Happy Holidays to All

I wish all of you the very best of the holiday season.

That said, I’ll probably find time for a post or two before we cross the threshold into 2010.

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.

Diverging Prospects for RIM and Palm

Research In Motion (RIM) and Palm both reported their latest quarterly results yesterday. RIM produced third-quarter results and guidance that were better than what the market expected; Palm disappointed.

As the smartphone market becomes more fiercely contested, these sets of results were analyzed for more than their immediate trading utility. Analysts and pundits carefully scrutinized them for clues as to how each vendor is faring in its bid for long-term prosperity in the smartphone market.

On that score, too, RIM emerged the better of the two. Not all the questions about RIM have been answered, but the company has a coherent strategy, ample resources, a credible brand, strong carrier relationships, and a track record of proving its detractors wrong. Palm doesn’t rate nearly as well on those counts.

As for RIM’s latest quarterly results, as reported by Dow Jones, revenue rose 11% to $3.92 billion, surpassing the company’s guidance of $3.60 billion to $3.85 billion as well as the Thomson Reuters estimate of $3.78 billion.

The company said it added about 4.4 million net new BlackBerry subscriber accounts in the third quarter, bringing the total BlackBerry subscriber account base to about 36 million at quarter-end.

Looking immediately ahead, RIM is forecasting fourth-quarter revenue of $4.2 billion to $4.4 billion and gross margin of roughly 43.5%, resulting in net earnings of $1.23 to $1.31 a share, all outpacing expectations of market watchers.

Unfortunately, where RIM is surging, Palm is treading water. Sales of its new smartphones, the Pre and the Pixi, are already starting to decline. Palm said it shipped a total of 783,000 smartphones during its fiscal second quarter, a drop of 5% from 823,000 smartphone units during the first fiscal quarter. (Palm’s year-to-year comparisons are irrelevant, with its smartphone overhaul occurring this year.)

Another area where RIM is doing well and Palm is not involves market coverage. RIM is pushing forward in China and everywhere else besides, whereas Palm is not. Breaking its dependence on North America, RIM reported that 37 percent of revenue is derived from overseas and approximately 35 percent of the BlackBerry subscriber base is now located outside North America.

Areas RIM is targeting for future growth include small- and mid-size businesses and China, where RIM has been building key partnerships lately. For example, a week after reaching a deal with China Mobile, RIM announced a similar partnership with China Telecom. Before that, RIM had inked a distribution partnership with China’s largest IT services provider, Digital China Holdings Ltd.

RIM is looking at doing more than selling its products in China. Said RIM co-CEO Jim Balsillie:

“To further support our efforts in China, RIM is also exploring opportunities to manufacture and conduct R & D activities in the region.”

Such a move would make sense. China is a burgeoning market, and RIM will have to commit to it, not only in terms of providing product localization, but also with regard to doing valuable R & D there. Perhaps, like McAfee in the security-software space, RIM will establish a wholly owned subsidiary in China.

While international expansion was a key contributor to the company’s success in the third quarter, RIM also is helping its cause with a more diversified product portfolio and gains in consumer patronage. Even though its installed base remains strongly represented by business customers, RIM said 80 percent of its new subscribers in the third quarter were non-corporate customers.

That’s all good news for RIM, but I still think the company will need to overhaul the look and feel of its BlackBerry software if it has aspirations of continued consumer gains amid intensifying smartphone competition.

The smartphone market is growing briskly, but it will consolidate. At that point, the leaders will reap the largest rewards, with the laggards failing or getting acquired, sometimes cheaply. That’s why maintaining and gaining share are so important, and why RIM’s latest solid results and bullish guidance are encouraging signs for the company.

Meanwhile, again, Palm isn’t looking so good. One can downplay Palm’s disappointing quarter by arguing that the company remains a work in progress and that it will have occasional stumbles as it goes all in as a smartphone player. Some apologists, with arguable justification, also will point to Palm’s early dependence on Sprint for sales of its webOS-based Pre and Pixi models. Nonetheless, Palm is losing momentum, doesn’t have the resources of its larger rivals, and the competition it faces in the space will only intensify.

