Dell Makes Enterprise Moves, Confronts Dilemma

Dell reported its third-quarter earnings yesterday, and reactions to the news generally made for grim reading. The company cannot help but know that it faces a serious dilemma: It must continue an aggressive shift into enterprise solutions while propping up a punch-drunk personal-computer business that is staggered, bloody, and all but beaten.

The word “dilemma” is particularly appropriate in this context. The definition of dilemma is “a situation in which a difficult choice has to be made between two or more alternatives, especially equally undesirable ones.” 

Hard Choices

Dell seems too attached to the PC to give it up, but in the unlikely event that Dell chose to kick to the commoditized box to the curb, it would surrender a large, though diminishing, pool of low-margin revenue. The market would react adversely, particularly if Dell were not able to accelerate growth in other areas.  

While Dell is growing its revenue in servers and networking, especially the latter, those numbers aren’t rising fast enough to compensate for erosion in what Dell calls “mobility” and “desktop.” What’s more, Dell’s storage business has gone into a funk, with “Dell-owned IP storage revenue” down 3% on a year-to-year basis.

Increased Enterprise Focus

To its credit, Dell seems to recognize that it needs to pull out all the stops. It continues to make acquisitions, most of them related to software, designed bolster its enterprise-solutions profile. Today, in fact, it announced the acquisition of Gale Technologies, and it also announced that Dario Zamarian, a former Cisco executive who has been serving as VP and GM of Dell Networking, has become vice president and general manager of  the newly formed Dell Enterprise Systems & Solutions, “focused on the delivery of converged and enterprise workload topologies and solutions.” Zamarian will report to former HP executive Marius Haas, president of Dell Enterprise Solutions Group. 

Zamarian’s former role as VP and GM of Dell Networking will be assumed by Tom Burns, who comes directly from Alcatel-Lucent, where he served as president of that company’s Enterprise Products Group, which included voice, unified communications, networking, and security solutions.

Dell has the cash to make other acquisitions to strengthen its hand in private and hybrid clouds, and we should expect it to do so.  The company would have more cash to make those moves if it were to divest its PC business, but Dell doesn’t seem willing to bite that bullet. 

That would be a difficult move to make — wiping out substantial revenue while eliminating a piece of the business that is a vestigial piece of Dell’s identity — but half measures aren’t in Dell’s long-term interests.  It needs to be all-in on the enterprise, and I think also needs to adopt a software mindset. As long as the PC business is around, I suspect Dell won’t be able to fully and properly make that transition. 

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Avaya Questions Mount

Those of you following the tortuous (some might call it torturous) saga of Avaya Inc. might wish to visit the investor-relations section of Avaya’s website or peruse Avaya’s latest Form-10Q filing on the SEC website.

Yes, Avaya’s numbers for its third fiscal quarter of 2012, which ended on June 30, are available for review. I have given the results a cursory look, and I’ve concluded that the story hasn’t changed appreciably since I last wrote about Avaya’s travails. There’s still no prospect of significant revenue growth, quarterly losses continue to accrue, channel sales are edging lower across the company’s product portfolio, and the long-term debt overhang remains formidable.

Goodwill Impairment? 

And there’s something else, which I neglected to mention previously: a persistently high amount of goodwill on the asset side of the ledger, at least some of which might have to be written down before long. The company’s goodwill assumptions seem willfully optimistic, and even Avaya concedes that “it may be necessary to record impairment charges in the future” if “market conditions continue to deteriorate, or if the company is unable to execute on its cost-reduction efforts.” While I believe the company will persist with its cost-reduction efforts, I don’t see a meaningful near-term turnaround in macroeconomic conditions or in the growth profile of the company’s product portfolio. Ergo, impairment charges seem inevitable.

In this regard, what you need to know is that Avaya is carrying goodwill of about $4.2 billion on its books as of June 30, up from nearly $4.1 billion as of September 30, 2011. The company’s total assets are about $8.24 billion, which means goodwill accounts for more than half that total.

For those desirous of a quick summary of revenue and net loss for the year, I can report that total revenue, including sales of products and services, amounted to $1.25 billion in the quarter, down from $1.37 billion in the corresponding quarter last year, a year-on-year decrease of $122 million or about 9 percent. Product sales were down across the board, except in networking, where sales edged up modestly to $74 million in the quarter this year from $71 million last year. Service revenue also was down. For the nine-month period ended on June 30, revenues also were down compared to the same period the previous year, dropping from $4.13 billion last year to about $3.9 billion this year.

Mulling the Options

Avaya’s net loss in the quarter was $166 million, up from $152 million last year.

The critical challenge for Avaya will be growth. The books show that the company is maintaining level spending on research and development, but one wonders whether its acquisition strategy or its R&D efforts will be sufficient to identify a new source of meaningful revenue growth, especially as it finds itself under mounting pressure to contain costs and expunge ongoing losses. Meanwhile, a foreboding long-term debt looms, kicked down the road but still a notable concern.

With the road to IPO effectively blocked — I really can’t see a way for Avaya to get back on that track now — Avaya’s private-equity sponsors, Silver Lake Partners and TPG Capital, must consider their options. Is there a potential strategic acquirer out there? Can the company be sold in whole, or will it have to be sold in parts? Or will the sponsors just hang on, hoping continued cost cutting and a strategic overhaul, perhaps including a change in executive leadership, might get the company back on course?

