Cisco’s Chambers Sends Messages on Canada, ZTE

Cisco Systems reported its fiscal first-quarter earnings yesterday. While the market responded favorably, both in after-hours trading and in regular trading early today, some analysts questioned whether Cisco has embarked on an extended period of smooth sailing or is merely experiencing calm before further storms.

That particular vein of prognostication, while interesting, is not what I want to address today. Instead, I want to draw attention to comments made in the last couple days by Cisco CEO John Chambers, both in interviews and on Cisco’s earnings call. 

As we know, Cisco possesses a vast cash hoard, most of which sits offshore.  It’s no secret that Chambers and the Cisco board of directors would like to see the U.S. government provide a repatriation-tax holiday. That was unlikely to happen before a U.S. presidential election, but now that the voting has occurred and the ballots have been counted, Cisco and other U.S.-headquartered companies with massive amounts of offshore cash might be anxious for some near-term tax relief.

Oh, Canada? 

In a series of interviews this week, Cisco’s Chambers repeatedly extolled the virtues of Canada as a potential destination for a large portion of Cisco’s cash holdings.  Chambers says Canada is the world’s “easiest place to do business,” citing the country’s federal corporate-tax rate of 15 percent and its “great education system.” 

Now, Chambers could sincere about what he says about Canada — as a Canadian, I certainly have nothing against the place, and I would welcome Cisco investments in the country — but I think Chambers has other motives. He’s talking about moving money to Canada, but he hasn’t done it yet. When people talk before they do something, they’re often sending messages, either explicit or implicit. In this case, Chambers is speaking to the U.S. government. He’s saying: “Hey, if you don’t give me my tax holiday, I’m not going to repatriate my cash to the U.S. Instead, I’m going to take a huge pile of it to Canada, where I get a better deal from the government.”  

If the U.S. government doesn’t budge, would he actually follow through on a Canadian cash expedition? It’s possible, I suppose, but Canada, while offering lower federal levels of corporate taxation and an education system that Chambers lauds, doesn’t match the U.S. in the range of investment opportunities it would offer. How many Canadian companies, for example, would Cisco wish to acquire?  Answer: Not many — and, no, Research in Motion (RIM) would not be among them. 

China Questions

Yes, Cisco could hire some Canadian engineers, provide early-stage funding to startup companies, and spend some money on relevant research initiatives at Canadian universities. But that would not require tens of billions of dollars. So, while Chambers is talking about Canada, he’s actually talking to his own government in Washington, D.C. 

Now, let’s shift our focus to China, another country mentioned by Chambers on the Cisco earnings call. Cisco’s sales in China were flat in the first quarter, but the company’s leadership team knows that China will be critical to Cisco’s future growth. Despite the national-security concerns that have inhibited expansion by Huawei and ZTE in the United States, Chambers does not foresee a trade war with China, which has amplified recent rhetoric about what it perceives as Western protectionism. 

ZTE: Back in Cisco’s Good Books?

As for Huawei, Chambers said Cisco is more than holding is own competitively against China’s largest networking company. What’s more — and this is the interesting part — Chambers said he sees ZTE as more a partner than a competitor, and indicated that he’s open to “expanding that relationship.” If one considers ZTE’s product portfolio in relation to Huawei’s, what Chambers says make sense. But there’s another aspect to this story (as there often is). 

Some of you with relatively good intermediate-term memory will recall that Reuters reported on October 8 that Cisco had ended a longstanding sales partnership with ZTE “after an internal investigation into allegations that the Chinese telecommunications equipment maker sold Cisco networking gear to Iran.” What’s more, Cisco spokesman John Earnhardt issued the following unambiguous statement to Bloomberg: “Cisco has no current relationship with ZTE.” 

Then again, the Guardian reported the following day that Cisco had “curtailed” its seven-year partnership with ZTE. So, you know, things change, and perhaps they are changing again.  

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For Huawei and ZTE, Suspicions Persist

About two weeks ago, the U.S. House Permanent Select Committee on Intelligence held a hearing on “the national-security threats posed by Chinese telecom companies doing business in the United States.” The Chinese telecom companies called to account were Huawei and ZTE, each of which is keen to expand its market reach into the United States.

It is difficult to know what to believe when it comes to the charges leveled against Huawei and ZTE. The accusations against the companies, which involve their alleged capacity to conduct electronic espionage for China and their relationships with China’s government, are serious and plausible but also largely unproven.

Frustrated Ambitions

One would hope these questions could be settled definitively and expeditiously, but this inquiry looks be a marathon rather than a sprint. Huawei and ZTE want to expand in the U.S. market, but their ambitions are thwarted by government concerns about national security.  As long as the concerns remain — and they show no signs of dissipating soon — the two Chinese technology companies face limited horizons in America.

Elsewhere, too, questions have been raised. Although Huawei recently announced a significant expansion in Britain, which received the endorsement of the government there, it was excluded from participating in Australia’s National Broadband Network (NBN). The company also is facing increased suspicion in India and in Canada, countries in which it already has made inroads.

Vehement Denials 

Huawei and ZTE say they’re facing discrimination and protectionism in the U.S.  Both seek to become bigger players globally in smartphones, and Huawei has its sights set on becoming a major force in enterprise networking and telepresence.

Obviously, Huawei and ZTE deny the allegations. Huawei has said it would be self-destructive for the company to function as an agent or proxy of Chinese-government espionage. Huawei SVP Charles Ding, as quoted in a post published on the Forbes website, had this to say:

 As a global company that earns a large part of its revenue from markets outside of China, we know that any improper behaviour would blemish our reputation, would have an adverse effect in the global market, and ultimately would strike a fatal blow to the company’s business operations. Our customers throughout the world trust Huawei. We will never do anything that undermines that trust. It would be immensely foolish for Huawei to risk involvement in national security or economic espionage.

