Category Archives: Tablets

Amazon-RIM: Summer Reunion?

Think back to last December, just before the holidays. You might recall a Reuters report, quoting “people with knowledge of the situation,” claiming that Research in Motion (RIM) rejected takeover propositions from Amazon.com and others.

The report wasn’t clear on whether the informal discussions resulted in any talk of price between Amazon and RIM, but apparently no formal offer was made. RIM, then still under the stewardship of former co-CEOs Jim Balsillie and Mike Lazaridis, reportedly preferred to remain independent and to address its challenges alone.

I Know What You Discussed Last Summer

Since then, a lot has happened. When the Reuters report was published — on December 20, 2011 — RIM’s market value had plunged 77 percent during the previous year, sitting then at about $6.8 billion. Today, RIM’s market capitalization is $3.7 billion. What’s more, the company now has Thorsten Heins as its CEO, not Balsillie and Lazardis, who were adamantly opposed to selling the company. We also have seen recent reports that IBM approached RIM regarding a potential acquisition of the Waterloo, Ontario-based company’s enterprise business, and rumors have surfaced that RIM might sell its handset business to Amazon or Facebook.

Meanwhile, RIM’s prospects for long-term success aren’t any brighter than they were last winter, and activist shareholders, not interested in a protracted turnaround effort, continue to lobby for a sale of the company.

As for Amazon, it is said to be on the cusp of entering the smartphone market, presumably using a forked version of Android, which is what it runs on the Kindle tablet.  From the vantage point of the boardroom at Amazon, that might not be a sustainable long-term plan. Google is looking more like an Amazon competitor, and the future trajectory of Android is clouded by Google’s strategic considerations and by legal imbroglios relating to patents. Those presumably were among the reasons Amazon approached RIM last December.

Uneasy Bedfellows

It’s no secret that Amazon and Google are uneasy Android bedfellows. As Eric Jackson wrote just after the Reuters story hit the wires:

Amazon has never been a big supporter of Google’s Android OS for its Kindle. And Google’s never been keen on promoting Amazon as part of the Android ecosystem. It seems that both companies know this is just a matter of time before each leaves the other.

Yes, there’s some question as to how much value inheres in RIM’s patents. Estimates on their worth are all over the map. Nevertheless, RIM’s QNX mobile-operating system could look compelling to Amazon. With QNX and with RIM’s patents, Amazon would have something more than a contingency plan against any strategic machinations by Google or any potential litigiousness by Apple (or others).  The foregoing case, of course, rests on the assumption that QNX, rechristened BlackBerry 10, is as far along as RIM claims. It also rests on the assumption that Amazon wants a mobile platform all its own.

It was last summer when Amazon reportedly made its informal approach to RIM. It would not be surprising to learn that a reprise of discussions occurred this summer. RIM might be more disposed to consider a formal offer this time around.

Lessons for Cisco in Cius Failure

When news broke late last week that Cisco would discontinue development of its Android-based Cius, I remarked on Twitter that it didn’t take a genius to predict the demise of  Cisco’s enterprise-oriented tablet. My corroborating evidence was an earlier post from yours truly — definitely not a genius, alas — predicting the Cius’s doom.

The point of this post, though, will be to look forward. Perhaps Cisco can learn an important lesson from its Cius misadventure. If Cisco is fortunate, it will come away from its tablet failure with valuable insights into itself as well as into the markets it serves.

Negative Origins

While I would not advise any company to navel-gaze obsessively, introspection doesn’t hurt occasionally. In this particular case, Cisco needs to understand what it did wrong with the Cius so that it will not make the same mistakes again.

If Cisco looks back in order to look forward, it will find that it pursued the Cius for the wrong reasons and in the wrong ways.  Essentially, Cisco launched the Cius as a defensive move, a bid to arrest the erosion of its lucrative desktop IP-phone franchise, which was being undermined by unified-communications competition from Microsoft as well as from the proliferation of mobile devices and the rise of the BYOD phenomenon. The IP phone’s claim to desktop real estate was becoming tenuous, and Cisco sought an answer that would provide a new claim.

