Posted on July 28, 2007
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Back in April we published an analysis of the current markets inspired by Kurt Godel, a famous mathematician. (forgive us the lazy lack of an omlaut here)
At the end of our ramblings we encouraged our readers to at least use options to protect their exposure to what were sure to be changing markets. Our point wasn’t to go short the markets (which would have been painful) but rather to take out capital protecting insurance. We have a nice bunch of long-term S&P puts which have completely protected the value of our long equity positions in the last week. If you didn’t you are not reading enough!
We point this out not to say we told you so. The research conclusion illustrated above is a permanent fact of markets and investing. If you are active in the market it’s essential to understand the fact that there is no reliable model of behavior and even the "expert" like Moody’s are 100% wrong sometimes. The downstream consequences are always unknowable. To have capital at risk in the market today means a commitment to risk management. Fortunately for small institutions and individuals it is easy and cheap. How many have managed the risk? If you are one who hasn’t please go back and re-read that section of the report.
– Kris Tuttle
Tags: Markets, Godel, Risk, Stocks
Posted on July 28, 2007
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There have been stories recently that the NY Times might discontinue their subscription-based offering TimesSelect. Part of the reason is that authors in the paper, especially in the OpEd section don’t want there to be a gate between their content and the world. As a writer, you want as many people as possible to read your work, it’s great if they pay but you generally favor readership over dollars.
The problem with TimesSelect and similar offering from other papers is that it’s annoying for the readers and subscribers. Some content is free, other requires a login. I’m a subscriber but sometimes my computer seems to forget how to login automatically and if the article isn’t that important I’m too busy to go through the whole "retrieve password" exercise.
So we’d completely understand if the Times decided to scrap TimesSelect. But it begs the question of if they do what then? We could write 20 pages here but instead suggest one option for the Times. When you stay at a resort you often get a simple short version of the Times (including the crossword) on 8 1/2 x 11 paper. I absolutely love it. If I lived full time in NY I’d subscribe to the Sunday Times but not the rest. We’re all too busy to sit down with the papers and page through them. It’s certainly all online today. However this packaging, combined with good editorial oversight would be a winner. I’d happily pay some amount per year for a 12 page PDF file of the NYTimes with just what I need to know. No advertising.
Display advertising online is now out of control. We have had to totally block and stop reading sites like Forbes.com, eWeek and ZDnet. The ads are overwhelming. You actually have to squint to see any of the text you are hoping to read.
Other publications, including the Financial Times, Nature and a probably all of them with a news focus need to find a way to deliver a nicely packaged version of the news to users that they would pay for. The efforts so far but the NYT and Dow Jones are pathetic. If the NYT just woke up and did something that adds value rather than just restricting access to random pieces of content they might be able to build a business out of it.
– Kris Tuttle
Tags: New York Times, Dow Jones, Newspapers, Subscriptions, TimesSelect
Posted on July 28, 2007
Filed Under Companies, Markets & Finance, Starting Up | Leave a Comment
In the early days many of us were enthusiastic users of Vonage and the company deserves some credit for breaking the ice of stupidly high calling rates, especially internationally, for those smart enough to place our little Vonage boxes around the world.
Of course technology is a tough business and during the past two years we have found more and more utility from Skype. (Skype has some serioius problems too but that’s anohter story/future post.)
We finally bit the bullet and called Vonage to cancel our services. This is the sad part. Of course like most subscription based services (including your phone company) you can get a lower price buy just calling and asking these days so they immediately offered to take the $24.95/month to $19.95. Then there was a $14.99 option. Still no? How about $9.99? Well we also have a $4.99 plan. Still no?!?
Finally there is a keep the box for free plan and pay for calls by the very low per minute rates. For us having extra boxes, phone numbers and accounts is not worth the trouble so we cancelled even the non-subscription.
Of course there are still individuals and companies that find one of the Vonage options a good fit for them but the trend certainly is not their friend. What a dismal way to spend your day, offering clients lower and lower prices until they still walk away after you get to free. Ouch. – Kris Tuttle
Tags: Vonage, Skype, Subscription Services
Posted on July 27, 2007
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I sort of “live blogged” the Microsoft (MSFT) Financial Analyst Day. I say, “sort of” because I did not actually post it up in real time, and I was in and out of the room with phone calls. And, oh by the way, I was not even there (but attended over the web).