Let me be clear – Huawei has not and will not jeopardise our global commercial success nor the integrity of our customers’ networks for any third party, government or otherwise. Ever.

A Telco Legacy 

Still, questions persist, perhaps because Western countries know, from their own experience, that telecommunications equipment and networks can be invaluable vectors for surveillance and intelligence-gathering activities. As Jim Armitage wrote in The Independent, telcos in Europe and the United States have been tapped repeatedly for skullduggery and eavesdropping.

In one instance, involving the tapping  of 100 mobile phones belonging to Greek politicians and senior civil servants in 2004 and 2005, a Vodafone executive was found dead of an apparent suicide. In another case, a former head of security at Telecom Italia fell off a Naples motorway bridge to his death in 2006 after discovering the illegal wiretapping of 5,000 Italian journalists, politicians, magistrates, and — yes — soccer players.

No question, there’s a long history of telco networks and the gear that runs them being exploited for “spookery” (my neologism of the day) gone wild. That historical context might explain at least some of the acute and ongoing suspicion directed at Chinese telco-gear vendors by U.S. authorities and politicians.

Chinese Merchant-Silicon Vendor Joins ONF, Enters SDN Picture

Switching-silicon ODM/OEM Centec Networks last week became the latest company to join the Open Networking Foundation (ONF).

According to a press release, Centec is “committed to contributing to SDN development as a merchant silicon vendor and to pioneering in the promotion of SDN adoption in China.” From the ONF’s standpoint, the more merchant silicon on the market for OpenFlow switches, the better.  Expansion in China doubtless is a welcome prospect, too.

Established in 2005, Centec has been financed by China-Singapore Suzhou Industrial Park Venture Capital, Delta Venture Enterprise, Infinity I-China Investments (Israel), and Suzhou Rongda. A little more than a year ago, Centec announced a $10.7-million “C” round of financing, in which Delta Venture Enterprise, Infinity I-China Investments (Israel), and SuZhou Rongda participated.

Acquisition Rumor

Before that round was announced, Centec’s CEO James Sun, formerly of Cisco and of Fore Systems, told Light Reading’s Craig Matsumoto that the company aspired to become an alternative supplier to Broadcom in the Ethernet merchant-silicon market. As a Chinese company, Centec not surprisingly has cultivated relationships with Chinese carriers and network-gear vendors. In his Light Reading article, in fact, Matsumoto cited a rumor that Centec had declined an acquisition offer from HiSilicon Technologies Co. Ltd., the semiconductor subsidiary of Huawei Technologies, China’s largest network-equipment vendor.

Huawei has been working not only to bolster its enterprise-networking presence, but also to figure out how best to utilize SDN and OpenFlow (and OpenStack, too).  Like Centec, Huawei is a member of the ONF, and it also has been active in IETF and IRTF discourse relating to SDN. What’s more, Huawei has been hiring SDN-savvy engineers in China and in the U.S.

As for Centec, the company made its debut on the SDN stage early this year at the Ethernet Technology Summit, where CEO James Sun gave a silicon vendor’s perspective on OpenFlow and spoke about the company’s plans to release a reference design based on Centec’s TransWarp switching silicon and an SDK with support for Open vSwitch 1.2. That reference design subsequently was showcased at the Open Networking Summit in April.

It will be interesting to see how Centec develops, both in competitive relation to Broadcom and within the context of the SDN ecosystem.

Direct from ODMs: The Hardware Complement to SDN

Subsequent to my return from Network Field Day 3, I read an interesting article published by Wired that dealt with the Internet giants’ shift toward buying networking gear from original design manufacturers (ODMs) rather than from brand-name OEMs such as Cisco, HP Networking, Juniper, and Dell’s Force10 Networks.

The development isn’t new — Andrew Schmitt, now an analyst at Infonetics, wrote about Google designing its own 10-GbE switches a few years ago — but the story confirmed that the trend is gaining momentum and drawing a crowd, which includes brokers and custom suppliers as well as increasing numbers of buyers.

In the Wired article, Google, Microsoft, Amazon, and Facebook were explicitly cited as web giants buying their switches directly from ODMs based in Taiwan and China. These same buyers previously procured their servers directly from ODMs, circumventing brand-name server vendors such as HP and Dell.  What they’re now doing with networking hardware, then, is a variation on an established theme.

The ONF Connection

Just as with servers, the web titans have their reasons for going directly to ODMs for their networking hardware. Sometimes they want a simpler switch than the brand-name networking vendors offer, and sometimes they want certain functionality that networking vendors do not provide in their commercial products. Most often, though, they’re looking for cheap commodity switches based on merchant silicon, which has become more than capable of handling the requirements the big service providers have in mind.

Software is part of the picture, too, but the Wired story didn’t touch on it. Look at the names of the Internet companies that have gone shopping for ODM switches: Google, Microsoft, Facebook, and Amazon.

What do those companies have in common besides their status as Internet giants and their purchases of copious amounts of networking gear? Yes, it’s true that they’re also cloud service providers. But there’s something else, too.

With the exception of Amazon, the other three are board members in good standing of the Open Networking Foundation (ONF). What’s more,  even though Amazon is not an ONF board member (or even a member), it shares the ONF’s philosophical outlook in relation to making networking infrastructure more flexible and responsive, less complex and costly, and generally getting it out of the way of critical data-center processes.

