Avaya Executive Departures, Intrigue Continue

Like many other vendors, Avaya showed off its latest virtualized wares at VMworld in San Francisco this week. While putting its best face forward at VMware’s annual conference and exhibition, Avaya also experienced further behind-the-scenes executive intrigue.

Sources report that Carelyn Monroe, VP of Global Partner Support Services, resigned from the company last Friday. Monroe is said to have reported to Mike Runda, SVP and president of Avaya Client Services. She joined Avaya in 2009, coming over from Nortel.

Meanwhile, across the pond, Avaya has suffered another defection. James Stevenson, described as a “business-services expert” in a story published online by CRN ChannelWeb UK, has left Avaya to become director of operations for reseller Proximity Communications.

Prior to the departures of Monroe and Stevenson, CFO Anthony Massetti bolted for the exit door immediately after Avaya’s latest inauspicious quarterly results were filed with the Securities and Exchange Commission (SEC). Massetti was replaced by Dave Vellequette, who has a long history of of working alongside Avaya CEO Kevin Kennedy.

In some quarters, Kennedy’s reunion with Vellequette is being construed as a circle-the-wagons tactic in which the besieged CEO attempts to surround himself with steadfast loyalists. It probably won’t be long before we see a “Hitler parody” on YouTube about Avaya’s plight (like this one on interoperability problems with unified communications).

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Avaya’s Struggles Slip Under Industry Radar

As public companies, Nokia and Research In Motion have drawn considerable press coverage relating to their ongoing struggles. Nary a day passes without a barrage of articles on the latest setbacks and travails affecting both companies.  Some of the coverage is decidedly morbid, even ghoulish, with death-watch speculation on how soon one company or the other might be sold off or otherwise expire. 

Perhaps because it is private, Avaya has escaped such macabre notice from the mainstream business media and the industry trade press.  Nonetheless, speculation has arisen as to whether the company, richly backed by private-equity sponsors Silver Lake Partners and TPG Capital, has a future any brighter than the dim prospects attributed to RIM and Nokia. 

Abandoned IPO Hope  

At this particular juncture, the prospect of an IPO, which once seemed tantalizingly close for Avaya, seems a remote and forlorn hope.  As I’ve noted on a couple occasions before now, Avaya’s IPO was scuppered not only by its wan growth profile, but also by industry and macroeconomic headwinds that show no sign of abating. 

If no IPO is in the cards, what happens to the company? While at least one blogger has speculated that bankruptcy could be an option, I suspect the deep-pocketed private-equity sponsors might have no choice but to prop up Avaya until a buyer can be found. Given Avaya’s tepid growth prospects, its daunting long-term debt overhang, a recent weakening of channel sales, and stiffening competition across its product portfolio, the company is unlikely to find itself in the driver’s seat in any negotiations with a prospective buyer, presuming one can be found.  

Stranded in Purgatory 

Meanwhile, Avaya stakeholders, including the company’s employees, are mired in a purgatory. Sources have suggested the company will consolidate facilities and further reduce headcount, but no major announcements have been made on either front.

With an IPO seemingly off the table as an exit alternative, all eyes turn to the company’s private-equity sponsors. One potential delaying tactic, which we could see before the end of this calendar year, is the potential departure of president and CEO Kevin Kennedy, who has served in that dual capacity since January 2009. We’ve already seen revolving doors in the executive suites along Avaya’s mahogany row, and “new blood” in the CEO office would buy time for the company’s financial backers to devise and articulate a compelling narrative for customers, channel employees, employees, and potential strategic acquirers. 

We’ll have more insight into Avaya’s circumstances soon. The company is due to report its latest quarterly results within the next month or so.   

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.

Avaya’s Latest Results Portend Hard Choices

Those of you following the Avaya saga might want to check out the company’s latest quarterly financial results, which are available in a Form 10-Q filed with the Securities and Exchange Commission.

For Avaya backers hoping to see an IPO this year or in 2013, the results are not encouraging. In the three-month period that ended on March 31, Avaya generated revenue of $1.257 billion, with $637 million coming from product sales and $620 million from services. Those numbers were down from the correspondence quarter the previous year, when the company produced $1.39 billion in revenue, with product sales generating $757 million and services contributing $633 million. Basically, product sales were down sharply and services down slightly.

