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The summer of 2008 has brought huge changes to the networks and communications industry. 3Com, ProCurve and Juniper Networks have new CEOs. Siemens combined with Enterasys and SER Solutions through a joint venture structure between the Gores Group and Siemens AG, creating the second largest networks and communications company. Foundry was acquired by Brocade to bolster up its data center networking architecture. ProCurve just purchased Colubris to increase its WLAN offerings. All this occurred while Cisco reported its strongest quarter in company history with over $10B in revenues, which is nearly the sum of all the annual revenues from the firms mentioned above. Put another way, in one quarter, Cisco takes in nearly all the revenues that Foundry, ProCurve, Juniper, the new Siemens and Brocade make all year. From data center networking to unified communications to enterprise networking there are mammoth changes and shifts occurring in IT spending which is forcing the consolidation and restructuring which is evident this summer. We’ll review the above transactions with our take and predictions for what’s to come.

But before we dive into the details, an observation of note. The global economic slowdown continues to fester as more jobs are lost, credit is still tight and the price of oil per barrel remains high. Yet even through this difficult economic period, IT spending remains strong. IBM, Cisco and Microsoft put up great numbers during the last quarter without downward guidance, which speaks volumes to the point that business and IT leaders are continuing to invest in IT during this period of economic uncertainty. During Cisco's August 6th conference call John Chambers, Cisco CEO said that "œwe all see the same mixed signals in the market, from both a U.S. perspective and other parts of the world, in terms of economic momentum, stock market behavior, energy costs and confidence challenges." But the big IT suppliers are navigating this period well with record revenues: $10B and $26.8B in the quarter for Cisco and IBM respectively, and $60B for the year for Microsoft; all of these record highs.

So the question is, will the large IT suppliers pull further away from their smaller competitors during this economic period or will the high tide raise all boats? Let's review some of the above-mentioned transactions in the networks and communications industry to try and answer that question.

Foundry acquired by Brocade

Foundry Networks is being acquired by Brocade for $3B in cash. First, the long anticipated second phase of consolidation of the networking industry has started. Data center networking starting it, thanks to Cisco's Data Center 3.0 initiative to unify data center front- and back-end networking with Ethernet. Clearly data center network architecture is in play and the Foundry acquisition by Brocade is a strong example that the market is heating up. There are now 5 approaches: Brocade/Foundry, Cisco (Nexus/vframe, VM), F5/Woven, HP, and IBM. Absent thus far are Juniper, Extreme, and ProCurve. By this acquisition Foundry has successfully positioned itself as a major data center player. What is odd is that this is a cash transaction which puts in question has much confidence Foundry executives have in the new Brocade as they opted for cash versus stock.

A New CEO At Juniper

In July, Juniper announced Kevin Johnson as its new CEO. Johnson, a 16-year veteran of Microsoft, was responsible for Windows software and this year’s failed bid to expand Microsoft's online presence by buying Yahoo. This moves Scott Kriens out of the CEO role but keeps him as Chairman of the Board.

Kriens may have been forced out after spending some $800 million to build Ethernet switches with little differentiation and virtually no direct distribution to the enterprise market. It's dubious what new skills Johnson will bring to the networking industry after focusing on desktop software and large public-facing web sites over the past 16 years. What relationships does he bring to Juniper's main customers and service providers? Further, what relationships and understanding does he have of enterprise network architects and designers, not to mention the technology, markets, and competitors that will benefit Juniper? Into what new markets can he bring Juniper? With data center networking, unified communications and network security being the hot markets in the current business cycle, Juniper could have done better. I give Johnson 12 months.

A New CEO and President At 3Com

In late spring, 3Com hired former Nortel Networks China CEO and Alcatel's regional president for greater China Robert Mao for the post of CEO, and former 3Com executive Ronald Sege as president and chief operating officer. This was clearly a re-grouping of 3Com following the failed Bain acquisition. Eric Benhamou is still the chairman of 3Com and has a ten-plus year working relationship with Sege.

This could be nothing but good news for 3Com and its customers as it now has executive management with the skills and understanding of the enterprise market. Clearly 3Com has lost much of its 1990s luster, market share and industry respect. But with a networking, security and unified communications portfolio plus a focused management team it should be in a better place. 3Com employees total approximately 4,000 in China, and more than 400 in Massachusetts with a worldwide labor pool of approximately 6,000. Its estimated annual sales are in the $1.3B range, nearly twice the size of Foundry Networks.

But while 3Com continues to focus on network switching, unified communications and network security there has not been a strategy or vision articulated for the firm. When 3Com sold its high-end switching products to Extreme years ago, it exited from the high-end enterprise market in order to address the small- and mid-sized market. It's the only enterprise networking and communications concern with a large manufacturer and sales distribution in China, thanks to the acquisition of its joint venture with Huawei called H3C. Sege will be key to any new momentum from 3Com as he knows the needs of network architects as well as channel and sales strategy, and he can create and deliver a strategy. He has to execute quickly.