In that respect, then, the Cius was a reactionary product, driven by Cisco’s own fears of desktop-phone cannibalization rather than by the allure of a real market opportunity. The Cius reeked of desperation, not confidence.

Hardware as Default

While the Cius’ genetic pathology condemned it at birth, its form also hastened its demise. Cisco now is turning exclusively to software (Jabber and WebEx) as answers to enterprise-collaboration conundrum, but it could have done so far earlier, before the Cius was conceived. By the time Cisco gave the green light to Cius, Apple’s iPhone and iPad already had become tremendously popular with consumers, a growing number of whom were bringing those devices to their workplaces.

Perhaps Cisco’s hubris led it to believe that it had the brand, design, and marketing chops to win the affections of consumers. It has learned otherwise, the hard way.

But let’s come back to the hardware-versus-software issue, because Cisco’s Cius setback and how the company responds to it will be instructive, and not just within the context of its collaboration products.

Early Warning from a Software World

As noted previously, Cisco could have gone with a software-based strategy before it launched the Cius. It knew where the market was heading, and yet it still chose to lead with hardware. As I’ve argued before, Cisco develops a lot of software, but it doesn’t act (or sell) like software company. It can sell software, but typically only if the software is contained inside, and sold as, a piece of hardware. That’s why, I believe, Cisco answered the existential threat to its IP-phone business with the Cius rather than with a genuine software-based strategy. Cisco thinks like a hardware company, and it invariably proposes hardware products as reflexive answers to all the challenges it faces.

At least with its collaboration products, Cisco might have broken free of its hard-wired hardware mindset. It remains to be seen, however, whether the deprogramming will succeed in other parts of the business.

In a world where software is increasingly dominant — through virtualization, the cloud, and, yes, in networks — Cisco eventually will have to break its addiction to the hardware-based business model. That won’t be easy, not for a company that has made its fortune and its name selling switches and routers.

Fear Compels HP and Dell to Stick with PCs

For better or worse, Hewlett-Packard remains committed to the personal-computer business, neither selling off nor spinning off that unit in accordance with the wishes of its former CEO. At the same, Dell is claiming that it is “not really a PC company,” even though it will continue to sell an abundance of PCs.

Why are these two vendors staying the course in a low-margin business? The popular theory is that participation in the PC business affords supply-chain benefits such as lower costs for components that can be leveraged across servers. There might be some truth to that, but not as much as you might think.

At the outset, let’s be clear about something: Neither HP nor Dell manufactures its own PCs. Manufacture of personal computers has been outsourced to electronics manufacturing services (EMS) companies and original design manufacturers (ODMs).

Growing Role of the ODM

The latter do a lot more than assemble and manufacture PCs. They also provide outsourced R&D and design for OEM PC vendors.  As such, perhaps the greatest amount of added value that a Dell or an HP brings to its PCs is represented by the name on the bezel (the brand) and the sales channels and customer-support services (which also can be outsourced) they provide.

Major PC vendors many years ago decided to transfer manufacturing to third-party companies in Taiwan and China. Subsequently, they also increasingly chose to outsource product design. As a result, ODMs design and manufacture PCs. Typically ODMs will propose various designs to the PC vendors and will then build the models the vendors select. The PC vendor’s role in the design process often comes down to choosing the models they want, sometimes with vendor-specified tweaks for customization and market differentiation.

In short, PC vendors such as HP and Dell don’t really make PCs at all. They rebrand them and sell them, but their involvement in the actual creation of the computers has diminished markedly.

Apple Bucks the Trend 

At this point, you might be asking: What about Apple? Simply put, unlike its PC brethren, Apple always has insisted on controlling and owning a greater proportion of the value-added ingredients of its products.

