Daily Archives: October 13, 2009

Is 3Com Affiliated with U.S. Ethernet Innovations?

A company called U.S. Ethernet Innovations announced this week that it is pursuing patent litigation against several computer vendors that allegedly infringed on intellectual property originally developed by 3Com Corporation.

Computer companies cited in the lawsuit include Acer, Apple, Asus, Dell, Fujitsu, Gateway, HP, Sony, and Toshiba. The patents at issue relate to 3Com’s Parallel Tasking technology, which expedites interaction between a computer and the network by performing two steps – read-in and transmit-out – simultaneously.

U.S. Ethernet Innovations hints strongly on its website that is affiliated with 3Com, but I’m not sure that’s true. In a Network World story about the patent litigation, U.S. Ethernet Innovations is said to own “the patents spun off from 3Com for the sole purpose of launching these sorts of lawsuits. ”

In its press release announcing the lawsuits, U.S. Ethernet Innovations provides the following boilerplate text:

U.S. Ethernet Innovations was formed to continue 3Com Corporation’s successful licensing program on behalf of its portfolio of foundational patents in Ethernet technology.

Both sentences, the one in Network World and the one in the boilerplate text, are ambiguous. It isn’t clear whether 3Com spun off the patents for the sole purpose of launching lawsuits or whether the litigation-based business model was devised and is being pursued exclusively by U.S. Ethernet Innovations. I suspect the latter, but I’d like confirmation; accordingly, I’ve requested clarification from Network World, from 3Com, and from U.S. Ethernet Innovations.

My assumption is that 3Com sold a patent portfolio to U.S. Ethernet Innovations, and that the latter is pursuing lawsuits against alleged infringers entirely on its own. Again, I’d like that assumption corroborated or explicitly refuted. I like clarity.

Based in Tyler, Texas, U.S. Ethernet Innovations is posing as a staunch defender of American technological honor.

David A. Kennedy, CEO of U.S. Ethernet Innovations, said:

“We strongly believe that 3Com’s Ethernet technologies are being regularly infringed by foreign and some US companies. We believe that the continued aggressive enforcement of the fundamental ethernet technologies developed by 3Com against the waves of cheap, knock-off, foreign manufactured equipment is a necessary step in protecting the competitiveness of this American technology and American companies in general.”

Samuel Johnson said: “Patriotism is the last refuge of a scoundrel.” He obviously did not anticipate the altruistic good works of U.S. Ethernet Innovations.

3Com, of course, has an interesting history of its own, which includes a former joint venture (H3C) with Huawei Technologies, a Chinese vendor of telecommunications equipment. Huawei nearly became a minority owner of 3Com, but the acquisition bid led by Bain Capital was scuppered on national-security grounds.

Having bought out Huawei’s interest in the joint venture, 3Com now runs H3C as a separate brand and business unit. It has extensive operations in China, including a large customer base.

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Digital River to Survive Surprise Symantec Defection

When Symantec informed Digital River, a manager of online storefronts for more than 40,000 companies, that it would no longer be needing its services, Digital River’s shares took a precipitous plunge of as much as 41 percent yesterday.

It was the sharpest drop the company’s shares had taken in seven and a half years — the sort of seven-year itch no public company wishes to experience.

As is often the case, however, the market seems to have overreacted. Even though Symantec was Digital River’s largest customer, accounting for 30 percent of sales in the quarter ended June 30 compared with 33.7 percent in the same period a year earlier, the spurned company will endure, perhaps even prosper.

Digital River has plenty of other customers, and it seems to be cultivating a robust consumer-electronics niche. Symantec’s defection hurts Digital River, but it isn’t fatal. The Symantec-related share of Digital River’s overall revenue and earnings has been declining, and the company has been looking to lessen its reliance on the security-software vendor. It will have to scramble to expedite the necessary repositioning, but Digital River will find healthy and growing substitutes for Symantec’s business.

Many observers were shocked that the Symantec defection caught Digital River, not to mention practically all the market analysts that follow both companies, completely by surprise.

Said Digital River CEO Joel Ronning:

“Until last Friday, we had no notification Symantec was developing their own internal system . . . . (At a meeting Friday, Symantec) “informed us they recently completed a multiyear effort to develop an internal solution for these services.”

Symantec CFO James Beer said on a conference call that the eCommerce business through Digital River accounted for about 36% of Symantec’s consumer revenue for the fiscal year ended in April. He believed Symantec’s net consumer revenue will now increase because it won’t be paying fees to Digital River, though he noted operating expenses will rise because Symantec will incur the cost of running its own online-sales platform.

It seems an odd move. One would think that the outsourced approach would be less costly, all things considered, than an internal solution, which will require ongoing maintenance and support. There’s also the risk that the transition won’t go that smoothly. It could be an instance where Symantec is penny wise and pound foolish.

It’s possible other factors were behind the move, but it’s too early to offer an educated guess as to what those might be.

Sophos Ponders NASDAQ Listing in 2010

Sophos, the UK-based security-software company, is preparing for a market flotation on NASDAQ in 2010, according to a report that first appeared in the Sunday Times.

The public offering would peg the company’s value at up to $1 billion, according to the report.

The company is 60-percent owned by Oxford University scientists Jan Hruska and Peter Lammer, who founded the business in 1985. A further 20 percent is owned by venture-capital group TA Associates, with 10 percent held by Investcorp, and the remainder held by founders and management.

