Category Archives: UC

Apple Isn’t in the Cisco Cius Picture

I don’t want to spend a lot of time on it, but I’ll offer a relatively brief assessment of Cisco’s Cius enterprise-tablet announcement yesterday.

Look, folks, the Cius is not competing with the iPad for the affections and disposable income of tablet-buying consumers. That’s not Cisco’s game, is not part of Cisco’s plans, and is just not happening. So, as difficult as it might be to do, forget about Apple and the iPad for now. Put it out of your minds. Apple gets more than its share of attention already, and I’m sure we’ll have many other reasons to pay homage to the iPad, the iPhone, and the other iWonders best0wed upon us by the wizards of Cupertino.

Now that we’ve determined what the Cius (as in “see us,” get it?) is not, what exactly is it? For starters, it’s clearly an extension of Cisco’s enterprise videoconferencing and video-collaboration portfolio. Cisco has been working from the high end to the low end, starting with luxury, room-based telepresence, buying its way into a wider range of corporate telepresence and videoconferencing through its Tandberg acquisition, and now developing its own low-end tablet, the Cius, to make enterprise video mobile and to deliver it to desktop docking stations.

So, one way of understanding the Cius is as a means for Cisco to  extend telepresence, videoconferencing, and video collaboration to areas of the enterprise it has yet to penetrate. It’s Cisco’s way of making sure video proliferates throughout its customer base, giving Cisco opportunities to derive sales not only from video-based products, but also from the enterprise-network upgrades that inevitably result from widespread utilization of high-bandwidth video on a corporate campus. For Cisco, there’s a revenue multiplier effect that is concomitant with the spread of enterprise video.

Not coincidentally, this move also precludes potential competitive encroachments by competing vendors of low-end videoconferencing and video-collaboration products. Cisco had a hole at the low end of its video product portfolio, and it has closed it with this announcement.

With the Cius, Cisco also integrates its enterprise-wide video-collaboration tributaries with its preexisting IP phone, unified communications (UC), and data-collaboration (as in WebEx) product streams. The docking station that comes with the Cius isn’t just an ornamental device holder; it is intended to act as the physical point of integration between personal video-collaboration and Cisco IP phones.  Competitors cut off at the pass here include Microsoft, HP, Avaya, and scores of others.

Finally — and Cisco’s reach might exceed its grasp on this one — the networking giant would like enterprises to view the Cius as an office-computer replacement. In defense of that argument, Cisco cites the Cius’ notebook-caliber Atom chip, its capacity to accommodate a monitor and keyboard, and its support for virtualization. I think Cisco has to put more meat on these skeletal bones, but I can see where they’d like to go and why. Again, Microsoft is a big target. It will be interesting to see how closely Cisco and Google, whose Android OS runs the Cius, can work together to disrupt their common foe.

All in all, the Cius was a logical move for Cisco, a practical and broad-based extension of its video-collaboration strategy. Apple, though, isn’t in this particular picture.

Magor Offers “Telecollaboration” to SMEs

Some have accused telepresence of being the preserve of the rich.

To be sure, room-based telepresence has an exclusive aura, conferred by its prohibitive price and imperious requirement. It is a proficient, if costly, means of bringing meeting participants together around a virtual boardroom table, but it is relatively inflexible and stiffly formal when asked to share the stage with data-based collaboration.

For verisimilitude, though, telepresence sits at the pinnacle of the video-meeting throne. It is followed in the hierarchy by videoconferencing, which covers a broad swatch of ground and extends from specialized systems to software-based services that provide a best-effort experience on nearly any device with a broadband Internet connection. With regard to the latter, think Skype.

It has become readily apparent, in fact, that the market for video communications is richly segmented rather than monolithic. Cisco would like to get more than its “fair share” of the market action, but its current portfolio (even with Tandberg) remains vulnerable to competitive incursions in the SME space, where price sensitivity is more acute than in the rarefied environs of the world’s largest transnational corporations. To be fair, though, even the world’s corporate kingpins are holding their wallets a little tighter as we move into a “new normal” of permanent cost controls and reduced growth scenarios.

Macroeconomic misgivings aside, there is also that unsettled question about how elegantly collaboration can be brought, figuratively and literally, into the videoconferencing picture.

One company taking its best shot at addressing the challenge is Magor Communications Corporation. The company calls what it does “telecollaboration,” which it defines as an “emerging category of communications solutions (that) . . . . combines high-definition (HD) videoconferencing and advanced collaboration capabilities to enable life-like interactions and experiences no matter where people are located.”

