sequentially from quarter to quarter, it won’t remain in the race much longer. Time isn’t on Palm’s side.

Lurid Bribery Case Doesn’t Reflect Poorly on Gartner

It’s a headline nobody at Gartner wants to see. Thankfully, the underlying story isn’t nearly as distressing.

The well-known consultancy and IT market-research concern probably is mortified that a news story posted on the Network World website — and covered elsewhere, too — offers the lurid headline, “Former Gartner manager gets jail for accepting bribes.” If you’re a company in Gartner’s business, you don’t ever want your name to appear in the same sentence as the words “jail” and “bribes.”

What’s important to note, however, is that the manager in question wasn’t involved in consulting or research activities. Instead, he was responsible for the purchase of multimedia services and equipment.

Moreover, an earlier press release from the United States Attorney Southern District of New York, makes clear that Gartner was a victim of the bribery scheme. It’s an unseemly and unfortunate tale, replete with attention-grabbing headlines, but it doesn’t and shouldn’t reflect negatively on Gartner’s credibility and repute as a purveyor of advisory services and market research.

Dell’Oro Forecasts Growth in Chinese Wireless-Infrastructure Spending in 2010

Primarily as a result of a decrease in 3G deployments in China, the worldwide market for wireless-network infrastructure declined 10 percent in the third quarter on a year-over-year basis, according to market researcher Dell’Oro.

Said Dell’Oro in a statement quoted by Reuters:

“While 3G spending in China is expected to stay depressed for the remainder of this year … heavy spending by China Unicom and China Telecom is expected to resume in 2010, and will be a prime contributor to both the WCDMA and CDMA markets.”

In this year’s third quarter, the market was worth $9 billion in revenue. As reported by FierceWireless, Ericsson’s share of the market remained steady, but Huawei gained share on Nokia Siemens Networks. Recently, Alcatel-Lucent won contracts worth approximately $1.7 billion to provide network upgrades, infrastructure, and services for China Mobile and China Telecom.

As in many other industries, telecommunications-equipment vendors seeking revenue growth will have to go to China to find it.

McAfee Maps the Malware World

The mind of the average cyber criminal is dark, devious place. These are people who spend considerable time thinking about how they can deceive you, the unsuspecting Internet voyager, for fun and profit.

McAfee, whose business it is to defend against the misdeeds of online malefactors, has just published its third annual “Mapping the Mal Web,” report, which provides insights into which top-level Internet domains (those suffixes at the end of web address, such as the “.com” and “.edu” designations) are the most frequent and likely harbors for malevolence.

For as long as humans use keyboards as a mechanism for alphanumeric communication, typographical errors will be with us. The Internet’s evildoers try to exploit such human frailty, which is why Cameroon’s domain, “.cm,” has risen to the top of the malware charts. All it takes is rushed keystrokes, and one can easily be transported to an Internet tar pit rather than to a desired destination.

That isn’t to say all “.com” sites are safe havens. McAfee finds that the designation for commercial sites ranks second, behind only Cameroon’s domain, as a source of online risk. Whereas McAfee assigns a weighted-risk ratio of 36.7 percent to Cameroon, it gives “.com” a ratio of 32.2 percent. (You can read about McAfee’s methodology, about the weighed-risk ratio, and about caveats associated with the study at the McAfee website hosting the report.)

The news isn’t all bad. Hong Kong (.hk) went from being the top-level domain with greatest number of risky registrations to an overall risk ranking of 34th in this year’s report. While you should never drop your guard completely while online, McAfee says your safest Internet travels will be among the domains associated with government (.gov), Japan (.jp), education (.edu), Ireland (.ie), and Croatia (.hr).

In considering where to register malicious websites, according to McAfee, scammers and hackers account for the following factors: lowest domain prices lack of domain regulatory control and supervision, and ease of registration.

Online malfeasance is a booming business. McAfee says we should not be surprised:

The evolution of malware delivery toolkits has given even the novice hacker the ability to easily create a fake bank site that challenges all but the most careful consumer to tell the difference. The persistence and proliferation of these phishing sites is in itself proof of this; absent of hacker profitability, phishing would disappear. Likewise, the explosion in the use of social networking sites and communication tools has exposed even more consumers to malware authors.

I suppose one could draw some dark inferences about humanity from the criminality manifested online. Then again, what’s new isn’t the evil, nastiness, and wrongdoing by some people against others. That’s been with us from time immemorial. What’s new, of course, is that the Internet has provided a venue in which certain criminal activities can become anonymized, unprecedentedly stealthy and surreptitious.