A New CEO At ProCurve

In June Marius Haas replaced John McHugh as senior vice president and general manager of the ProCurve Networking business. McHugh was a long time HP employee who oversaw the proCurve business for the past two decades and was the executive credited with establishing ProCurve as its own business. Before Haas, HP executive management placed an interim CEO, Bret Cromwell as acting general manager. Cromwell was previously worldwide controller for HP ProCurve.

Now while there have been rumors for years that ProCurve was up for sale, this cannot be discounted now as Haas previously served as HP's senior vice president of strategy and corporate development. In that role, he led initiatives that focused on efficiency and driving growth for HP, including the execution and integration of all acquisitions since 2004.

I talked with Haas on August 11th when he said that the HP strategy is to more tightly integrate ProCurve into HP, leveraging its relationships with business and IT leaders to sell ProCurve gear. HP has a large presence in data centers; Haas could use that as a basis to develop a new data center network portfolio with ProCurve to gain a larger share of that market. But just like John McHugh before him, Haas will report into Shane Robison, executive vice president, chief strategy and technology officer at HP. Shane didn't see the value of ProCurve while McHugh ran it, so it's unlikely that he'll see it now. Haas does have acquisition and business development experience which could be helpful in architecting a different kind of ProCurve.

Haas' first action as CEO was the acquisition of Colubris for an undisclosed amount on August 11th. This is a big improvement to ProCurve's previously limited WLAN offering and it may offer a glimpse into HP's ProCurve strategy. HP may very well be planning to increase ProCurve's value by acquiring a number of firms to increase its product portfolio in an effort to either make it more competitive and/or increase its potential sale price. It's not clear if HP's strategy is grow by acquisition, steady as she goes, or increase value before a sale. Haas insisted that a sale of ProCurve is not on the table and that HP will focus on the first two options: acquiring firms to strengthen weak areas in the product portfolio and steady as she goes. But until Haas puts out a vision and strategy for ProCurve there is just no way to know what HP's plans are for ProCurve and where it will focus its resources.

A New Siemens Emerges

In June there were only three firms which offered both networks and communications: Cisco, 3Com and Nortel. Then Siemens AG and The Gores Group created a joint venture and populated it with Siemens Enterprise Communications, Enterasys and SER Solutions, creating the 4th firm to offer both networking gear and communication solutions. The JV name is Siemens Enterprise Communications. The new Siemens will be the 2nd largest firm offering both enterprise networks and communications, larger than 3Com and Nortel but still dwarfed by Cisco.

The new Siemens will be a $5B firm with more than 1 million customers, 15,000 employees and a presence in 80 countries, according to a fact sheet on the Siemens Enterprise Communications site. The Gores Group will own a 51% stake in the joint venture while Siemens AG retains 49% ownership. While the new Siemens will be the 2nd largest networks and communications concern focused on the enterprise market, its share distribution between Siemens, Enterasys and SER are not aligned.

Siemens is the 4th largest VoIP equipment supplier according to Dell'Oro but much of its share resides in Europe. Siemens owns nearly 10% share of the US market for Enterprise Telephony according to Synergy Research Group and has a leadership position (nearly 20% share) of Western Europe's Enterprise Telephony market. Over the past eighteen months Siemens has locked up German distribution channels to other competitors by signing deals with new indirect channel partners. By contrast market share for Enterasys and SER Solution is concentrated in North America. This may help Siemens grow its current 10% share of the North American VoIP market while boosting Enterasys and SER Solutions European market share. In short, this JV creates a global provider of enterprise networks and communications, which is matched and surpassed only by Cisco.

It's clear that software economics associated with unified communications has forced a consolidation in this industry as revenue from fixed point phones drops from $600/phone to a software license of $8/softphone. Siemens and its customers are better off as a combined firm with a broader product portfolio. This JV can only be good news for Enterasys and SER as they both gain new channels into the European market and work on developing products and architectures that leverage networks and communications. Enterasys and SER customers should be delighted as there will now be a new path for their products.

It will take time for this JV to solidify being spread over large geographic distances with mixed cultures and different sales channels and partners to rationalize. Here too there needs to be a solid strategy, vision and architecture which links the three entities together so that customers understand how their investments will grow over time and add value to their operations.

At the end of summer 2008 nears, there is now one new large enterprise networks and communications supplier, two less Ethernet switch providers and changes at the top of Juniper, ProCurve and 3Com. This is the kind of market confusion of which Cisco knows how to take advantage. While Siemens, Enterasys, SER, Juniper, Foundry, Brocade, ProCurve and 3Com focus on new management, product rationalizations, strategy and architecture development, Cisco keeps selling, executing and growing. Add on top of that an uncertain economic environment and record results at Cisco, and you have to be more than a little nervous if you're running one of its competitors.

Data center networking and unified communications are two of the largest change agents in the networks and communications markets. There is more consolidation to come in both market segments with the summer just a prelude to a busy fall.