Unlike Dell and HP, for example, Apple has its own operating system for its computers, tablets, and smartphones. Also unlike Dell and HP, Apple did not assign hardware design to ODMs. In seeking costs savings from outsourced design and manufacture, HP and Dell sacrificed control over and ownership of their portable and desktop PCs. Apple wagered that it could deliver a premium, higher-cost product with a unique look and feel. It won the bet.

A Spurious Claim?

Getting back to HP, does it actually derive economies of scale for its server business from the purchase of PC components in the supply chain? It’s possible, but it seems unlikely. The ODMs with which HP contracts for design and manufacture of its PCs would get a much better deal on component costs than would HP, and it’s now standard practice for those ODMs to buy common components that can be used in the manufacture and assembly of products for all their brand-name OEM customers. It’s not clear to me what proportion of components in HP’s PCs are supplied and integrated by the ODMs, but I suspect the percentage is substantial.

On the whole, then, HP and Dell might be advancing a spurious argument about remaining in the PC business because it confers savings on the purchase of components that can used in servers.

Diagnosing the Addiction

If so, then, why would HP and Dell remain in the PC game? Well, the answer is right there on the balance sheets of both companies. Despite attempts at diversification, and despite initiatives to transform into the next IBM, each company still has a revenue reliance on — perhaps even an addiction to — PCs.

According to calculations by Sterne Agee analyst Shaw Wu, about 70 to 75 percent of Dell revenue is connected to the sale of PCs. (Dell derived about 43 percent of its revenue directly from PCs in its most recent quarter.) In relative terms, HP’s revenue reliance on PCs is not as great — about 30% of direct revenue — but, when one considers the relationship between PCs and related related peripherals, including printers, the company’s PC exposure is considerable.

If either company were to exit the PC business, shareholders would react adversely. The departure from the PC business would leave a gaping revenue hole that would not be easy to fill. Yes, relative margins and profitability should improve, but at the cost of much lower channel and revenue profiles. Then there is the question of whether a serious strategic realignment would actually be successful. There’s risk in letting go of a bird in hand for one that’s not sure to be caught in the bush.

ODMs Squeeze Servers, Too

Let’s put aside, at least for this post, the question of whether it’s good strategy for Dell and HP to place so much emphasis on their server businesses. We know that the server business faces high-end disruption from ODMs, which increasingly offer hardware directly to large customers such as cloud service providers, oil-and-gas firms,  and major government agencies. The OEM (or vanity) server vendors still have the vast majority of their enterprise customers as buyers, but it’s fair to wonder about the long-term viability of that market, too.

As ODMs take on more of the R&D and design associated with server-hardware production, they must question just how much value the vanity OEM vendors are bringing to customers. I think the customers and vendors themselves are asking the same questions, because we’re now seeing a concerted effort in the server space by vendors such as Dell and HP to differentiate “above the board” with software and system innovations.

Fear Petrifies

Can HP really become a dominant purveyor of software and services to enterprises and cloud service providers? Can Dell be successful as a major player in the data center? Both companies would like to think that they can achieve those objectives, but it remains to be seen whether they have the courage of their convictions. Would they bet the business on such strategic shifts?

Aye, there’s the rub. Each is holding onto a commoditized, low-margin PC business not because they like being there, but because they’re afraid of being somewhere else.

Can Dell Think Outside the Box?

Michael Dell has derived great pleasure from HP’s apparent decision to spin off its PC business. As he has been telling the Financial Times and others recently, Dell (the company) believes having a PC business will be a critical differentiator as it pulls together and offers complete IT solutions to enterprise, service-provider, and SMB customers.

Hardware Edge?

Here’s what Dell had to say to the Financial Times about his company’s hardware-based differentiation:

 “We are very distinct from some of our competitors. We believe the devices and the hardware still matter as part of the complete, end-to-end solution . . . . Think about the scale economies in our business. As a company spins off its PC business, it goes from one of the top buyers in the world of disk drives and processors and memory chips to not being one of the top five. And that raises the cost of making servers and storage products. Ultimately we believe that presents an enormous opportunity for us and you can be sure we are going to seize it.”

