The new power of two

Phone.com and Software.com, which both sell Internet software to service providers, have agreed to merge in a stock swap valued at $7.4 billion, and they've chosen a top-ranking Cisco Systems executive to lead the new entity.

The company will combine the strengths of Software.com, which sells unified messaging products, and Phone.com, which links mobile carriers' customers to the Internet with its Web-enabled browser.

Both software vendors have attracted carrier customers - between them, they have about 150 under contract, said Phone.com CEO Alain Rossmann - but neither has turned a profit yet. Nonetheless, investors gave the union a ringing endorsement, increasing the stock price of the pair immediately after the announcement and adding about $2.6 billion to their market capitalization.

Donald Listwin will leave his post as executive vice president of Cisco to lead the company, which has yet to choose which of the two existing names it will adopt. Rossmann will become chairman and executive vice president. Software.com CEO John McFarlane also will become an executive vice president.

Listwin, a 10-year veteran at Cisco, had been mentioned as a candidate for Cisco's top spot should John Chambers ever depart. Listwin also has served as a member of the board of directors of Software.com, in which Cisco currently holds an 8% share. Cisco will have about a 4% stake in the company formed by the merger.

Founded by Rossmann as Unwired Planet, Phone.com worked with manufacturers Ericsson, Motorola and Nokia to create a standard technology allowing mobile phones and other wireless devices to access the Internet. That Wireless Application Protocol (WAP) is free to OEMs.

Phone.com makes its money by selling platforms and applications that permit Web sites to be accessed by the WAP browsers in wireless phones. In July, Phone.com claimed 4.1 million users subscribe to wireless Internet services based on its software, which is used in 12 million mobile handsets.

The companies began considering a merger six months ago for several reasons, Rossmann said, including the explosive growth of the wireless Internet and the consolidation of providers in their respective customer bases.

"But the most important trend is the unification of service offerings across all segments, including wireless, wireline, portal and broadband, around a common set of IP standards and IP platforms," he said. The new company will be able to supply global service providers with a unified software platform based on open Internet standards.

Ben Linder, vice president of marketing for Phone.com, pointed to BT as an example of a telco with rapidly converging networks. "They've got wireline, wireless and ISP businesses, yet they want to offer voice mail and unified messaging across all of those to a single customer with multiple access points," he said. "That is a market opportunity we have quantified, and we believe we can address it through our two companies better than anyone because we bring together the primary leaders in separate parts of the market."

The companies can now speed their entry into each other's markets in tandem, said Valdur Koha, president of Software.com. "Nobody here hastime to even think about building the kind of sales force that Phone.com already has in the wireless space," he said.

For Phone.com, the merger may reduce its reliance upon WAP. Lately, the protocol has come under fire from competing technologies that also bring the Web to mobile phones - most notably, the proprietary i-mode system used by Japan's NTT DoCoMo, which now has 10 million users.

Some industry critics maintain i-mode is a superior platform for wireless Web browsing because it is more closely related to HTML. But KDDI, Phone.com's Japanese carrier customer, has 3 million subscribers using WAP phones, Linder said. An open standard will be more useful to the mobile Internet industry in the long run, he said.

"WAP remains a really key ingredient, but even before this merger, Phone.com was a provider of a set of applications that rides well above the protocol layer," Linder said. "The WAP business is the plumbing that makes everything else we do possible."

That claim does not quite fit with Rossmann's prediction last year that WAP would become as dominant in mobile Internet as the DOS operating system became in desktop computing.

"The WAP standard and [Phone.com's] microbrowsers are both in trouble," said Barney Dewey, an analyst with The Andrew Seybold Group. "There are very smart people at the top there that realize the technology's not all that it's been hyped to be. This is a great way for them to get out of that sole focus and diversify the business."