What this tells us is that even the best anti-malware can only go so far in providing us with online protection. Many Internet criminals are proficient social engineers. It’s incumbent on us all to rely at least as much on our wits as on our firewalls and anti-virus software.

What follows is a color-coded map, excerpted from the McAfee report, ranking countries according to the relative risk of their Internet domains.

InternetDangerNations2.jpg

Overview of Fortinet IPO

Proffering advice on whether others ought to buy into a company on its first day of public trading always is a tricky business. At any given moment, one has only limited visibility into the company’s prospects, the industry to which it belongs, and the health of the overall market. Things change — often with alarming speed.

It goes without saying that plenty of caveats, provisions, and reservations attend any recommendation. Still, I feel good about the immediate prospects of Fortinet, the unified threat management (ATM) security-appliance vendor that begins trading today under the “FTNT” symbol.

I don’t know whether the company will be successful in the longer-term against larger competitors such as Cisco, Juniper, and now HP (through its 3Com acquisition) as it attempts to take a bigger share of the high-end enterprise and service-provider market segments, but in the near term, it seems like an investment that can deliver some pop.

Fortinet makes appliances that integrate several security capabilities into a single box. Any customer that buys from Fortinet gets a security appliance that providse anti-spam, antivirus, firewall, VPN, IPS, and web filtering all in a single system. For the Fortinet customer, the value proposition is that a single appliance can deliver the security functionality of multiple point products, leading to savings in product-related security costs and in the ongoing management of devices and vendor relationships.

That said, the strength of a UTM appliance also is its weakness. I would not say that Fortinet is a jack of all trades and a master of none, but I would contend that many large enterprises might be inclined to select a best-of-breed application-security appliance over a broad-based UTM box.

As of now, according to information provided in the Fortinet prospectus, the company’s product sales are evenly divided between its low-end, midrange, and high-end models, with each product class accounting for about a third of sales. A perception lingers that UTM solutions sell mainly to small and midrange companies, and not to larger enterprises, and Fortinet cites that perception as a risk in its prospectus, particularly in light of its desire to get more business from high-end enterprise, government, and service-provider customers.

Unlike Cisco, Fortinent doesn’t have much in the way of a direct sales force. Its sales are made through its channel partners, comprising distributors, resellers, and some specialized integrators. That strategy covers a lot of ground and helps defray cost of sales, but it can also be a weakness in some large accounts.

Another potential weakness for Fortint is its reliance of open-source software for various facets of its security functionality. Fortinet argues that its “secret sauce,” if you will, is its FortiASIC hardware, which is optimized for accelerated processing of security and networking tasks. It also has its underlying FortiOS, an operating system that provides a foundation for application-security functionality.

Above those two technological cornerstones, however, one will find open-source software that Fortinet has licensed to provide disparate security functionality. With such code in play, there always is a danger, as Fortinet’s history attests, of patent-related litigation. Fortinet has been down that litigious road before, and it readily concedes that further courtroom drama could ensue.

Fortinet has has a lot of R&D in China, as well as in Canada (Vancouver), and in the USA. The China-based R&D will provide it with cost advantages over many competitors.

In the second quarter of 2009, market-researcher IDC said Fortinet had about 15.4 percent of the worldwide UTM market. According to IDC projections, the market will grow from $1.3 billion in 2007 to $3.5 billion in 2012, representing a compounded annual growth rate (CAGR) of 22.3 percent. In its prospectus, Fortinet said it has shipped more than 475,000 appliances to more than 5,000 channel partners and 75,000 customers worldwide — including more than 50 customers in the Fortune Global 100 — during the first nine months of 2009.

Regarding that latter point, my observation is that Fortinet would like deeper penetration in those high-end Fortune 500 accounts. Although it has cracked Fortune 500 companies, Fortinet’s account presence often is at a small number of branch offices rather than throughout the organizations. As much as it resists the notion, Fortinet probably would reluctantly concede that UTM products traditionally have enjoyed more success in SME accounts than in high-end enterprises.

Fortinet reported revenue of $123.5 million, $155.4 million, and $211.8 million for its fiscal years 2006, 2007, and 2008, respectively. It says it had revenue of $152.7 million and $181.4 million in the first nine months of fiscal 2008 and 2009, respectively. I regard as a strength the geographical diversification of Fortinet’s revenue mix. In first nine months of fiscal 2009, 37 percent of total revenue came from the Americas, 37 percent from Europe, and 26 percent from APAC. Since 2006, more than 60 percent of Fortinet’s revenue has been derived from outside the Americas.

