What Dow’s Results Portend for the Tech Industry

As a company that provides basic ingredients used in a wide range of products that ultimately are sold to consumers, Dow Chemical Co.’s financial performance is seen as a barometer of consumer sentiment.

If the company’s latest quarterly results and guidance are reliable indicators, developed economies in North America and Europe will remain torpid well into 2010.

What growth Dow is seeing now comes from Asia Pacific, primarily China. That’s not surprising considering China’s robust growth, driven largely by the government’s stimulus spending on large-scale infrastructure projects.

Meanwhile, many export-driven nations seem concerned about the steadily declining value of the U.S. dollar. But, given the overall context, the dollar’s decline is perfectly understandable, perhaps inevitable.

Unfortunately, though, these export-driven industrial nations don’t seem to have grasped what’s happening to the global economy. Countries and corporations no longer can count on a river of exports to American consumers and businesses. If those days haven’t ended, they are close to their terminus.

American consumerism has reached its limits. The entire world, and not just American consumers and businesses, will have to adapt to a new reality.

While a near-term danger exists that the Chinese economy might overheat, the long-term trend is for greater consumer and industrial demand to emanate from China and other developing economies, with relatively less demand coming from the U.S. and Europe.

Information-technology companies must acknowledge the changing dynamic, too.

China is committed to establishing a healthy, sustainable consumer base to support the continued expansion of its own industrial sector. In the past, frugal and often impoverished Chinese consumers represented theoretical buyers of goods and services rather than practical, real-world consumers, especially in relation to the comparatively luxurious products consumed by their counterparts in developed economies.

All that is about to change now, and technology companies will have to be prepared for the tectonic shifts, which appear to be arriving sooner than most of us imagined.

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Musings on Windows 7

Well, Windows 7 hits the streets today, and I feel compelled to acknowledge the occasion with a post.

After the disappointment that was Windows Vista, Microsoft will seek to vindicate itself with this release of its flagship operating system. Technically, from what I’ve seen of Windows 7, I think Microsoft will be redeemed. I also believe the market will embrace Windows 7, giving Microsoft a boost in both credibility and revenue.

A Bloomberg story on Windows 7 got me thinking about a couple things. They’re somewhat connected, so please indulge my mental perambulations.

First, perhaps because of Apple’s successful television-advertising campaign that pits the laid-back personification of the Mac against the geeky Windows guy, the media is focusing unduly on how well Microsoft’s Windows 7 will fare against Apple’s OS X.

In my view, that’s just not a major issue for Windows 7.

From a Microsoft perspective, all Windows 7 must do is keep Windows users in Microsoft’s camp and generate some much-needed operating-system upgrades from the Windows XP installed base of enterprise users consumers. I really don’t think Microsoft, much less Apple, views Windows 7 as a serious danger to Macs and OS X.

The real drama in the operating-system space will play out in the developing world, where Apple isn’t a meaningful player. It’s in China, India, Brazil, Russia, Eastern Europe, and Latin America — all growing markets for computing and operating systems — that Microsoft will meet a critical test. In those jurisdictions, the threat to Microsoft will come from Google, with its lightweight web-oriented Chrome OS, and from similarly scaled-down operating systems, such as one China’s Baidu is developing.

Given that Windows 7, like its immediate predecessor, is somewhat bulky on netbooks and other low-end systems, Microsoft might find itself vulnerable to competitive incursions in the developing world.

That leads me into a related point, pertaining to periodic speculation as to whether Microsoft might decide to follow Apple’s example and produce its own Microsoft-branded PCs. I’ve written about this subject previously, a couple years back, and fundamentally I haven’t altered my position. For a variety of reasons, I just don’t see Microsoft attempting to roll out its own PC hardware.

In addition to all the reasons I adduced previously, a new one involves Google and Chrome OS. As we can see, Google will make its web-optimized operating system available to anybody that wants it. If the real threat to Microsoft isn’t high-end Apple but broadly focused Google, then it makes no sense for the braintrust in Redmond to alienate its established hardware ecosystem.

Remember, Microsoft might have slightly more than 90 percent operating-system market share in North America, but its worldwide market share is above 95 percent. That’s a huge percentage, and getting into a high-end slugfest with Apple by designing and producing its own PCs — which would compete with those of its hardware OEMs — just doesn’t make business sense.

In remarks he made last week, here’s what Microsoft CEO Steve Ballmer said:

“About 96 percent of the world’s computers are PCs and 4 percent are Macs, and thanks to their advertising I guess everybody kind of knows the difference. I like 96, they like 4, I guess. You can’t say they don’t have a good business. They actually have a good business, as do we.”

