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.

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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.

For Huawei, U.S. M&A Door Remains Closed

Huawei Technologies felt it would be different this time.

Back in 2008, Huawei was thwarted in its ambition to become a minority owner of 3Com, tagging along on an $2.2-billion acquisition bid by Bain Capital that ultimately was discouraged on national-security grounds by the Committee on Foreign Investment in the United States (CFIUS).

After that embarrassment, which caused a Huawei executive to term the American national-security concerns “bullshit” — if only because Huawei would have owned just 16.5 percent of 3Com if the Bain-led purchase had been approved — the Chinese network-gear company assumed a lower profile, licking its wounds and biding its time.

Better Luck This Time?

Huawei was strong in its home market, after all, and it was gaining momentum and customer patronage in Europe and in developing markets in Asia, Africa, and South America, too. It would have other opportunities to crack North America. Time was on its side.

In recent months, Huawei felt now was the time to step from the shadows again. The company believed circumstances had become more favorable, perhaps because of the worldwide economic downturn, perhaps because if felt that old doubts and reservations about its ties to the People’s Liberation Army (PLA) and China’s rulers had faded under a new presidential administration in the U.S.

Whatever the case, Huawei earlier this year got ready to take another high-profile plunge into M&A activity on American shores, this time without the cover of a private-equity partner. (One concern, which nobody uttered publicly back in 2008, was that Bain might have been acting as a temporary beard for Huawei, taking the majority share of 3Com up front only to sell it back to Huawei, which had a joint venture with 3Com called H3C, in increments. Was it true? We’ll probably never know.)

Lobbyists, Lawyers, and Investment Bankers

Just a few months back, according to sources quoted by Bloomberg, Huawei pulled out all the stops. It hired lobbyists, investment bank Morgan Stanley, and high-priced law firms such as such as Sullivan & Cromwell LLP and Skadden, Arps, Slate, Meagher & Flom LLP.

Even with all that well-connected hired help, and even though it outbid its rivals by a wide margin in two different acquisition forays, Huawei went home empty-handed. Again.

Indeed, as Bloomberg reported, Huawei outbid Nokia Siemens Networks (NSN) for Motorola’s telecommunications-networking unit and it offered more than Pace PLC put forward to close its purchase of 2Wire. In the case of the Motorola division, Huawei’s bid surpassed the one offered by NSN by more than $120 million.

In each case, the seller was concerned that a Huawei acquisition would be delayed or rejected on U.S. national-security concerns. As such, the sellers in both transactions sought to negotiate the simplest, surest deal rather than the one that offered the biggest payday. For its part, NSN got creative in negotiating an agreement with Motorola that indirectly boosted the value of its offer, allowing Motorola to argue that it had done its fiduciary duty in negotiating the best deal possible under the circumstances.

Motorola might even have gilded the lily by suing Huawei in the middle of July, alleging that the Chinese vendor had wrongfully obtained Motorola’s trade secrets relating to cellular-networking gear.

Back to the Stop Sign

Well, no matter how you cut it, Huawei has been rebuffed again. This time it had a coterie of well-heeled dealmakers in its corner, and it still was unable to overcome its own political radioactivity. Motorola and 2Wire, as well as their agents, were concerned that deals with Huawei might not be approved. Rather than take that risk, they went in a different direction.

What can Huawei do now? Short of an explicit announcement from the U.S. government that it will look favorably on Chinese network-equipment companies’ acquisitions of U.S. technology concerns — an unlikely scenario. to be sure — Huawei will remain at the same impasse that stopped it cold in 2008.

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.

Why Microsoft Might Finally Acquire RIM

In the past, I have argued that a Microsoft acquisition of Research in Motion (RIM) was unlikely and unwise. Still, stuff happens in the space-time continuum — circumstances change, new dynamics come into play — that cause one to revisit earlier assumptions and to reconsider possible outcomes.

Such is the case for my thoughts about a union between Microsoft and RIM. I no longer view it as an unlikely scenario. Considering what has been happening in the industry, and in light of the daunting challenges Microsoft and RIM face in the mobile marketplace, a marriage of convenience, if not one of amorous intent, could be in the cards.