For its size, the company has accrued a respectable amount of cash. Fortinet has generated positive cash flow from operations since 2005. Operational cash flow has grown from $3.4 million in fiscal 2005 to $37.7 million in fiscal 2008. During the first nine months of fiscal 2009, the company saw positive cash flow from operations of $45.8 million.

With the company’s revenue coming from product sales as well as from subscription-based services, the latter have provided a significant and growing source of recurring, high-margin revenue. That’s all good. As long as new customers are brought into the fold, subscription-based revenue will continue to proliferate and Fortinet will continue to generate meaningful operational cash flow.

Given the cash it is spinning and the proceeds it will derive from today’s IPO, Fortinet should be reasonably well placed to fortify itself, through acquisitions or other means. Although some factors are beyond its control, it is positioning itself strongly for the competitive struggles ahead.

The company has a good, battle-hardened management team. It’s a balanced group, with business and technological acumen. Fortinet also has been through some trials and tribulations. This isn’t a group of neophytes. The company has met adversity and endured.

Nothing lasts forever and nothing is a sure thing, but Fortinet comes into its IPO in good health, and with the near-term prospect of trading above its opening price range of $9 to $11 per share.

It now will sell 12.5 million shares instead of the originally planned 12 million shares.

Safra Catz Meets with EU Competition Commissioner as Opposition to Oracle’s Sun Buy Grows

Oracle CEO Larry Ellison must feel under siege.

From the inception of Oracle’s announced $7.4-billion acquisition of Sun Microsystems last spring, he’s had to contend with staunch opposition to the deal coming from the usual suspects, including Microsoft and SAP.

Now, though, others are jumping into the fray to express their resistance to the merger amid sullen rumblings that regulators at the European Commission (EC) are in a truculent mood, ready to push Oracle to the wall for substantial concessions.

Those concessions would involve Oracle spinning off or otherwise divesting MySQL, the open-source database property it hopes to inherit in the Sun acquisition.

That’s the prescribed course of action Michael ‘Monty’ Widenius, the creator of open-source database MySQL and founder of the namesake company, would like Oracle to follow. It’s also the path that entrepreneur and EU strategist Florian Mueller would like Oracle to trod. Open-source activist Richard Stallman and the non-profit organizations Knowledge Ecology International (KEI) and Open Rights Group (ORG) have also issued a strongly worded letter to EU competition commissioner Neelie Kroes, demanding that Oracle not be allowed to gain ownership of MySQL through its pending acquisition of Sun.

As we all know by now, the EC has subjected Oracle’s Sun acquisition to an extended regulatory review that could last until January 19, though some are speculating that the regulatory body will give Oracle a strong indication of which way the wind is blowing well before then.

We also know that Ellison has spoken publicly and forcefully of his desire to own and retain MySQL. He says he sees it as an open-source bulwark against IBM, but savvy observers think Oracle actually intends to use MySQL as a competitive cudgel against Microsoft in the world’s fast-growing developing markets and among small- and -mid-size businesses. In both those markets, Oracle’s proprietary databases have limited exposure, too expensive for most buyers.

According to Evans Data, Microsoft SQL Server is the most popular database in the emerging markets of China, India, Eastern Europe, and Latin America, but MySQL isn’t far behind. Evans says more than 50 percent of developers in emerging-market countries said they are using Microsoft’s SQL Server, but 46 percent said they are using MySQL. Microsoft’s SQL Server leads in China and Latin America, and MySQL is slightly stronger in India and Latin America.

Those markets are largely untapped for Oracle. It would stand to gain a lot from having a reasonably priced database offering that could generate revenue and profitability from fast-growing overseas markets expected to outpace North America and Europe for the foreseeable future.

Thus, opponents of the Sun deal who claim that Oracle wishes to eradicate MySQL are wrong. MySQL fills a gaping hole in Oracle’s product strategy.

A relevant question is whether Oracle will hobble or technically impair MySQL so that it never develops into a scalable, large-enterprise threat to its proprietary database franchise. That would be a difficult balancing act for Oracle to manage: doing enough to keep MySQL in a price-performance battle with Microsoft for patronage in developing markets but not going so far as to transform it into a danger to Oracle’s establish products. Then again, Oracle relishes those sorts of complex challenges and complicated games.

Oracle’s plans for MySQL could be a moot point if the European regulators decide that a worldwide database market carved up among Oracle, IBM, and Microsoft — a troika that currently holds about 85-percent of the space — would be deleterious to competition and to buyers of the technology.