He’s right. Apple and Microsoft each have strong franchises, and each company should play to its strengths. Taking on Apple, to the extent of trying to follow the Apple business model, wouldn’t work for Microsoft. If Microsoft were to pursue that course, it would be incurring too much risk for too little reward.

That is particularly true when you think of emerging markets, where Apple isn’t much of a threat but others, including Google, are ready to pounce.

Despite Mixed Quarterly Results, Polycom Well Positioned

Polycom’s third-quarter results weren’t great.

Yes, the company’s revenue surpassed the expectations of analysts, and it gave relatively good guidance for its fourth quarter, but it seems to have lost share to Tandberg in the lucrative market for videoconferencing systems.

Polycom’s older voice-conferencing product portfolio picked up the slack, showing sequential improvement. But that’s not the growth market the company is targeting, and concerns about rising costs and competitive positioning, especially in light of Tandberg’s pending acquisition by Cisco, are warranted.

Nonetheless, Cisco’s Tandberg acquisition isn’t all bad news for Polycom. The company stands to benefit as Cisco competitors that are (or were) former Tandberg partners consider their strategic options. Microsoft, HP, and IBM are likely to gravitate toward Polycom in the months ahead.

I don’t necessarily see Polycom being snapped up in an imminent acquisition, but the company can benefit from partnerships with companies disinclined to continue working with Tandberg as it becomes assimilated into the Cisco corporate machine.

In the near term, HP will be partnering aggressively with Polycom, as the company’s CEO Robert Hagerty intimated in an interview with Reuters, excerpted as follows:

“We’re getting attention. There’s a lot of discussion going on,” Hagerty said. “We’re taking a lot more phone calls, a lot more people inbounding into Polycom, a lot more attention from strategic folks, like the forementioned Microsoft, IBM, Avaya-Nortel, HP.”

Hagerty suggested that Polycom was talking to HP. HP is also a key Tandberg partner and because of its rivalry with Cisco, analysts think Polycom could gain.

“We sure think it’s a huge opportunity and we believe we can capitalize on it. At least we certainly hope we can.”

If Cisco can mollify Tandberg’s dissident shareholders and close the acquisition — which I believe will happen in the next couple weeks — the networking giant clearly looks poised to solidify its status as a dominant player in the telepresence and videoconferencing-systems markets.

Still, Polycom is far from a lost cause. It stands to solidify its position as a strong and capable number-two player, and it will be an acquisition target for a strategic partner that decides it must have a direct stake in the action.

F5 Delivers Strong Quarter, with Another on the Way

Despite difficult economic headwinds, F5 Networks sails ahead smoothly.

The application-delivery network specialist — whose competitors include Cisco Systems, Citrix Systems, and Juniper Networks — announced fourth-quarter financial results last night that surpassed market expectations. It also gave strong first-quarter guidance that ran ahead of analyst projections.

Fourth-quarter net income increased to $28.4 million, or 36 cents per share, from $19.7 million, or 24 cents per share, a year earlier. Revenue grew about 2 percent to $175.1 million, up from $171.3 million in the same quarter last year

The impressive results buoyed F5’s share price in after-hours trading last night, and the company’s share price has more than doubled during the past year.

F5 wrote the book on how to beat Cisco at its own game. The two companies originally fought it out in the load-balancing market, which then morphed into the application-traffic management space. F5 now calls what it does “application-delivery networking,” which is all about ensuring the secure, reliable, and fast delivery of applications.

Like any good technology company, F5 never stops innovating. It keeps adding software-based functionality to its product portfolio, looking to deliver more value to existing and prospective customers. The modular architecture of its flagship BIG-IP product family allows it to offer extensible solutions that can accommodate evolving requirements. The company is well placed, for example, to benefit from increased data-center virtualization and cloud computing.

File virtualization is a relatively new area for the company. The F5 Data Manager is in a nascent market, not contributing much to F5’s current revenue or profitability; but it’s a good example of how the company tries to anticipate where its customers might want to go next.

F5 also has a strong executive team, and a well-developed channel strategy worldwide. It wasn’t always that way, as the company’s veterans will tell you, but F5 reached a point where it understood that channel quality counts for more than channel quantity. Channel partners that are committed to F5 receive a commensurate and reciprocal level of support from the company.

It seems F5 always is the subject of acquisition rumors. That’s certainly been the case recently, with many observers speculating that the company might be acquired in an impending wave of data-center consolidation. It’s possible, but bear in mind that this company has resisted acquisition on at least a few occasions.

I have no doubt that F5 would be an attractive target for one or two prospective buyers, but I wonder whether the ardor would be requited.