Palm had an early chance to carve out a growing niche for itself, but its window of opportunity is closing rapidly. While RIM has gained ground and positioned itself well for the future by expanding in markets outside North America with a diversified product portfolio, Palm is something of a one-trick pony, still focused primarily on North America with a narrow product line and an overwhelming dependence on getting and keeping the favor of fickle consumer who are bombarded by the heavier and slicker brand advertising of Palm rivals such as Apple, the Google Android mafia (Motorola and Verizon with Droid, for example), RIM, HTC, Nokia, and others.

It’s too early to perform last rites – how many times has RIM proved doomsayers wrong? – but Palm’s prospects are dimming.

New figures from AdMob, measuring worldwide smartphone Internet traffic, demonstrate how quickly the market might be consolidating. With traffic attributable to the iPhone and Google Android-based handsets dominating and on the rise, respectively, everybody else is struggling to hold market share.

RIM is positioning itself for future growth in China and other foreign markets, while maintaining its hold on its sizable installed base of enterprise-messaging customers, means it is likely to stay the course, though it’s anybody’s guess how the situation might look three years from now.

RIM has the resources to play a game of attribution, however. Palm doesn’t. Unlike RIM, Palm doesn’t have the luxury of a lucrative, money-spinning installed base of corporate mobile-email customers. It doesn’t have option to reinvent itself one more time.

If Palm’s smartphone unit shipments continue to slip sequentially from quarter to quarter, it won’t remain in the race much longer. Time isn’t on Palm’s side.

McAfee Commits to China, Establishes Wholly Owned Subsidiary

As I’ve discussed previously in venerable forum, security-software vendors face unique challenges in trying to crack the potentially lucrative Chinese market.

Notwithstanding those challenges, security-software market leaders such as Symantec, McAfee, and Trend have every intention of pursuing opportunities in China. To do so, they must find the right mix of product offerings (including localization), positioning, pricing, and channel partners.

To succeed in China, though, vendors must commit to China. Responding to that imperative, McAfee said yesterday that it would establish a new wholly owned subsidiary in China.

In Beijing to make the announcement, Dave DeWalt, McAfee’s president and CEO, issued the following statement:

“China offers compelling opportunities for McAfee. China has great potential as a center for manufacturing, research and development for McAfee and is also a significant burgeoning market for our products. McAfee has continuously strengthened its presence in China over the last decade and we are planning to expand our investment in the near term to take full advantage of the opportunities China presents.”

McAfee estimates that its potential addressable market in China will grow from about $390 million in 2009 to $1.09 billion in 2013.

In a press release accompanying the announcement of its new Chinese subsidiary, McAfee explained that its Chinese expansion also would include the following:

• A new call center planned to open in Beijing in February 2010 to service the mid-market segment, particularly in smaller cities across China.

• Additional headcount in functions including sales, sales engineering, marketing, support and research and development (R&D), including a planned doubling of the field sales organization in 2010.

• Recently signed reseller partnerships with both Neusoft and CS&S (China National Software and Services) who have become premier partners for McAfee products in China.

• A partnership with Lenovo to market McAfee VirusScan products through Lenovo retail outlets across China, opening up a significant retail channel for McAfee and contributing to our position as the world’s largest dedicated security technology company. McAfee products ship on more than 50% of the PCs shipped by the top 10 PC OEMs.

• A partnership with Dell to offer China consumers 15 month subscriptions on all their retail and direct systems with a Microsoft Windows preinstalled.

McAfee also plans to strengthen existing partnerships in the Chinese market and to establish new ones. Prior to the announcement, McAfee operations in China included sales, manufacturing of the McAfee Unified Threat Management Firewall, and an R&D team focused on mobile security, localization, and security research.

The cornerstone of this move, though, is the establishment of the wholly owned subsidiary. As DeWalt explained to PCWorld, McAfee’s formation of the subsidiary will give the company greater flexibility and more options relating to its China-based manufacturing and to the regulatory approval of its products.