Alcatel-Lucent Banks on Carrier Clouds

Late last week, I had the opportunity to speak with David Fratura, Alcatel-Lucent’s senior director of strategy for cloud solutions, about his company’s new foray into cloud computing, CloudBand, which is designed to give Alcatel-Lucent’s carrier customers a competitive edge in delivering cloud services to their enterprise clientele and — perhaps to a lesser extent — to consumers, too.

Like so many others in the telecommunications-equipment market, Alcatel-Lucent is under pressure on multiple fronts. In a protracted period of global economic uncertainty, carriers are understandably circumspect about their capital spending, focusing investments primarily on areas that will result in near-term reduced operating costs or similarly immediate new service revenues. Carriers are reluctant to spend much in hopeful anticipation of future growth for existing services; instead, they’re preoccupied with squeezing more value from the infrastructure they already own or with finding entirely new streams of service-based revenue growth, preferably at the lowest-possible cost of market entry.

Big Stakes, Complicated Game

Complicating the situation for Alcatel-Lucent — as well as for Nokia Siemens Networks and longtime market wireless-gear market leader Ericsson — are the steady competitive advances being made into both developed and developing markets by Chinese telco-equipment vendors Huawei and ZTE. That competitive dynamic is putting downward pressure on hardware margins for the old-guard vendors, compelling them to look to software and services for diversification, differentiation, and future growth.

For its part, Alcatel-Lucent has sought to establish itself as a vendor that can help its operator customers derive new revenue from mobile software and services and, increasingly, from cloud computing.

Alcatel-Lucent CEO Ben Verwaayen is banking on those initiatives to save his job as well as to revive the company’s growth profile. Word from sources close the company, as reported first by the Wall Street Journal, is that the boardroom knives are out for the man in Alcatel’s big chair, though Alcatel-Lucent chairman Philippe Camus felt compelled to respond to the intensifying scuttlebutt by providing Verwaayen with a qualified vote of confidence.

Looking Up 

With Verwaayen counting on growth markets such as cloud computing to pull him and Alcatel-Lucent out of the line of fire, CloudBand can be seen as something more than the standard product announcement. There’s a bigger context, encompassing not only Alcatel-Lucent’s ambitions but also the evolution of the broader telecommunications industry.

CloudBand, according to a company-issued press release, is designed to deliver a “foundation for a new class of ‘carrier cloud’ services that will enable communications service providers to bring the benefits of the cloud to their own networks and business operations, and put them in an ideal position to offer a new range of high-performance cloud services to enterprises and consumers.”

In a world where everybody is trying to contribute to or be the cloud, that’s a tall order, so let’s take a look at the architecture Alcatel-Lucent has brought forward to create its “carrier cloud.”

CloudBand Architecture

CloudBand comprises two distinct elements. First up is the CloudBand Management System, derived from research work at the venerable Bell Labs, which delivers orchestration and optimization of services between the communications network and the cloud. The second element is the CloudBand Node, which provides computing, storage, and networking hardware and associated software to host a wide range of cloud services. Alcatel-Lucent’s “secret sauce,” and hence its potential to draw meaningful long-term business from its installed base of carrier customers, is the former, but the latter also is of interest.

Hewlett-Packard, as part of a ten-year strategic global agreement with Alcatel-Lucent, will provide converged data-center infrastructure for the CloudBand nodes, including compute, storage, and networking technologies. While Alcatel-Lucent has said it can accommodate gear from other vendors in the nodes, HP’s offerings will be positioned as the default option in the CloudBand nodes. Alcatel-Lucent’s relationship with HP was intended to help “bridge the gap between the data center and the network,” and the CloudBand node definitely fits within that mandate.

Virtualized Network Elements in “Carrier Clouds”

By enabling operators to shift to a cloud-based delivery model, CloudBand is intended to help service providers market and deliver new services to customers quickly, with improved quality of service and at lower cost. Carriers can use CloudBand to virtualize their network elements, converting them to software and running them on demand in their “carrier clouds.” As a result, service providers  presumably will derive improved utilization from their network resources, saving money on the delivery of existing services — such as SMS and video — and testing and introducing new ones at lower costs.

If carriers embrace CloudBand only for this reason — to virtualize and better manage their network elements and resources for more efficient and cost-effective delivery of existing services — Alcatel-Lucent should do well with the offering. Nonetheless, the company has bigger ambitions for CloudBand.

Alcatel-Lucent has done market research indicating that enterprise IT decision makers’ primary concern about the cloud involves performance rather than security, though both ranked highly. Alcatel-Lucent also found that those same enterprise IT decision makers believe their communications service providers — yes, carriers — are best equipped to deliver the required performance and quality of service.

Helping Carriers Capture Cloud Real Estate 

Although Alcatel-Lucent talks a bit about consumer-oriented cloud services, it’s clear that the enterprise is where it really believes it can help its carrier customers gain traction. That’s an important distinction, too, because it means Alcatel-Lucent might be able to help its customers carve out a niche beyond consumer-focused cloud purveyors such as Google, Facebook, Apple, and even Microsoft. It also means it might be able to assist carriers in differentiate themselves from infrastructure-as-a-service (IaaS) leader Amazon Web Services (AWS), which became the service of choice for technology startups, and from the likes of Rackspace.

As Alcatel-Lucent’s Fratura emphasized, many businesses, from SMBs up to large enterprises, already obtain hosted services and software-as-a-service (SaaS) offerings from carriers today. What Alcatel-Lucent proposes with CloudBand is designed to help them capture more of the cloud market.