Let’s first consider Microsoft’s circumstances. The company has failed utterly and repeatedly in its bid to establish a dominant mobile platform. Its smartphone licensees are defecting in droves, running into the welcoming arms of Google’s Android proselytizers.

Microsoft’s share of the smartphone operating-system market is plummeting like sales of The Knack’s follow-up albums. Microsoft’s latest silver bullet in this market is called Windows Phone 7, but a technical preview of that software, now undergoing lab testing at wireless operators, suggests Microsoft hasn’t cracked the code. A consensus is building that Windows Phone 7 is several years too late and several hundred-hundred million dollars short of where it needs to be.

At the same time, Microsoft might be coming to the grim realization that it isn’t the consumer-electronics behemoth it sees when it looks into the Redmond funhouse mirror. Microsoft’s perception of itself, as a company that actually understands and intuitively anticipates the desires of consumers, has been unmasked as abject delusion.

Fortunately, Microsoft might be gradually coming around to reality, recognizing that it must play to its strengths, not to its weaknesses. Its strengths are in enterprise markets, from SMBs upward. That  has been increasingly obvious to many people, except to certain denizens of Microsoft’s boardroom and to a few habitues of its executive suites.

Regrettably, though, Microsoft’s mobile offerings for the enterprise, even in terms of integration with its own server-based products, are sorely lacking in nearly every respect. Microsoft has failed at mobile, and it has disregarded one of its key constituencies in the process.

Meanwhile, we have RIM. Despite not having quite the corporate breadth of, let’s say, Nokia, RIM has the benefit of market focus and an established enterprise franchise that won’t vanish overnight. RIM could remain independent and stay the course. It could retain a solid core of its enterprise customer base — especially in certain vertical markets that require the centralized control, compliance, security, and back-end integration that BlackBerry products and technologies provide — but it will see some market-share erosion at the hands of Google’s Android and even Apple’s iPhone.  If RIM had more resources at its disposal, it might be able mitigate that erosion, if not stop it.

RIM might not want to entertain a union with Microsoft — scuttlebutt suggests it has resisted Microsoft’s entreaties before — but it might be more amenable to considering a compelling proposal now. Watching what’s happening to Nokia — a death of a thousand cuts amid a river of piranha, after losing its strategic bearings in a predatory jungle — cannot be edifying viewing for the chieftains at RIM. At one time, Nokia had acquisitive interest in RIM, and now Nokia is fighting, apparently without success, to remain relevant.

To be sure, RIM would not accept just any Microsoft offer. Maybe now, though, it  would not slam the door on the right offer. What might that be, though, and would Microsoft be willing to entertain it?

With more than $37 billion (and counting) in cash reserves, Microsoft has the means at tis disposal to pull off a RIM purchase involving a combination of cash and stock. RIM now has a market capitalization of $29.58 billion. Microsoft would have to pay a premium of at least 30 percent, probably more, to complete a deal. A $40-billion offer, with the right inducements, might suffice.

Clearly, that’s a lot of coin. We’re not talking about a simple, low-cost tuck-in acquisition with a modest risk profile. This would be a big deal, larger than any acquisition Microsoft has done. Until now, Microsoft’s biggest deal involved aQuantive, an online-marketing concern it bought for more than $6 billion in 2007. If Microsoft were to buy RIM, it would involve a transaction orders of magnitude greater than its purchase of aQuantive.

Indeed, the acquisition of RIM would be a scary proposition for the potentates in Redmond. It would be an off-the-scale move, a sharp deviation from Microsoft’s past practices and strategic playbook. But, as the saying goes, desperate times call for desperate measures. Microsoft, I believe, is very desperate. It could immediately realize revenue and profitability from RIM’s product portfolio and business model, which are more lucrative by far than anything Microsoft could offer in the mobile realm. Synergies with complementary Microsoft products and services also ought to be taken into account.

Critics might scoff, perhaps justifiably, citing two factors that argue against a deal (aside from the prohibitive price tag, which we’ve already discussed). First, they would point to technology-integration issues, arguing that Microsoft would struggle to convert RIM’s BlackBerry platform to Windows.