In the afternoon session, we heard more about the Software Plus Service strategy than we had heard in the spring. More important, we heard less about advertising and devices being of equal importance with software and service than we had heard in the morning sessions from Steve Ballmer (comments on the morning session are here). In the morning Ballmer had talked about the four (software, service, advertising, devices) as if they were the pillars of Corinth (I know, there are only three remaining). But by the time of the Q and A at the end of the day, advertising had returned to being a way to monetize technology, as it is with Google (GOOG), and I didn’t hear a mention of a Microsoft telephone or Microsoft TV.
Forgetting Ballmer’s morning foray complicating the discussion, the issue is that even a “software PLUS service,” as opposed to a software as a service (SaaS) approach, potentially extends Microsoft beyond what it can afford to do. The good news is that Ray Ozzie and Craig Mundie, Microsoft chief architect and technology strategist respectively, talked about “software plus service” as if it was SaaS.
Both alluded to previous-life experiences that firmed up their understanding of what best belongs “in the cloud” and what belongs “on the edge.” Ozzie’s story, especially related to Notes, is well known. Mundie developed some breakthrough data management software back in the day and was one of the founders of the company that brought the successful Alliant parallel processor to market in the 1980s. Probably less well known is that Mundie (like Ozzie, a Data General alum), is the guy that strategized the Data General software that never had a chance in the market because it ran on the system called Fountainhead (FHP) that was never marketed, as documented in the 1980-Pulitzer-Prize winning book, The Soul of a New Machine.
Ozzie said he thinks of every Microsoft software offering is a “socket for a service.” Ozzie is theorizing (and helping to enable) a services platform approach for Microsoft to provide speed, scale and monetization (and cost savings for the IT budget) to both Microsoft itself and Microsoft’s enterprise customers. The platform he describes is the utility computing concept as MIT, GE and Bell Labs first conceived it in the late 1960s. See his speech for a full breakout of the framework.
Mundie said the 20-year personal computing model is evolving. He couldn’t say it’s dead of course so he pictured it as a pendulum swinging back and forth between personal and centralized computing every 20 years (now being the time it swings away from personal). Doing a great Carl Sagan, Mundie began a software discussion by explaining the implications of “watts generated per centimeter” of chip real estate. It’s the basic thing that is holding back Moore’s law as Gates had talked about in the morning (as opposed to physics). It’s all about heat. In order to compute more things in the current hardware-design paradigm, you need higher-frequency computing devices. Moore’s law will allow it. But at some point you would need asbestos gloves to work the mouse and asbestos pants to hold it on your lap.
The solution Mundie says is specialized chips that will show up in all kinds of devices scattered all over the framework described by Ozzie, in the cloud and on the edge. This means that the free lunch of higher and higher performance is over for software developers. Programmers that are now used to a one-size-fits-all programming approach will have to “write to” specialized chips. The software of tomorrow will have to take advantage of a loosely coupled (Software PLUS Service), asynchronous environment based on composite layering, decentralized compute power, and resiliency achieved via redundancy.
Such a brave new world will balance the personal computing vs. centralized computing pendulum, stopping it from swinging. Microsoft wants to sit right in that middle and is well positioned to do so (“in the pole position,” according to one analyst present). But it has to decide whether it wants to be the utility, or the guy that makes the dynamos. “Software plus service” is a costly conflicting corporate strategy that may become a self-fulfilling prophecy, a step back to the 1990s. Hell, a step back to the GE of 1910. If Microsoft tries to straddle that fence (be both a service provider and a technology supplier), its investors will be the ones hit by the pendulum.