It just might work, but it won’t be easy. As Ray Le Maistre at LightReading wrote, cloud solutions on this scale are not a walk on the beach or a day at the park (yes, you saw what I did there). What’s more, Alcatel-Lucent will have to hope that a sufficient number of its carrier customers can deploy, operate, and manage CloudBand to full effect. That’s not a given, even if Alcatel-Lucent offers CloudBand as managed service and even though it already sells and delivers professional services to carriers.

Alcatel-Lucent says CloudBand will be available for deployment in the first half of 2012.  At first, CloudBand will run exclusively on Alcatel-Lucent technology, but the company claims to be working with the Alliance for Telecommunications Industry Solutions (ATIS)  and the Internet Engineering Task Force (IETF) to establish standards to enable CloudBand to run on gear from other vendors.

With CloudBand, Alcatel-Lucent, at least within the content of its main telecommunications-equipment competitors, is seen as having first run at the potentially lucrative market opportunity of cloud enabling the carrier community. Much now will depend on how well it executes and on how effectively its competitors respond to the initiative.

The Carrier Factor

In addition, of course, the carriers themselves are a factor. Although they undoubtedly want to get their hands around the cloud business opportunity, there’s some question as to whether they have the wherewithal to get the job done. The rise of cloud services from Google, Apple, Facebook, Amazon was partly a result of carriers missing a golden opportunity. One would like to think they’ve learned from those sobering experiences, but one also can’t be sure they won’t run to prior form.

From what I have heard and seen, the Alcatel-Lucent vision for CloudBand is compelling. It brings the benefits of virtualization and orchestration to carrier network infrastructure, enabling the latter to manage their resources cost-effectively and innovatively. If they seize the opportunity, they’ll save money on their own existing services and be in a great position to deliver range of cloud-based enterprise services to their business customers.

Alcatel-Lucent should find a receptive audience for CloudBand among its carrier installed base. The question is whether those Alcatel-Lucent customers will be able to get full measure from the technology and from the business opportunity the cloud represents.

Bad and Good in Avaya’s Pending IPO

We don’t know when Avaya will have its IPO, but we learned a couple weeks ago that the company will trade under the symbol ‘AVYA‘ on the New York Stock Exchange.

Long before that, back in June, Avaya first indicated that it would file for an IPO, from which it hoped to raise about $1 billion. Presuming the IPO goes ahead before the end of this year, Avaya could find itself valued at $5 billion or more, which would be about 40 percent less than private-equity investors Silver Lake and TPG paid to become owners of the company back in 2007.

Proceeds for Debt Relief

Speaking of which, Silver Lake and TPG will be hoping the IPO can move ahead sooner rather than later. As parents and controlling shareholders of Avaya, their objectives for the IPO are relatively straightforward. They want to use the proceeds to pay down rather substantial debt (total indebtedness was $6.176 billion as of March 31), redeem preferred stock, and pay management termination fees to its sponsors, which happen to be Silver Lake and TPG. (For the record, the lead underwriters for the transaction, presuming it happens, are J.P. Morgan, Morgan Stanley, and Goldman Sachs & Company.)

In filing for the IPO, Avaya has come clean not only about its debts, but also about its losses. For the six-month period that end on March 31, Avaya recorded a net loss of $612 million on revenue of $2.76 billion. It added a further net loss of $152 million losses the three-month period ended on June 30, according to a recent 10-Q filing with the SEC, which means it accrued a net loss of approximately $764 million in its first three quarters of fiscal 2011.

Big Losses Disclosed

Prior to that, Avaya posted a net loss of $871 million in its fiscal 2010, which closed on September 30 of 2010, and also incurred previous losses of $835 million in fiscal 2009 and a whopping $1.3 billion in fiscal 2008.

Revenue is a brighter story for the company. For the one months ended June 30, Avaya had revenue of more than $2.2 billion, up from $1.89 billion in the first nine months of fiscal 2010. For the third quarter, Avaya’s revenue was $729 million, up from $700 million in the corresponding quarter a year earlier.

What’s more, Avaya, which bills itself as a “leading global provider of business collaboration and communications solutions,” still sits near the front of the pack qualitatively and quantitatively in  the PBX market and in the unified-communications space, though its standing in the latter is subject to constant encroachment from both conventional and unconventional threats.

Tops Cisco in PBX Market

In the PBX market, Avaya remained ahead of Cisco Systems in the second quarter of this year for the third consecutive quarter, according to Infonetics Research, which pegged Avaya at about 25 percent revenue share of the space. Another research house, TeleGeography, also found that Avaya had topped Cisco as the market leader in IP telephony during the second quarter of this year. In the overall enterprise telephony equipment  market — comprising sales of PBX/KTS systems revenues, voice gateways and IP telephony — Cisco retains its market lead, at 30 percent, with Avaya gaining three points to take 22 percent of the market by revenue.

While Infonetics found that overall PBX spending was up 3.9 percent in the second quarter of this year as compared to last year, it reported that spending on IP PBXes grew 10.9 percent.

Tough Sledding in UC Space

Meanwhile, Gartner lists Avaya among the market leaders in its Magic Quadrant for unified communications, but the threats there are many and increasingly formidable. Microsoft and Cisco top the field, with Avaya competing hard to stay in the race along with Siemens Enterprise Networks and Alcatel-Lucent. ShoreTel is gaining some ground, and Mitel keeps working to gain a stronger channel presence in the SMB segment. In the UC space, as in so many others, Huawei looms as potential threat, gaining initial traction in China and in developing markets before making a stronger push in developed markets such as Europe and North America.