My response: Who says that needs to happen? RIM already integrates well with Microsoft applications and back-end systems. and Microsoft has been rewriting its mobile operating systems, practically from scratch, recently. It’s starting all over again with Windows Phone 7, which is receiving mixed reviews.

What risk would Microsoft incur by replacing Windows Phone 7, which doesn’t have an installed base, with RIM’s BlackBerry OS? I don’t see powerful arguments against the move. The cost of the transaction is a bigger impediment.
But, one might argue, what about Microsoft’s hardware licensees? What would Microsoft do about them?

Perhaps you’ve noticed, but Microsoft is losing their formerly loyal patronage. HP has bought Palm, and will begin using webOS in its mobile devices, while HTC, Motorola, and scores of others increasingly are adopting Google’s Android as their smartphone operating system. I don’t see many smartphone vendors anxiously awaiting the release of Windows Phone 7. They’ve moved on, and Microsoft knows it. What’s more, Google is giving away Android to licensees, making it all the more difficult for Microsoft to sell its smartphone operating system to handset manufacturers. Google changed the business dynamics of the OS-licensing game.

More than at any time I can recall, Microsoft is considering the merits of an integrated platform, one that involves a tight fusing of device hardware, operating-system software, uniform user experience (including a sleek, universal browser), a focused developer program, and a unified means of delivering and monetizing applications and content.

I am not saying Microsoft will buy RIM. The price alone is enough to dissuade it from doing so, and there are valid concerns about corporate integration and assimilation, about being able to get everybody moving in the same direction, about precluding needless and distracting internecine warfare and turf battles. There are good reasons, in fact, not to do such a deal, only a few of which I’ve touched on here.

But there’s desperation in Redmond. It’s palpable. Microsoft views mobile success as absolutely integral to its continued growth and prosperity. But Microsoft is no longer confident of its golden touch, especially in mobile computing, and it is more inclined to look beyond its doors for answers. RIM already has the sort of business Microsoft would like to own, with the potential for further synergies stemming from integration with Microsoft’s enterprise product portfolio and its cloud-computing strategy.

Consequently, I must revise my earlier opinion. I can no longer dismiss the possibility of Microsoft acquiring RIM.

Rumor Mongers of Summer

It’s like being in a hall of mirrors this evening. But instead of being filled with mirrors, this hall echoes with furtive whispers about potential acquisitions involving networking-industry notables.

Some of these rumors are unadulterated disinformation, propagated for one reason or another by vested interests (of which, I can assure you, I am not one).

In fact, before I continue, allow me to make full disclosure (as opposed to full monty, which is another thing entirely) and issue an important disclaimer: I have no financial interest or investment position in any of the companies or rumors I am about to discuss. If you should be foolhardy enough to trade on uncorroborated information presented in this blog post, you should seek psychiatric and financial help forthwith.

I will tolerate a lot of nonsense around here, but I will not countenance anybody blaming me for the loss of hard-earned money on the stock market. Buyer beware — and a little paranoia probably doesn’t hurt.

Okay, with those formalities out of the way, let’s get started on the sudden wave of madness that overtook the Intertubes beginning this afternoon. The rumors have been rife, coming from all manner of cranks, dealers, freaks, and schemers. One of these rumors might even prove to be true, but don’t count on it.

At this moment, one can hear chatter of Dell interest in Brocade; of IBM interest in Juniper; of a technology integration involving F5 and Juniper that might result in something more; of HP acquiring Fortinet; of Arris talking with suitors; and of Huawei, not Nokia Siemens Networks (NSN), being the company Motorola is trying to interest in its telecommunications-equipment business.

Meanwhile, a few crazies even think Cisco is kicking RIM’s tires. In my view, Microsoft — once it shakes off the cold sweats and horrific flashbacks associated with its gruesome Kin debacle — is more likely to troop to Waterloo with checkbook in hand.

It’s the middle of summer, but the industry natives are restless for hot-and-heavy investment-banker action. The investment bankers are ready to put on a show, too. The question is, will vendors pull the trigger on a deal or deals?

We can only wait, watch, and listen.

Microsoft Stumbles in Mobile Murk

This post is something of an experiment. I want to write about Microsoft’s commitment  to the tablet PC and see whether anyone cares.

