The Lippis Report

It’s been over a month that Avaya has acquired Nortel and in that little time it has produced the most extensive product rationalization and roadmap the industry has seen. Kevin Kennedy, Avaya CEO and long time industry veteran known for execution and operations clearly has his hands all over the New Avaya as it consolidates product and organizational lines and expands a global channel ecosystem all the while striving to make Avaya easier to work with for both channel partners and customers. During times of rationalization it’s often easy to get mired in details, but Avaya maintains a key focus on unified communications, collaboration and contact center. Like a laser it’s focused on financials. It purchased the Nortel Enterprise Business for slightly more then $900m and reported FY09 revenue of $4.2B while projecting an initial proforma FY10 combined revenue of $5.5B! Its net debt to EBITDA or Earnings Before Interest, Taxes, Depreciation and Amortization, a measure of profitability, is 5.9 with a goal of driving it below 4 by year-end 2011. While Kennedy’s hand is on operations his eye is on profitability as Avaya’s EBITDA is in the mid teens to lower 20 percent of revenue with a goal of being industry leading at 25% by year-end 2011. In this Lippis Report Research Note I review the “New Avaya” and provide an assessment of its going forward strategy.

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No matter where you look today the structure of IT is fundamentally changing. Applications are being increasingly accessed from mobile devices along with traditional laptop, desktop and even kiosk machines. Applications are downloaded for free or a few dollars on mobile devices, while cloud computing and anything as a service offers a new approach to application delivery. As a result corporate application portfolios are shifting in their mix under IT leaders from one of total control to partial to none. In short, IT leaders are finding that the largest application growth in their corporation is coming from outside of their traditional perimeter and with no control knobs. In essence applications and networks are becoming borderless.

While borderless networks offer productivity improvements allowing work to follow individuals, IT leaders are concerned about its security implications, that being how do I secure corporate assets when applications are being accessed and used within and outside of corporate perimeters? Can IT leaders deliver the ease of use afforded by borderless networks securely? In this Lippis Report Research Note we offer an approach to securing networks without borders.

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Information demand is growing faster than Moore’s Law. IDC recently predicted that between 2008 and 2012 IT staff will grow at approximately 1.1 times the rate of business growth while servers will grow at 1.9 times, mobile internet users will grow at 3 times, non-traditional user devices will grow at 3.6 times, information will grow at 4.5 times and interactions per day will grow at 8.4 times. Clearly, the gap between IT staff resources and business expectations for IT services is huge and growing fast. To close the “business expectation” gap many IT leaders are evaluating public cloud-based services to augment their private data center/cloud services as IT leaders observe an increasing amount of applications being deployed from outside the enterprise perimeter. Salesforce.com, EC2, Google Apps and other cloud services will have a huge impact on their data center capacity. The enterprise network is an integration point in an IT architecture allowing homegrown, private and public cloud services to be deployed securely and reliably.

IT business leaders have long been seeking more dynamic data center infrastructure that allows applications and services to scale with demand, both up and down. This flexibility of service delivery has become acute during the recent economic downturn as business leaders cut under performing business models, streamlined business processes and sought to quickly enter markets as they developed. This business agility requirement to usher in new business priorities and processes need prompt data center provisioning and service delivery automation. The time to provision a server, storage, network and application is too long, often measured in months. Provisioning automation is paramount in the data center as it quickens the pace of business while also contributing to business continuity initiatives.

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In this Lippis Report Research Note we offer our 2010 top ten predictions for the biggest issues that the IT industry will confront. Our predictions span technology, industry structure and IT budgets. This Research Note is based upon a Lippis Report Podcast recorded with Nick Lippis and Zeus Kerravala of the Yankee Group. This end-of-year, forward-looking analysis is one of our most popular research notes, so we offer it to our subscribers as a holiday gift with wishes for a great holiday season and prosperous New Year.

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This is a different kind of Lippis Report research note than those we usually produce as it is product vs industry or architecture focused. We were impressed with the ease of installation and performance of the Ruckus Wireless dual-band 802.11n ZoneFlex 7962 access points and ZoneDirector 1000 wireless LAN (WLAN) controller in our office so we decided to write about it. Ruckus provided these products for us to test and use. In this Lippis Report Research Note we document our experience.

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HP is planning to acquire 3Com for $2.7B to bolster its converged infrastructure position. HP, Dell, IBM, Oracle, Cisco, et al., are astute and see that IT is entering a new convergence era where servers, storage, management software, facilities and networking are packaged, bundled and sold as a unit. Convergence is being driven by technology and market dynamics that are forcing large IT suppliers to cross into each other’s traditional markets. While our industry is starting a new IT wave of virtualization and cloud computing which promises to distribute applications and content to thin, virtual and mobile end-points over massively connected global networks, the reality is that most corporations will contain a mix of private and public/outsourced/cloud computing environments. But be it on or off premises enterprise computing has entered a convergence era, which every large IT supplier is now engaged in developing solutions to address. It’s for this reason that HP is bolstering up its networking portfolio by planning to acquire 3Com and more than likely many others. The knee-jerk reaction to HP’s planned acquisition of 3Com is the competitive position that places HP against Cisco. HP and Cisco are on a path to becoming head-to-head competitors but as they fight it out in the market, their blows may land on IBM, Dell, Oracle, Juniper, et al., who have been slow to react to the new convergence era reality. In this Lippis Report Research Note I review the planned acquisition of 3Com by HP and its potential industry impact especially with respect to Cisco.