There’s an irony in Microsoft’s Lync Server 2010 emerging as a market-leading threat to Avaya’s UC aspirations. As those with long memories will recall, Microsoft struck a valuable UC-centric strategic alliance — for Microsoft, anyway — with Nortel Networks back in 2006. Microsoft got VoIP credibility, cross-licensed intellectual property, IP PBX expertise and knowledge — all of which provided a foundation and a wellspring for what Microsoft eventually wrought with  Lync Server 2010.

The Nortel Connection

What did Nortel get from the alliance? Well, it got some evanescent press coverage, a slippery lifeline in its faltering battle for survival, and a little more time than it might have had otherwise. Nortel was doomed, sliding into irrelevance, and it grabbed at the straws Microsoft offered.

Now, let’s fast forward a few years. In September 2009, Avaya successfully bid for Nortel’s enterprise solutions business at a bankruptcy auction for a final price of $933 million.  Avaya’s private-equity sponsors saw the Nortel acquisition as the finishing touch that would position the company for a lucrative IPO. The thinking was that the Nortel going-out-of-business sale would give Avaya an increased channel presence and some incremental technology that would help it expand distribution and sales.

My feeling, though, is that Avaya overpaid for the Nortel business. There’s a lot of Nortel-related goodwill still on Avaya’s books that could be rendered impaired relatively soon or further into the future.  In addition to Nortel’s significant debt and its continuing losses, watch out for further impairment relating to its 2009 purchase of Nortel’s assets.

As Microsoft seeks to take UC business away from Avaya with expertise and knowhow it at least partly obtained through a partnership with a faltering Nortel, Avaya may also damage itself through acquisition and ownership of assets that it procured from a bankrupt Nortel.

OpenPlug Buy Deepens Alcatel-Lucent’s Commitment to Application Enablement

I spoke earlier today with representatives of Alcatel-Lucent about the company’s acquisition of OpenPlug and how it fits into a broader application-enablement strategy that bridges developers and service providers.

Laura Merling, vice president of Alcatel-Lucent’s developer platforms and related programs, explained that company’s move into developer tools is part of a long-term strategy that could help redefine the relationship between developers, primarily of the mobile variety, and service providers. In the process, of course, it also could help redefine Alcatel-Lucent relationships with both constituencies, particularly service providers.

The way Alcatel-Lucent sees it, the company is responding to an urgent needs in both camps. For a long time, developers have wanted wireless operators and other carriers to expose more of their network services. Wireless operators, for their part, often have been willing to play along, but they haven’t had the means of doing so. Meanwhile, smartphone vendors, such as Apple and Google, sought to fill the void with device-specific development tools for application creation and monetization.

Sending Strong Signal

With its Open API initiative, its earlier acquisition of ProgrammableWeb, and now its acquisition of OpenPlug, Alcatel-Lucent is sending a strong signal that it is serious about application-enablement. In sending that signal, it’s letting wireless operators know that it’s in their corner as they try to regain some of the developer and subscriber patronage they’ve surrendered to Apple and, increasingly, to Google.

In theory, Alcatel-Lucent’s push to become a valued intermediary between developers and service providers makes sense, but the challenge is daunting. On one side, it must convince developers that it is creating a new broad-based platform that will allow them to address network-layer services and target a wide range of smartphone and feature-phone handsets without having to compromise on application quality. On the other side, it must convince wireless operators and other carriers that it can help them draw the support of developers. It’s a chicken-and-egg dilemma, and it will need support and mutual reinforcement from both parties to have a viable shot at success.

Toward that end, Alcatel-Lucent is working hard to ensure that it precludes potential objections from either side of the aisle. Developers, for instance, can be wary of lowest-common denominator approaches to serving broad-based device demographics. They want to ensure that applications are optimized for the devices on which run and deliver good customer experiences. As such, Alcatel-Lucent takes pains to note that OpenPlug lets developers write once using a single development tool and then compile natively to each operating system.

Indeed, OpenPlug’s ELIPS Studio, which now becomes part of Alcatel Lucent’s developer platform, is a development environment that allows ISVs to create and deploy mobile applications cost-effectively and quickly across iPhone, Android, Symbian, Windows Mobile, Linux, and other systems.

Arrayed Against Apple, Google

Fundamentally, Alcatel-Lucent’s whole application-enablement strategy is intended to put it in league with developers and service providers against the fragmented forces of independent smartphone platforms, such as Apple’s iPhone, Google’s Android, and RIM’s BlackBerry. The smartphone vendors cannot be expected to provide Alcatel-Lucent with any comfort.

Even though the application-enablement initiative is intended to be synergistic with the Alcatel-Lucent’s core business of selling telecommunications equipment, the company is committed to making the the new initiative a going concern in its own right. That will take work and perseverance, but the two acquisitions this year — with perhaps more M&A activity to follow — suggest that the company is in it for the long haul.

It’s good for Alcatel-Lucent to have something like application-enablement in its back pocket as a means of differentiating it from lower-cost telco-equipment vendors such as Huawei and ZTE. It’s also a good insurance policy against margin erosion on the hardware side of the business. On the score, Alcatel-Lucent is taking a “freemium” ad and license-based approach to sales of its application-enablement software to the developer community, and it will sell licenses to wireless operators and other carriers.

Whether Alcatel-Lucent will be successful in its application-enablement capacity remains to be seen, but the company, in making two acquisitions and allocating substantial resources to the effort, does not seem inclined to cut and run.