Put simply, Magor is trying to fuse adaptable high-quality (1080p, where possible) videoconferencing with data-based collaboration.

The company, which is now raising a round of financing, recently gave me an opportunity to experience its technology firsthand.  I came away impressed by the price-performance proposition, the quality and naturalness of the videoconferencing experience, and the smooth interplay of collaboration and videoconferencing. The user interface also seemed uncluttered and surprisingly simple. Like the best telepresence and videoconferencing systems, Magor’s facilitated a natural eye-to-eye conversation without getting in the way.

The Magor technology doesn’t give you all the visual brilliance of, let’s say, Cisco’s telepresence, but it also won’t give mid-sized enterprises sticker shock. That factor, and some others I’ll mention at the end of this piece, could be pivotal to the company’s success.

If you ask Magor what sets it apart from the pack, it cites four main differentiators.

At the top of its list is a patented video-compression technology that allows Magor to stream HD video at 2 Mbps, peaking at 4 Mbps. In contrast, it says, its competitors transmit at 5 Mbps, peaking at 30 Mbps, to accommodate one 1080p stream. When the network is heavily congested, Magor says, its system can dynamically and gracefully adjust the video quality to accommodate constrained resources. If network conditions improve, Magor readjusts video quality accordingly. To effect these quality adjustments, Magor’s software samples the video stream multiple times per second.

A second point of differentiation, according to Magor, is that its functionality is delivered entirely in software that runs on industry-standard, off-the-shelf hardware. Magor says it is looking to port its software to a range of platforms, including increasingly powerful notebook PCs, tablets (such as the iPad), and smartphones.

Magor says another distinguishing characteristic is its support for original-format data collaboration rather than for a bandwidth-sapping H.323 “collaboration image” pushed through a side channel.

Finally, Magor points to how easy its systems are to use. To add users or data collaboration to a conference, participants need only push a button on a SIP phone or click on a mouse.

With regard to pricing, a single-display system goes for approximately $15,000, with a dual-display system selling for about $30,000, and a three-display configuration going for $45,000. The two- and three-display configurations are offered with the option to purchase additional HDTV cameras, which increases the price of the packages by about $2,000.

Launched in 2006 under the aegis of Wesley Clover — an investment firm chaired by Terry Matthews, founder of Mitel and Newbridge Networks — Magor sports an accomplished executive team. Mike Pascoe, the company’s CEO, served in the same role at Meriton Networks and PairGain Technologies. Dan Rusheleau, Magor’s executive VP of product development, co-founded Newbridge. Not surprisingly, considering its progenitor, the entire executive team comprises alumni of Terry Matthews’ corporate constellation.

I suspect there’s a potentially sizable market for what Magor is selling, but it will face competition from above — Cisco, HP, Polycom — and from below, where Logitech’s LifeSize and the cheap-and-cheerful Skype are among the players.

The big challenge for Magor will be to establish strong business partnerships that give it the industry profile, channel reach, and business scalability to gain separation from the pack. It is busily building OEM strategies, vertical-market plans, and reseller networks. It already has Mitel in its camp, and it is working on a series of other agreements.

Apple’s Innovation Falls Short in Product Naming

Apple has a well-earned reputation as an innovator, a company that regularly and repeatedly brings industry-leading designs, products, and technologies to market.

Apparently that innovation does not extend to the naming of its products and technologies. In that area, Apple increasingly displays a covetousness for what other technology companies already have brought to market. At its Worldwide Developers Conference (WWDC) yesterday, Apple had much to announce, including a renamed iPhone OS — now called iOS 4 — and a video-calling service called FaceTime.

As Network World notes, IOS and FaceTime are well-established trademarks in the technology world. Anybody familiar with Cisco Systems will know that IOS has long been an acronym and trademark of its Internetwork Operating System, a multitasking OS that runs on the networking behemoth’s routers and switches. Less known is that FaceTime was the trademarked name of a company that provides security and compliance software for IP-based collaboration and communications, including instant messaging, unified communications, and (more recently) social networking.

To avoid being sued for repurposing commercial names already on the market, Apple has licensed the IOS (or iOS) brand from Cisco (for an amount unknown), and its has acquired the FaceTime trademark from the company formerly known as FaceTime. FaceTime has put the best possible spin on the transaction, the value of which has not been disclosed:

As you’ve probably heard, Apple has announced that it will use “FaceTime” as the trademark for its new video calling application

Our agreement with Apple to transfer the FaceTime trademark to them comes as we are rebranding our company to better reflect our capabilities. We will be announcing a new name in the coming months.