A well-respected Internet-security vendor involved in a number of industry associations, Sophos has several technology partnerships with major players such as IBM, HP, Cisco, Sun Microsystems, Citrix, and Novell, among others.

Advised by Deutsche Bank, Sophos is said not to have made a decision on the timing of the offering.

Juniper Hurt Most by Cisco’s Starent Acquisition?

I looked at the Starent acquisition through a Cisco prism earlier today, trying to fathom what it might suggest about the networking giant’s subsequent moves to capture its fair share of the mobile-video opportunity.

What about Cisco’s (and Starent’s) competitors? How are they affected by the deal?

Eric Savitz at Barron’s Tech Trader Daily quotes Avi Cohen, research chief at Avian Securities, as saying the news is particularly bad for Juniper Networks.

According to Cohen, as captured by Savitz:

“. . . . this acquisition is extremely negative because it significantly impacts JNPR’s ability to compete for mobile core infrastructure builds such as LTE. This puts Cisco into play within the mobile infrastructure sector, which the company has not had much success in over the past 18 months…Cisco is intent on remaining relevant within the core networking equipment segment and snatching STAR out from under JNPR is an indication of how far Cisco will go to maintain its market share within core networking accounts.”

Cohen thinks Alcatel-Lucent, Nokia Siemens, and Juniper might consider topping Cisco’s bid for Starent, but he believes the size of the deal is likely to discourage them from making an offer.

From what Alcatel-Lucent’s CEO Ben Verwaayen has said recently, he doesn’t believe M&A activity will be his company’s path to deliverance. In light of his company’s M&A history, one can hardly blame him.

Before announcing the Starent deal, Cisco had $35 billion in cash, but only $6 billion of that total was available domestically. The rest of Cisco’s cash pile is overseas.

It’s conceivable that Cisco could use its US-based cash to outbid any competing offer, but, if it did so, Cisco might be constrained from making further all-cash US-based acquisitions in the near term.

In Wake of Starent Acquisition, Cisco Smartphone Possible

Although most of its cash is overseas, Cisco tapped nearly half its available US cash ($2.9 billion) for its announced acquisition of Starent Networks today.

The Starent deal follows closely on the heels on Cisco’s $3-billion acquisition of videoconferencing-systems vendor Tandberg. That deal was done with Cisco’s mountain of foreign cash. Before the Starent deal was announced, Cisco had approximately $29 billion in foreign cash and about $6 billion to spend within the USA.

Video is the common denominator linking the two deals. Tandberg provides room- and desktop-based videoconferencing systems, including telepresence offerings that complement those Cisco already had. Starent provides network infrastructure that enables wireless operators to scale and optimize their networks for delivery of mobile-broadband services, which increasingly feature video communications from smartphones such as Apple’s iPhone.

Starent’s solution portfolio spans practically every flavor of 3G and 4G networks. The company recently announced that it had reached its 100th carrier deployment. Starent’s top customers include Verizon Wireless, Vodafone, Sprint, and China Telecom.

In the first six months of this year, Starent had revenue of approximately $129 million, up 27.6 percent from the same period a year ago. Net income was about $28 million, up 19.3 percent from year-ago results. In 2008, Starent had revenue of $254.1 million, up 74 percent from the year before. It has about 1,000 employees worldwide, approximately 290 of which are located in Massachusetts, where the company is based.

Cisco expects the acquisition to dilute its earnings in its fiscal years 2010 and 2011 and to be accretive in fiscal year 2012. The transaction has been approved by both boards and now awaits regulatory clearance.

According to Dow Jones Newswires, Cisco is paying a 24 percent premium on Starent’s stock price at close of trading Monday. The New York Times has put the price premium closer to 20 percent.

Cisco believes the market for mobile data will double every year through 2013. It forecasts that about 60 percent of the data traveling across mobile networks in 2013 will be video traffic.

With the acquisitions of Tandberg and Starent, Cisco is betting heavily on video. A company that generally shies away from big-money acquisitions, Cisco now has shelled out close to $6 billion to buy two companies in the first half of October. It will take some work to pull off the Tandberg and Starent integrations simultaneously – particularly considering neither company is in Cisco’s Bay Area backyard.

Given the size of the two acquisitions, and Cisco’s single-minded strategic focus on video communication, I would not be surprised to see Cisco develop its own video-centric smartphones, likely based on the Flip mobile video cameras acquired from Pure Digital.

On March 31, as reported by BusinessWeek, Cisco was awarded a patent for managing time delays in relaying video wirelessly to consumer-electronics devices. That same day, it received a patent for a network-connected phone capable of streaming video. Cisco has filed other patents that cite a PDA-type device that would benefit from those innovations – and could definitely benefit from the products and technologies Starent offers.

Analysts at RBC Capital and UBS wrote earlier this year that a Cisco foray into smartphones shouldn’t be discounted. Those analysts noted that a video-centric smartphone would complement Cisco’s mainstay networking business while taking the company into substantial growth markets.

Many observers might have difficulty envisioning Cisco as a smartphone vendor. But this isn’t your grandfather’s Cisco. It’s doing a lot of things – servers, consumer electronics, a social-entertainment platform for music and entertainment companies – that would have been considered improbable a few years ago.

A Cisco smartphone? It could happen.