Daily Archives: July 24, 2006

Is YouTube Worth $1 Billion?

After being feted and wooed by the media world’s biggest players at investment bank Allen & Co.’s annual Sun Valley jamboree, YouTube CEO Chad Hurley might have contracted an inflated sense of his company’s worth.

That’s the scuttlebutt being promulgated by news tabloid The New York Post (owned, incidentally, by Rupert Murdoch’s News Corporation) in a column yesterday that suggested that Hurley his team of investors and executives at YouTube are aiming for a $1-billion-dollar market valuation, presumably via acquisition.

Howls of indignation followed publication of the column, with John Battelle suggesting that it is probably the mischievous media, not Hurley and company, that are promoting the $1-billion price tag. Battelle  notes that the content with the greatest download popularity at YouTube is doubtless copyrighted, and that a major entertainment company would not risk acquiring YouTube for fear of stepping into a litigious quagmire. He also downplays the likelihood that a new-media powerhouse such as Google, Yahoo, and Microsoft would part with a $1 billion to won YouTube, though he believes Google probably would be the best fit, if it were so inclined.

Meanwhile, the folks at Techdirt believe that this is a media-manipulation ploy by YouTube — which sports negligible revenue along with $1-million-per-month bandwidth bills — to induce a major player to overpay for the privilege of owning the company. In this respect, Techdirt says, YouTube is emulating the approach Skype took in finding its buyer, eBay, which paid $4.1 billion after Skype had successively used the media to publicize an ever-increasing valuation that went from $1 billion to $3 billion before reaching its buyout price.

I think Post columnist is merely repeating what he heard from investment bankers and perhaps from News Corp. executives who returned from Sun Valley. I don’t believe that any major multibillion-dollar corporate concern, regardless of whether it is a new- or old-media company, can be persuaded by media hype to buy a company for an exorbitant price.

For all that’s been said about a Web 2.0 bubble, we haven’t gone back in time to 1999. Big companies are more discriminating about whey do with their money. The bust, and the long downturn that followed, still haunts us to this day, and it’s impossible for the "irrational exuberance" of that hyper-delusional era to return. eBay might have overpaid for Skype — though the jury is trying hard to withhold a definitive verdict — but if it did, it was because of faulty assumptions and flawed business-model methodologies, not because it was rendered mindless by a maelstrom of media hype.

I tend to agree with Battelle’s reasoning as to why YouTube isn’t worth $1 billion. Then again, to paraphrase NFL coach Bill Parcells, companies are worth what the market says they’re worth.

Avici Buyout Rumors Rekindled by Strong Quarter

Last Thursday, shares of Avici Systems Inc. skyrocketed 45 percent after the vendor of core routers for telecommunications carriers reported a second-quarter profit and revenue of $25.3 million, more than twice the $11.6 million it reported for the same period a year earlier.

Market analysts expected revenue of less than $11 million and a loss on the quarter. Instead, Avici delivered net income of $7.9 million, or 58 cents per share, the first time it had generated a profit under GAAP rules.

Avici now has provided strong results in consecutive quarters. Earlier this year, the company’s first-quarter results also exceeded expectations.

Sounds great, right? Well, all is not perfect in the world of Avici. The company derives the vast majority of its revenue from one customer, AT&T, and, without the addition of new customers, Avici runs the risk of falling off a tightrope and into an abyss. If AT&T shifts some or all of its core-router business to another vendor, as has been rumored, Avici and its stock will crash like a kite in wind shear.

Avici’s executives recognize the danger. Earlier this year, the company moved to eliminate 45 percent of its 300 full-time and contract-staff positions, 135 jobs in all, as part of an effort to shave $20 million from annual expenditures.

Meanwhile, even in delivering the company’s glowing results last week, Avici CEO Bill Leighton sounded a disconcerting note.

"We expect to continue to see strong revenue and bottom line results in 2006, but caution that the business conditions driving this increased demand can change significantly."

Well, yes, when you rise or fall on the whims of one customer, that’s especially true. Avici is living from quarter to quarter, hoping that it can somehow find new customers while retaining AT&T’s life-sustaining patronage.

Then again, Avici also is open to acquisition overtures. As you might expect, Avici has been evaluating its long-term future. During a post-earnings conference call with analysts, Leighton disclosed that the company had "talked with several interested parties and held numerous discussions" regarding strategic alternatives.

I suppose it is possible that somebody could find Avici attractive as a buyout candidate. The core-router market has shown signs of renewed vitality, and Avici has retained some engineering talent, a surprisingly loyal telecommunications customer, and approximately $47 million in cash reserves — with no debt. Granted, those cash reserves can deplete quickly if the company has a disastrous quarter or two, but that’s where they stand now.