This announcement echoes our long held belief that the Internet is changing the way people communicate. Increasingly the Internet is about communications, collaboration and communities – whether it’s social networking, instant messaging or now video calling, users are bringing these tools into the workplace.

FaceTime Communications helps businesses realize the benefits of the New Internet through enterprise solutions that provide unified security, management and compliance across the broadest set of applications and modalities.

Apple continues to be prolific in ideating and delivering its own designs and technology innovations, but product naming is a different story. In that domain, it is more than willing to pay handsomely for rights to the creative fruits of others.

Major Ramifications from HP’s Palm Buy

Microsoft was one of the primary reasons I did not think HP would pursue an acquisition of Palm. Simply put, I though HP would tap Microsoft as its operating-system partner in the mobile space. I calculated that HP wouldn’t do anything that would endanger its extensively business and technology partnerships with Microsoft.

Well, I was wrong.

In buying Palm, HP sent shockwaves through the industry. It’s time to review and challenge the assumptions and orthodoxies that underpin our understanding of the information-technology universe. This move will have repercussions beyond the mobile space, which is increasingly important in its own right.

Even if HP fails utterly with its acquisition of Palm — even if it spins its wheels as a fringe player in the mobile space with smart phones, tablets, and netbooks running webOS — it has sent a powerful message that is being carefully digested in boardrooms worldwide.

Microsoft, once the capo di tutti capi of the industry, is no longer a feared and respected force. In choosing to buy Palm, in choosing to have an mobile operating system of its own over anything its longtime partner could provide, HP is speaking volumes not only about its own objectives and the changing dynamics of the mobile space, but also about Microsoft’s downwardly mobile place in the world.

The HP-Microsoft partnership is or was exceptionally close, far closer than any dalliance HP had with Cisco. HP and Microsoft partnered across product portfolios, markets, business units, and geographies. If Microsoft developed software, one could be sure it would run on an HP system, be it a server, PC, or mobile device. The companies co-marketed and sold into nearly every addressable market.

Even though executives from HP and Microsoft say the relationship will remain strong, that it will endure, one has to wonder. HP has wounded Microsoft grievously, and both parties know it. What’s more, the rest of the vendor community knows it, too.

Everything must be reconsidered now. How and where else will HP deviate from its Microsoft alliances? Watch for changes to HP’s collaboration and unified-communications strategy, especially for HP to enhance and extend 3Com’s VoIP product portfolio from its mid-market perch. Watch also for HP to bolster its videoconferencing capabilities.

What does Microsoft do now? Now that HP has kicked it in the gut, its other mobile operating-system licensees will question, even more than before, whether Windows Phone 7 Series is really for them. Those doubts are turning into negative judgments, decisions to look elsewhere for what they need.

I would have to think everything is back on the table at Microsoft, even acquisitions of other mobile players, something that would have been unthinkable before HP’s acquisition of Palm. For Microsoft, mobile is too important a space for it to be seen as week and irrelevant.

Irrespective of whether HP succeeds in squeezing value from Palm, it has set off an interesting chain reaction.

Cisco’s Tandberg Acquisition Officially Approved, Dance for Polcyom Begins

When I first learned of the alleged acquisitive interest Apax Partners was said to have expressed toward Polycom, I dismissed it as nothing more than a media head fake.

Let’s consider: When news of that sort is leaked, it’s made public for a reason. In this context, it seemed, the reason was to bring others to the table. Somebody who has an interest in Polycom being acquired wanted to engender a bidding war for the company. It happens all the time.

There was something else, too. Apax didn’t seem a likely acquirer. Where were the direct synergies with Polycom in Apax’s investment portfolio? Where were the connections between Apax’s people and major vendors in the videoconferencing and unified-communications worlds? The deal didn’t offer enough risk mitigation for Apax; the pieces didn’t fit together.

Even if Apax had wanted to acquire Polycom, I’m not sure it had the conviction or the stomach to conclude the deal at the price Polycom would have commanded.

Now, though, Cisco’s acquisition of Tandberg has been consummated, and Polycom stands exposed. Polycom was Tandberg’s videoconfencing rival, and it’s a company of considerable importance to the UC strategies of more than one vendor.

We must consider the Cisco-Tandberg context, because contrivances like the leaked report of Apax’s interest in Polycom tend not to occur in a vacuum. Who’s supposed to step from the shadows and make a welcome bid, at an appetizing price, for Polycom?