No Growth in Sight

Avaya also is seeing a weakening in channel sales. Moreover, growth from its networking products, on which the company had once pinned considerable hope, is stagnating. In the six-month period ending March 31, the company generated just $146 million from Avaya Network sales, down from $154 million in the preceding year. For the latest three-month period, concluding on the same date, networking sales were down to $64 million from $76 million last year. It is not projecting the profile of a growth engine.

Things are not much better in Avaya’s Global Communications Solutions (GCS) and Enterprise Collaboration Solutions (ECS) groups, which together account for the vast majority of the company’s product revenue. At this point, Avaya does not have a business unit on its balance sheet showing growth over the six- or three-month periods for which it filed its latest results.

Meanwhile, losses continue to mount and long-term debt remains distressingly high. Losses were down for both the three- and six-month periods reported by Avaya, but those mitigated losses were derived from persistent cost containment and cuts, which, if continued indefinitely, eventually (as in maybe now) hinder a company’s capacity to generate growth.

Interestingly, Avaya’s costs and operating expenses are down across the board, except for those attributable to “restructuring charges,” which are up markedly Avaya’s net loss for the six months ended on March 31 were $188 million as compared with $612 million last year. For the three-month period, the net loss was $162 million as compared with $432 million the previous year.

IPO Increasingly Unlikely

Although Avaya is not a public, and — company aspirations notwithstanding — does not appear to be on a trajectory to an IPO, markets reacted adversely to the financial results. Avaya bonds dropped to their lowest level in fourth months in response to the revenue decline, according to a Bloomberg report.

Avaya’s official message to stakeholders is that it will stay the course, but these results and market trends suggest a different outcome. Look for the company to explore its strategic options, perhaps considering a sale of itself in whole or in part. A sale of the floundering networking unit could buy time, but that, in and of itself, wouldn’t restore a growth profile to the company’s outlook.

Difficult choices loom for a company that has witnessed significant executive churn recently.

Departures from Avaya’s Mahogany Row Thicken IPO Plot

My plan was to continue writing posts about software defined networking (SDN). And why not?

SDN is controversial (at least in some quarters), innovative, intriguing, and potentially  disruptive to network-infrastructure economics and to the industry’s status quo. What’s more, the Open Networking Summit (ONS) took place this week in Santa Clara, California, serving a veritable gushing geyser of news, commentary, and vigorous debate.

But before I dive back into the overflowing SDN pool, I feel compelled to revisit Avaya. Ahh, yes, Avaya. Whenever I think I’m finished writing about that company, somebody or something pulls me back in.

Executive Tumult

I have written about Avaya’s long-pending IPO, which might not happen at all, and about the challenges the company faces to navigate shifting technological seas and changing industry dynamics. Avaya’s heavy debt load, its uncertain growth prospects, its seemingly shattered strategic compass, and its occasionally complicated relationship with its channel parters are all factors that mitigate against a successful IPO. Some believe the company might be forced into selling itself, in whole or in part, if not into possible bankruptcy.

I will not make a prediction here, but I have some news to report that suggests that something is afoot (executives, mainly) on Avaya’s mahogany row.  Sources with knowledge of the situation report a sequence of executive departures at the company, many of which can and have been confirmed.

On April 12, for example, Avaya disclosed in a regulatory filing with the SEC that “Mohamad S. Ali will step down as Senior Vice President and President, Avaya Client Services, to pursue other opportunities.” Ali’s departure was effective April 13.  Sources also inform me that a vice president who worked for Ali also left Avaya recently. Sure enough, if you check the LinkedIn profile of Martin Ingram, you will find that he left his role as vice president of global services this month after spending more than six years with the company. He has found employment SVP and CIO at Arise Virtual Solutions Inc.

As they say in infomercials, that’s not all.