I did not witness Microsoft CEO Steve Ballmer’s opening address at his company’s Worldwide Partner Conference. Most reports suggest that Ballmer was typically loud and proud, proclaiming an imminent Microsoft revival in cloud computing, mobile operating systems, and tablet computing.

For now, in this particular post, I will limit by commentary to Microsoft’s plans for tablet computing. The other topics will be addressed at another time.

According to Ballmer, about 20 device manufacturers will unveil various shapes and sizes of slate and tablet computers based on Microsoft’s Windows 7 operating system before the year ends. Among the vendors churning out Windows 7 slates and tablets will be Acer Inc, Dell Inc, Samsung Electronics Co Ltd, Toshiba Corp, Sony Corp., and numerous other hardware OEMs.

Ballmer didn’t mention HP, which procured its own operating system for smartphones, slates, and tablets when it acquired Palm and webOS. Nonetheless, Reuters reported that HP’s logo appeared on a slide listing PC makers working on Windows-based devices.

It’s hard to know how much to invest in that tidbit, however, because Phil McKinney, CTO of HP’s personal systems group, was simultaneously explaining at VentureBeat’s MobileBeat 2010 conference in San Francisco that his company bought Palm to “control the end-to-end experience” delivered by HP’s mobile devices.

It’s possible, of course, that HP will offer tablets based on Windows 7 as alternatives to its webOS products. HP might do so just to keep its relationship with Microsoft from fraying. Even so, HP will put its primary focus on the technology it acquired from Palm. To suggest otherwise is to question why HP bought Palm, and to question the sanity of HP’s executive leadership. Clearly HP did not buy Palm just so that it could license Windows for HP’s mobile devices.

Putting aside the touchy HP question, does Microsoft have what it takes to compete in a space that has been authoritatively defined by the success of Apple’s iPad? Theoretically anything can happen, but past performance and current circumstances suggest that Microsoft will not become king of this particular castle.

Let’s enumerate the reasons. First, there are questions about the technical suitability of Windows 7 for various slates and tablets. Windows hasn’t performed elegantly on netbooks — I, for one, immediately replaced the sluggish Windows Vista with Ubuntu on a low-end netbook in my possession —  and it’s an open question as to how well Windows 7 will perform on touch-based slates and tablets. A second consideration is whether Microsoft can deliver an experience that will be uniformly satisfactory across a broad range of devices from multiple vendors. Finally, it’s not 1999 anymore, and Microsoft’s isn’t the only operating-system software that device OEMs can evaluate for their new products. Google’s Android and Chrome are available, as are many variations of Linux. Microsoft isn’t the only game in town for tablet manufacturers.

Moreover, and perhaps more to the point, Microsoft seems to lack the customer intimacy and market focus that would give it a fighting chance in any competition against a strong rival with a notable head start.

Does Microsoft understand its tablet customers? Does it know who they are, what they want, and why they might choose a Windows device over one from Google or Apple? I’m not sure Microsoft has those answers. The company still seems to be pitching its products at an indeterminate intersection between the enterprise and the consumer. The trouble is, that crossroads is enveloped in darkness and fog, indistinct and poorly defined. Meanwhile, Microsoft wanders in the market’s wilderness, failing to travel on either road.

As I said earlier, though, anything is possible. Microsoft could get back on track, and it could reverse its declining fortunes in mobile devices, starting with slates and tablets and then —  yes, suspension of disbelief is required for this illogical leap — with smartphones, too. That said, Microsoft didn’t do enough today to prefigure such a bright future. From were I stand, the horizon looks murky and ominous.

What’s Behind Microsoft’s Patent-Licensing Deal with HTC?

Jared Newman of PC World expounds on two possible scenarios behind Microsoft’s agreement to license unspecified patents to handset vendor HTC for use with that company’s Android-based smartphones.

Quoting directly from Newman’s article:

Here are two possible scenarios behind the HTC-Microsoft agreement:

The first is a conservative view. HTC’s phones may infringe on Microsoft patents. Rather than engage in two legal battles at once, HTC quickly agreed to license Microsoft’s patents before Redmond went after it. This spares HTC from another attack in court, while giving Microsoft a sort of insurance plan on HTC’s increasingly popular Android phones along with securing royalties.