There are a few candidates, including one that already has tipped its hand. That player is The Gores Group, 51-percent owner of Siemens Enterprise Communications. But The Gores Group’s bid was leaked, too, and we have to wonder why. Expect others to enter the picture, publicly or otherwise.

An obvious candidate is Avaya. Even though Avaya has barely digested its acquisition of Nortel’s enterprise business, it might feel as though it cannot let Polycom fall into other hands. In a perfect world, Avaya would not have to pursue Polycom now, immediately after assimilating and integrating Nortel.

Nonetheless, strategic imperatives might necessitate a move. Avaya is backed by the high rollers at Silver Lake, who rarely think small. They might not be willing to pass up the opportunity of taking Polycom off the board.

Who else? Not Dell. I can’t see it happening.

I don’t think HP will make the move, either. It’s got is own telepresence systems already, it’s very close to Microsoft in unified communications, and it wants to leverage Microsoft in the battle against their common enemy, Cisco.

Juniper is a possibility, but the company has signaled that it will grow organically, not through big-ticket M&A. Juniper will stay focused on building its intelligent network infrastructure and try not to get distracted by the action in the M&A casino.

IBM could make a move for Polycom, but I don’t think it will. Microsoft also enters the equation.

Yes, Polycom sells hardware, and Microsoft has steered clear of stepping on the toes of hardware partners such as HP. But there’s a way Microsoft could structure a deal that would be amenable to HP and its other hardware partners. All it takes a little creativity and ingenuity, and Microsoft retains plenty of that commodity on the enterprise side of its business.

If I were making book on which company will acquire Polycom, I’d make Silver Lake-baked Avaya the favorite, with Gores-backed Siemens Enterprise Communications the second choice, Microsoft the third option, with IBM next. Of course, in no way do I encourage illicit gambling on prospective M&A activity.

If you have theory on whether Polcyom will be acquired, and by whom, feel fee to share your thoughts below.

UC Won’t Follow WiFi’s Path

At his No Jitter blog, Zeus Kerravala recounts a panel discussion he co-moderated yesterday at VoiceCon.

The panel — ostensibly convened to discuss “next-generation communications architectures” — comprised representatives from most of the industry’s heavyweights, including Cisco, Microsoft, Avaya, HP, IBM, and Polycom. While the vendor representatives seemed initially in agreement regarding how communication architectures are shifting away from vertical integration into distinct layers, they didn’t take long to eschew common cause in favor of recrimination and one-upmanship.

That’s the nature of the beast, of course. I’ve been on these sorts of panels, and I know that everybody there has an agenda that involves promoting his or her company’s products and vision, often in contradistinction to those of your counterparts. Salesmanship never sleeps, especially when it’s on a dais. Away from the panels, too, each vendor continually looks for an edge over its rivals.

Later in his blog post, Kerravala wonders why unified communications can’t be like WiFi, where everything just works together and interoperability between and among different vendors’ products isn’t a problem for customers.

Kerravala cites two main reasons why UC isn’t like WiFi. First, he says, vendors have trouble agreeing on common standards. In Kerravala’s words: “Everyone wants their standard to become the industry standard.” He’s absolutely right.

Second, he argues, WiFi-scale standardization changes the economics of the industry. That’s true, too. As he points out, standardization and commoditization of WiFi resulted in low-cost embedding of the technology in nearly anything and everything, changing the business models of infrastructure vendors in the process.

On that point, we should mention that the major vendors who drove WiFi standardization clearly foresaw how commoditization would eviscerate profit margins on underlying infrastructure. They knew what they were doing, and they went into it with eyes wide open.

They did it because they knew the value of the applications and content WiFi unleashed would create new business opportunities and drive growth in adjacent markets that were of compelling interest to them. Standardized WiFi paved the way for new market opportunities — including increased sales of preexisting and future products — and that’s why the industry movers and shakers got behind the standards effort. In more ways than one, WiFi was a foundation technology.

Can the same be said for UC? That’s the crux of the matter, because if UC is more a market end rather than a means to manifold other market ends, vendors have limited motivation to standardize.

Another difference between WiFi and UC is that the former clearly sits at the bottom of the OSI protocol stack whereas UC, in its breadth and depth, ranges all the way up the stack. Generally, standardization occurs more readily at the bottom of the stack, starting at the PHY and MAC layers, and gets more difficult at the higher layers, especially at the application layer, where differentiation and proprietary advantage often confer great rewards.