Well, perhaps. I don’t know the intimate details of Dell’s PC economies of scale or its server-business costs, nor do I know what HP’s server-business costs will be when (and if) it eventually spins off its PC business. What I do know, however, is that IBM doesn’t seem to have difficulty competing and selling servers as integral parts of its solutions portfolio; nor does Cisco seem severely handicapped as it grows its server business without a PC product line.

Consequences of Infatuation

I suspect there’s more to Dell’s attachment to PCs than pragmatic dollars-and-cents business logic. I think Michael Dell likes PCs, that he understands them and their business more than he understands the software or services market. If I am right in those assumptions, they don’t suggest that Dell necessarily is wrong to stay in the PC business or that it will fail in selling software and services.

Still, it’s a company mindset that could inhibit Dell’s transition to a world driven increasingly by the growing commercial influence of cloud-service providers, the consumerizaton of IT, the proliferation of mobile devices, and the value inherent in software that provides automation and intelligent management of “dumb” industry-standard hardware boxes.

To be clear, I am not arguing that the “PC is dead.” Obviously, the PC is not dead, nor is it on life support.

In citing market research suggesting that two billion of them will be sold in 2014, Michael Dell is right to argue that there’s still strong demand for PCs worldwide.  While tablets are great devices for the consumption of content and media, they are not ideal devices for creating content — such as writing anything longer than a brief email message, crafting a presentation, or working on a spreadsheet, among other things.  Although it’s possible many buyers of tablets don’t create or supply content, and therefore have no need for a keyboard-equipped PC, I tend to think there still is and will be a substantial market for devices that do more than facilitate the passive consumption of information and entertainment.

End . . . or Means to an End?

Notwithstanding the PC market’s relative health, the salient question here is whether HP or Dell can make any money from the business of purveying them. HP decided it wanted the PC’s wafer-thin margins off its books as it drives a faster transition to software and services, whereas Dell has decided that it can live with the low margins and the revenue infusion that accompanies them. In rationalizing that decision, Michael Dell has said that “software is great, but you have to run it on something.”

There’s no disputing that fact, obviously, but I do wonder whether Dell is philosophically disposed to think outside the box, figuratively and literally. Put another way, does Dell see hardware as a container or receptacle of primary value, or does it see it as a necessary, relatively low-value conduit through which higher-value software-based services will increasingly flow?

I could be wrong, but Michael Dell still seems to see the world through the prism of the box, whether it be a server or a PC.

For me, Dell’s decision to maintain his company’s presence in PCs is beside the point. What’s important is whether he understands where the greatest business value will reside in the years to come, and whether he and his company can remain focused enough to conceive and execute a strategy that will enable them to satisfy evolving customer requirements.

Intel-Microsoft Mobile Split All Business

In an announcement today, Google and Intel said they would work together to optimize future versions of the  Android operating system for smartphones and other mobile devices powered by Intel chips.

It makes good business sense.

Pursuit of Mobile Growth

Much has been made of alleged strains in the relationship between the progenitors of Wintel — Microsoft’s Windows operating system and Intel’s microprocessors — but business partnerships are not affairs of the heart; they’re always pragmatic and results oriented. In this case, each company is seeking growth and pursuing its respective interests.

I don’t believe there’s any malice between Intel and Microsoft. The two companies will combine on the desktop again in early 2012, when Microsoft’s Windows 8 reaches market on PCs powered by Intel’s chips as well as on systems running the ARM architecture.

Put simply, Intel must pursue growth in mobile markets and data centers. Microsoft must similarly find partners that advance its interests.  Where their interests converge, they’ll work together; where their interests diverge, they’ll go in other directions.