–Dennis Byron
Tags: Microsoft, virtualization, Software as a Service, SaaS, Google
Tags: Microsoft, virtualization, software as a service, SaaS, Google
Posted on July 26, 2007
Filed Under Companies, Markets & Finance, Research, Software, Technology & The Web | 1 Comment
I am “live blogging” the Microsoft (MSFT) Financial Analyst Day. But unintentionally what I am doing is characteristic of Microsoft’s approach to its “… Live” services:
In order of appearance but not necessarily importance:
Bill Gates: Gates believes Moore’s law is being amended to “slower than halving and doubling every 18 months,” which was inevitable of course. However the ubiquity of broadband helps overcome that problem just in time, in Gates’ opinion. I hope he’s right but what more can you say. If he isn’t, analyzing information technology (IT) is going to be about as interesting as analyzing the corn-flake market.
Steve Ballmer: I’ll need to look at the transcript to make sure I heard him right but Steve Ballmer this morning went past the Microsoft “Software PLUS Services” business model mantra to say that Microsoft is going into the devices and advertising businesses as well.
I’m sure Ballmer thinks that he has to go into the advertising business to compete with Google. But as we’ve said, Google is not in the advertising business. I thought Microsoft bought aQuantive to add more software that it could build an enterprise service around but maybe I’m wrong.
And Ballmer talked about competing with Sony and Apple in the device business. I don’t know why he thinks he has to go into their business. He must like taking billion dollar write-offs when hardware breaks down, carrying inventory, and all those other fun 20th-century type things.
Sell! Sell! Sell! Or just sit because I don’t think Steve will get a chance to execute that plan anyway. In fact, I don’t think the Software PLUS Services strategy will ever really happen. In the end (meaning a good end or a bad ending), it is all going to turn on services.
Jeff Raikes: In the Microsoft Business Division, the new buzzwords for Microsoft are unified communications and business intelligence (BI), when aiming at the information worker in larger enterprises. In smaller businesses and among consumers, the idea is to sell many more PC users up to Office, monetize those that haven’t been paying for Office, and monetize more of the discrete functionality within Office as add-ons. The latter is a “… Live” play so will be the most critical in my opinion. There was not a lot about the Service part of Software PLUS Service in this section.
Kevin Turner: Turner talked about “growing and expanding the core.” Closing the loop on the subjects he and Jeff Raikes were presenting on, Turner framed his discussion around Vista and growth especially in emerging geographies. I didn’t do the math but when you look at the growth rates outside the U.S. that Turner presented, especially in the BRIC countries, you wonder what is really happening in Europe. Maybe we hear so much open source software (OSS) discussion out of Europe because they really are voting with their feet against Microsoft. This would give Microsoft all the more reason to walk away from the EU, as I have opined about (just because it would be such a great story, not because I really believe it will ever happen).
Microsoft rightly set the meeting up so that the financial analysts got their first chance at formal questions immediately following Turner. The questions covered
The answers were right out of the company handbook so nothing very revealing in this session.
Kevin Johnson: Johnson started the discussion about what was happening outside the core Microsoft of client/server application and infrastructure software and tools, highlighting some tactics to support online advertising as a business. He talked about the content Microsoft will create to attract eyeballs and followed up with what he will do for publishers. He wants to be measured by “…Live” ID, if you want to build a model. Not that I believe Microsoft will stay with this idea for the long haul anyways but if they do, Google wins (unless Google changes its tune and also tries to get into the content business).
Johnson talked about aQuantive, which is good acquisition even if I am correct that the “advertising business” will be folded into a more traditional SaaS model sooner rather than later. Johnson also announced the acquisition of ACN (sic-press release not available yet), an “exchange” for advertising spot buys and similar middleman activity.
Despite all the talk about advertising, an astute analyst kicked off separate questioning of Johnson by asking where is the “killer service” that distinguishes Microsoft the way search distinguishes Google (GOOG), CRM distinguishes salesforce.com (CRM), and so forth His answer was that all you see and much that you haven’t seen yet—because it hasn’t been acquired—will all be “brought together the way Microsoft brought together PowerPoint, Excel, Word and Outlook under Office.”
Despite most of his formal talk, 4 out of 5 of the questions that followed his talk were on services, three of them about Search. The analysts didn’t see how Microsoft was going to get from here to there (there being Microsoft as a viable competitor of Google). On the advertising side, Johnson said that “more than 50%” of revenue will come from publishers. OK, that shows a little understanding of what Google is doing.