The second possibility is more intriguing. Microsoft is throwing HTC a life preserver, letting the phone maker use Microsoft patents as a way to fend off Apple and its iPhone. I see it as an escape plan if HTC’s case against Apple goes south. If the possibility of a court-ordered injunction against HTC Android phones becomes real, HTC could simply say it’s using Microsoft’s patents instead, adjusting the design of its phones accordingly. This assumes that there’s overlap between Apple’s and Microsoft’s smartphone patents, and we don’t know because Microsoft didn’t get into details.

There is a third scenario, though, and it was mentioned in an IDG News Service item that quoted Francisco Jeronimo, an IDC research manager. To wit:

The fact that HTC, Samsung and Sony Ericsson also make Windows phones may make any discussions with Microsoft easier to resolve, according to Francisco Jeronimo, research manager at IDC. He said he wouldn’t be surprised if the vendors can get discounts related to how they are going to push devices based on Windows Phone 7.

Indeed, I think we have a winner.

While HTC can expect no mercy from Apple and its patent lawyers regarding alleged infringements occasioned by the former’s Google Android handsets, Microsoft is a different beast entirely. As I’ve said before, Google stands to make its mobile-platform gains at Microsoft’s expense, not at Apple’s. That’s because Google and Microsoft both count on patronage from handset vendors that license their mobile operating systems. Apple, as a vertically integrated player (providing operating system, handset, and online applications and content) doesn’t need handset vendors. It is its own handset vendor.

Consequently, Microsoft and Google are direct mobile competitors in a way that neither competes against Apple. In the battle between Microsoft and Google for the affections of handset vendors, it’s a zero-sum game. If a handset vendor, such as Motorola, defects from Microsoft to the Google camp, that’s lost business for Microsoft, and a lost service conduit to consumers.

What’s Microsoft to do? Some of the handset vendors — HTC, Samsung, Sony Ericsson — are hedging their bets, with feet in both camps. Microsoft wants to keep their business. To do so, it will be inclined to use every instrument and mechanism at its disposal, carrots and sticks. The threat of patent-infringement lawsuits might be a compelling stick to wield, just as sweet deals on patent licensing, with certain strings attached, might represent a tasty carrot.

It isn’t difficult to envision a Microsoft negotiating team making the following pitch to HTC: “You’re infringing on our patents with those Android-based handsets, and we intend to rectify the situation. Rather than pursue litigation that nobody wants, we’re willing to give you a great licensing deal . . . on the condition that you continue to develop and effectively market Microsoft-based handsets. What do you think?”

That’s the basic outline, anyway. The specifics of the deal might look a little different, but the essential idea is that Microsoft uses patents and litigation as bargaining chips to keep handset vendors in the Windows Phone 7 Series stable.

Palm Tries to Bluff, but It’s Too Late

In the latest rumor du jour, Lenovo is cited by Reuters as a potential acquirer of Palm. It really does seen the menu changes daily, and if you’re having trouble keeping up with the Palm-takeover speculation, feel free to join the bemused club.

Palm’s sales agents, Goldman Sachs and Frank Quatrrone’s Qatalyst Partners, have conducted themselves with all the discretion and subtlety of carnival barkers. It’s clear that their contrived, heavy-handed tactics — including a seemingly endless succession of leaks to the business press — have failed. If anything, Palm is in a worse situation today than when the investment bankers set up their medicine-show sales tent on the M&A midway.

One after another, like too-obvious suspects in a creaking murder-mystery potboiler, Palm’s rumored acquirers have removed themselves from suspicion, apparently miffed and a little mortified at having been used as plot decoys.

So now it’s down to Lenovo. Before that, companies suggested to have an acquisitive interest in Palm included Dell, Microsoft, Nokia, Google, RIM, Apple, HP, and Motorola. Then, the focus shifted to China and Taiwan, where Huawei and HTC were drafted into the action. Nobody went for the bait — not seriously enough, anyway.

I thought ZTE might be tempted to take a look, but its chairman told Reuters it was not approached by Palm or its agents. Maybe Palm and its agents that ZTE would step from the shadows and declare its interest.

