Betting On The Right Horse


HobbyHorse

The annoucement of the merger of Alcatel-Lucent and Nokia was a pretty big discussion last week. One of the quotes that kept being brought up in several articles was from John Chambers of Cisco. Chambers has said the IT industry is in for a big round of “brutal consolidation” spurred by “missed market transitions”, which is a favorite term for Chambers. While I agree that consolidation is coming in the industry, I don’t think market transitions are the driver. Instead, it helps to think of it more like a day at the races.

Tricky Ponies

Startups in the networking industry have to find a hook to get traction with investors and customers. Since you can’t boil the ocean, you have to stand out. You need to find an application that gives you the capability to sell into a market. That is much easier to do with SDN than hardware-based innovation. The time-to-market for software is much lower than the barriers to ramp up production of actual devices.

Being a one-trick pony isn’t a bad thing when it comes to SDN startups. If you pour all your talent into one project, you get the best you can build. If that happens to be what your company is known for, you can hit a home run with your potential customers. You could be the overlay company. Or the policy company. Or the Docker networking layer company.

That rapid development time and relative ease of creation makes startups a tantalizing target for acquistion as well. Bigger companies looking to develop expertise often buy that expertise. Either acquiring the product or the team that built it gives the acquiring company a new horse in their stable.

If you can assemble an entire stable of ponies, you can build a networking company that addresses a lot of the needs of your customers. In fact, that’s how Cisco has managed to thrive to the point where they can gamble on those “market transitions”. The entity we call Cisco is really Crescendo, Insieme, Nuova, Andiamo, and hundreds of other single focus networking companies. There’s nothing wrong with that strategy if you have patience and good leadership.

Buy Your Own Stable

If you don’t have patience but have deep pockets, you will probably end up going down a different road. Rather than buying a startup here and there to add to a core strategy, you’ll be buying the whole strategy. That’s what Dell did when they bought Force10. If the rumors are true, that’s what EMC is looking to do soon.

Buying a company to provide your strategy has benefits. You can immediately compete. You don’t have to figure out synergies. Just sell those products and keep moving forward. You may not be the most agile company on the market but you will get the job done.

The issue with buying the strategy is most often “brain drain”. We see brain drain with a small startup going to a mid-sized company. Startup founders aren’t usually geared to stay in a corporate structure for long. They vest their interest and cash out. Losing a founder or key engineer on a product line is tough, but can be overcome with a good team.

What happens when the whole team walks out the door? If the larger acquiring company mistreats the acquired assets or influences creativity in a negative way, you can quickly find your best and brightest teams heading for green pastures. You have to make sure those people are taken care of and have their needs met. Otherwise your new product strategy will crumble before you know it.


Tom’s Take

The Nokia/Alcatel deal isn’t the last time we’ll hear about mergers of networking companies. But I don’t think it’s because of missed market transitions or shifting strategies. It comes down to companies with one or two products wanting protection from external factors. There is strength in numbers. And those numbers will also allow development of new synergies, just like horses in a stable learning from the other horses. If you’re a rich company with an interest in racing, you aren’t going to assemble a stable piece by piece. You’ll buy your way into an established stable. In the end, all the horses end up in a stable owned by someone. Just make sure your horse is the right one to bet on.

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