– Dennis Byron
Tags: Microsoft, Vista, Longhorn, Dynamics, SaaS, Google, MSFT, Analyst Meeting
Posted on July 26, 2007
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Those of us in the software business joke about HP antics. Like Sun Microsystems before them they have proven to be one of the worst run companies out there vis-a-vis software. In contrast to IBM which at least has Steve Mills to at least generate return on investment, HP has no such person or strategy.
Back in May we gave a talk at the CA Council for Technical Excellence that focused on the missing "S" in SOA. The large techology vendors continue not to really get it from a business perspective. In fact during our reserach it became very clear that HP was the poster child for doing things the wrong way and even their OpenView product was going into the tank. (CA was happy to hear this as is IBM I’m sure.)
The truth is that for HP it doesn’t matter. Once they manage to destroy one set of products and lose the revenue they will simply spend another $1B+ to buy in the revenue they lost. So we were not surprised by the Opsware purchase although it happened sooner than we expected. Of course Marc Andreessen dutifully gushed at how this makes HP the "clear and overwhelming market leader" in the space. We’ll forgive him under the circumstances. After he watches HP "execute" the acquisition it may temper his enthusiasm.
– Kris Tuttle
Tags: HP, Opsware, Management, SOA
Posted on July 26, 2007
Filed Under Companies, Markets & Finance, Research, Software, Technology & The Web | 1 Comment
Not everyone knows SAP like they think they do. Our senior analyst, Dennis Byron, released a 14-page report to our clients earlier this week that delves into some of the details behind the SAP evolution in functionality and architecture, the market, and the competitive environment. SAP is a larger player in middleware and tools than most realize and can sit at the same table with IBM, BEA, and Oracle.
Here is the full summary:
SAP is focusing on growth in mid-market and smaller companies by grappling with the related industry trends of both architecting its next generation service oriented architecture (SOA) and deploying the resulting software as a service (SaaS). The complexity of that two-pronged task makes 2007 a building year in Waldorf. SAP has emphasized publicly that it will not reach “volume readiness” in SaaS (and implicitly SOA) until 2008. There appears to be little if any optimism built in to the current share price regarding SAP’s ability to leverage these recent industry trends. SAP stock has dramatically underperformed both Oracle and Salesforce.com by a wide margin over the past few years.
We want to be clear however that SAP’s dominance of large enterprises is quite secure and profitable owing in major part to its comprehensive industry-centric application functionality. Our analysis suggests that the strategy SAP has for long-term growth is credible but that it will take some time to be reflected in operating results. The current company valuation appears to underestimate the value of the SAP franchise, its dominant market share in applications, and its current strong financial position. Our long-term valuation methodology suggests a share price of $52 if the company can be moderately successful in executing its plans.
– Kris Tuttle
Tags: SAP, IBM, Software, ERP, Microsoft
Posted on July 25, 2007
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Back in March I wrote that only IBM could take an out-and-out obtuse technical concept such as service oriented architecture (SOA) and turn into a business issue. IBM had to overcome two challenges to make it happen. Most important, technically SOA refers to:
• Layering a 10-year-old service-level-agreement mechanism (“the contract”) inherited from the utilities industry
• On top of the decades-old concepts of set-theory-based object-oriented polymorphism, encapsulation and inheritance
• In a 20-year-old client/server relationship
To some that conduct academic research into SOA, Internet and enterprise service bus (ESB) technologies are also required on the above list to make the architecture truly SOA.
Another challenge IBM faced of course is that very little of IBM’s current software revenue stream is SOA-based.
But I said at the time that if IBM wants to say SOA is a business strategy, it had its advertising power during the upcoming golf-season and March-Madness basketball tournament to make it so. We saw later that month that IBM also commissioned the Object Management Group to advocate for SOA as a business issue from the user side.
Looks like it worked. This month, IBM announced the results of “a survey of clients” that concludes that the “strategic decisions to adopt an SOA are shifting away from the realm of IT staffers to business executives.” That must be why so many IT guys are telling me the IBM message causes them so many problems (expletives deleted) but are also good for a stress-relieving laugh. And why TIBCO’s (TIBX) Greg the Architect series had so much fun with the SOA acronym and won awards for best tech PR.