In all likelihood, UC always will be more proprietary in design and implementation than WiFi. The two are too dissimilar in their technological and market characteristics to share similar fates.

Vendors refrain from standardizing UC products and technologies because they have neither the desire nor the need to do so. The customers, the buying community, want standardization, which would lower solution costs and result in interoperability and product interchangeability; but the vendors don’t want to go there, for obvious reasons.

UC and collaboration looks more like an application or application service to me than like an 802.11 IEEE networking standard. It’s not so much a cornerstone or foundation for other markets and services as it is an end in and of itself. As such, vendors contesting the space will continue to seek proprietary advantage and resist homogenized standardization.

Despite vendor pieties and platitudes on interoperability and openness, customers shouldn’t hold their breath waiting for UC purveyors to make buying decisions cheaper and easier.

SIP Pioneer Reportedly No Longer at Adobe

I have heard reports that Henry Sinnreich, the “godfather of SIP,” has left Adobe Systems.

Some suggest that Sinnreich was included in the latest wave of layoffs at Adobe, but I haven’t been able to confirm those reports. While it appears Sinnreich is no longer at Adobe, I don’t know the circumstances surrounding his departure.

I’ve had the pleasure of working on SIP-related initiatives and partnership with Henry. I wish him all the best in his future endeavors, wherever they take him.

Rumor Musings: Avaya Acquisition of Polycom Plausible

Rumor buzz this week has intensified, and at least some it involves a mooted acquisition by Avaya of videoconferencing vendor Polycom.

Unless one is an insider — which, in this instance, I am assuredly not — one never knows whether rumors of these deals represent anything other than an optical illusion of smoke without fire. Insiders know what’s happening behind the scenes, but they’re not supposed to tell anybody, notwithstanding apparent evidence to the contrary as exemplified by the scandal involving Galleon Investments and others.

So, we’re left to play Sherlock Holmes in the technology markets, looking for clues and employing deductive reasoning to ascertain whether a given rumor possesses anything more than surface plausibility.

As it turns out, a case can be made for an Avaya acquisition of Polycom. It could happen. That doesn’t mean it will happen, and I am not advising anybody to bet the farm on such an outcome. It’s just that looking at Avaya’s strategic ambitions and how Polycom could further them, I could envision a scenario in which Avaya takes an acquisitive shine to its longstanding business partner.

The partnership, while not evidence that a closer relationship will ensue between the companies, represents coincident interests and a history of working together.

Additionally, let’s remember that Polycom might be amenable to a takeover in the wake of Cisco’s purchase of its primary videoconferencing rival, Tandberg. Polycom could continue to stand alone, but shareholders and other major stakeholders might be thinking that the timing and circumstances favor a sale.

Let’s also consider Avaya. The company bought insolvent Nortel’s enterprise business for more than $900 million at auction last fall. It’s still assimilating that purchase, dealing with product overlaps, roadmap questions, and channel issues. Still, when one considers the searing ambition that drove that acquisition and that continues to power the strategic thinking in Avaya’s executive suites, it would be folly to completely dismiss the potential for Avaya to make further M&A moves.

Avaya’s CEO is Kevin Kennedy, a former Cisco executive who subscribes to the same GE-inspired mantra as John Chambers regarding market focus, specifically the part about aiming to be first or second in every market a company enters.

Cisco and Avaya go head to head for market leadership in enterprise VoIP and unified communications. Meanwhile, video-based communication and collaboration are seen as the next major wave, with Cisco betting heavily on the space and Polycom moving into a prominent market position in videoconferencing on the back of its voice-conferencing franchise. Avaya could see ownership of Polycom as both a competitive necessity and a natural adjunct to its existing business.

Remember, too, that Avaya is a private company, richly backed by the munificence of private-equity houses Silver Lake and TPG. Being private, Avaya has more liberty than most public companies to devise and pursue a long-term strategy. Having the backing of Silver Lake and TPG potentially gives Avaya the means to swing for the fences.

There are reasons, perhaps many, why an Avaya-Polycom deal won’t transpire. This rumor, though, seems to have more plausibility than most I hear during an average week.

Latest Market Data Prompts Questions on Cisco Dominance

New data on the state of the Ethernet-switching market surfaced yesterday and today.

First, Dell’Oro Group reported that the Ethernet-switching market grew sequentially at a 20-percent clip in the fourth quarter of 2009. As a result, Cisco, HP, and Juniper were said to have added $600 million in incremental revenue.