Guarded Optimism on Alcatel-Lucent

Since being created as a result of the 2006 merger of the two companies that confer its name, Alcatel-Lucent has struggled unsuccessfully to reach profitability. It’s still struggling for financial stability, but some market watchers and analysts believe there’s light at the end of the tunnel. What’s more, they believe the light in question isn’t coming from an onrushing train.

There is reason for guarded optimism. Operationally and strategically, Alcatel-Lucent is on firmer ground than it has been for quite some time, even in the face of stiff macroeconomic winds and a chronic component shortage that has affected the company’s ability to deliver products.

You’ll notice, though, that I employed a qualifying adjective in the first sentence of the preceding paragraph. Alcatel-Lucent still has work to do.

The company depends on the sustainability of a real broad-based recovery in the global economy — carriers will constrain their network-infrastructure spending if they believe smartphone-toting consumers will curtail their consumption of data-rich applications and data services — and it must work harder to make headway in emerging markets. In the latest quarter, North America carried the day for AlcaLu, and numbers everywhere else were down.

Moreover, as Ray LeMaistre notes and documents at Light Reading, Alcatel-Lucent needs better growth from its Applications and Services divisions, which are strategically important to the company’s long-term prospects. AlcaLu is looking to differentiate itself from lower-cost Chinese network-equipment rivals such as Huawei and ZTE by providing software-led value with its Application Enablement strategy, buttressed by its Developer Platform and its Open API Service.

By bringing developers and carriers together, and providing integration services bridging the two camps, Alcatel-Lucent hopes to make itself more valuable to both. There’s still time for the strategy to play out, but higher rates of growth from those parts of the business would be encouraging.

At NSN, Nokia and Siemens Still Grope for Exit

Let’s say two companies are involved in a joint venture that’s been an unhappy marriage. The relationship isn’t as toxic as the former partnership between Mel Gibson and Oksana Grigorieva, but it hasn’t been a day at the beach, either. Neither partner wants to remain in the business alliance; they’re both looking for a dignified exit.

With logic and reason as your guides, what would you expect their next moves to be?

Yes, one partner might approach the other, looking to sell its interest in full. It’s also possible that one company might sell its interest to an approved third party, offering a right of first refusal to its JV partner. It’s also conceivable that both partners would put the joint venture on the block, hiring an agent to discreet present it to private-equity shops and strategic buyers. They might even consider putting some lipstick on the pig and trying an IPO, hoping to benefit from auspicious timing and favorable lighting.

Okay, now throw logic and reason to the wind. What would you do now?

Maybe, as Nokia and Siemens have done at Nokia Siemens Networks (NSN), you’d compound the unhappy union by acquiring a floundering telecommunications-equipment business from a vendor eager to unload it. Misery loves company, after all, so why not plunge headlong into the pit of despair? If you put on your absurdist bifocals, the move just might make sense on a surreal existential level. But we’re talking business, not Dadaism.

Just when I think there’s nothing in this crazy industry that can surprise me, something does just that. I admit, I’ve been puzzling over why NSN would buy Motorola’s networks business, which retains some wireless-operator customers, especially in North America, but also carries hefty baggage in the form of a product portfolio predicated on technologies (a large portion of its 3G gear, and its WiMAX 4G offerings) that have gone out of fashion. NSN will pay $1.2 billion for the Motorola unit, and — other than some modest scale and a minor ostensible market-share gain — I don’t see how it derives much benefit from the transaction.

Squeezed from all angles, from traditional competitors Ericsson and Alcatel-Lucent and from hard-charging Huawei — when it’s not fighting an intellectual-property lawsuit launched by, of all vendors, Motorola — NSN isn’t a thriving business. As I have mentioned previously, its joint-venture partners have taken massive goodwill writedowns since forming the business back in 2007.

Digressing for a moment, I want to note that I am not a proponent of joint ventures. Many European companies seem favorably disposed to them, and I understand the underlying reasoning behind them: pool resources, share and mitigate risk, eliminate distraction to one’s core business. Unfortunately, they’re usually unworkable in practice. It’s hard enough getting people from the same company to agree on strategy and to execute successfully. When you have the political machinations inherent in a joint venture, well, the job becomes nearly impossible.

Getting back on track after that brief digressive detour, NSN is in a tough spot.

How tough became clear to me after I read an article in the Wall Street Journal yesterday. Neither Nokia nor Siemens wants to continue participating in the joint venture, but they can’t find a way out. It’s as if Jean-Paul Sartre has rewritten No Exit and staged it in a boardroom. Hell is having to deal with other people in a joint venture.

HP Keeps UCC Options Open

When it comes to unified communications and collaboration (UCC), HP isn’t ready to bet the house on a single partner. It has struck UC-related partnerships with Microsoft, Avaya, and Alcatel-Lucent, and it also has the capability, through products obtained as a result of its 3Com acquisition, to develop a home-grown alternative.

It isn’t surprising that HP’s channel partners and customers, as well as neutral observers, are confused by HP’s seemingly promiscuous approach to UCC solutions. I’ll try to shed a bit of light on the situation, but I suspect nothing is carved in stone and that HP’s strategy will be subject to change.

HP’s latest UCC-related move involves Avaya.  The two companies announced a three-year alliance in which HP will sell and service Avaya UC and contact-center products as part of HP’s UCC enterprise-level services portfolio. The deal was inked in the aftermath of a similar 10-year accord that HP struck with Alcatel-Lucent.

Avaya and Alcatel-Lucent struck their deals with HP’s services business, which will act as a system integrator in bundling and delivering solutions to customers. It’s worth noting that HP also has a video-collaboration and UC partnership with Polycom.