The survey was conducted for IBM by the Link Group and consisted of a “sampling of” attendees at the IBM Impact 2007 SOA event in May, which drew more than 4,200 technical and business leaders. This approach has a few methodological problems of course but it’s interesting to see what they said. The survey revealed that 67 percent of the respondents said the key decision makers responsible for moving to an SOA strategy are business leaders, including C-level executives and business managers. For anybody that remembers a few years back, that was the same crew that brought us the dot.com bubble. Additionally, 65 percent of “clients” said that business leaders are also primarily responsible for selecting an IT partner to help achieve business goals in an SOA. I think the press release means to say (1.) attendees at the event (2.) that took the survey but I am not sure. And of course, 53 percent of respondents indicated that their budgets for SOA projects for 2007 increased between 10 and 20 percent compared to 2006. That’s not exactly a wow increase but that’s what the survey said.
IT guys get either bent out of shape or a good laugh out of this stuff because basically the IT whole world is going to be based on SOA by about 2019 no matter what, ending a process that began around 2001, just as almost the whole IT world today is based on n-tier client/server computing, almost at the end of a process that began around 1989. No amount of surveys or advocacy groups is going to make it happen any faster or slower. But IBM will do its best to speed up the chemistry.
(By the way, the SOA buzzword itself is in the third year of the typical five-year life of buzzwords. With the standard buzzword half-life of one year, SOA will soon become much less visible. Greg the Architect will have to find a new buzzword to kick around.)
–Dennis Byron
Tags: IBM , SOA, TIBCO, ESB, enterprise service bus, services oriented architecture
Posted on July 23, 2007
Filed Under Software, Technology & The Web | 1 Comment
I think mainstream financial analyst questions at quarterly conference calls must be designed to support day trading. They don’t appear to be much help when it comes to investing. The back and forth at the recent Microsoft quarterly conference call was just another example. I heard a dozen trivia questions about old news like client and server software and only one (there might have been another technical modeling thing) about the future, Microsoft’s online division.
Nor did I hear a question about the open source software (OSS) movement vis a vis Microsoft. I don’t think OSS is a threat to Microsoft, and I am a firm believer in open choice in which the two coexist. But as long as the OSS movement thinks Microsoft is an “enemy” and parts of the OSS movement wish to achieve “World Domination” investors have to pay attention. In fact, I don’t think I heard a single question about the competitive environment. To be fair, the mainstream analysts are going to have all day Thursday July 26 at Microsoft’s annual analyst day to dig deeper (and you’re invited).
What I did hear in the formal presentation and in the carefully scripted answers to the carefully backwards-looking questions was all good. Even the stuff in the seams between the carefully scripted pauses was good news: 1) The guidance does not yet include the boost that the aQuantive advertising/publishing applications will give the online division, and 2) the estimate of what enterprises will do in general in FY 2008 is conservative. There could be upside from the already raised expectations.
Other little nuggets include (you can dig deeper in Research 2.0’s soon-to-be-released Microsoft annual study):
• Microsoft kept saying “It’s early days for Vista. The next 12 to 18 months are more important.” That relates to the fact that Microsoft adjusted the expected Vista/XP revenue split from 85/15 down to 78/22. (Long live Pinball, Owen!)
• Expecting a good CY 2008 boost from Longhorn, the new BI-laced SQL/Server, and what is likely to be an “eclipsing” Visual Studio, Microsoft noted a stronger than ever annuity-revenue mix in enterprise sales. It believes this change in mix is a long-term trend.
• Microsoft promised better “live” family integration and to build out its data centers. Promises are cheap, and heavy investments that do not provide healthy returns are very expensive. But throughout Microsoft history, the third time has always been a charm.
