Daily Archives: December 14, 2009

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.

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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.