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Cloud computing has become of great interest to providers, business and IT leaders as the economic downturn forced review of business processes and IT’s automation of them. As business and IT leaders searched for efficiency, cloud computing came into focus as it promises a different and favorable IT economic and delivery model. There are multiple cloud visions and use cases, but one I hear most often in corporate IT organizations is that of thin and mobile clients accessing a mix of custom, consumer-based and cloud-based applications. In this scenario real or virtualized desktops and mobile clients present applications that are hosted in a cloud residing on a virtual machine isolated from another corporation’s applications. Economics, technology and business imperatives are driving this future into reality. In fact, IT organizations are increasingly losing control of their application portfolios as a new generation of IT savvy workers develop and/or find applications that help them get work done without the blessing or assistance of corporate IT. As cloud computing promises to radically expand access to applications and low cost application development, IT leaders fear that the portion of applications they control will increasingly shrink if they don’t get ahead of this curve. As such, IT organizations are focusing like a laser on cloud security, application control, portability and the critical potential role of the network.

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I’ve been working in the networking industry my entire adult life starting in the mid 1980s, having developed and reviewed numerous network architectures. I view an IT supplier’s network architecture as insight into their perspective of business changes plus trends and how their IT solutions can be exploited for corporate advantage. In short, the architecture provides a roadmap or blueprint of their investment plan and corporate priorities. The latest IT architecture I’ve reviewed is Borderless Networks from Cisco Systems and it does a great job of addressing business, economic and technical trends that are converging into an opportunity for business leaders to accelerate earnings while preparing for and taking advantage of top line growth. The first manifestation of Borderless Networks into product is in Cisco’s October 20th, 2009 Borderless Branch Office Network launch including the Integrated Services Router Generation 2. In this Lippis Report Research Note I review Cisco’s Borderless Networks architecture, an approach to networking that is very much in synch with the times in which we live.

2036

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The market crash of 2008 had a similar effect to a long drought on a once lush ecologically diverse and thriving environment. Only the strong survive such harsh conditions. With hardware sales down some 25 to 30% over the past year the revenue drought in the networking and communications industry brought large changes. We have seen the once huge Nortel go bankrupt and be sold off in pieces; Siemens Enterprise, Enterasys and Avaya were brought private; Foundry Networks was sold to Brocade and now Brocade may be up for sale; HP ProCurve was integrated into the large HP group TSG; 3Com re-emerged in the enterprise market while many start-ups closed shop.

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The World Health Organization (WHO) has reported over 182,166 laboratory-confirmed cases of 2009 H1N1 influenza virus with 1,799 deaths. In June 2009 the WHO raised the pandemic alert level to six, signaling a pandemic of this influenza is underway. If the H1N1 virus, or swine flu, is in full pandemic force during the fall and winter months of the seasonal flu, 40 to 50 percent of the workforce could be affected; yes that’s 40 to 50%. However, early numbers indicate H1N1 is no more infectious than seasonal flu strains that typically hit each year. But H1N1 could still pose a significant threat. New flu strains can mutate, sometimes becoming more serious and more contagious. Businesses may have already been impacted by the spring and summer outbreaks of 2009 H1N1 influenza affecting their employees. CDC anticipates that more communities may be affected than were in the spring/summer 2009, and/or more severely affected, reflecting wider transmission and possibly greater impact. In addition, this fall and winter seasonal influenza viruses may cause illness at the same time as 2009 H1N1.

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In late July Avaya announced that it had signed an agreement with Nortel to purchase its enterprise business for $475 million. The agreement would add talent, bolster Avaya’s channel partner network, increase its presence in the growing government business and expand its product portfolio to include the computer networking gear of routing and switching. But this is not a simple transaction. On September 11th Nortel will hold a bidding process to entertain other offers with a hope to gain more value, i.e., dollars for its enterprise assets. In addition, whoever wins the bidding process must then pass anti-trust hurdles in all the countries in which Nortel conducts business. In short, it will not be until first quarter of 2010 before anyone knows who will own Nortel’s enterprise business.

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Cyber crime and IT security threats are taking a more ominous turn as they seek financial gain by exploiting open Web 2.0 technology vulnerabilities and share “tricks of the trade” via collaborative web sites. Hackers and cybercriminals are launching ever more sophisticated attacks on businesses and individuals, intent on mastering the arts of trust-breaking and reputation-hijacking. The economic motive for cybercrime is well documented and lucrative, which is disturbing on multiple levels.

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Today’s Enterprise IT defenses against malware or exploits are built by deploying a set of security appliances that mitigate specific threats. This appliance approach was very effective during the 1990s when dominant threats were hackers attacking corporate IT assets via the Internet. As hackers were joined by cybercriminals an economic motive to target personal data and create greater havoc materialized along with increased exploit sophistication. In fact, most of today’s threats are blended, meaning that an exploit might enter a corporation through e-mail, then pass through the web which ends up having botnet traffic that eventually infects a client and phones home to a botnet server. An exploit could use three or four different vehicles before it launches a full-scale attack, bypassing legacy or siloed security tools. These blended attacks result in the all-too familiar consequence of security breaches including company image damage, personally-identifiable information (PII) theft, service downtime, cleanup and remediation costs, compliance penalties, and corporate liability. So how do security leaders defend against these assaults? The solution lies in the fact that the more IT security defenses can view the better control defense they enjoy. Enter the Gestalt approach to IT security.

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Nortel, announced on June 20th, that it will liquidate its assets and may get less then $2B, which is less then 1% of its pre-dotcom boom valuation. This is such a sad story as $2B will be divided among holders of approximately $4.5 billion in Nortel debt, and more than $2 billion owed in severance to ex-employees and pensions to retired managers, and other obligations, according to the Wall Street Journal. While the CDMA and LTE groups are being sold to Nokia Siemens for an estimated $650M, the enterprise unit which includes its IP Telephony, UC, Routing, Switching, et al., products is being valued at less than $500 million since it’s losing money, according to people familiar with the business. As Warren Buffet said, when the tide goes out you get to see who’s swimming naked, and Nortel was very naked.

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