Ultimately, then, the big question is whether the European Commission will approve Oracle’s Sun acquisition. With opposition mounting, Oracle decided the best defense is a good offense. Accordingly, company president Safra Catz met earlier today with European Union Competition Commissioner Neelie Kroes to discuss objections to the pending deal.

Initial reports on the meeting suggest Oracle has some work to do.

Said Jonathan Todd, a spokesman for Kroes:

“Kroes expressed her disappointment that Oracle failed to produce, despite repeated requests, either hard evidence that there were no competition problems or a proposal for a remedy to the competition concerns identified by the commission. Kroes reiterated to Catz the commission’s willingness to move quickly towards a decision but underlined that a rapid solution lies in Oracle’s hands.”

A reasonable extrapolation is that Oracle has failed to demonstrate that its ownership of MySQL will result in healthy database competition. Oracle can, and probably will, take another crack at making its case. At some point, though, as time drags and Sun’s losses of $100 million per month accrue — and as the company is forced to shed staff to reduce costs — Oracle might be forced to consider the unthinkable: a climbdown, a retreat.

Yes, there’s a possibility it might be forced to surrender MySQL to get this deal done. At the beginning of the regulatory-review process, I didn’t think it would come to that, but indications now suggest the EC position has hardened rather than softened.

Presuming that to be true, what does Oracle do? Some presupposed that MySQL wasn’t even an afterthought in Oracle’s calculations ahead of the Sun acquisition. We now know MySQL was more than a secondary consideration. What we don’t know is whether Oracle will want to pay $7.4 billion for a Sun Microsystems that doesn’t include MySQL.

If the EC remains unmoved by Oracle’s blandishments and protestations, we might get an answer to that question.

What’s Gartner Saying?

As I perused Gartner’s press release announcing its “top 10 technologies and trends that will be strategic for most organizations in 2010,” two of the listed items annoyed me, though for slightly different reasons.

At the top of Gartner’s list of top 10 strategic technologies is cloud computing, that much-discussed but nebulous technological phenomenon that is reputedly taking hold in the minds and planning processes of enterprises worldwide.

I am not going to take the position that cloud computing isn’t important, or that it doesn’t have a potentially lucrative future, but I am going to take the position, alongside Oracle CEO Larry Ellison, that it is ambiguously and poorly defined by most of those who like to talk about it.

Alas, Gartner is no exception to that rule. Gartner, coming down the mountain with its tablet of 10 strategic technologies, says the following on the subject:

Cloud computing is a style of computing that characterizes a model in which providers deliver a variety of IT-enabled capabilities to consumers. Cloud-based services can be exploited in a variety of ways to develop an application or a solution. Using cloud resources does not eliminate the costs of IT solutions, but does re-arrange some and reduce others. In addition, consuming cloud services enterprises (sic) will increasingly act as cloud providers and deliver application, information or business process services to customers and business partners.

Could that have been more muddled? Does anybody understand what Gartner is on about? Shouldn’t we expect a modicum of clarity and cogency from a research firm that is paid so richly to tell enterprises and IT vendors what to think?

Yes, my apoplexy is in full-tilt boogie. But I feel my cause is righteous. So-called thought leaders should express their thoughts articulately and clearly. Coherence and intelligibility should not be negotiable.

Further down the list, Gartner says the following about another allegedly strategic technology, social computing:

Workers do not want two distinct environments to support their work – one for their own work products (whether personal or group) and another for accessing “external” information. Enterprises must focus both on use of social software and social media in the enterprise and participation and integration with externally facing enterprise-sponsored and public communities. Do not ignore the role of the social profile to bring communities together.

Again, the sentence structure and wording leave something to be desired, but I’ll put that objection aside. What I will not put aside, however, is my complaint that Gartner has not put forward a compelling reason for enterprises to countenance their employees spending time on social-networking sites while at the office, presumably during business hours.

Really, what’s the business case for untrammeled Facebook access at work? Shouldn’t employees who report to the office, you know, actually work there? Does Gartner realize that Facebook owns the content posted to it? How does that adhere to corporate or government policies relating to information confidentiality?

What’s the ROI-related business case for allowing employees to spend time on Facebook or MySpace? It’s impossible to know, because Gartner has stated no clear business argument for opening the social-networking floodgates.

I’m taken aback that Gartner has issued this press release. Not enough thought has gone into the substance and presentation of its content. That should be a worrying sign for the clientele that pay the company for its research and opinions.