Change Only Constant

Sources say Alan Baratz, who came to Avaya from Cisco Systems nearly four years ago, has left the company. Baratz, formerly SVP and president of Avaya’s Global Communications Solutions, had taken the role of SVP for  corporate development and strategy amid another in a long line of Avaya executive shuffles that had channel partners concerned about the stability of the company’s executive team.

Sources also report that Dan Berg, Avaya’s VP for R&D, who served as Skype’s CTO from January 2009 until joining Avaya in February 2011, will leave the company at the end of this month.

Furthermore, sources also say that David Downing, VP of worldwide technical operations, apparently has left the company this week. Downing was said to have reported to Joel Hackney, Avaya’s SVP for global sales and marketing and the president of field operations.

On the other side of the pond, it was reported yesterday in TechTarget’s MicroScope that Andrew Shepperd, Avaya’s managing director for the UK, left after just eight months on the job. Shepperd’s departure was preceded by other executive leave-takings earlier this year.

Vanishing IPO?

So, what does all this tumult mean, if anything? It’s possible that all these executives, perhaps like those before them, simply decided individually and separately that it was time for a change. Maybe this cluster of departures and defections is random. That’s one interpretation.

Another interpretation is that these departures are related to the dimming prospects for an IPO this year or next year. With no remunerative payoff above and beyond salary and bonuses on the horizon, these executives, or at least some of them, might have decided that the time was right to seek greener pastures. The company is facing a range of daunting challenges, some beyond its immediate control, and it wouldn’t be surprising to find that many executives have chosen to leave.

Fortunately, we won’t have to wait much longer for clarity from Avaya on where it is going and how it will get there. Sources tell me that Kevin Kennedy, president and CEO, has called an “all-hands meeting” on May 18.

For you SDN aficionados, fret not. We will now return to regularly scheduled programming.

Avaya IPO? Don’t Count On It

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

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

Reconsidering the “Nortel Option”

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

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

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

Unconvincing Narrative

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

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

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

Lofty Aspirations

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

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

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

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

Growth by Acquisition?

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

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

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

No Word on Avaya’s Long-Pending IPO

Like many other prospective public offerings, Avaya’s pending trick-or-treat IPO would appear to be in suspended animation. The company and its agents wanted to get the deal done this year, but there’s been no word on whether it will go ahead before the sands in 2011’s hourglass run down.

Avaya signaled its intentions and filed the requisite paperwork in June, but then economic conditions worsened. Here’s an excerpt from a post I wrote about the pending IPO when all the leaves were still on the trees:

“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.”

Making Moves While Waiting for Logjam to Clear

Speaking of Silver Lake and TPG, they must feel a particular urgency to get this deal consummated.  As mentioned in my previous post, 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 Avaya’s sponsors, which happen to be Silver Lake and TPG.  That’s plenty of incentive.

The lead underwriters for the transaction, when it eventually occurs, will be J.P. Morgan, Morgan Stanley, and Goldman Sachs & Company.

Avaya hasn’t been sitting on its hands while waiting to go public. The company acquired SIP-security specialist Sipera, a purveyor of session border controllers (SBC) and unified-communications (UC) security solutions, early this month. It followed that move with the acquisition of Aurix, a UK-based provider of speech analytics and audio data-mining technology.

Financials terms were not disclosed regarding either transaction.

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.

On Further Review, the Cius Still Looks Doomed

I’m returning to the topic of the Cisco Cius, but I promise I won’t make it an obsession.

My view of the commercial prospects for the Cius has shifted significantly during the past year, from when Cisco first announced the pseudo-tablet to now, as it prepares to ship the device, presumably in something approximating volumes. Back in the summer of 2010, I thought the Cisco Cius might have a fighting chance of currying favor within the company’s installed base, playing to IT decision makers with a practical and broad-based extension of its video-collaboration strategy.

Changing Landscape

Some things have changed since then. The Apple iPad franchise, as we all know, has gone from strength to strength. iPads now proliferate in small businesses and enterprises as well as in homes. They’ve crossed the computing rubicon from the consumer realm to the business world. They, like iPhones and other smartphones, also have helped to engender the much-discussed “consumerization of IT,” whereby consumers have insisted on bringing their favorite devices to the office, where they have been gradually and grudgingly accepted by enterprise IT departments under imperatives from CFOs to bring down IT-related capital and operating expenses.

