Steve, let me offer a somewhat different perspective on the NTOP announcement and it's business model. I do not see it as a risky software startup at all. A risky software startup is one where there is no market, no code, no referenceable install base, no going concerns relying on the product, etc. In other words, it is truly a new concept, a new business, etc. NTOP's software exists and works and there has to be a hardware switch. You know that as someone who has a software background. You need hardware, microcode and some form of a compiler or operating system to run application code such as what NTOP announced with Cisco (ADIR Technologies). That is why Hawaii's comment about this being a rushed announcement and not all of it coming forth may have some truth to it. But even if there is no hardware Cisco will provide that missing link and what Cisco wants is a piece of the code business. So what you really have here is a combination of the two most profitable business models that exist in the technology business today: The OEM model and the Software model.
In essence, what NTOP is doing is OEMing to other Enterprises their existing software operations that currently run the Net2Phone networks. It works and must work better than other platforms since if it didn't you would not have T, AOL, Yahoo, MSFT, and all the others buying into or partnering with NTOP. Their DD is not just the financials but the technological competitiveness of the NTOP platform and they have the skills to make that assessment. Certainly no one can argue whether Cisco has those skills and what Cisco determined through their DD was that NTOP's software was best of breed and filled a niche they did not have (Cisco's VoiP is currently targeted to the business set not consumer set). The OEM business model has the advantage of not having to cost recover development (development engineering, apportionments, ramp up, code creation, test, etc.) The OEM model starts with a finished product or sub-product assembly, maybe even a final test commodity such as a chip set. Software has an additional advantage since there is no "base manufacturing cost" associated with it since all you do is spin code off a media writer to an OD and distribute, though that efficiency is obviously more profound with consumer code versus this kind of unique code. What the OEM model does is allow your existing business to eat all the expense associated with a "start up" business and then replicate that business without duplicating the cost so that you can either sell below market and still be profitable or sell at market and be enormously profitable. Either way there is no Anti Trust implications since they pass the "deep discount" test of profitability which would not bother NTOP much but is a concern to larger companies with dominant position such as Cisco, MSFT, T and AOL.
The Software business model is even more compelling as indicated above. Once the product is created your cost structure is reduced to enhancements, software patches, support, among other items but your base manufacturing costs are minimal. It becomes a legacy business enhanced by new versions with a continuing positive cash flow unless you go OTC which would generate huge up front profits. With NTOP's partners creating ubiquity at the consumer end the most efficient solution for a service provider is to use the ADIR Technologies products since it creates a seamless fit and therefore ease of installation and since there are no compatibility issues it would be the low cost implementation. It is my humble opinion that no one has intellectualized these issues and calculated into the overall business models the OEM and Software methodologies.
When you look at IBM, and you debate all the Gerstner moves, and the financial engineering issues, the buybacks, the restructuring and moves to services with IGS, and so on, none of these issues are anywhere as important on a continuing basis as the billion dollars a year in IP cross-licensing that flows virtually to the bottom line, the billions in OEM businesses particularly in the disk drive sector, the legacy software business in the Enterprise space that is enormously profitable or the continuing high margins in the legacy S/390 hardware business which contrary to being a dinosaur, still processes 70% of the world's daily commerce, yet these four business sectors have kept IBM afloat during the 90s and will continue to be the bedrock of their business well into the 21st century, yet this is not what gets the sound bites. I would suggest that that the Cisco/NTOP announcement yesterday didn't get the kind of in-depth analysis it deserved nor did it get the right sound bites either. Hopefully, over time, it will be better understood. |
