WorldCom rocks markets
Fragile confidence in the telecommunications and technology sectors was dealt a devastating new blow after WorldCom, one of the pioneers of the telecoms boom of the late 1990s, admitted it had overstated its cash flow by more than $3.8 billion (EU3.9bn) over the past five quarters. The acquisitive company, the second-biggest long-distance phone company in the US and one of the largest data communications providers in Europe, has been mired in controversy for much of the past 12 months.
But not even the most cynical analyst foresaw the scale of the scandal that broke, almost out of the blue, on the evening of 25 June 2002. The company announced that it had discovered a massive bookkeeping fraud during an internal audit and had fired its chief financial officer, Scott Sullivan. It appeared to be the biggest case of false accounting in history. Certainly, the Securities and Exchange Commission (SEC), the US financial regulator, said the irregularities were of “unprecedented magnitude” and called for “comprehensive market reforms”.
Comment: Where does the telecoms sector go from here? For WorldCom, almost certainly into bankruptcy proceedings. For suppliers of network equipment and software, a hard sell just got even harder. Juniper Networks, which derives a tenth of its sales from WorldCom, is one of a group of vendors in real difficulties. Telecoms companies, who were slashing investments even before the scandal broke, will find it even harder to raise funds. Only vendors with a balance of non-telecoms clients and well-established service provider clients have a realistic chance of surviving the fallout.
The death of WAP?
The wireless application protocol (WAP), a name
synonymous with unpopular mobile Internet services, last month moved a step closer to entering the graveyard of failed technologies. Its key pressure group, the WAP Forum, was subsumed into a major new wireless-sector partnership of almost 200 technology companies, called the Open Mobile Alliance (OMA), which is charged with developing interoperable wireless standards for mobile phones and handheld computers. Microsoft is one of the new members of the alliance, which also includes Nokia, headed by Jorma Ollila, pictured, Oracle, IBM, Sun Microsystems, Hewlett-Packard, Motorola and BEA Systems.
But Palm, whose operating systems for mobile devices still account for more than half of all handheld computers sold, was a notable absentee. Other groups that have agreed to merge into OMA include the Open Mobile Architecture initiative, the SyncML Initiative, the Location Interoperability Forum and the MMS Interoperability Group.
Comment: If this is truly WAP’s final chapter, it is a sad and quiet end to a technology that seemed to promise so much when it was launched in a fanfare of publicity in 1999. For all the symbolism of the possible death of WAP, of greater importance is the truce between the wireless technology industry’s battle-worn heavyweights. Compatibility between the myriad of next-generation mobile technologies is clearly an issue that will determine the success or failure of the hitherto disappointing mobile Internet.
Novell buys SilverStream
Troubled networking software and services company Novell, best known for its NetWare network operating system, bought application server and web services tools company SilverStream for $212 million (EU215m). The acquisition, Novell said, is part of its plan to become a leading force in the commercialisation of web services. The company has recently positioned its directory software as a means of connecting web services and has made it the foundation of its new ‘one Net’ product line. Nasdaq-listed SilverStream supplies graphical tools for building applications based on components. Its initial focus was on Java objects, but it has recently concentrated more directly on web services.
Comment: See Novell’s new thing.
Micromuse acquires Riversoft
Consolidation in the network management software sector
gathered pace as Micromuse paid £43 million (EU67m) in cash for troubled UK rival Riversoft. Micromuse CEO Greg Brown said his company was buying Riversoft primarily for its network intelligence engine, which provides object modelling and root-cause analysis and which Micromuse hopes will complement its flagship Netcool diagnosis and correlation tool.
Riversoft, founded by ex-Micromuse executive, Phil Tee, pictured, floated on the London Stock Exchange in December 2000, but fell out of favour with investors when sales and profits failed to meet inflated expectations. New management slashed costs in a bid to cut losses, but revenue fell further in the first three months of 2002 to only £500,000 (EU780,000).
Comment: The EU67 million price tag may seem a little high for a company in crisis, representing as it does a 58% premium to the closing price the day before the deal was announced. But this appears to be another example of a software company buying a rival as much for its cash as for its technology and client base: Riversoft’s cash reserves at the end of March 2002 were £48 million (EU74m).
EDS buys Loudcloud
IT services group Electronic Data Systems (EDS) said it planned to acquire assets of Loudcloud, the web-hosting business set up by Netscape co-founder Marc Andreessen, for $63.5 million (EU67.3m) in cash. As part of the deal, Loudcloud will cut about 120 jobs, or almost a third of its staff, and will change its name and brand identity to Opsware. About 140 staff will join EDS when the sale is completed in September 2002. EDS will pay a further $52 million (EU55.1m) over three years to license the ‘Opsware’ IT automation software.