That has cut into Cisco’s appeal. Cisco, as a big old-school enterprise player, didn’t count on consumerist employees having any appreciable say in the navigation of the enterprise IT ship. Cisco, as the Flip debacle, made obvious, is not exactly a popular consumer brand, notwithstanding the barrage of television commercials it has unleashed on couch potatoes during the last several years.

One could also argue that the commoditization of a broad swathe of enterprise-networking equipment, led by Cisco competitors, also is slashing into the giant’s dominance as well as its margins. Moreover, it remains to be seen how the inexorable march of virtualization and cloud computing will redefine the networking universe and Cisco’s role as the brightest star in that firmament.

 Penny-Pinching as New Normal

Then there are macroeconomic factors. Everywhere in the developed world, IT buyers at SMBs and large enterprises alike are trying to save hard-earned money. Cisco can wave cost-of-ownership studies all it wants, but most network and technology buyers do not perceive Cisco products as money savers. Consequently, there’s a big push from buyers, as perhaps never before, for open, standards-based, interoperable solutions that are — you guessed it — cheaper to buy than the proprietary solutions of yore.

So, it all amounts to a perfect storm driving right through the heart of John Chambers’ once-peaceful neighborhood. This is true for Cisco’s entire product portfolio, not just the Cius, but I’m writing about the Cius today — not that I’m obsessed with it, you understand — so let me pull things back into tighter focus now.

 Trying to Stop the Phones from Bleeding 

With the Cius, Cisco still seems to the think that the old rules, the old market dynamics, and its old customer control still apply. I thought more about this yesterday when I received an email message from a regular reader (imagine that!) who pointed out to me that Cisco is right about one thing: The Cius isn’t a tablet.

I’ll quote directly from his message:

The Cius isn’t a tablet  — it only looks like one.  It’s a desktop and video phone.  Cisco is in this business because PCs and wireless handsets are subsuming the function of the enterprise desktop phone (thanks to Microsoft Lync, Apple iPhone, Android, etc.).  Their phone business is a multi-billion dollar per year business.  I agree — the Cius is a distraction, but they have to do *something* to protect that desktop phone revenue stream.  Tough spot.

These are perceptive comments, and they’re borne out by recent articles and analysis on Cisco’s Cius push. All of which makes me feel, even more than when I wrote my Cius post of earlier this week, that the product is doomed to, as Mike Tyson said in one of his best malapropisms, “fade into Bolivian.” 

Gambit Won’t Work

Cisco has made a lot of money selling desktop IP phones, but that gravy train, like so many others, is drawing fewer passengers at each station. The trends I mentioned above — stronger consumer-oriented offerings from competitors in smartphone and tablets, the consumerization of IT, the enterprise focus on cutting IT costs wherever possible, and a concomitant pull away from premium proprietary technologies — are threatening to eviscerate Cisco’s IP phone franchise.

Hence, the Cius. But, even as a defensive bulwark, it doesn’t work. At the end of the day, CIsco might see an IP phone replacement when it looks at the Cius through its rose-colored glasses, but customers will see it for what it is — a relatively high-priced, seven-inch tablet running a smarphone-version of Android, and tied to proprietary video, voice, and collaboration solutions. Both the Cius and the AppHQ go strongly against the tide of IT consumerization and mobile-platform heterogeneity. That’s not a tide Cisco can reverse.

With sublime brevity, my reader-correspondent said it best: Tough spot.

Limited Horizons for Cisco Cius

Cisco’s Cius Android-based tablet will be available for purchase later this month, but it’s difficult to envision how or why it would be bought by anybody other than hardcore Cisco shops that have made substantial investments in Cisco’s enterprise collaboration and telepresence technologies.

With the Cius, and much else lately, Cisco seems to be predicating its strategy and tactics on an antiquated playbook (pardon the pun). While the world moves toward cost-effective, multivendor technologies and embraces consumerization of IT, Cisco still stubbornly pushes to be a one-stop shop for network infrastructure and much else besides. What’s more, the company is completely disregarding the consumerization wave, failing to recognize that corporate IT bosses and their departments are compelled to find ways to embrace the trend to cut enterprise costs and boost productivity.