The partnership with Microsoft is a bit different. That relationship primarily involves HP’s product and marketing groups, and it entails ongoing product integration and joint-marketing programs that stemmed from  the companies’ Frontline Partnership. Another difference is that Microsoft is taking a desktop-oriented approach to delivering unified communications whereas HP’s other partners, Avaya and Alcatel-Lucent, are addressing it from the IP PBX.

HP has decided to play the field for a couple reasons. First, the UCC space remains an underdeveloped market whose best days remain ahead of it. Despite years of hype, unified communicaitons has yet to fulfill its potential. To be fair, the reasons for that underachievement have more to do with industry politics and macroeconomic circumstances than with technological factors. Nonetheless, the market is one that has seemed perpetually on the cusp of better times.

Another reason that HP has cast a wide net with its UCC partnering efforts is that the predilections of the market, both with regard to vendors and architectural approaches, have yet to be revealed. Neither the PBX approach from Avaya and Alcatel-Lucent nor the desktop gambit from Microsoft has been declared a definitive winner. Moreover, the possibility exists that hosted UCC solutions might prove attractive to a significant number of enterprise customers. HP is getting into the game, but it’s spreading its bets across a number of leading contenders until the odds shift and one vendor establishes a clear market advantage.

As for why HP is getting into the game, well, the answer is partly that the company detects improving fortunes for UCC and partly that it feels compelled to respond to Cisco. One thing that HP and all its UCC partners have in common is competition against Cisco. HP needs an enterprise alternative to what Cisco is offering, and these partnerships provide it with various options.

Even though HP focused on the SME space with its latest Microsoft UCC announcement, I can’t see clear horizontal- or vertical-market delineation in HP’s partnering strategy.

Consequently, HP’s technology partners can’t feel overly secure. Any of these deals could fall apart, in real (revenue-generating) terms, without much warning. HP will follow its customers’ money. At the same time, it might be tempted to build or buy its own alternative. Further chapters in this story are sure to written.

Toward an Understanding of the China Problem

In this post, I will attempt to pull together some interrelated and overlapping observations (which I have touched on previously) and synthesize them into what I hope will be a rough framework for understanding some of what’s been happening to the global technology industry.

This is a blog, however, and not a book, so I’ll be painting in broad brushstrokes. Some generalizations will be closer to the mark than others, and for that I readily apologize. Still, I thought it was time to write this particular piece. Let’s get on with it.

The very thing that the helmsmen of market-based capitalism wanted most of all might have sewn the seeds of its decline.

Transnational corporations obviously wanted globalization. It would give them access to new sources of growth in foreign markets; it also would provide access to new investment opportunities, new supply-chain relationships, and new pools of low-cost labor. If you were a corporate chieftain, what was not to like about globalization?

But perhaps they forgot about the enduring, immutable law of unintended consequences.

In some ways, globalization has undermined market-based capitalism’s formula for success. For years, as global markets were regulated and protected, corporations struck a tacit pact, or a socioeconomic contract, with the governments and peoples in their home markets and their primary sales territories.  Corporations would generate returns for their shareholders, governments would benefit from corporate tax revenue, and the people would benefit from jobs at the corporations as well as from the infrastructure and services that taxation funded.

But, with globalization – especially in the context of the aftermath of the global financial crisis and China’s rise as an industrial hegemonic power – the old models and verities are unraveling. Many transnational corporations, who serve shareholders before all others, might be compelled by circumstance to reassess their accommodations of enlightened self-interest with governments, employees, and other secondary stakeholders in their home markets.

What I am suggesting here, in a roundabout way, is that globalization set the stage for China – with its massive domestic market and its command-and-control state-based capitalism — to steal a march on market-based capitalism’s standard bearers.  While the social compact in developed markets seemingly has broken down, China has fashioned an impressive alignment of interests between its political rulers, its people, and its geopolitical industrial strategy.

Keenly attuned to history, China’s rulers recognize that it’s easier to run an immense country with the implicit consent of the population than without it. China’s political masters have been careful to ensure that China’s people benefit from the country’s economic growth and industrialization. That’s why we see policies like “indigenous innovation,” designed to ensure that homegrown Chinese companies, products, and technologies are favored domestically over their foreign counterparts. The Chinese market is a big market, and if Chinese companies can dominate there, they will have the economies of scale to compete successfully, in many market segments, on the global stage.

China’s authorities recognize, at a fundamental level, that their long-term political control is inextricably linked to how well they pacify and placate the Chinese population. Providing people with jobs, rising income, and improving standards of living will be essential to the long-term rule of China’s political elite. This is why China will not allow itself to remain in the relative ghetto of commodity-product manufacturing. The Chinese authorities have devised an intricate, sophisticated plan that envisions the country and its people ascending the technological value chain, moving up from low-cost manufacturing to higher-end innovation and research and development (R&D). That transition won’t be easy to achieve, but it has begun.

Look at what is happening in many renewable-energy markets, such as photovoltaics and wind power, where Chinese companies are trying to advance from the manufacture of cheap knockoff products to the development of innovative breakthroughs. They have a lot of work to do, especially on wind turbines, but the plan clearly is in place.

In computer networking, Huawei went from, um, emulating the likes of Cisco Systems and Alcatel to developing its own standards-based networking products that now compete nearly as much on quality as on price against products from longtime market leaders. Cisco CEO John Chambers has said Huawei increasingly is his biggest global competitor, and he is not flattering to deceive.  It’s no coincidence that HP bought 3Com, which had transformed itself into a Chinese company with an American façade.