Those considerations are significant. In China, McAfee not only competes against its traditional rivals, such as the aforementioned Symantec and Trend, but also against domestic Chinese software companies that have benefited from home-field advantage in more ways than one.

Cisco’s Chambers Says Tandberg Acquisition Went According to Plan

Come on, John. Just admit you were temporarily flummoxed. We all make mistakes, take a wrong step from time to time, and you and your boys got knocked back on your heels before regaining your balance on this one.

That was my reaction when I read a few days back that Cisco CEO John Chambers tried to persuade visiting financial analysts that his company’s turbulent $3.4-billion acquisition of videoconferencing-vendor Tandberg went pretty much according to plan.

Really, John? What sort of plan was that? Is that the one that includes needless digressions, unnecessary distractions, high-stakes gamesmanship, and take-it-or-leave-it ultimatums?

If so, then you must have too much time on your hands. Hey, I understand the desire to inject a little excitement into the acquisition process, but the Tandberg takeover was like the trajectory of a runaway roller-coaster. It was, well, a little out of control.

Yet we’re supposed to believe that Cisco foresaw every stage of the process and that the deal went down just like it was drawn up?

I have no idea whether Chambers made these claims with a straight face or with tongue firmly planted in cheek. Nor do I know whether the analysts reacted by rolling their eyes or putting down their notepads, refusing to play along with the charade. Perhaps, as guests, they felt that wasn’t an appropriate response.

Said Chambers of the takeover drama and of Tandberg itself:

“We went into it knowing the exact challenges that we would face. … It unfolded much like we anticipated. . . .

“Their leadership team may be the best total leadership team we’ve had since the acquisition of Crescendo in 1993.”

Crescendo, as industry historians will recall, brought Cisco a wealth of engineering and executive talent, including Mario Mazzola, Luca Cafiero, and Jayshree Ullal.

That just makes me wonder even more about how the tortuous Tandberg deal went down. If Tandberg has such great executive talent, and it was so strategically valuable to Cisco as a linchpin of its video strategy, then why not get the deal done faster, without the diversions and the shuck-and-jive tactics? Time is money, as the lawyers involved in this deal with attest.

As I said at the top of this piece: Come on, John.

CommVault CEO Says Company Not Interested in Being Acquired

Rumors abound that Dell is poised to acquire a software company, most likely of the enterprise variety.

CommVault Systems, a Dell partner and data-management software firm that had been mentioned as a Dell acquisition candidate, apparently will not be subject to a takeover.

In a recent interview with Bloomberg, CommVault CEO Robert Hammer said the following:

“We can create more shareholder value over time than having someone acquire us. We are not interested in being acquired.”

Technically, of course, not having interest in being acquired is not the same as being adamantly and unalterably opposed to being acquired. By playing hard to get, CommVault might make itself more attractive to a prospective buyer.

Anything is possible, but Hammer seems to be preparing shareholders and the market for a long-term growth story predicated on CommVault’s ongoing independence.

Glassdoor Compiles List of Best and Worst Technology Employers

Glassdoor.com, the online career and workplace community, has polled employees across America and compiled its second annual list of the best and worst companies for which to work.

Om Malik has listed the highest-rated and lowest-rated technology companies. Juniper Networks ranks at the top among technology employers, though technically it finishes in a dead heat with National Instruments, Google, and NetApp. Apple, Qualcomm, Novell, Adobe, EMC, and Rackspace round out the top ten.

Although Adobe finishes in the top ten, it slides down the charts from last year.

At 91 percent, Apple’s Steve Jobs captures the top employee-approval rating of tech CEOs. Eric Schmidt of Goole ranks second among technology CEOs in employee approval, with James Truchard of National Instruments taking the bronze medal.

The lowest-rated technology company for which to work? That dubious honor goes to Xilinx. Affiliated Computer Services noses out Hewlett-Packard for second.

HP CEO Mark Hurd might have some friends on Wall Street, but he’s not winning friends and influencing people within his own company, where he earns a CEO approval rating of 22 percent. It might be time for him to hire an executive “food taster” for those boardroom lunches.