Just Business

In PCs, the Wintel tandem was and remains a powerful industry standard. In mobile devices, Intel is well behind ARM in processors, while Microsoft is well behind Google and Apple in mobile operating systems. It makes sense that Intel would want to align with a mobile industry leader in Google, and that Microsoft would want to do likewise with ARM. A combination of Microsoft and Intel in mobile computing would amount to two also-rans combining to form . . . well, two also-rans in mobile computing.

So, with Intel and Microsoft, as with all alliances in the technology industry, it’s always helpful to remember the words of Don Lucchesi in The Godfather: Part III: “It’s not personal, it’s just business.”

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.

Limits to Consumerization of IT

At GigaOm, Derrick Harris is wondering about the limits of consumerization of IT for enterprise applications. It’s a subject that warrants consideration.

My take on consumerization of IT is that it makes sense, and probably is an unstoppable force, when it comes to the utilization of mobile hardware such as smartphones and tablets (the latter composed primarily and almost exclusively of iPads these days).

This is a mutually beneficial arrangement. Employees are happier, not to mention more productive and engaged, when using their own computing and communications devices. Employers benefit because they don’t have to buy and support mobile devices for their staff.  Both groups win.

Everybody Wins

Moreover, mobile device management (MDM) and mobile-security suites, together with various approaches to securing applications and data, mean that the security risks of allowing employees to bring their devices to work have been sharply mitigated. In relation to mobile devices, the organizational rewards of IT consumerization — greater employee productivity, engaged and involved employees, lower capital and operating expenditures — outweigh the security risks, which are being addressed by a growing number of management and security vendors who see a market opportunity in making the practice safer.

In other areas, though, the case in favor of IT consumerization is not as clear. In his piece, Harris questions whether VMware will be successful with a Dropbox-like application codenamed Project Octopus. He concludes that those already using Dropbox will be reluctant to swap it for a an enterprise-sanctioned service that provides similar features, functionality, and benefits. He posits that consumers will want to control the applications and services they use, much as they determine which devices they bring to work.

Data and Applications: Different Proposition

However, the circumstances and the situations are different. As noted above, there’s diminishing risk for enterprise IT in allowing employees to bring their devices to work.  Dropbox, and consumer-oriented data-storage services in general, is an entirely different proposition.

Enterprises increasingly have found ways to protect sensitive corporate data residing on and being sent to and from mobile devices, but consumer-oriented products like Dropbox do an end run around secure information-management practices in the enterprises and can leave sensitive corporate information unduly exposed. The enterprise cost-benefit analysis for a third-party service like Dropbox shows risks outweighing potential rewards, and that sets up a dynamic where many corporate IT departments will mandate and insist upon company-wide adoption of enterprise-class alternatives.

Just as I understand why corporate minders acceded to consumerization of IT in relation to mobile devices, I also fully appreciate why corporate IT will draw the line at certain types of consumer-oriented applications and information services.

Consumerization of IT is a real phenomenon, but it has its limits.

Clarity on HP’s PC Business

Hewlett-Packard continues to contemplate how it should divest its Personal Systems Group (PSG), a $40-billion business dedicated overwhelmingly to sales of personal computers.  Although HP hasn’t communicated as effectively as it should have done, current indications are that the company will spin off its PC business as a standalone entity rather than sell it to a third party.

That said, the situation remains fluid. HP might yet choose to sell the business, even though Todd Bradley, PSG chieftain, seems adamant that it should be a separate company that he should lead. HP hasn’t been consistent or predictable lately on mobile hardware or PCs, though, so nothing is carved in stone.

Not a PC Manufacturer

No matter what it decides to do, the media should be clearer on exactly what HP will be spinning off or selling. I’ve seen it misreported repeatedly that HP will be selling or spinning off its “PC manufacturing arm” or its “PC manufacturing business.”