Said Alan Weckel, director of research at Dell’Oro:

“Year-end budget spending and supply constraints from the previous quarter helped propel market growth in the fourth quarter. We expect the market to continue to expand in 2010, especially as 10-Gigabit Ethernet continues to grow not only as a server connectivity technology but also as an aggregation technology within the data center.”

Indeed, growth in the Ethernet-switch market is being driven exclusively by adoption of 10-GbE in data centers.

The next piece of market data came from Nikos Theodosopoulos, research analyst with UBS Research. Om Malik reports that Theodosopoulos combed through the Dell’Oro data, did some analysis, and made a few observations of his own. Salient among them is that Cisco is suffering market-share erosion — albeit not of the vertiginous sort — across many of its core switching and routing product groups, among both carrier and enterprise customers.

As reported by Jim Duffy of Network World, Theodosopoulos found that, while Cisco lost share in 2009, vendors such as HP, 3Com, Juniper, Brocade gained ground in the market for Layer 2 and 3 switches. Higher up the stack, F5 Networks and Citrix captured share in the Layer 4-7 segment.

On the routing side of house, Alcatel-Lucent and Juniper advanced relative to Cisco in carrier edge routing. In core routing, Huawei increased its share by nearly two percent while Cisco lost a touch of ground. Meanwhile, Cisco’s share was unchanged in 2009 in enterprise routing.

So, is this the beginning of a steady decline in Cisco’s mainstay businesses? It’s far too early to say. It could be nothing more than a short-term anomaly conditioned by severe recessionary conditions (though Cisco has gained share in previous downturns). Besides, Cisco’s switching and routing franchises are so entrenched that meaningful deterioration in the company’s business fundamentals would be unlikely to occur for some time.

Steady commoditization is the biggest threat CIsco faces in its switching and routing redoubts, and the company saw that threat coming long before now. Confronting low-priced, good-quality, standardized gear from Huawei and 3Com (among others), Cisco knew it had to diversity its product portfolio, not just into higher-end hardware — where it hasn’t done as well against F5, for example, as it might like — but also into software and services.

Just take a look at all the emerging market adjacencies Cisco has entered, including (but not limited to) forays into home networks and home-network management; telepresence, videoconferencing, and video-based collaboration; web-based collaboration and unified communications; mobile video cameras (the Flip); networked digital signage and video-based surveillance; and smart-grid infrastructure. Cisco isn’t stopping there, either. It will continue to push into other markets where data networking confers a feasible mandate.

The challenge for Cisco comes in growing these emerging markets, with their sustainable margins, while coming under mounting commodity pricing pressure in its established switch and router markets. Analysts should closely monitor how quickly these emerging spaces gain substantive traction for Cisco.

Now, you might reasonably ask, where does Cisco’s Unified Computing System (USC) fit? Some people think it was a mistake for Cisco to move into blade servers, that the networking giant made an ill-considered move when it encroached on the territory of erstwhile partner HP and others, such as IBM and Dell.

However, I think Cisco felt it had no choice. The future vendor value in data centers will derive from convergence and integration, which means software and services will be essential to success. The hardware, whether represented by servers or switches, will become commoditized.

Today, that hardware still provides revenue and some margin, but it can also serve as a platform for account consolidation. Fist, though, it’s essential to consolidate the hardware, which is exactly what Cisco and HP are doing. They’re using consolidated hardware to create integrated data-center solution stacks, effectively trying to lock out other players and manage account presence. They’re using hardware for initial leverage, but that’s not the end game.

IBM is taking a different tack, having made the transition to relatively sophisticated data-center software and accompanying services well before its two big rivals altered their courses. Some think IBM will buy a networking vendor, such as Juniper, but I’m not so sure. I think IBM views the underlying hardware as an interchangeable commodity, just the underlying plumbing above which orchestration and management software will run the show.

This battle is just beginning, though, so the vendors — and this humble observer — reserve the right to change tack.

Cisco: Results Impress, Guidance Encouraging, Challenges Remain

Cisco announced encouraging second-quarter financial results at the close of trading yesterday. It also provided robust guidance for the quarter ahead, even if its optimism was of an understandably cautious vintage.

In the technology space, Cisco CEO John Chambers and his team rank near the top in the way they deal with the analyst and investor community. Cisco set up this “market beat” perfectly, and it struck the right tone regarding outlook. Really, Chambers and company are masterful in how they prepare for and execute these quarterly calls with analysts and investors. These calls are like performances, in that a lot of preproduction work goes on behind the scenes before the event itself.