Pica8 and Cumulus

So, yes, software-defined networking (SDN) is the software complement to cloud-service providers’ direct procurement of networking hardware from ODMs.  In the ONF’s conception of SDN, the server-based controller maps application-driven traffic flows to switches running OpenFlow or some other mechanism that provides interaction between the controller and the switch. Therefore, switches for SDN environments don’t need to be as smart as conventional “vertically integrated” switches that combine packet forwarding and the control plane in the same box.

This isn’t just guesswork on my part. Two companies are cited in the Wired article as “brokers” and “arms dealers” between switch buyers and ODM suppliers. Pica8 is one, and Cumulus Networks is the other.

If you visit the Pica8 website,  you’ll see that the company’s goal is “to commoditize the network industry and to make the network platforms easy to program, robust to operate, and low-cost to procure.” The company says it is “committed to providing high-quality open software with commoditized switches to break the current performance/price barrier of the network industry.” The company’s latest switch, the Pronto 3920, uses Broadcom’s Trident+ chipset, which Pica8 says can be found in other ToR switches, including the Cisco Nexus 3064, Force10 S4810, IBM G8264, Arista 7050S, and Juniper QFC-3500.

That “high-quality open software” to which Pica8 refers? It features XORP open-source routing code, support for Open vSwitch and OpenFlow, and Linux. Pica8 also is a relatively longstanding member of ONF.

Hardware and Software Pedigrees

Cumulus Networks is the other switch arms dealer mentioned in the Wired article. There hasn’t been much public disclosure about Cumulus, and there isn’t much to see on the company’s website. From background information on the professional pasts of the company’s six principals, though, a picture emerges of a company that would be capable of putting together bespoke switch offerings, sourced directly from ODMs, much like those Pica8 delivers.

The co-founders of Cumulus are J.R. Rivers, quoted extensively in the Wired article, and Nolan Leake. A perusal of their LinkedIn profiles reveals that both describe Cumulus as “satisfying the networking needs of large Internet service clusters with high-performance, cost-effective networking equipment.”

Both men also worked at Cisco spin-in venture Nuova Systems, where Rivers served as vice president of systems architecture and Leake served in the “Office of the CTO.” Rivers has a hardware heritage, whereas Leake has a software background, beginning his career building a Java IDE and working at senior positions at VMware and 3Leaf Networks before joining Nuova.

Some of you might recall that 3Leaf’s assets were nearly acquired by Huawei, before the Chinese networking company withdrew its offer after meeting with strenuous objections from the Committee on Foreign Investment in the United States (CFIUS). It was just the latest setback for Huawei in its recurring and unsuccessful attempts to acquire American assets. 3Com, anyone?

For the record, Leake’s LinkedIn profile shows that his work at 3Leaf entailed leading “the development of a distributed virtual machine monitor that leveraged a ccNUMA ASIC to run multiple large (many-core) single system image OSes on a Infiniband-connected cluster of commodity x86 nodes.”

For Companies Not Named Google

Also at Cumulus is Shrijeet Mukherjee, who serves as the startup company’s vice president of software engineering. He was at Nuova, too, and worked at Cisco right up until early this year. At Cisco, Mukherjee focused on” virtualization-acceleration technologies, low-latency Ethernet solutions, Fibre Channel over Ethernet (FCoE), virtual switching, and data center networking technologies.” He boasts of having led the team that delivered the Cisco Virtualized Interface Card (vNIC) for the UCS server platform.

Another Nuova alumnus at Cumulus is Scott Feldman, who was employed at Cisco until May of last year. Among other projects, he served in a leading role on development of “Linux/ESX drivers for Cisco’s UCS vNIC.” (Do all these former Nuova guys at Cumulus realize that Cisco reportedly is offering big-bucks inducements to those who join its latest spin-in venture, Insieme?)

Before moving to Nuova and then to Cisco, J.R. Rivers was involved with Google’s in-house switch design. In the Wired article, Rivers explains the rationale behind Google’s switch design and the company’s evolving relationship with ODMs. Google originally bought switches designed by the ODMs, but now it designs its own switches and has the ODMs manufacture them to the specifications, similar to how Apple designs its iPads and iPhones, then  contracts with Foxconn for assembly.

Rivers notes, not without reason, that Google is an unusual company. It can easily design its own switches, but other service providers possess neither the engineering expertise nor the desire to pursue that option. Nonetheless, they still might want the cost savings that accrue from buying bare-bones switches directly from an ODM. This is the market Cumulus wishes to serve.

Enterprise/Cloud-Service Provider Split

Quoting Rivers from the Wired story:

“We’ve been working for the last year on opening up a supply chain for traditional ODMs who want to sell the hardware on the open market for whoever wants to buy. For the buyers, there can be some very meaningful cost savings. Companies like Cisco and Force10 are just buying from these same ODMs and marking things up. Now, you can go directly to the people who manufacture it.”

It has appeal, but only for large service providers, and perhaps also for very large companies that run prodigious server farms, such as some financial-services concerns. There’s no imminent danger of irrelevance for Cisco, Juniper, HP, or Dell, who still have the vast enterprise market and even many service providers to serve.

But this is a trend worth watching, illustrating the growing chasm between the DIY hardware and software mentality of the biggest cloud shops and the more conventional approach to networking taken by enterprises.

Avaya IPO? Don’t Count On It

Reports now suggest that Avaya’s pending IPO, which once was mooted to occur this month, might not take place until 2013.

Sources who claim to be familiar with the matter told Reuters and Bloomberg that Avaya has deferred its IPO because of tepid demand amid competition for investment dollars from Facebook, the Carlyle Group, and Palo Alto Networks, among others.