That’s wrong. As knowledgeable observers know, HP doesn’t manufacture PCs. Increasingly, it doesn’t even design them in any meaningful way, which is more than partly why HP finds itself in the current dilemma of deciding whether to spin off or sell a wafer-thin-margin business.

HP’s PSG business brands, markets, and sells PCs. But — and this is important to note — it doesn’t manufacture them. The manufacturing of the PCs is done by original design manufacturers (ODMs), most of which originated in Taiwan but now have operations in China and many others countries. These ODMs increasingly provide a lot more than contract manufacturing. They also provide design services that are increasingly sophisticated.

Brand is the Value

A dirty little secret your favorite PC vendor (Apple excluded) doesn’t want you to know is that it doesn’t really do any PC innovation these days. The PC-creation process today operates more along these lines: brand-name PC vendor goes to Taiwan to visit ODMs, which demonstrate a range of their latest personal-computing prototypes, from which the brand-name vendor chooses some designs and perhaps suggests some modifications. Then the products are put through the manufacturing process and ultimately reach market under the vendor’s brand.

That’s roughly how it works. HP doesn’t manufacture PCs. It does scant PC design and innovation, too. If you think carefully about the value that is delivered in the PC-creation process, HP provides its brand, its marketing, and its sales channels. Its value — and hence its margins — are dependent on the premiums its brand can bestow and the volumes its channel can deliver . Essentially, an HP PC is no different from any other PC designed and manufactured by ODMs that provide PCs for the entire industry.

HP and others allowed ODMs to assume a greater share of PC value creation — far beyond simple manufacturing — because they were trying to cut costs. You might recall that cost cutting was  a prominent feature of the lean-and-mean Mark Hurd regime at HP. As a result, innovation suffered, and not just in PCs.

Inevitable Outcome

In that context, it’s important to note that HP’s divestment of its low-margin PC business, regardless of whether it’s sold outright or spun off as a standalone entity, has been a long time coming.

Considering the history and the decisions that were made, one could even say it was inevitable.

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.

Why RIM Takeover Palaver is Premature

Whether it is experiencing good times or bad times, Research in Motion (RIM) always seems to be perceived as an acquisition target.

When its fortunes were bright, RIM was rumored to be on the acquisitive radar of a number of vendors, including Nokia, Cisco, Microsoft, and Dell. Notwithstanding that some of those vendors also have seen their stars dim, RIM faces a particularly daunting set of challenges.

Difficult Circumstances

Its difficult circumstances are reflected in its current market capitalization. Prior to trading today, RIM had a market capitalization of $11.87 billion; at the end of August last year, it was valued at $23.27 billion. While some analysts argue that RIM’s stock has been oversold and that the company now is undervalued, others contend that RIM’s valuation might have further to fall. In the long run, unless it can arrest its relative decline in smartphones and mobile computing, RIM appears destined for continued hardship.

Certainly, at least through the end of this year — and until we see whether its QNX-based smartphones represent compelling alternatives to Apple’s next crop of iPhones and the succeeding wave of Android-based devices from Google licensees — RIM does not seem to have the wherewithal to reverse its market slide.

All of which brings us to the current rumors about RIM and potential suitors.

Dell’s Priorities Elsewhere

Dell has been mentioned, yet again, but Dell is preoccupied with other business. In an era of IT consumerization, in which consumers increasingly are determining which devices they’ll use professionally and personally, Dell neither sees itself nor RIM as having the requisite consumer cache to win hearts and minds, especially when arrayed against some well-entrenched industry incumbents. Besides, as noted above, Dell has other priorities, most of which are in the data center, which Dell sees not only as an enterprise play but also — as cloud computing gains traction — as a destination for the applications and services of many of its current SMB customers.

In my view, Dell doesn’t feel that it needs to own a mobile operating system. On the mobile front, it will follow the zeitgeist of IT consumerization and support the operating systems and device types that its customers want. It will sell Android or Windows Phone devices to the extent that its customers want them (and want to buy them from Dell), but I also expect the company to provide heterogeneous mobile-management solutions.