Nonetheless, Palm, distressed and capsizing, is asking too high a price. The company’s advisers (investment bankers) were said to be seeking $1.2 billion for the company. It’s difficult to envision any of the dwindling prospective buyers paying anywhere near that price.

As a result of tepid buyer interest, Palm now is making sounds about staying the course as an independent entity. The company says it could get out of hardware and license its WebOS platform to handset vendors, along the lines of Google with Android and Microsoft with Windows Phone 7 Series or whatever else it decides to sell.

Palm isn’t serious, though. That move wouldn’t make much business sense, not with licensing as its exclusive business model, and not against two well-heeled players who utilize their mobile platforms as vehicles for bigger business ambitions.

Alas, Palm is bluffing when it says ti could just walk away from the M&A table. The problem is, it’s too late to bluff when all your cards are on the table, their faces fully exposed.

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.

RIM: Not Dead Yet

Let’s wait a bit longer before we summon the coroner to RIM’s bedside. The company isn’t in danger of imminent demise, by its own hand or as a result of the furious onslaughts of its competitors.

In fact, RIM isn’t even seriously ill. Could it benefit from a better diet, more exercise, and a makeover? Absolutely. But we could say that for many former high-fliers who’ve found life in the smart-phone market more difficult than it used to be.

The smartphone market is changing, heading into a period of intensifying competition in established markets and fresh opportunities in emerging markets. Based on the evidence presented yesterday, in the form of RIM’s latest quarterly results, we’d have to say that the company is doing better extending itself into new markets than it is at defending its old turf.

Revenue, earnings, and average sales price per handset failed to meet Wall Street’s expectations, but subscriber growth was robust and margins remain strong. Challenged by Motorola’s Android-based Droid at Verizon, where RIM derives more than 25 percent of its sales, the company seems to have a fight on its hands. The problem will be exacerbated as Apple’s iPhone moves into Verizon and other CDMA carriers.

These are new threats to RIM’s franchise, and the company will have to respond effectively, with new phones, new marketing, better operating-system software, and an improvement in the quality and quantity of applications that run on the BlackBerry. The challenges are considerable, but RIM knows what it’s up against. It’s gearing up for a fight, not for the undertaker.

A bright spot for the company is foreign sales, which appear to have compensated for its struggles in North America. Clearly, foreign sales are a double-edged sword. Many developing markets, where RIM is placing significant emphasis, will offer lower average sales prices and slimmer margins than those to which RIM has become accustomed in North America.

RIM will have to be careful with its brand, too, both in emerging and developed markets. What is RIM’s niche? What are the BlackBerry’s defining characteristics and its unique identity? RIM knew the answer in the past — the BlackBerry was the enterprise-friendly, mobile-email kingpin — but the company is going through a mid-life crisis that must not become a protracted period of introspection.

Tacking Apple on its own terms will be futile — RIM isn’t a consumer-oriented company, despite its best efforts — and it’s doubtful that RIM can match Google’s geek appeal. I still think the enterprise, particularly certain vertical markets, is a strong franchise for RIM, but the company will have to do more than mount a rearguard defense if it wishes to meet the market’s expectations for growth.

As we look ahead, RIM faces many questions, and definitive answers aren’t yet available. Keep an eye on the company, by all means, but it’s too early for a funeral procession. Throughout its history, RIM has repeatedly refuted its doomsayers.

Google’s China Problems Cause Motorola to Explore Smartphone Search Alternatives

Uncertain about how Google’s dispute with China will be resolved, technology partners who license Google’s search and other online services are making contingency plans for the Chinese market.

Given the robust growth of China’s mobile marketplace, it’s no surprise that handset vendors are at the front of the queue. Motorola, which licenses Google Android and offers other Google services on its new smartphones, established a search partnership with Baidu earlier this year and now it’s added one with Microsoft, according to a report in the Wall Street Journal.

Pursuant to terms of the deal, Motorola will offer Microsoft’s Bing search and map capabilities on its smartphones in China beginning this quarter.

When Google first devised its strategy for Android, I’m sure it didn’t envision a future in which its handset partners bundled Bing as their mobile search engine. Then again, I’m sure Google didn’t anticipate that its relationship with China would become so strained.