Rounding out technology’s bottom ten are Avaya, Real, NVIDIA, Infosys, Nortel Networks, Perot Systems, and Dell. Considering that Dell just acquired Perot Systems, it probably won’t have undue difficulty meeting the workplace expectations of post-integration Perot personnel.

All things considered, it’s surprising that Nortel didn’t fare worse than it did. After all, the company went from bad to worse — and then to utter dissolution — this year.

Former Nortel CEO Mike Zafirovski received an approval rating of just 2 percent, far worse than any other corporate kingpin running the lowest-rated companies. Even then, one wonders whether he had relatives working at the company to provide even that modest degree of approbation.

Lurid Bribery Case Doesn’t Reflect Poorly on Gartner

It’s a headline nobody at Gartner wants to see. Thankfully, the underlying story isn’t nearly as distressing.

The well-known consultancy and IT market-research concern probably is mortified that a news story posted on the Network World website — and covered elsewhere, too — offers the lurid headline, “Former Gartner manager gets jail for accepting bribes.” If you’re a company in Gartner’s business, you don’t ever want your name to appear in the same sentence as the words “jail” and “bribes.”

What’s important to note, however, is that the manager in question wasn’t involved in consulting or research activities. Instead, he was responsible for the purchase of multimedia services and equipment.

Moreover, an earlier press release from the United States Attorney Southern District of New York, makes clear that Gartner was a victim of the bribery scheme. It’s an unseemly and unfortunate tale, replete with attention-grabbing headlines, but it doesn’t and shouldn’t reflect negatively on Gartner’s credibility and repute as a purveyor of advisory services and market research.

Gartner Sees Better TImes Ahead for Smartphones in 2010

Gartner says smartphone sales didn’t quite meet its expectations in 2009, even though the high-end handsets continue to account for a growing percentage of overall mobile-phone sales.

In 2013, according to Gartner, more than every third phone sold will be a smartphone. The market-research firm says the biggest threat to that forecast is represented by wireless operators, which could inhibit sales if they persist in packaging smartphones with flat-rate data plans that put the handsets beyond the financial means of many prospective buyers.

For 2009 — which might go down as annus horribilis in so many respects — sales of mobile phones to consumers are expected to drop less than one percent and total about 1.2 billion units. Gartner predicts that mobile-phone sales will start to grow again, at about 9 percent, in 2010, with average sales prices per unit dropping approximately $2 from 2009 levels. Average sales prices of mobile phones dropped about $10 per unit in 2009.

I haven’t seen Gartner’s base assumptions for growth across global markets, so I’ll refrain from commenting in detail. That said, I’m skeptical of a sharp rebound in market growth, especially one that won’t be goosed by lower prices.

Facebook’s Latest Privacy Betrayal Shouldn’t Surprise Anyone

As the latest privacy-related Facebook controversy exploded in shards of anger, righteous indignation, and disappointment, I was reminded of the lyrics to an old Archers of Loaf song, “What Did You Expect?”.

The chorus is good, but near the end of the number, the following words are barely intelligible amid the din:

You aren’t listening
To what you’re saying
When you say the things you’re saying.

This is how I feel about the erstwhile Facebook apologists and backers who suddenly seem shocked — shocked, I tell you! — that the social networking site has betrayed them with its latest savaging of the putative privacy of its subscribers.

I never have been under any illusions about Facebook. It’s a business, backed by big-money investors, people who aren’t doing what they do for shits and giggles. They could care less that you have a place to share information and confidences with your friends. To them, you are a means to a lucrative end.

It’s not personal. It’s just business.

What I never understood, though, is why so many otherwise rational and sane people believed Facebook was about something more than generating pornographic wealth for its investors and principals. I also never understood why these same people didn’t demand at least a modicum of honesty from Facebook.

Jason Calacanis is a smart guy, but he gets it wrong when he says the following about Facebook:

The entire purpose of Facebook since inception has been to share your
information with a small group of people in your private network.
Everyone knows that and everyone expects that. In fact, Facebook’s
success is largely based on the face that people feel safe putting
their private information on Facebook.