Google Theory

Google also has been rumored to be a potential acquirer of RIM. Notable on this front has been former Needham & Company and ThinkEquity analyst Anton Wahlman, who wrote extensively on why he sees Google as a RIM suitor. His argument essentially comes down to three drivers: platform convergence, with Google’s Android 4.0 and RIM’s QNX both running on the same Texas Instruments OMAP 4400 series platform; Google’s need for better security to facilitate its success in mobile-retail applications featuring Near-Field Communications (NFC); and Google’s increasing need to stock up on mobile patents and intellectual property as it comes under mounting litigious attack.

They are interesting data points, but they don’t add up to a Google acquisition of RIM.

Convergence of hardware platforms doesn’t lead inexorably to Google wanting to buy RIM. It’s a big leap of logic — and a significant leap of faith for stock speculators — to suppose that Google would see value in taking out RIM just because they’re both running the same mobile chipset. On security, meanwhile, Google could address any real or perceived NFC issues without having to complete a relatively costly and complex acquisition of a mobile-OS competitor. Finally, again, Google could address its mobile-IT deficit organically, inorganically, and legally in ways that would be neither as complicated nor as costly as having to buy RIM, a deal that would almost certainly draw antitrust scrutiny from the Department of Justice (DoJ), the Securities and Exchange Commission (SEC), and probably the European Union (EU).

Google doesn’t need those sorts of distractions, not when it’s trying to keep a stable of handset licensees happy while also attempting to portray itself as the well-intentioned victim in the mobile-IP wars.

Microsoft’s Wait

Finally, back again as a rumored acquirer of RIM, we find Microsoft. At one time, a deal between the companies might have made sense, and it might make sense again. Now, though, the timing is inauspicious.

Microsoft has invested significant resources in a relationship with Nokia, and it will wait to see whether that bet pays off before it resorts to a Plan B. Microsoft has done the math, and it figures as long as Nokia’s Symbian installed base doesn’t hemorrhage extravagantly, it should be well placed to finally have a competitive entry in the mobile-OS derby with Windows Phone. Now, though, as Nokia comes under attack from above (Apple and high-end Android smartphones) and from below (inexpensive feature phones and lower-end Android smartphones), there’s some question as to whether Nokia can deliver the market pull that Microsoft anticipated. Nonetheless, Microsoft isn’t ready to hit the panic button.

Not Going Anywhere . . . This Year

Besides, as we’ve already deduced, RIM isn’t going anywhere. That’s not just because the other rumored players aren’t sufficiently interested in making the buy, but also because RIM’s executive team and its board of directors aren’t ready to sell.  Despite the pessimism of outside observers, RIM remains relatively sanguine about its prospects. The feeling on campus is that the QNX platform will get RIM back on track in 2012. Until that supposition is validated or refuted, RIM will not seek strategic alternatives.

This narrative will play out in due course.  Much will depend on the market share and revenue Microsoft and Windows Phone derive from Nokia. If that relationship runs aground, Microsoft — which really feels it must succeed in mobile and cloud to ensure a bright future — will look for alternatives. At the same time, RIM will be determining whether QNX is the software tonic for its corporate regeneration. If  the cure takes, RIM won’t be in need of external assistance. If QNX is no panacea, and RIM loses further ground to Apple and the Google Android camp, then it will be more receptive to outside interests.

Those answers will come not this year, but in 2012.

Is Li-Fi the Next Wi-Fi?

The New Scientist published a networking-related article last week that took me back to my early days in the industry.

The piece in question dealt with Visible Light Communication (VLC), a form of light-based networking in which data is encoded and transmitted by varying the rate at which LEDs flicker on and off, all at intervals imperceptible to the human eye.

