Category Archives: Market Research & Intelligence

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.

VC Funds Down; Late-Stage Funds Take Biggest Hit

Dow Jones Private Equity Analyst confirms what we all suspect: Venture-capital funds are down sharply in number and in amounts raised.

Venture capital funds raised $3.5 billion in 26 funds in the third quarter of 2009, a 51% decline from the $7.2 billion raised in the same quarter last year, according to Dow Jones Private Equity Analyst. In total, venture-capital firms raised $8.0 billion across 83 funds thus far in 2009, less than half of the $18.9 billion raised by 141 funds in the same nine-month period last year.

As investors realize that difficult economic conditions will persist for the foreseeable future, they’re taking particular care to keep their money out of late-stage venture funds, which raised $564 million through the first three quarters of 2009, a vertiginous decrease from the $3 billion raised in the same period last year.

The situation is better, but not great, for early stage funds, which raised $1.6 billion across 18 funds in the latest quarter, down from $2.9 billion raised by 17 funds in the third quarter last year.

Multi-stage firms raised $1.8 billion across seven funds, down from $2.6 billion raised by 17 funds in the same quarter last year.

Not surprisingly, big VC firms fronted by marquee names are doing relatively well. Those players include Khosla Ventures, with its focus on cleantech; Domain Associates, with its life-sciences orientation; Matrix Partners; and newcomer Andreessen Horowitz, which, of course, has celebrity entrepreneur Mark Andreessen to wave its banner.

Toward the end of August, Benchmark Capital’s Bill Gurley explained why the venture-capital industry is being downsized and reconfigured. The results of those industry dynamics are apparent in the latest numbers from Dow Jones.

Startups Fewer in Number, Less Ambitious in Scope

The economic downturn, called the Great Recession by some, is supposed to be over. Numerous economists and pundits have pronounced an incipient recovery. If it has arrived, it’s an odd sort of recovery that is barely perceptible, even invisible to many.

We know the downturn has taken an enormous toll on the information-technology industry in North America. We know that jobs have been lost, companies have gone out of business, and that venture capital has contracted. We also know, as an article in today’s Wall Street Journal notes, that fewer startup companies – in all industries, not just technology – are getting off the ground.

From the WSJ:

Company formation typically dips slightly in recessions, says Brian Headd, a Small Business Administration economist. Earlier this decade, business starts — including new businesses and units of existing businesses — fell 9% between the third quarter of 2000 and the first quarter of 2003, the BLS says.

This time, the decline has been steeper. Business starts fell 14% from the third quarter of 2007 to the third quarter of 2008; the 187,000 businesses launched in that quarter were the fewest in a quarter since 1995. The number ticked up slightly in the fourth quarter, the latest data available. But those new establishments created only 794,000 jobs, the fewest since the government began tracking the data in 1993.

The reasons behind the declining numbers of startup companies are relatively easy to identify. Funding, from venture capitalists and banks, is harder to get. Entrepreneurs, recognizing the funding squeeze, are become less tolerant of risk, choosing to pursue less-ambitious startup ideas or not to pursue them at all. Many would-be entrepreneurs have chosen to ride out the economic turbulence as employees of larger, established companies.

For the most part, businesses that are getting started are smaller than those launched in previous periods, even in past recessions. That’s directly attributable to constrained funding, which compels entrepreneurs to focus on businesses and markets that require relatively modest capital expenditures and that already exist as established niches. Unfortunately, these smaller businesses are inclined to grow less than previous generations of startups. That means they will generate fewer jobs, too.

Also troubling is that many new businesses are in areas – such as babysitting and house-cleaning services – with low income potential. Relatively fewer businesses have been launched in areas with higher income potential.

One mistake being made by the mainstream business media is that they continue to treat the downturn we’ve been experiencing as just another recession in just another business cycle. That diagnosis just isn’t correct. I think this downturn’s origins, its immediate effects, and its long-term repercussions are different from what we’ve experienced previously.

We’re witnessing a reconfiguration of the global economy, not just an attempted rebound from a typical recession. Some things, such as high-powered spending by US consumers, are not coming back to their former glory. With new regulations and an overdue wariness inhibiting financial chicanery, Americans will save more and spend less. Their homes are no longer veritable automated teller machines, their jobs are no longer secure, and their retirement savings are no longer assured.

Conversely, China, which funded US consumerism by buying US bonds, has begun to lay the groundwork for its own consumer economy, largely in a bid to lessen its reliance on manufactured exports to the USA and Europe.

These are huge tectonic shifts beneath the surface of the global economy, and they don’t seem to be fully appreciated by the business press. Looking back at the past-performance charts of previous cycles won’t give us an accurate guide to where we’re heading this time.