Well, Jason, they never should have felt safe putting their private information on Facebook. The latest privacy fiasco just proves the point.

Facebook’s entire purpose is to make money, subscribers be damned. Well, perhaps it’s not that stark — Facebook needs its subscribers, like a vampire needs warm, bloody bodies on which to feast — but it’s close. Facebook will make money, or it will fail to make money, on the basis of how well it exploits the private information provided by its registered users.

And making money is paramount.

If it doesn’t make money, it won’t be in business for long. Therefore, it must make money. And, therefore, if we follow the logic, Facebook must trade on the private information of those who use its service.

Calacanis gets wise to this reality when he explains that Facebook is “trying to dupe hundreds of millions of users they’ve spent years attracting into exposing their data for Facebook’s personal gain.”

It’s all about the pageviews, Calacanis notes, which means it’s all about driving increased traffic to Facebook, which means boosting advertising revenue for Facebook, which means a greater probability of big-time return on investment (ROI) for Facebook’s backers.

Meanwhile, Gawkers talks about Facebook’s “great betrayal” of its users.

Facebook’s privacy pullback isn’t just outrageous; it’s a landmark turning point for the social network. Facebook has blundered before, but the latest changes are far more calculated. The company has, in short, turned evil.

Maybe Facebook is evil. If that’s true, it was a congenital condition, permanently stamped in its DNA. Maybe it was the Rosemary’s Baby of social-networking sites.

Look, I like wealth creation as much as the next guy. I have no ethical or moral objection to making money, as long as it’s done honestly, openly, transparently. Facebook never has been upfront about its business model, its relationship with its subscribers, its relationship with its advertisers and investors, or about practically anything else it does.

To understand Facebook, one needs to look at what it does, not what it says. It’s mastered the art of public relations and spin, which is why the Valley influencers and much of the mainstream business press have been so abjectly uncritical of the company.

Well, I’m not part of the mainstream, and I’ve never been deceived by Facebook’s misdirection. I was on to them early. I knew the only way they could make money would be by exploiting the privacy of their users. I didn’t want to be part of such a cynical enterprise. I certainly didn’t want to contribute to its success.

As a consumer, I like the idea of knowing what I’m getting for my time and my money. Vendors should be honest about the goods or services they’re providing, and about the duties, rights, and responsibilities of all parties to the transaction.

Until Facebook can be honest and transparent about what it is, about how it will make money, and about the nature of the relationships between it and its various stakeholders, you should avoid it like the plague.

Even a mugger looks you in the eye when he takes you down.

Google’s Phone Could Give Microsoft Reprieve with Handset Licensees

It seems that Google will release a mobile handset of its own.

Reports suggest that the mobile phone, called the “Nexus One,” will be manufactured by HTC, a licensee of Google Android, and will work on the T-Mobile network.(From a technical perspective, it probably could work on the AT&T Wireless GSM network, too, but Google hasn’t had the best of relationships with that particular wireless operator.)

Google apparently couldn’t strike a bargain with Verizon Wireless, and nothing is in the works with Sprint, which means a Nexus One for CDMA networks isn’t in the immediate cards.

With respect to Google’s foray into the phone market, I’ll be watching for a few things.

First, the phone hasn’t reached market yet. It appears to be coming, but it isn’t here. It will be interesting to see how the handset is positioned, promoted, marketed, and sold. Early indications suggest that it will include Wi-FI support, and obviously it will come stuffed with Google applications and services. Until we know the details, though, it’s impossible to pass definitive judgment on whether it will be a winner.

Second, depending on what Google delivers to market (and how it delivers it), watch closely for the responses of Google’s Android licensees. HTC obviously doesn’t object too vociferously to Google’s encroachment onto its territory, but the other Android licensees, who aren’t manufacturing the device for Google, might take strong exception to the move. Motorola has declined comment, apparently, and one wonders whether it and other licensees knew that Google was cooking up its own smartphone in the labs.