Also called Li-Fi — yes, indeed, the marketers are involved already — VLC is being positioned for various applications, including those in hospitals, on aircraft, on trading floors, in automotive car-to-car and traffic-control scenarios, on trade-show floors, in military settings,  and perhaps even in movie theaters where VLC-based projection might improve the visual acuity of 3D films. (That last wacky one was just something that spun off the top of my shiny head.)

From FSO to VLC

Where I don’t see VLC playing a big role, certainly not as a replacement for Wi-Fi or its future RF-based successors, is in home networking. VLC’s requirement for line of sight will make it a non-starter for Wi-Fi scenarios where wireless networking must traverse floors, walls, and ceilings. There are other room-based applications for VLC in the home, though, and those might work if device (PC, tablet, mobile phone), display,  and lighting vendors get sufficiently behind the technology.

I feel relatively comfortable pronouncing an opinion on this technology. The idea of using light-based networking has been with us for some time, and I worked extensively with infrared and laser data-transmission technologies back in the early to mid 90s. Those were known as free-space optical (FSO) communications systems, and they fulfilled a range of niche applications, primarily in outdoor point-to-point settings. The vendor for which I worked provided systems for campus deployments at universities, hospitals, museums, military bases, and other environments where relatively high-speed connectivity was required but couldn’t be delivered by trenched fiber.

The technology mostly worked . . . except when it didn’t. Connectivity disruptions typically were caused by what I would term “transient environmental factors,” such as fog, heavy rain or snow, as well as dust and sand particulate. (We had some strange experiences with one or two desert deployments). From what I can gather, the same parameters generally apply to VLC systems.

Will that be White, Red, or Resonant Cavity?

Then again, the performance of VLC systems goes well beyond what we were able to achieve with FSO in the 90s. Back then, laser-based free-space optics could deliver maximum bandwidth of OC3 speeds (144Mbps), whereas the current high-end performance of VLC systems reaches transmission rates of 500Mbps. An article published earlier this year at theEngineer.com provides an overview of VLC performance capabilities:

 “The most basic form of white LEDs are made up of a bluish to ultraviolet LED surrounded by a yellow phosphor, which emits white light when stimulated. On average, these LEDs can achieve data rates of up to 40Mb/sec. Newer forms of LEDs, known as RGBs (red, green and blue), have three separate LEDs that, when lit at the same time, emit a light that is perceived to be white. As these involve no delay in stimulating a phosphor, data rates in RGBs can reach up to 100Mb/sec.

But it doesn’t stop there. Resonant-cavity LEDs (RCLEDs), which are similar to RGB LEDs and are fitted with reflectors for spectral clarity, can now work at even higher frequencies. Last year, Siemens and Berlin’s Heinrich Hertz Institute achieved a data-transfer rate of 500Mb/sec with a white LED, beating their earlier record of 200Mb/sec. As LED technology improves with each year, VLC is coming closer to reality and engineers are now turning their attention to its potential applications.”

I’ve addressed potential applications earlier in this post, but a sage observation is offered in theEngineer.com piece by Oxford University’s Dr. Dominic O’Brien, who sees applications falling into two broad buckets: those that “augment existing infrastructure,” and those in which  visible networking offers a performance or security advantage over conventional alternatives.

Will There Be Light?

Despite the merit and potential of VLC technology, its market is likely to be limited, analogous to the demand that developed for FSO offerings. One factor that has changed, and that could work in VLC’s favor, is RF spectrum scarcity. VLC could potentially help to conserve RF spectrum by providing much-needed bandwidth; but such a scenario would require more alignment and cooperation between government and industry than we’ve seen heretofore. Curb your enthusiasm accordingly.

The lighting and display industries have a vested interest in seeing VLC prosper. Examining the membership roster of the Visible Light Communications Consortium (VLCC), one finds it includes many of Japan’s big names in consumer electronics. Furthermore, in its continuous pursuit of new wireless technologies, Intel has taken at least a passing interest in VLC/Li-Fi.

If the vendor community positions it properly, standards cohere, and the market demands it, perhaps there will be at least some light.