Reconsidering the “Nortel Option”

Well, if you are generously disposed, you might believe that particular interpretation of events. However, if you are more skeptical, you might wonder whether an Avaya IPO will ever materialize. If I were making book on the matter — and I’m not, because that sort of thing is illegal in many jurisdictions — I would probably skew the morning-line odds against Avaya bringing its long-deferred IPO to fruition.

Some of you found it amusing when I mooted the possibility of Avaya pursuing the “Nortel option” — that is, selling its assets piecemeal to various buyers — but I can easily envision it happening. Whether that occurs as part of bankruptcy proceedings is another question, though Avaya’s long-term debt remains disconcertingly and stubbornly high.

Despite recent acquisitions, including that of Radvision for $230 million earlier this month, I don’t see the prospect of compelling and sustained revenue growth that would allow Avaya to position itself as an attractive IPO vehicle.

Unconvincing Narrative

No matter where one looks, Avaya’s long-term prospects seem unimpressive if not inauspicious. In its core business of “global communications solutions” — comprising its unified-communications and contact-center product portfolios — it is facing strong rivals (Cisco, a Skype-fortified Microsoft) as well as market and technology trends that significantly inhibit meaningful growth. In networking, its next-biggest business, the company’s progress has been stalled by competition from entrenched market leaders (Cisco, Juniper, HP, etc.), the rise of aggressive enterprise-networking newcomers (Huawei), and a chronic inability to meaningful differentiate itself from the pack.

According to a quarterly financial report that Avaya filed with the Securities and Exchange Commission (SEC) last month, the company generated overall revenue of $1.387 billion during the three months ending on December 31, 2011. That was marginally better than the $1.366 billion in revenue Avaya derived during the corresponding quarter in the previous year. In the fourth quarter of 2011, products accounted for $749 million of revenue and services contributed $638 million, compared to product revenue of $722 million and services revenue of $644 million during the fourth quarter of 2010.

If we parse that product revenue, Avaya’s story doesn’t get any better. The aforementioned “global communications solutions” produced $667 million in revenue during the fourth quarter of 2011, up slightly over revenue of $645 million in the fourth quarter of 2010. Those growth numbers aren’t exactly eye popping, and the picture becomes less vibrant as we turn our attention to Avaya Networking. That business generated revenue of $82 million in the fourth quarter of 2011, a very slight improvement on the $78 million in revenue recorded during the fourth quarter of 2010.

Lofty Aspirations

Avaya can point to seasonality and other factors as extenuating circumstances, but, all things considered, most neutral parties would conclude that Avaya has a mountain to climb in networking. Unfortunately, it seems to be climbing that mountain without sensible footwear and with the questionable guidance of vertiginous  sherpas. I just don’t see Avaya scaling networking’s heights, especially as it pares its R&D spending and offloads sales costs to its channel partners.

True, Marc Randall, who now heads Avaya Networking, has lofty aspirations for the business unit he runs, but analysts and observers (including this one) are doubtful that Avaya can realize its objective of becoming a top-three vendor. Hard numbers validate that skepticism: Dell’Oro Group figures, as reported by Network World’s Jim Duffy, indicate that Avaya has lost half of its revenue share in the Ethernet switching market since taking ownership of Nortel’s enterprise business nearly three years ago. Furthermore, as we have seen, Avaya’s own numbers from its networking business confirm a pronounced lack of market momentum.

Avaya’s networking bullishness is predicated on a plan to align sales of network infrastructure with key applications in five target markets: campus, data center, branch, edge, and mobility. The applications with which it will align its networking gear include Avaya’s own unified communications and contact center solutions, its Web Alive collaboration software, and popular business applications that it neither owns nor controls.

Essentially, Avaya’s networking group is piling a lot of weight on the back of a core business that is more beast of burden than Triple Crown thoroughbred.

Growth by Acquisition?

Perhaps that explains why Avaya is searching for growth through acquisitions. In addition to the acquisition of Radvision this year, Avaya last year acquired Konftel (for $15 million), a vendor of collaboration and conferencing technologies; and Sipera, a purveyor of session-border controllers (SBCs). The Radvision acquisition extended Avaya’s product reach into video, but it probably will not do enough to make Avaya a leader in either videoconferencing or video-based collaboration. It seems like a long-term technology play rather than something that will pay immediate dividends in the market.

So the discussion comes full circle as we wonder just where and how Avaya will manage to produce a growth profile that will make it an attractive IPO prospect for investors. I’m not a soothsayer, but I am willing to predict that Avaya will sell off at least some assets well before it consummates an IPO.

Avaya IPO? Magic 8-ball says: Don’t count on it.

U.S. National-Security Concerns Cast Pall over Huawei

As 2011 draws to a close, Huawei faces some difficult questions about its business prospects in the United States.  The company is expanding worldwide into enterprise networking and mobile devices, such as smartphones and tablets, even as it continues to grow its global telecommunications-equipment franchise.

Huawei is a company that generated 2010 revenue of about $28 billion, and it has an enviable growth profile for a firm of its size. But a dark cloud of suspicion continues to hang over it in the U.S. market, where it has not made headway commensurate with its success in other parts of the world. (As its Wikipedia entry states, Huawei’s products and services have been deployed in more than 140 countries, and it serves 45 of the world’s 50 largest telcos. None of those telcos are in the U.S.)

History of Suspicion

The reason it has not prospered in the U.S. is at primarily attributable to persistent government concerns about Huawei’s alleged involvement in cyber espionage as a reputed proxy for China. At this point, I will point out that none of the charges has been proven, and that any evidence against the company has been kept classified by U.S. intelligence agencies.

