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Why Amdocs Is 'Seeing' Microsoft

Ray Le Maistre

Technology patents are much in the news these days, usually because of a legal battle. But one recent intellectual property agreement involving Amdocs Ltd. (NYSE: DOX) and Microsoft Corp. (Nasdaq: MSFT) stands out from the crowd because it hints at what could be an important development in the Service Provider Information Technology (SPIT) sector.

The announcement, made by Microsoft, notes that the agreement includes "a license under Microsoft's patent portfolio covering Amdocs' use of Linux-based servers in its data centers." (See Microsoft, Amdocs Strike Patent Pact.)

But that's only part of it. This isn't just Amdocs licensing from Microsoft -- this is a cross-license agreement that "provides mutual access to each company's patent portfolio."

So what's that all about? Our interest was piqued further when both parties declined to answer any questions related to the agreement.

That's probably because this is more than just a cross-licensing deal: It looks more like the start of related efforts by both companies to broaden their appeal to the global communications service provider (CSP) sector, which, if they are successful, could dent Oracle Corp. (Nasdaq: ORCL).

Here's why.

Growth potential at Amdocs
The company has broadened its portfolio in recent years, making some notable acquisitions. It's best known, though, for its billing systems and services and is the market leader in this sector. Those systems, in common with most other high-volume transaction systems deployed at CSPs, run mostly on Oracle platforms -- database software often running on Oracle/Sun servers, or HP Inc. (NYSE: HPQ) servers -- notes Heavy Reading senior analyst Ari Banerjee. That's something CSPs are comfortable with, as they need their back office systems running on dependable, scalable IT technology.

Of course, that suits Amdocs, too, at least from an operational standpoint: It doesn't want to be damaged by the failure of any underlying IT systems.

But it's not that simple. Historically, Oracle was just a supplier. But now it's a rival, having acquired its way into the OSS and BSS markets during the past five years or so. Oracle Communications, the IT giant's division for the CSP market, is now one of the giants of the SPIT sector. (See Oracle/Sun Expresses Telco Ambitions, Oracle's Higher Price Lands BEA, Oracle Buys More OSS With MetaSolv, Oracle Unveils SDP Plans and Oracle Acquires Portal.)

And Oracle technology does not come cheap (with good reason -- it works). Amdocs pays a lot of cash to Oracle each year (believed to be tens of millions of dollars) in license fees and that makes its solutions more expensive.

Now, Amdocs isn't short of cash. The company, which has a current market capitalization of $5.3 billion, just announced its results for the nine months to the end of June, during which it generated revenues of more than $2.4 billion and net profits of $293.4 million. (See Amdocs Reports Fiscal Q3 Profit of $98.7M.)

That's very impressive, but investors always want more. And Amdocs, while weathering the global economic turmoil of recent years, is still very reliant on the North American market for its business (about 70 percent of revenues) and isn't showing signs of generating even better sales or margins. And while the vendor is trying to break into new markets, with a small degree of success, its new billing wins are mostly with Tier 1 operators, the ones that can afford large, relatively expensive systems.

Heavy Reading's Banerjee agrees that Amdocs needs to do something different to boost its chances with mid-sized and smaller CSPs. "Its problem has always been figuring out how to scale down to mid-tier markets. It needs to find a way to scale down and be competitive in price-sensitive markets," notes Banerjee.

That imperative might have more urgency these days as Amdocs faces growing competition, with Huawei Technologies Co. Ltd. becoming a force in the telecom software world and with the recent acquisition of Convergys by NEC Corp. (Tokyo: 6701)'s Netcracker Technology Corp. . (See NEC to Buy Convergys Unit for $449M and NetCracker Plays End-to-End Game.)

So the pressure appears to be growing for Amdocs to find another IT technology partner to help it build more affordable billing/charging solutions for a broader range of customers and to reduce its costs (or grow its margins, however you want to look at it).

So, could that partner be Microsoft? Possibly, but that would require a leap of faith for CSPs to trust their billing and charging systems to Microsoft's SQL Server database technology, which is currently perceived, in general, to be lacking the required scalability and downtime capabilities for CSP billing deployments (though Microsoft is working hard to change that perception -- see below).

So Amdocs will be looking to stress test a combination of its BSS systems with Microsoft's database technology to validate that combination for potential customers and, should it go to market with such a combination, it has a patent deal with Microsoft in place.

That, of course, could have all been covered by a unilateral patent agreement, with Amdocs licensing from Microsoft. But this is a bilateral deal, so ... What does Microsoft want with Amdocs patents?
Microsoft has been trying for years to become a major IT supplier to CSPs but hasn't had the level of success it wanted. Heavy Reading's Banerjee notes that it has had a fair degree of success in the CRM market but not much else.

These days it is more visible as a partner to CSPs, with offers such as its Office 365 service that is resold by a number of major operators and has become a solid partner with many BSS vendors, such as Redknee. (See The Other Microsoft and The Other Microsoft.)

But it's still hungry to play a greater role with Tier 1 CSPs and to do that it needs to develop products that are more carrier-grade than they are at present: Having access to Amdocs's patent portfolio will enhance its R&D processes, enabling it to build better IT systems from the ground up.

It's already making as much noise as it can about the suitability of the latest iteration of its database technology, SQL Server 2012. In May, Microsoft and Redknee, along with other partners, boasted of a performance and scalability benchmark tests "designed to simulate the requirements of a typical Tier-1 communications service provider." (See this Redknee press release.)

Working closely with Amdocs on such developments will give Microsoft more credibility with the major CSPs, believes Banerjee. And it seems likely that benchmark test results will be forthcoming from Amdocs and Microsoft in the near future.

The main unknown is whether any major CSP back office deployments of Amdocs systems running on Microsoft IT will ever happen. But if it does, this will be the patent licensing deal that set the ball rolling.

— Ray Le Maistre, International Managing Editor, Light Reading

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