Not that there’s any sleight of hand in Cisco’s actual results, though. The numbers were solid. As Cisco said, quarterly results were relatively strong across product lines, industry sectors, and geographies. Some were better than others, though, and I’ll touch on that later.

Cisco is happy enough with its results and, more important, with its business prospects that it will begin hiring in anticipation of continued growth in established market segments as well as in sectors that are relatively new to the company. All told, Cisco will add from 2,000 to 3,000 positions, though we don’t know where in the world those jobs will materialize or how they’ll be apportioned departmentally. We can keep an eye of the Cisco employment board to find out.

The networking giant signaled that it will be aggressive in partnerships and acquisitions, too.

After trending downward for a few quarters, Cisco’s operating cash flow spiked on both a sequential and year-over-year basis, with the company now holding cash and cash equivalents of more than $39.6 billion. A caveat is that most of that money — about $35 billion, by my back-of-envelope estimation — is held overseas. Cisco is unwilling to repatriate that money, and to incur attendant taxation, so it probably will seek purchases in foreign markets wherever possible.

Cisco obviously hopes that its stock will become more attractive as acquisition-related currency. Cisco is talking up the recovery, which the company says has entered a “second stage” (though those of us who weren’t playing the public markets might have missed the initial stage entirely). It also has continued its share-repurchase program. Obviously, to accept Cisco stock in lieu of hard cash, target companies and their backers would have to be confident that Cisco’s shares will appreciate rather than languish.

We know Cisco beat the Street’s expectations like a rented mule. It beat even the high-end revenue and earnings estimates of analysts. What’s more, it issued bullish guidance that was ahead of consensus projections from the analyst community. It’s all good, right?

Well, it’s good for now. That said, the price of business success is eternal vigilance, and Cisco must remain alert to both threats and opportunities. It must also be able to distinguish between the two.

Blemishes included a modest dip in gross margins and faltering performance in Europe and emerging markets (not including India and China, the latter where Cisco is reorganizing to position itself for better results against China’s homegrown Huawei and 3Com, which has a huge Chinese workforce as a result of its earlier partnership with Huawei).

Also of concern is Cisco’s nominal growth in its “advanced technologies” segment, which includes many of its emerging businesses in so-called market adjacencies. Revenue in advanced technologies grew just one percent in the quarter on a year-over-year basis.

Cisco will place considerable emphasis on improved performance in these segments, which represent the company’s future growth. Cisco saw some long-deferred equipment upgrades and refreshes from its North American enterprise customers in the just-concluded quarter, but it will need to sell them new products as well as replacement gear to drive meaningful, sustained growth.

Fully aware of this conundrum, Cisco must be concerned to see its video business down 12 percent. This puts the Tandberg acquisition into an interesting new light, explaining why Cisco heralded it when first announcing it back in October and why Cisco was disinclined to walk away when a significant percentage of Tandberg shareholders banged their fists on the table and demanded a sweetened offer.

Other areas of Cisco advanced technologies that were down include application networking, the networked home, and storage. Security was flat.

On the positive side, unified communications was up a whopping 17 percent, and wireless grew in high single digits. Chambers also reported that enterprises have responded favorably to the company’s Unified Computing System (UCS), with more than 400 customers placing orders.

I’m sure we’ll see Cisco working hard organically and through acquisition to get all its advanced technologies performing as well as its unified communications and wireless groups. It also will continue looking for more market adjacencies.

Avaya Wraps Deal for Nortel Enterprise Business, Prepares for Post-Merger Challenges

Now that Avaya has closed its acquisition of Nortel’s enterprise business, it must figure out how to meet new challenges as a bigger company with weightier expectations.

Owned by private-equity concerns Silver Lake and TPG capital, which bought the company for approximately $8.2-billion in 2007, Avaya now has paid $900-million for insolvent Nortel’s enterprise assets and $15 million for employee retention.

The pressure now will be on Avaya CEO Kevin Kennedy, a former Cisco executive who left to pursue his personal quest for a big chair after concluding that John Chambers wasn’t prepared to vacate his gilded throne. It will fall to Kennedy and his team to plot a course toward exit for the Nortel-engorged Avaya.

Kennedy might be on the clock, but he’s playing for time, too. In an interview with Reuters, he said an eventual exit for the company was contingent on external factors, mainly the global economy, as well as on his company’s strategy and execution.