It’s Not a Tablet

To make matters worse, Cisco’s Cius runs Android 2.2, not the tablet-optimized Android 2.3. It’s as if Cisco, perhaps under the assumption that its installed base of enterprise collaboration and telepresence customers will follow its lead obediently, couldn’t even be roused to deliver a competitive product. The price, at $750 per unit, also suggests that Cisco thinks its loyal customers will pay a sticker-shock premium for anything that ships with the company logo stamped on the box.

Cisco, for its part, has persuaded some analysts to believe that, appearances to the contrary, it’s not really a tablet vendor, even though it’s about to start shipping what is unquestionably a tablet at the end of July. The Cius, you see, is just, an entry point into Cisco’s collaboration ecosystem.

Counting on the Fans

I suppose that’s as good a way as any for Cisco to attempt to avoid direct comparisons between the price and performance of the seven-inch Cius and those of competing devices, including a new crop of ten-inch Android-based tablets that are about to hit the market as well as the ubiquitous Apple iPads that C-level executives have brought into their enterprises.

Cisco is hoping to use an enterprise app store, AppHQ, and security as hooks that will keep current customers in the fold and bring new ones into its tent. However, in an era of heterogeneous mobile-device management (MDM) suites and equally heterogeneous mobile-security suites — which seem to offer cost and flexibility advantages over the proprietary Cisco alternative in the vast majority of deployment scenarios — Cisco’s Cius market adoption will be limited to the vendor’s most zealous enterprise fan base.

Avaya’s Kennedy Sends Cautious Signals on Post-Nortel Business

Reading between the lines of Avaya CEO Kevin Kennedy’s recent interview with Network World, I have the strong suspicion that revenues from Nortel’s installed base of VoIP and unified communications (UC) customers are not ramping as robustly as Avaya had hoped they would.

I get that impression as much from what Kennedy doesn’t say as from what he says. He’s bold and brash when talking about combined R&D efforts and product roadmaps, but he’s reserved when discussing revenue targets and near-term sales. He doesn’t say the Avaya-Nortel combination has been a commercial disappointment, but he’s not boasting of its conquests, either.

A few market analysts are noticing that Avaya’s acquisition of the Nortel enterprise business hasn’t resulted in market-share hegemony for the merged company. These market watchers seem surprised that Avaya didn’t take the Nortel customer base by storm and leave Cisco in its rearview mirror, choking on dust and fumes.

But that failure to reconcile with reality is at least as much the analysts’ fault as it is Avaya’s. Earlier in this saga, I noted that a Nortel-fortified Avaya would be fortunate to maintain any market-share edge over Cisco. It seemed an obvious conclusion to reach.

Unfortunately, though, when unwary market analysts examine a post-acquisition scenario, they will add the market share of the two companies involved, then assume the merged entity will maintain or extend its combined market share. For many reasons, however, that rarely — if ever — happens.

In the case of Avaya’s acquisition of Norte’s enterprise business, several complicating factors suggested that the merger, from a market-share perspective, would result in less than the sum of its parts.

First, there was the product overlap, which was not insignificant. Second,  there were channel-management issues, which also were considerable. (Some Nortel partners were concerned about having to deal with Avaya.) Third, Nortel’s enterprise business had been in distress for some time, and it was suffering market-share erosion before and after Avaya took control. Fourth, even among Nortel customers still in the fold, some eventually will choose options other than those presented by Avaya.

I think Avaya anticipated most (if not all) of these challenges. Just after the acquisition closed, for example, Kennedy sought to temper post-merger expectations. He cited external factors, such as the weak economy, as well as the usual post-merger integration challenges. His tone was one of cautious optimism rather than of unchecked exuberance. He knew it wouldn’t be easy, with or without Nortel’s enterprise business.

He’s staying on message, probably for good reason.

HP Keeps UCC Options Open

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

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

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

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

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

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

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

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

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

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