What’s more, the core router market is one of the few provinces of telecommunications equipment that remain undisturbed by Huawei, the $6-billion-a-year Chinese manufacturer  whose product quality is catching up with its 30-percent price discounts against competitors’ products.

Some observers believe Huawei, continuing its relentless expansion in Western Europe and emerging markets, has played a part in triggering M&A activity involving some of the world’s largest telecom-infrastructure suppliers. That might be partly true, but I suspect the consolidation of telecommunications carriers themselves has had a least as much to do with the squeeze on equipment providers.

Here’s a thought to consider: What if Juniper, which has been rumored recently to have a renewed interest in Avici, isn’t the one that makes a successful bid? What if, instead of Juniper, it’s Huawei that makes a winning offer for Avici?

There aren’t many vendors who would want what Avici offers, but Huawei might be one of them.

Microsoft UC Partnership Fuels Nortel’s Channel Push

In a sign of how much Nortel Networks believes in and is depending upon its partnership with Microsoft to bring unified communications to enterprises of all sizes, the company plans to expand relationships with distributors Ingram Micro, Synnex, and Westcon Group.

Nortel recently introduced new networking products and VoIP gear for SMBs, but its channel expansion also is being driven by its four-year strategic alliance with Microsoft in unified communications. Nortel expects the partnership to deliver $1 billion in revenue through 2009, and there’s no question it will need ample assistance from the channel to reach that objective.

Since neither Nortel nor its channel partners have targeted SMBs traditionally, the company must bring its existing channel partners up to speed on how to serve the market while working with major distributors to identify and cultivate new partners with greater SMB experience and familiarity.

It will be a difficult and costly initiative for Nortel, but, if it wants to fully benefit from and serve Microsoft’s broad base of mid-size enterprises, it has no choice but to adapt its channel strategy and upgrade its expertise accordingly.

AOL Acknowledges Reality, to Offer More Services Free of Charge

In a belated acknowledgment of reality, Time Warner’s AOL LLC online business unit has indicated that it would rather cannibalize its own dwindling installed base of dial-up subscribers than watch its competitors devour them.

AOL has no choice in this matter. It can continue to let its subscription numbers fade into oblivion (or Bolivia, as Mike Tyson would say), or it can leverage its assets — including its parent company’s enormous vault of entertainment properties and content — in an attempt to compete with Google, Yahoo, Microsoft, and others. Those companies have adopted advertising-supported business models that deliver free content and services over the web, and even AOL has made incremental moves in that direction.

Half measures, though, won’t suffice. AOL has to go all the way, offering up practically everything it owns to consumers at no charge, relying on advertisers to supply the revenue. We don’t know how far AOL will travel in that direction, but we’ll likely get the answer shortly after Time Warner’s board meets Thursday to consider a proposal from AOL’s executive team.

Yes, by opening the floodgates of free content, AOL will lose the paying subscribers it has today, but they were leaving anyway, enticed by free services from Google and Yahoo that often were of better quality than paid services from AOL.

EU Clears Way for Alcatel-Lucent Corporate Seppuku

Nothing stands in the way of Alcatel’s acquisition of Lucent excerpt for the formal assent of Lucent shareholders, which is expected to be given on September 7.

European Union regulators today cleared the proposed $13.4-billion merger between French telecom-equipment maker Alcatel SA and its erstwhile competitor, New Jersey-based Lucent Technologies Inc. That sets up the vote on September 7 as the last formal obstacle to a corporate combination that seems destined to sorely disappoint investors and to chase what remains of Lucent’s best engineering talent out the door like a vengeful poltergeist in a haunted house.

The European Commission, the executive body of the EU, said in a statement that the merger’s main impact on competition would be in the supply of optical networking equipment and broadband access solutions, the latter a market where Alcatel is especially strong. Nonetheless, the EC concluded that sufficient competition will endure in both areas subsequent to the merger’s completion and that powerful telephone companies, whose negotiating hands have been strengthened through industry consolidation, would be able to ensure that the Alcatel-Lucent would-be behemoth doesn’t enjoy undue advantages in the marketplace.

Well, the European Commission needn’t have concerned itself about that unlikely eventuality. Lucent has issued multiple profit warnings this year, and there might be more to come. Nobody is sure when or how a coherent strategy will arise for Alcatel-Lucent, since the primary motivation for the combination seemed to be fear rather than business logic. Employees in both companies are bracing for job cuts, said to number at least 9,000. Finally, the resulting management structure seems designed for palace intrigue and internal backbiting rather than for cooperation and resolute focus.