Nonetheless, innuendo and suspicions persist, and they inhibit Huawei’s ability to serve customers and grow revenue in the U.S. market. In the recent past, the U.S. government has admonished American carriers, including Sprint Nextel, not to buy Huawei’s telecommunications equipment on national-security concerns. On the same grounds, U.S. government agencies prevented Huawei from acquiring ownership stakes in U.S.-based companies such as 3Com, subsequently acquired by HP, and 3Leaf Systems. Moreover, Huawei was barred recently from participating in a nationwide emergency network, again for reasons of national security.

Through it all, Huawei has asserted that it has nothing to hide, that it operates no differently from its competitors and peers in the marketplace, and that it has no intelligence-gathering remit from the China or any other national government. Huawei even has welcomed an investigation by US authorities, saying that it wants to put the espionage charges behind it once and for all.

Investigation Welcomed

Well, it appears Huawei, among others, will be formally investigated, but it also seems the imbroglio with the U.S. authorities might continue for some time. We learned in November that the U.S. House Permanent Select Committee on Intelligence would investigate potential security threats posed by some foreign companies, Huawei included.

In making the announcement relating to the investigation, U.S. Representative Mike Rogers, a Michigan Republican and the committee’s chairman, said China has increased its cyber espionage in the United States. He cited connections between Huawei’s president, Ren Zhengfei, and the People’s Liberation Army, to which the Huawei chieftain once belonged.

For its part, as previously mentioned, Huawei says it welcomes an investigation. Here’s a direct quote from William Plummer, a Huawei spokesman, excerpted from a recent Bloomberg article:

“Huawei conducts its businesses according to normal business practices just like everybody in this industry. Huawei is an independent company that is not directed, owned or influenced by any government, including the Chinese government.”

Unwanted Attention from Washington

The same Bloomberg article containing that quote also discloses that the U.S. government has invoked  Cold War-era national-security powers to compel telecommunication companies, including AT&T Inc. and Verizon Communications Inc., to disclose confidential information about the components and composition of their networks in a hunt for evidence of Chinese electronic malfeasance.

Specifically, the U.S. Commerce Department this past spring requested a detailed accounting of foreign-made hardware and software on carrier networks, according to the Bloomberg article. It also asked the telcos and other companies about security-related incidents, such as the discovery of “unauthorized electronic hardware” or suspicious equipment capable of duplicating or redirecting data.

Brand Ambitions at Risk

The concerns aren’t necessarily exclusive to alleged Chinese cyber espionage, and Huawei is not the only company whose gear will come under scrutiny. Still, Huawei clearly is drawing a lot of unwanted attention in Washington.

While Huawei would like this matter to be resolved expeditiously in its favor, the investigations probably will continue for some time before definitive verdicts are rendered publicly. In the meantime, Huawei’s U.S. aspirations are stuck in arrested development.

To be sure, the damage might not be restricted entirely to the United States. As this ominous saga plays out, Huawei is trying to develop its brand in Europe, Asia, South America, Africa, and Australia. It’s making concerted advertising and marketing pushes for its smartphones in the U.K., among other jurisdictions, and it probably doesn’t want consumers there or elsewhere to be inundated with persistent reports about U.S. investigations into its alleged involvement with cyber espionage and spyware.

Indulge me for a moment as I channel my inner screenwriter.

Scenario: U.K. electronics retailer. Two blokes survey the mobile phones on offer. Bloke One picks up a Huawei smartphone. 

Bloke One: “I quite fancy this Android handset from Huawei. The price is right, too.”

Bloke Two: “Huawei? Isn’t that the dodgy Chinese company being investigated by the Yanks for spyware?

Bloke One puts down the handset and considers another option.

Serious Implications

Dark humor aside, there are serious implications for Huawei as it remains under this cloud of suspicion. Those implications conceivably stretch well beyond the shores of the United States.

Some have suggested that the U.S. government’s charges against Huawei are prompted more by protectionism than by legitimate concerns about national security. With the existing evidence against Huawei classified, there’s no way for the public, in the U.S. or elsewhere, to make an informed judgment.

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.

Discouraged in US, Huawei Invests Heavily in European Enterprise Push

As we watch Huawei invest heavily and ramp up for a sustained enterprise-networking push in Europe, the Chinese network-equipment provider, which made its name and fortune in telecommunications gear before expanding to mobile devices and enterprise infrastructure, remains conspicuous by its relative absence in the USA.

That’s not how Huawei planned it, of course. The company has made successive bids to establish a meaningful beachhead in the US, and each time it was turned back on national-security grounds.

Thwarted at Every Turn

There was its joint $2.2-billion takeover bid, as a minority player, with Bain Capital for 3Com, its former joint-venture partner in H3C, an acronym for Huawei 3Com. That came to naught when the Committee on Foreign Investment in the United States (CFIUS) discouraged the prospective buyers from pursuing the deal because of concerns about Huawei’s potential access to Tipping Point and 3Com security technologies. Concerns about the US government’s disposition to Huawei also torpedoed the Chinese company’s efforts to acquire Motorola’s wireless-network business and software vendor 2Wire, even though Huawei reportedly bid at least $100 million more than the successful acquirer in each case.

Since then, Huawei was warned off an acquisition of assets belong to 3Leaf, a cloud-software provider. Last, but perhaps not least from Huawei’s perspective, it has been effectively prevented from making headway in its sale of wireless base stations and other telecommunications infrastructure to America’s leading wireless operators, including Sprint Nextel.