Meanwhile, the information-technology industry is commoditizing, a process intensified by what HP terms “labor-market arbitrage” – a euphemistic phrase denoting a transfer of jobs across international boundaries to where they can be done cheapest – and increased automation of functions that formerly were delivered by humans. At the same time, the global economy is undergoing a major realignment, as tapped-out consumers (and many governments and businesses, as well) in Western markets can no longer fulfill their role as consumption catalysts. Growth is occurring elsewhere – in the BRIC nations and beyond – and jobs are moving with it.

When the developed-world’s consumers could still buy more stuff than they actually needed, China – the world’s manufacturer – was more than content to buy U.S. treasuries to sustain a mutual relationship of convenience. Now , though, as the U.S. consumer engine sputters, China is reassessing its options. Already, we’ve heard Chinese officials say the U.S. and Europe are “less indispensable” to China’s strategic aspirations than they were in the past. Chinese has begun cultivating its own consumer economy, but it’s doing so under a state-controlled capitalism that espouses “indigenous innovation,” under which Chinese companies will keep most spoils and benefits at home.

Many Western technology companies are banking on growth derived from sales of products and services in China. As long as China pursues policies of nationalist mercantilism and indigenous innovation, those growth expectations are unlikely to be realized.

The only way Western companies will be allowed to derive big contracts from China’s biggest customers, most of which are owned or affiliated with the Chinese government, will be by moving their core R&D efforts and initiatives to China, which will make them subject to that country’s intellectual-property rights (IPR) and laws. This strategy amounts to a very different type of labor arbitrage from the one to which transnational companies have subscribed.

Fear not, though, because Chinese regulations and laws pertaining to intellectual property will become more effective and protective as China gains the upper hand in innovation and R&D. As HP has figured out, China doesn’t so much care that a company is Chinese as long as it plays by China’s rules, which will entail doing an increasing percentage of innovation and R&D in China, and not elsewhere.

Think about that.  It might be a beneficial arrangement for corporate shareholders – though that remains to be seen – but it’s not so good for engineers, researchers, and many other knowledge workers in Western economies.

I think this dynamic, the zero-sum rise of China at the direct expense of many of us in the developed world, is a problem that needs to be recognized and addressed. What China is pursuing is not your father’s market-based capitalism, in which the benefits of trade presumably would be widely shared worldwide. This is a different model, one guided primarily by geopolitical considerations. As it gains ground, it will have major repercussions worldwide.

Components Shortages Affecting Vendors Worldwide

At the moment, components shortages seem to be pervasive in the technology industry. Vendors large and small, throughout most of the world, have been affected by them to greater or lesser degrees.

The problem appears to be with us for a while. To be best of my knowledge — and I will concede at the outset that my research hasn’t been definitive — vendors everywhere in the world are having difficulty sourcing adequate numbers of many types of components. The only exception is China, where vendors in telecommunications, cleantech, and other fields have not reported that same component-sourcing difficulties that have hobbled their counterparts in Europe, North America, and other parts of Asia.

That doesn’t necessarily mean that Chinese companies aren’t affected by components shortages. All it means is that they haven’t reported them, at least in the English-speaking media I’ve perused. Still, it’s a development that bears watching. In that China does not ascribe to the tenets of unfettered capitalism, it sometimes operates according to a unique set of rules.

Today’s component shortages span various semiconductor types, including but not limited to DSPs, FETs, diodes, and amplifiers. Vendors of solar inverters, particularly those based in Europe, also have been affected.

Meanwhile, Reuters reports that a shortage of basic electrical components could last into the second half of 2011, limiting the ability of telecommunications-equipment manufacturers to respond to improving market demand.

Reuters reports that memory chips and other fundamental components such as resistors and capacitors are in short supply after their makers slashed output, fired staff, put equipment purchases on hold or went out of business during the recession.

The shortages already have been blamed for weaker-than-expected results last quarter at telecommunications-equipement vendors Alcatel-Lucent and Ericsson, which really don’t need the added grief.

Alcatel-Lucent blamed components shortages for a large loss that it posted in its first fiscal quarter. Alcatel-Lucent’s CEO Ben Verwaayen said the said the shortages involved “everyday” low-cost components. He explained that most components come from China, where the manufacturing industry hasn’t been revamped since major cuts that followed the severe global downturn. 

We already know that the supply-chain issues that afflicted Cisco’s channel partners and customers were blamed partly on component shortages.

What’s more, Dell partly blamed shortages and higher costs of components, including memory, for its inability to maintain gross margins during its just-reported quarter.



And AU Optronics, Taiwan’s second-ranked LCD manufacturer and a supplier to Dell and Sony, reported that an LCD panel shortage is likely to last into the second half of this year.

By no means are those the only vendors affected. You only have read the recent 10-Qs or conference-call transcripts of companies involved in computer networking, telecommunications gear, personal computers, smartphones, displays, or cleantech hardware to understand that components shortages are nearly everywhere.

I just wonder — and I make no accusation in doing so — whether Chinese manufacturers are as affected by the shortages as are their competitors in other parts of the world.

Might Huawei Consider Extreme Acquisition?

It’s Friday, and I’m in an expansive mood. Speculation is in the air.

Extreme Networks is going through some difficult times, with executive overhauls, layoffs (reportedly still continuing), and stiff competition that figures to intensify now that HP is bringing 3Com under its corporate roof.