The deal stipulated that top management of the merged company must be represented equally by executives from both firms. Lucent CEO Patricia Russo, who does not speak French, will be the CEO, with Alcatel chairman and CEO staying on as a non-executive chairman, though you can be sure he will not be reticent about expressing his opinions regarding day-to-day operations.

As the French say: Zoot alors!

IBM Remains Likeliest Candidate to Acquire ISS

During the last week, shares in Internet Security Systems (ISS) have gained on rumors of its imminent acquisition and been beaten back down, at least partially, by an analyst downgrade.

The acquisition rumors are persisting, and it seems there’s some legitimacy to them.

IBM still remains the likeliest acquirer, since ISS already is one of its partners and IBM would like to become a stronger player in Internet security. ISS’s managed-security offerings and its intrusion-prevention products would offer IBM entree into two security markets with robust growth prospects. The managed-security offerings would also fit exceptionally well into IBM Global Services’ solutions portfolio, translating into instant revenue gains.

The companies supposedly are talking to another, but that doesn’t mean a deal will be consummated.

Other companies cited as potential acquirers of ISS in an article appearing today at TheStreet.com include Microsoft, CA (oops, I almost referred to it as Computer Associates, the company’s name during its bad old days), Nortel, and Extreme Networks.

Let’s eliminate Extreme Networks as a candidate immediately. Extreme is more likely to be acquired than to acquire, and its market capitalization of $468 million is dwarfed by ISS’s market cap of about $966 million. Extreme would have to go into massive debt to make the acquisition work, and I doubt that its board or its shareholders have the stomachs for that sort of roller-coaster ride.

Next up is CA, which has lost its appetite for bigger acquisitions and is restricting itself to buying small private companies, sometimes at relatively early stages of development. Just last week, CA acquired XOsoft, which provides application-availability solutions and will be incorporated within CA’s storage-management portfolio.

I don’t think CA is inclined to enter the IPS market, and some of the other areas in which ISS is active would overlap with products CA already has developed internally or has obtained through previous acquisitions. The probability of CA acquiring ISS is low.

As for Nortel, the company has its hands full getting out of markets where it made ill-advised acquisitions in the past. It wouldn’t be able to leverage the managed-services element of an acquisition of ISS, and it might not want to enter the IPS market, where it would have to compete with a range of vendors including Cisco, Juniper, McAfee, 3Com, Symantec, and others, some of whom Nortel might need as partners in other areas of its business. There also are parts of ISS’s product portfolio that wouldn’t mesh well with Nortel’s admittedly capricious strategic direction. Nortel is a low-probability acquirer of ISS, but probably not as much of a rank longshot as CA.

That leaves IBM and Microsoft.

I don’t think Microsoft will be acquire ISS, but it could happen. When you examine Microsoft’s security strategy, you will find that its focus has been on, and continues to be about, securing and defending Microsoft’s own applications and operating systems, not about providing a generic umbrella of protection throughout the enterprise. Now, if you look at what an network IPS  does and where it typically sits in a network, you’ll note that it is an inline device that inspects application-content flows — across the full spectrum of application protocols — to prevent attacks in real time.

In my view, Microsoft would not be fervently interested in a network-based IPS, but it might be inclined to look at host-based intrusion prevention systems, which could and would sit alongside its various server products, such as its email, web, database, and business-application servers.

While it is true that ISS offers both host- and network-based IPS products, as well as a desktop-based IPS offering, there are parts of ISS — including its network-based IPS, its email-security products, its desktop and server firewalls, and much of its security-management and web-content filtering offerings — that Microsoft might not want due to lack of interest or overlap with existing products.

Microsoft remains a possibility, though, because of its potential interest in what ISS’s host- and desktop-based IPS products could offer.

Still, the likeliest acquirer, if one steps forward, is IBM, for the reasons enumerated above. 

More Washington-Insider Clout Added to Viisage’s Board

Perhaps you’ve haven’t heard of Viisage Technology Inc. After all, the company isn’t a household name. It trades on NASDAQ, has a market capitalization of approximately $474 million, and it generated revenues that barely surpassed $66 million in 2005.

Take a close look, though. This company — specializing in a full array of biometric security solutions and technologies for government (mainly defense contracting), law-enforcement, and enterprise customers — is bred and built for success. Its chairman of the board is Robert V. LaPenta, founder and CEO of L-1 Investment Partners LLC, and a former executive at Loral Communications and a subsequent founder and driving force behind the success of defense contractor L-3 Communications. LaPenta is well connected to the defense establishment and the Pentagon, and his past corporate performance includes more than 60 acquisitions compiled during 30 years of executive-management experience.