For a while, Google seemed well placed to enjoy conquests with all the vendors in Microsoft’s black book of Windows Mobile licensees. Now, until the dust settles in the aftermath of the Nexus One launch, we’ll have to see whether Google has handed Microsoft a reprieve.

Much is being written at the moment regarding whether Google will espouse a new approach to selling phones to consumers in the USA. Most handsets in America are subsidized by wireless operators, who defray the cost of the phones significantly — selling, let’s say, a $499 smartphone for $199 — but then make up for that initial subsidy by tying subscribers to lucrative long-term service contracts.

The hope is that Google will sell the phone “unlocked,” but at a price that isn’t prohibitive. It could perhaps do so by asking consumers to subject themselves to Google advertising in exchange for a price allowance on the handset. Google might sell the phone from its website, with buyers offered a menu of wireless operators at the time of purchase, according to some reports. At any rate, as Sascha Segan writes at PC Magazine, it’s probably wise not to expect a dramatic departure from convention or an imminent revolution that overturns the American telecommunications establishment.

In fact, in bringing its new phone to market, Google probably has its sights fixed at least as much on foreign markets as it does on the domestic space.

Regardless of how this story plays out, Google has injected a charge of excitement into the usual torpor that predominates just before the holiday break. It’s also given journalists and pundits a reason to do something other than their year-end top-ten lists.

Enterprise-Switching Dilemma Behind Cisco’s Strategic Shift

If Goldman Sachs is right, Cisco will be faced with a dilemma in 2010. Under mounting pricing pressure from emboldened competitors in enterprise switching, Cisco will have to choose between defending is margins or defending its market share.

If it chooses to defend its market share — which slipped from 75 percent in Ethernet switching as of the fourth quarter of 2008 to 69 percent in the third quarter of 2009 — it must tolerate reduced margins, never an easy option for a public company.

On the other hand, if Cisco decides to hold the line on margins, it will be condemned to lose market share, along with the ongoing revenue flows attached to defecting customer accounts.

In developing markets, Huawei is putting price pressure on Cisco. In the USA, Cisco is facing a renewed pricing assault from a slew of vendors. That situation is likely to intensify now that HP has acquired an army of low-cost Chinese engineers and competitively priced products and technologies as a result of its 3Com purchase.

Goldman’s research found that performance and price were the foremost considerations of 100 Ethernet-switch-buying IT executives at Fortune 1000 firms. As Goldman notes, those priorities suggest “best-of-breed vendors with superior price/performance can gain market share despite Cisco’s significant incumbency advantages.”

Cisco isn’t going to be transformed overnight from a bruising champion to a battered has-been in enterprise networking. Nonetheless, the networking giant is gradually losing the aura of invincibility that shielded it like an impregnable bubble in Fortune-listed accounts. It is vulnerable to losses, and its rivals know it.

The question is, does Cisco know it? I would argue that it certainly does.

That’s why it is pursuing the strategy of “market adjacencies” that is taking it into new, unfamiliar territory. Cisco saw the writing on the wiring-closet wall, and it didn’t like what it said. The company saw a mature, slow-growth market susceptible to increasing commoditization, with all the pricing pressure that such a situation entails. It was facing a double whammy of slow growth and reduced margins.

Cisco will fight, of course. It will pull out all stops, use every sales trick in the book, and leverage every last ounce of goodwill and loyalty from its enterprise customer base. But some of the factors arrayed against Cisco are beyond its control. There’s only so much it can do, and there are limits to how much territory it can protect if it plays the old game by the old rules.

Give Cisco credit. It’s sales force has been accused of arrogance, but the company’s executive team isn’t so hubristic as to overlook or to underestimate looming dangers. It knows what’s coming, whats’ been building on the horizon for a while now. That’s why it devised the all-or-nothing Unified Computing System (UCS) for the converged data center — and that’s also why it’s barreling into so many new markets.

Cisco is trying to change the rules of one game while getting involved in several new ones. Adhering to the old rules, just playing out its hand in enterprise switching, wasn’t an option.