While Huawei has made sales to smaller US service providers, it seems effectively locked out of sales to top-tier wireless operators. Understandably, that limits its growth in the US market, making displacement of incumbent vendors impossible.

Aiming for Enterprise Revenue of $7 Billion Next Year

As such, it’s no wonder Huawei looks to other parts of the world as it rolls out an aggressive plan to grow its new enterprise business to sales of $7 billion next year, from just $2 billion last year and $4 billion this year. By 2015, Huawei sees its enterprise business generating revenue of $15 billion to $20 billion.

That’s a heady growth target, and Huawei clearly is focusing on its domestic market in China, as well as emerging economies in Asia and South America, as well as strong growth in Australia and Europe, the Middle East, and Africa (EMEA).

I wouldn’t want to say that Huawei has given up on the US market — I don’t think Huawei gives up on anything — but it clearly recognizes political reality and will focus elsewhere for the time being.

For Cisco, Good News and Bad News

For Cisco and other enterprise-networking vendors with significant market share in the United States, that’s good news. The news might not be as good in Europe, where Huawei clearly is girding for intensive engagement with customers and channel partners, including those now in other camps.

Cisco obviously benefits, though it is not alone, if Huawei remains constrained or otherwise discouraged from moving aggressively into the US domestic market. Conversely, however, there is a danger that China, which seems to be influenced at least in part by Huawei and ZTE’s strategic imperatives (see recent developments in Libya), might make life more difficult for Cisco in China if Huawei’s hardships in the US persist.

Although Cisco seems to have stayed on the good side of Chinese authorities hitherto, circumstances and situations are subject to change. These developments, like so many others in a networking market that is now surprisingly fluid, bear watching.

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.

What Cisco and Huawei Have in Common

Cisco and Huawei have a lot in common. Not only has Huawei joined Cisco in the enterprise-networking market, but it also has put down R&D roots in Silicon Valley, where it and Cisco now compete for engineering talent.

The two companies have something else in common, too: Both claim their R&D strategies are being thwarted by the US government.

Cisco Hopes for Tax Holiday

It’s no secret that Cisco would like the Obama Administration to deliver a repatriation tax holiday on the mountain of cash the company has accumulated overseas. The vast majority of Cisco’s cash — more than $40 billion — is held overseas. Cisco is averse to bringing it back home because it would be taxed at the US corporate rate of 35 percent.

Cisco would prefer to see a repatriation tax rate, at least for the short term, of a 5.25-percent rate. That would allow Cisco, as well as a number of other major US technology firms, to bring back a whopping war chest to the domestic market, where the money could be used for a variety of purposes, including R&D and M&A.

Notwithstanding some intermittent activity, Cisco’s R&D pace has decelerated.  Including the announced acquisition of collaboration-software vendor Versly today, Cisco has announced just four acquisitions this year. It announced seven buys in 2010, and just five each in 2009 and 2008. In contrast, Cisco announced 12 acquisitions in 2007, preceded by nine in 2006 and 12 in 2005.

Solid Track Record

Doubtless the punishing and protracted macroeconomic downturn has factored into Cisco’s slowing pace of M&A activity. I also think Cisco has lost some leadership and bench strength on its M&A team. And, yes, Cisco’s push to keep money offshore, away from US corporate taxes, is a factor, too.

Although Cisco is capable of innovating organically, it historically has produced many of its breakthrough products through inorganic means, namely acquisitions. Its first acquisition, of Crescendo Communications in 1993, ranks as its best. That deal brought it the family of Catalyst switches, a stellar group of executive talent, and eventual dominance of the burgeoning enterprise-networking market.

Not all Cisco acquisitions have gone well, but the company’s overall track record, as John Chambers will tell you, has been pretty good. Cisco has a devised cookbook for identifying acquisition candidates, qualifying them through rigorous due diligence, negotiating deals on terms that ensure key assets don’t walk out the door, and finally ensuring that integration and assimilation are consummated effectively and quickly.  Maybe Cisco has gotten a bit rusty, but one has to think the institutional memory of how to succeed at the M&A game still lives on Tasman Drive.

Acute Need for M&A

That brings us to Cisco’s overseas cash and the dilemma it represents. Although developing markets are growing, Cisco apparently has struggled to find offshore acquisition candidates. Put another way, it has not been able to match offshore cash with offshore assets. Revenue growth might increasingly occur in China, India, Brazil, Russia, and other developing markets, but Cisco and other technology leaders seem to believe that the entrepreneurial innovation engine that drives that growth will still have a home in the USA.

So, Cisco sits in a holding pattern, waiting for the US government to give it a repatriation tax holiday. Presuming that holiday is granted, Cisco will be back on the acquisition trail with a vengeance. Probably more than ever, Cisco needs to make key acquisitions to ensure its market dominance and perhaps even its long-term relevance.

Huawei Discouraged Repeatedly

Huawei has a different sort of problem, but it is similarly constrained from making acquisitions in the USA.  On national-security grounds, the US government has discouraged and prevented Huawei from selling its telecommunications gear to major US carriers and from buying US-based technology companies. Bain Capital and Huawei were dissuaded from pursuing an acquisition of networking-vendor 3Com by the Committee on Foreign Investment in the United States (CFIUS) in 2008. Earlier this year, Huawei backtracked from a proposed acquisition of assets belonging to 3Leaf, a bankrupt cloud-computer software company, when it became evident the US government would oppose the transaction.

Responding to the impasse, Huawei has set up its own R&D in Silicon Valley and has established a joint venture with Symantec, called Huawei Symantec, that structurally looks a lot like H3C, the joint venture that Huawei established with 3Com before the two companies were forced to go their separate ways. (H3C, like the rest of 3Com, is now subsumed within HP Networking. Giving HP’s apparent affinity for buying companies whose names start with the number 3 — 3Com and 3Par spring to mind — one wonders how HP failed to plunder what was left of 3Leaf.)