LaPenta and his team have been busy putting together acquisitions at Viisage, including the purchase of privately held Iridian Technologies Inc., a developer of iris-recognition technology, for $35 million earlier this month. In an earlier post, I attempted to explain the significance of that deal and why I think Viisage is a company to watch. In sum, the company is assembling a comprehensive and unique product portfolio encompassing all the major biometric-security elements: fingerprint authentication, facial-recognition verification, and iris-scanning technology.

It will soon change its name to it L-1 Identity Solutions to better reflect its business focus.

But its vision, product strategy, and proficiency in acquisitions aren’t the only factors in its favor. Viisage, soon to be L-1 Identify Solutions, is forging connections in the upper reaches of the US government that will assure that it doesn’t get omitted from any RFPs relating to sophisticated defense-related security requirements. The company has built a heavyweight board, and two recent additions make it even stronger. Aside from LaPenta, who knows his way around Washington, the board includes Robert S. Gelbard, chairman of consultancy Washington Global Partners, LLC and a career diplomat who held several prominent ambassadorial positions; Charles E. Levine, former president of Sprint PCS; Harriet Mouchly-Weiss, founder and managing partner of consultancy Strategy XXI Group; and, last but not least, George J. Tenet (yes, that George J. Tenet), former director of the Central Intelligence Agency (CIA).

Recently, Viisage added two other influential names to its board: Admiral James M. Loy, former deputy secretary of the Department of Homeland Security (DHS) , and also a former commandant of the U.S. Coast Guard; and Louis Freeh (yes, that Louis Freeh), the former director of the Federal Bureau of Investigations (FBI), who, it was announced today, will be joining the company’s board after the company completes its pending merger with Identix Inc., with which it combined earlier this year.

Now that’s a board with members whose phone calls are sure to be returned in the nation’s capital.

Television Industry Meets “The Venice Project”

The first business success for software entrepreneurs Niklas Zennstrom and Janus Friis was Kazaa, a file-sharing, peer-to-peer network on which consumers distributed music and video content. It was controversial because it completely circumvented the recording and film industries and allowed its users to make available and receive creative content for free. The potentates in the music and film industry weren’t amused, and lawsuits against Zennstrom and Friis, who tend to avoid traveling to the USA for legal reasons, are pending to this day.

Next, the dynamic duo launched Skype, with which nearly everybody has become familiar. Taking a page from the Kazaa playbook, Sykpe was a peer-to-peer communicaitons network that some allege is builit on and derived from Kazaa code, specifically elements of the propriety FastTrack protocol. Skype was all about allowing free conversations using VoIP or IM. While Kazaa circumvented the the recording and film industries, Skype did an end run around telecommunications carriers. The carriers weren’t pleased, as one can imagine, and they began looking for technological means to impair or impede Skype sessions, which are difficult to intercept because they can come from nearly anywhere and they constantly change the ports they use to communicate between nodes.

All of which brings us to what Zennstrom and Friis are doing today. Well, they’re still at Skype, now owned by eBay. They probably won’t be walking way from eBay imminently, because that would entail leaving behind about $1.8 billion in stock options that tie them to the company for the next three years. The senior executives at eBay, however, recognize that these two characters are inveterate entrepreneurs, so they’re letting them explore ideas that might lead to commercial fruition.

One of these ideas apparently has taken hold, and Friis and Zennstrom seem on their way to turning into into a real business. According to an article in BusinessWeek, referencing “people familiar with the matter,” the pair plans to develop software that will use the Web to distribute TV shows and other forms of video content. It’s likely, of course, that peer-to-peer networking technology is involved, but this time the founders of Kazaa and Skype intend to work with the existing industry rather than to obviate it.

They have approached television studios and networks, though it isn’t known whether deals are close to being reached, and a formal debut of the new venture, code-named “The Venice Project,” might occur as early as this fall.

It’s isn’t surprising that the business model for the new project would vary from the ventures that preceded it. Perhaps Zennstrom and Friis are more sensitive to issues of intellectual property and ownership of creative content, but I think what has changed more is the willingness of the incumbent industries — in this case, the television industry — to work with and adopt Internet-based distribution models. Unlike the music business before it, the television industry can see the ineluctability of the online channel. It’s coming, and there’s no point being in denial about it.

In fact, the television industry hasn’t been waiting for Zennstrom and Friis make their approach. Instead, the industry’s top executives already are engaged in negotiations and deals with the likes of YouTube, Apple’s iTunes, Microsoft’s MSN, Veoh, Brightcove, as well as others. The venture known as “The Venice Project” is late to this party, so it needs to come bearing gifts and wearing a sociable demeanor.