Fortunately for Extreme and its shareholders, the company’s acting CEO, Bob Corey, has an interesting track record. When he’s at a company, it tends to be acquired. Here’s some of Mr. Corey’s history, as recounted late last fall by Eric Savitz at Tech Trader Daily:

*Corey was CFO at Thor Technologies when it was acquired by Oracle in 2005.

*Corey was chairman of Interwoven when it was acquired by Autonomy in March 2009

*Corey was CFO at Forte Software at the time it was acquired by Sun Microsystems in October 1999.

*Corey was CFO of Documentum, until about a year before it was acquired by EMC.

Moreover, according to a Schedule 13D SEC filing last month, the Cowen Group’s Ramius LLC and its subsidiaries obtained significant stakes in Extreme. Not much has been written or said about this transaction, but it warrants attention.

Finally, we know Huawei would like to make acquisitions in the U.S. Recently, Huawei is said to have expressed interest in acquiring Motorola’s network-infrastructure unit. In connection with that bid, and perhaps others, Huawei reportedly has broached a “mitigation agreement” with the U.S. government, similar to the pact Alcatel signed when it acquired Lucent. The objective of the agreement would be to allay American concerns relating to national security.

In the past, Huawei’s acquisitive ambitions in the U.S. have been thwarted on national-security grounds. The Chinese networking company, alleged to have close ties with China’s defense and intelligence agencies, saw its bid for minority ownership of 3Com frustrated a few years ago when Bain Capital was discouraged from pursuing the deal by the U.S. government.

If Huawei can satisfactorily address the national-security concerns of the Obama Administration, it would be able to pursue not only an acquisition of Motorola’s network-infrastructure unit, but of other U.S.-based networking vendors, too.

Extreme might be a logical candidate. The company is available, it has a product portfolio of interest to Huawei (which wants to strengthen its enterprise offerings to counter HP/3Com and Cisco in China and elsewhere), and it has intellectual property (patents) that Huawei might find attractive.

Sure, Extreme has lost a lot of engineering talent in Silicon Valley during its recent struggles. But Huawei doesn’t need engineers. It has plenty of those in China.

While this post is entirely speculative, I would not be surprised to see Huawei make an enterprise acquisition. Extreme wouldn’t be the only option available to Huawei, but it would probably be the easiest to execute in terms of regulatory constraints and integration challenges.

UC Won’t Follow WiFi’s Path

At his No Jitter blog, Zeus Kerravala recounts a panel discussion he co-moderated yesterday at VoiceCon.

The panel — ostensibly convened to discuss “next-generation communications architectures” — comprised representatives from most of the industry’s heavyweights, including Cisco, Microsoft, Avaya, HP, IBM, and Polycom. While the vendor representatives seemed initially in agreement regarding how communication architectures are shifting away from vertical integration into distinct layers, they didn’t take long to eschew common cause in favor of recrimination and one-upmanship.

That’s the nature of the beast, of course. I’ve been on these sorts of panels, and I know that everybody there has an agenda that involves promoting his or her company’s products and vision, often in contradistinction to those of your counterparts. Salesmanship never sleeps, especially when it’s on a dais. Away from the panels, too, each vendor continually looks for an edge over its rivals.

Later in his blog post, Kerravala wonders why unified communications can’t be like WiFi, where everything just works together and interoperability between and among different vendors’ products isn’t a problem for customers.

Kerravala cites two main reasons why UC isn’t like WiFi. First, he says, vendors have trouble agreeing on common standards. In Kerravala’s words: “Everyone wants their standard to become the industry standard.” He’s absolutely right.

Second, he argues, WiFi-scale standardization changes the economics of the industry. That’s true, too. As he points out, standardization and commoditization of WiFi resulted in low-cost embedding of the technology in nearly anything and everything, changing the business models of infrastructure vendors in the process.

On that point, we should mention that the major vendors who drove WiFi standardization clearly foresaw how commoditization would eviscerate profit margins on underlying infrastructure. They knew what they were doing, and they went into it with eyes wide open.

They did it because they knew the value of the applications and content WiFi unleashed would create new business opportunities and drive growth in adjacent markets that were of compelling interest to them. Standardized WiFi paved the way for new market opportunities — including increased sales of preexisting and future products — and that’s why the industry movers and shakers got behind the standards effort. In more ways than one, WiFi was a foundation technology.

Can the same be said for UC? That’s the crux of the matter, because if UC is more a market end rather than a means to manifold other market ends, vendors have limited motivation to standardize.

Another difference between WiFi and UC is that the former clearly sits at the bottom of the OSI protocol stack whereas UC, in its breadth and depth, ranges all the way up the stack. Generally, standardization occurs more readily at the bottom of the stack, starting at the PHY and MAC layers, and gets more difficult at the higher layers, especially at the application layer, where differentiation and proprietary advantage often confer great rewards.

In all likelihood, UC always will be more proprietary in design and implementation than WiFi. The two are too dissimilar in their technological and market characteristics to share similar fates.

Vendors refrain from standardizing UC products and technologies because they have neither the desire nor the need to do so. The customers, the buying community, want standardization, which would lower solution costs and result in interoperability and product interchangeability; but the vendors don’t want to go there, for obvious reasons.

UC and collaboration looks more like an application or application service to me than like an 802.11 IEEE networking standard. It’s not so much a cornerstone or foundation for other markets and services as it is an end in and of itself. As such, vendors contesting the space will continue to seek proprietary advantage and resist homogenized standardization.

Despite vendor pieties and platitudes on interoperability and openness, customers shouldn’t hold their breath waiting for UC purveyors to make buying decisions cheaper and easier.