Still, even though Huawei has been forced to go “organic” with its strategy in North America, the company clearly wants the opportunity to make acquisitions in the USA. It’s taken to lobbying the US government, and it has unleashed a charm offensive on market influencers, trying to mitigate, if not eliminate, concerns that it is owned or controlled by China’s government or that it maintains close ties with the China’s defense and intelligence establishments.

Waiting for Government’s Green Light

Huawei wants to acquire companies in North America for a few reasons.  For starters, it could use the R&D expertise and intellectual property, though  it has been building up an impressive trove of its own patents and intellectual property. There are assets in the US that could expedite Huawei’s product-development efforts in areas such as cloud computing, data-center networking, and mobile technologies. Furthermore, there is management expertise in many US companies that Huawei might prefer to buy wholesale rather than piecemeal.

Finally, of course, there’s the question of brand acceptance and legitimacy. If the US government were to allow Huawei to make acquisitions in America, the company would be on the path to being able to sell its products to US-based carriers. Enterprise sales — bear in mind that enterprise networking is considered a key source of future growth by Huawei — would be easier in the US, too, as would be consumer sales of mobile devices such as Android-based smartphones and tablets.

For different reasons, then, Cisco and Huawei are hoping the US government cuts them some slack so that each can close some deals.

Divining Google’s Intentions for Motorola Mobility

In commenting now on Google’s announcement that it will acquire Motorola Mobility Holdings for $12.5 billion, I feel like the guest who arrives at a party the morning after festivities have ended: There’s not much for me to add, there’s a mess everywhere, more than a few participants have hangovers, and some have gone well past their party-tolerance level.

Still, in the spirit of sober second thought, I will attempt to provide Yet Another Perspective (YAP).

Misdirection and Tumult

It was easy to get lost in all the misdirection and tumult that followed the Google-Motorola Mobility announcement. Questions abounded, Google’s intentions weren’t yet clear, its competitors were more than willing to add turbidity to already muddy waters, and opinions on what it all meant exploded like scattershot in all directions.

In such situations, I like to go back to fundamental facts and work outward from there. What is it we know for sure? Once we’re on a firm foundation, we can attempt to make relatively educated suppositions about why Google made this acquisition, where it will take it, and how the plot is likely to unspool.

Okay, the first thing we know is that Google makes the overwhelming majority (97%) of its revenue from advertising. That is unlikely to change. I don’t think Google is buying Motorola Mobility because it sees its future as a hardware manufacturer of smartphones and tablets. It wants to get its software platform on mobile devices, yes, because that’s the only way it can ensure that consumers will use its search and location services ubiquitously; but don’t confuse that strategic objective with Google wanting to be a hardware purveyor.

Patent Considerations 

So, working back from what we know about Google, we now can discount the theory that Google will be use Motorola Mobility as a means of competing aggressively against its other Android licensees, including Samsung, HTC, LG, and scores of others.  There has been some fragmentation of the Android platform, and it could be that Google intends to use Motorola Mobility’s hardware as a means of enforcing platform discipline and rigor on its Android licensees, but I don’t envision Google trying to put them out of business with Motorola. That would be an unwise move and a Sisyphean task.

Perhaps, then, it was all about the patents? Yes, I think patents and intellectual-property rights figured prominently into Google’s calculations. Google made no secret that it felt itself at a patent deficit in relation to its major technology rivals and primary intellectual-property litigants. For a variety of reasons — the morass that is patent law, the growing complexity of mobile devices such as smartphones, the burgeoning size and strategic importance of mobility as a market — all the big vendors are playing for keeps in mobile. Big money is on the table, and no holds are barred.

Patents are a means of constraining competition, conditioning and controlling market outcomes, and — it must be said — inhibiting innovation. But this situation wasn’t created by one vendor. It has been evolving (or devolving) for a great many years, and the vendors are only playing the cards they’ve been dealt by a patent system that is in need of serious reform. The only real winners in this ongoing mess are the lawyers . . . but I digress.

Defensive Move

Getting back on track, we can conclude that, considering its business orientation, Google doesn’t really want to compete with its Android licensees and that patent considerations figured highly in its motivation for acquiring Motorola Mobility.

Suggestions also surfaced that the deal was, at least in part, a defensive move. Apparently Microsoft had been kicking Motorola Mobility’s tires and wanted to buy it strictly for its patent portfolio. Motorola wanted to find a buyer willing to take, and pay for, the entire company. That apparently was Google’s opening to snatch the Motorola patents away from Microsoft’s outstretched hands — at a cost of $12.5 billion, of course. This has the ring of truth to it. I can imagine Microsoft wanting to administer something approaching a litigious coup de grace on Google, and I can just as easily imagine Google trying to preclude that from happening.

What about the theory that Google believes that it must have an “integrated stack” — that it must control, design, and deliver all the hardware and software that constitutes the mobile experience embodied in a smartphone or a tablet — to succeed against Apple?

No Need for a Bazooka

Here, I would use the market as a point of refutation. Until the patent imbroglio raised its ugly head, Google’s Android was ascendant in the mobile space. It had gone from nowhere to the leading mobile operating system worldwide, represented by a growing army of diverse device licensees targeting nearly every nook and cranny of the mobile market. There was some platform fragmentation, which introduced application-interoperability issues, but those problems were and are correctable without Google having recourse to direct competition with its partners.  That would be an extreme measure, akin to using a bazooka to herd sheep.