The Avaya chief thinks the economy is recovering, but he said customers remain wary of making big investments and are targeting projects that provide near-term returns.

Said Kennedy:

“They speak as though there will be growth. But they are preparing for sometime during the calendar year for a setback. So they tend to be committing to projects that can be completed within six months rather than 12 to 24 months.

We believe that the economy will be some place between flat and up, cautiously up, I’d say. But we are also managing the company as though there could be a setback.”

Setback. He used that word twice in the two preceding paragraphs. A setback for the global economy would be a setback for Avaya’s customers, and that would represent a setback for Avaya and for its exit-seeking investors. (For those of you keeping score, I just used the word “seback” four times — five, if you include the reference in this parenthetical sentence — in this paragraph, thus trumping Kennedy in a competition in which he is an unwilling, unknowing participant.)

Kennedy prepared his company’s financial backers for a potentially long haul well before he spoke with Reuters last week, but it’s interesting that he is working so hard to temper expectations outside the Avaya boardroom.

Unwary industry observers, who are good at simple arithmetic but fail to take context into account, will add Nortel’s IP PBX market share to Avaya’s and conclude that the merged entity will have a combined 25 percent of the enterprise telephony space. They’ll excitedly point to that number and say that the Avaya-Nortel colossus will overwhelm Cisco, which holds about 16 percent of the market.

What they must remember, however, is that it won’t play out that way. Even though the Cisco of today doesn’t seem as invincible as the Cisco of yore, enterprise telephony and unified communications — the latter with its bandwidth-hogging video traffic — are areas where the computer-networking leader is unlikely to get lackadaisical.

More to the point, Avaya has to eliminate product overlaps with the Nortel portfolio. It also must deal with daunting channel-integration issues. A lot of customer confusion and uncertainty will result.

Taking all that into account, the keen industry watcher will realize that one plus one, in the case of post-merger market share, will not always equal three. Sometimes, as in this case, it doesn’t even equal two. When the dust settles about six to nine moths from now, Avaya will have done well to keep a market-share edge over Cisco.

Avaya has said it plans to sell and support all Nortel lines for 12 to 18 months. The company also said it will provide a migration plan for any products that it decides to phase out. With the Nortel brand not being part of the acquired bounty, future product releases from the Nortel side of the family will carry the Avaya name.

After closing its deal to acquire Nortel’s enterprises, Avaya now prepares for the heavy lifting.

Avaya Must Avoid Distractions in Nortel Integration

If all goes according to plan, Avaya will take possession of insolvent Nortel’s enterprise assets, won at auction for approximately $900 million in September.

It’s at that point that Avaya will face some difficult decisions and daunting challenges. As it integrates and assimilates Nortel products and employees — not to mention its channel partners — Avaya will contend with multiple overlaps and redundancies. In most cases, those overlaps will be resolved in favor of products within Avaya’s portfolio. Nonetheless, as an article at Network World suggests, Nortel products might prevail in rare exceptions.

Avaya will have to decide whether it wishes to prolong the lives of Nortel’s switch and security portfolio. These are the products — minus Alteon load balancers, small-office/home-office gear, and blade switches, which now belong to Radware, Netgear, and Blade Network Technologies, respectively — that Nortel inherited when it acquired Bay Networks for $9.1 billion in 1998, back when the Internet seemed a limitless, gurgling fountain of obscene wealth.

There’s not much of Bay Networks left standing within Nortel. What remains really isn’t worth Avaya’s bother of keeping it alive. The cost to Avaya wouldn’t just be manifest in the bills associated with maintaining, supporting and extending the product portfolio. Additional “opportunity costs” would be incurred in the form of lost partnerships with vendors that sell networking products similar to those, but (in most cases) better than, the Nortel switches and security boxes. (Current Avaya enterprise-networking partners include HP ProCurve, Extreme Networks, and Brocade/Foundry.)

Besides, the Nortel switches would be a distraction, a once-shiny, now-irredeemably tarnished bouncy ball that Avaya executives would be remiss to chase. They’ll get some useful things from the Nortel acquisition, but the ex-Bay stuff isn’t among them.

Avaya would be wise to keep its eye on its core enterprise-communications business. Whether those communications involve VoIP alone, or unified communications, it will face tough competition from Cisco. Avaya has neither the scale nor the resources to compete with Cisco right across the enterprise board.

Accordingly, the company should strive to keep Cisco’s enterprise-networking enemies among its allies as it wades into battle.