EDS said the deal lays the foundation for “widespread automation of service delivery and applications management” – first within the company’s managed hosting business, then throughout its global network of data centres.
Comment: This deal is filled with irony for web pioneer Andreessen, who once said he hoped to transform the start-up into “the EDS of the Internet”. The sale price represents a small fraction of the $306 million (EU342.3m) that Andreessen and Loudcloud’s other founders have raised from investors since starting the company in 1999.
Siemens’ 3G win in China
German electronics giant Siemens won an important concession in its bid to dominate the world’s biggest mobile phone market, China. The Beijing government gave Siemens and its local partner Datang the go-ahead to build a trial third-generation (3G) wireless network based on the Siemens-developed time division synchronous code division multiple access (TD-SCDMA) standard. The move appeared to indicate China’s willingness to support the Siemens-backed system over the two main alternatives – the Qualcomm-backed CDMA2000 and the Nokia and Ericsson-backed wideband CDMA. TD-SCDMA is considered to have less transmission capacity and speed than its rivals but is also regarded to be a cheaper upgrade to existing networks.
Comment: This is a significant victory for Siemens and a blow to Nokia’s and Ericsson’s ambitions to persuade Beijing to back their preferred system. Yet while Siemens’ European rivals may have lost this battle, the war goes on. China is unlikely to rule on which technology it will officially support when it comes to license 3G frequencies in the next two or three years. The decision, when it finally comes, could be worth EU30 billion for the winner.
Final lap for Microsoft case?
Just as the Microsoft antitrust trial threatens to draw to a close in the US, the European Union (EU) said that it was nearing a decision on whether to punish Microsoft for breaching competition law in the region. The European inquiry has focused on whether Microsoft’s policy of bundling applications such as Windows Media Player with its Windows XP operating system is anticompetitive. A judgement is expected by 1 September 2002.
For her part, US judge Colleen Kollar-Kotelly, who presided over the nine rebel states’ appeal against the proposed settlement, is expected to reach a judgement before the end of the summer. Meanwhile, the European Commission is looking into allegations that Microsoft’s Passport authentication system could be violating EU rules on users’ privacy and data protection.
Comment: Potentially, the EU inquiry could be highly damaging. If Brussels finds Microsoft guilty, it can impose fines worth up to 10% of a company’s annual sales – in Microsoft’s case, a massive $2.8 billion (EU2.9bn). Even if it avoids that fate, Microsoft will still be dogged by legal action for some time to come. The software giant faces a host of private lawsuits filed on the back of the US antitrust trial.
Oracle double woe
Database software giant Oracle suffered two separate
blows to its reputation. Highlighting Oracle’s aggressive sales practices, Californian legislators launched an investigation into a $95 million (EU96.1m) contract signed between the State of California, Oracle and Logicon, an Oracle reseller, in May 2001. The inquiry followed a state audit that concluded the contract applied to more seat licences than necessary and would end up costing the state more to run than the previous system. Oracle had claimed it would save the state at least $100 million (EU101.2m) over six to 10 years.
Meanwhile, Oracle reported disappointing full-year results that gave little hint of a turnaround in the enterprise software market. For the 12 months to the end of May 2002, revenues plunged by more than a billion dollars, to $9.7 billion (EU9.8bn) from $11 billion (EU11.1bn) a year earlier. CEO Larry Ellison later attributed part of this fall to a board decision to outlaw end-of-quarter discounts.
Comment: See Oracle joins Cisco… for more on Oracle’s discounting strategy.
Memory chip ‘cartel’ probed
Chips are down. Antitrust investigators at the US Department of Justice launched inquiries into alleged anticompetitive practices at some of the world’s biggest memory-chip manufacturers. Grand jury subpoenas from the US district court for northern California were served on Micron Technology of the US, the US unit of South Korea’s Samsung Semiconductor, Germany’s Infineon Technologies, South Korea’s Hynix Semiconductor and Taiwan’s Winbond Electronics and Nanya Technology. The investigation follows a significant but short-lived price increase during the first quarter of 2002. It is believed to be probing allegations that the vendors colluded about cutting manufacturing capacity.
Comment: It is too early to say whether gamekeeper has turned poacher. But it is worth remembering that Micron itself sued Asian rivals in the 1980s for anticompetitive behaviour. Collusion or not, what is clear is that overcapacity, fierce competition and falling PC sales meant memory chips were being sold in 2001 for less than $2, or up to half the cost price. An increase of some magnitude was, therefore, arguably overdue.