Google Android licensees were struggling in the court of law, but not so much in the court of public opinion as represented by the market. Why do you think Google’s competitors resorted to litigious measures in the first place?

So, no — at least based on the available evidence — I don’t think Google has concluded that it must try to remake itself into a mirror image of Apple for Android to have a fighting chance in the mobile marketplace. The data suggests otherwise. And let’s remember that Android, smartphones, and tablets are not ends in themselves but means to an end for Google.

Chinese Connection?

What’s next, then? Google can begin to wield the Motorola Mobility patent portfolio to defend and protect is Android licensees. It also will keep Motorola Mobility’s hardware unit as a standalone, separate entity for now. In time, though, I would be surprised if Google didn’t sell that business.

Interestingly, the Motorola hardware group could become a bargaining chip of sorts for Google. I’ve seen the names Huawei and ZTE mentioned as possible buyers of the hardware business. While Google’s travails in China are well known, I don’t think it’s given up entirely on its Chinese aspirations. A deal involving the sale of the Motorola hardware business to Huawei or ZTE that included the buyer’s long-term support for Android — with the Chinese government’s blessing, of course — could offer compelling value to both sides.

Taking Aim At Enterprise Networking, Huawei Adds to Cisco’s Woes

Now that Cisco Systems has managed to placate Wall Street at least temporarily by slightly exceeding diminished expectations for its fourth-quarter earnings and first-quarter guidance, some observers have suggested that perhaps the worst is over for Cisco.

It’s possible, of course, that the Good Ship Cisco has weathered the storm and is slowly regaining its equilibrium, steadying its course, and preparing to reclaim its hegemony over networking’s high seas.

Calm  . . . or the Calm Before a Perfect Storm?

That said, it’s also possible that what we’re seeing is the calm before a potential tsunami. It’s possible, in fact, that Cisco could struggle for years to come, worn down by a veritable perfect storm comprising a competitive war of attrition; market and technology changes that play more to the strengths of its rivals; an increasingly budget-conscious customer base that is less inclined to buy Cisco solutions at a premium; and the disaffection of a fickle channel.

That’s a Cisco dystopia that easily could come to pass, though it isn’t predestined by any means. Cisco can change. It can adapt to new realities and alter its strategic course, its philosophy, its product mix, its marketing messages, and its channel programs.

As we look ahead, though, let’s not underestimate the challenges. In the long run — as opposed to the myopic vista of day traders and stock flippers — Cisco confronts a number of unprecedented trials and tribulations.

No Irrational Exuberance These Days

Although Cisco successfully vanquished an array of enterprise-networking competitors in the 1990s, times have changed, and so has Cisco. It’s not the same company it was back then, not in size and not in culture, and our macroeconomic climate today — what some have called the “recovery-less recovery” — is a long way from the effervescent exuberance of the late 90s. (There’s no threat of Alan Greenspan having to warn us about “irrational exuberance” these days.)

One challenge Cisco faces is on the competitive front, where many of its rivals seem more attuned to the economic and technological zeitgeist. While Cisco has been content to demand its usual premiums and ample margins, competitors with lower cost structures, decent products, and aggressive pricing have been chipping away at  the networking behemoth’s market share in enterprise switching and routing. Meanwhile, nimble high-end rivals, outpacing Cisco in organic innovation, are presenting compelling data-center solutions to customers in networking’s most lucrative vertical markets.

Cisco is being squeezed from above and below. Even in converged infrastructure for data centers, where Cisco thought it could establish a competitive edge, it isn’t clear that the company will thrive. It doesn’t have its own storage component, and it’s not obvious that Cisco can maintain an edge on options that are more open.

What About Huawei?

Then there’s Huawei, a still-opaque company that nevertheless has amassed $28 billion in annual revenue and has aspirations to become a $100-billion powerhouse within a decade. Still capturing as much carrier business as it can find with its telecom-equipment product portfolio, Huawei now is expanding into other areas, including smartphones — where it wants to be a top-five player — and enterprise networking.

Huawei doesn’t just want to be an enterprise-networking purveyor in China. No, it plans to compete vigorously worldwide, following the script it used so successfully in the telecommunications world. It will target developing markets and Europe first, leaving resistant North America as a last course. As reported by Bloomberg, Huawei aims to double annual sales at its enterprise group to $4 billion this year, from $2 billion last year. Within three to five years, Huawei forecasts enterprise-networking revenues of $15 billion to $20 billion.

For Cisco, the question is, how soon and how much will Huawei cut into its revenue and its margins? There’s no definitive answer yet. Much will depend on how well Huawei executes and how well Cisco responds to the threat, but a couple data points are worth noting.

First, Huawei is looking beyond just pushing low-priced boxes into the enterprise market. While I’m sure Huawei will compete and win its share of business on price, it also will be promoting a networking narrative that encompasses solutions for private and public cloud computing, security services, and mobile computing.

Engineers and R&D Galore

It will be interesting to see how the vision evolves and how the company executes on it. Remember, though, as Gartner’s Mark Fabbi pointed out, unlike many of its competitors these days Huawei is a private company with a vast R&D budget. To quote Fabbi:

 “You can’t throw 1,000 engineers at a problem that might bear fruit five years from now. Huawei can.” 

Finally, I’m hearing that Huawei  is preparing to launch (or may have launched) a competitive trade-in program targeted at Cisco enterprise switches, much like HP Networking’s “A Catalyst for Change Trade-in Promotion.” I’m still trying to learn more about the specifics of this program, though.

All considered, Huawei’s foray into enterprise networking looks set to add to Cisco’s mounting woes.