• Office is booming, and CRM didn’t do badly either. I would have rather heard about ERP, but Microsoft buried those results in its new FY 2007 segmentation, so it’s hard to compare the old Great Plains/Navision against SAP’s and Oracle’s ERP results. Overall business bookings were up 24% YoY but you can’t tell whether that is ERP or just CRM (or even Office, I guess). The fact that Microsoft said nothing tells me a lot, not even a thanks and good bye to Doug. Maybe we are looking at Microsoft’s first great divestment in the process setting up (resetting up actually) a great partner? It certainly helped IBM in the short-term to spin out MAPICS back in the day, creating the “AS/400 ecosystem Nova” that has only recently collapsed back into the black hole of Infor.
• In entertainment and devices, Microsoft said it accounted for some pricing and console tactics that it won’t tell us about yet in its guidance. Wait for the holidays.
• Actually there was one semi-competitive-environment comment: Microsoft doesn’t think the tide is raising it along with SAP, IBM, and so forth. It thinks the tide is at slack and that Microsoft is taking share from others in a fairly stable spend environment.
–Dennis Byron
Tags: Microsoft, Software as a Service, SaaS, Vista, open source software, OSS
Posted on July 20, 2007
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It’s summer time (at least here in the northern hemisphere), and the living is easy here on Cape Cod. And the quarterly earnings announcements from leading information technology (IT) suppliers SAP (SAP) and IBM (IBM) make pleasant beach reading.
In looking at their reports, I am going to do my best not to rain on anybody’s beach or boat or golf bag. There is nothing I heard this week that changes my past opinions, which were generally favorable already on these two leaders in their sectors. The yellow flags and foreseeable downsides are already factored in.
Here are the good things I heard:
• IBM had its best revenue growth quarter since 2001. IBM made it clear the “tough compares” start in 3Q and 4Q, so for now sit back and read that beach book.
• SAP software and related revenue was strong for 1H and stronger for 2Q, going into the European slow period. Yes, consulting is flat but that’s not new news. It’s just that no one’s really using the new R/3 stuff yet—just licensing it at great prices. So cut the engine and drift with the current (You’re not in a major shipping channel are you?).
• The IBM problem in the Americas in 1Q must have just been ice storms in March or something because the boys on the company softball team hit a home run in 2Q.
• SAP lifted the kimono a little more on A1S. Keeping with my summer “good times” theme, I will not mention that the first thing that came to mind when I read “A1S appliance” in the transcript was Pandesic (but I think Henning said that was what some customers in Europe wanted—the customer is always right). More important, countering one of my major criticisms of SAP, I now believe there is a supervisory board member with “channel” on his forehead; it’s Henning himself.
• IBM’s plan to almost double EPS by 2010 was prodded and probed by the mainstream financial analysts six weeks after it was implemented the same way the mainstream U.S. consumer press is prodding and probing the U.S. armed forces about its surge plan in Iraq six weeks after they got there. At least give it the summer to work guys.
• SAP’s customer base was up 3,000 in the first half, including some 400 R/3 customers so the core is growing again whereas it had been almost flat in 2006. And SAP counted 800,000 Duet users (upsells today) and almost 2,000 Business One customers (upsells tomorrow).
• IBM says organic growth in the branded middleware segment is beginning to account for “over half” of branded middleware growth. There’s a little overparsing of a “the glass is half full” philosophy in this claim (it’s the flip side of upcoming “tough compares” after all) but these numbers are definitely going in the right direction.
• SAP talked about its pending 1B euro year in middleware revenue. As I detail in our new report on SAP, it could have really rubbed Larry’s nose in it in terms of how quickly SAP reached the $1B level. But discretion is the better part of valor given the Tommorow lawsuit. Also, I must have missed this earlier but it is also good news that Sungard will be a NetWeaver Inside application supplier. I am a little leery of the use of the term “hub concept” by anyone developing modern middleware, but it’s summer time, so I’ll wait for the first leaves of fall to dig into that line.
• IBM says it can meet its EPS goals via selling more new software products (in proportion to older software products I guess) and virtualization. I’ve already disagreed with the former and agreed with the latter so “play away.”
• SAP added two GEA contracts. It’s not SaaS, but it’s real money in the bank even if not recognizable revenue this past half.
• Finally, despite my concerns in the spring based on both company’s 1Q reports, macroeconomics looked good according to both. SAP was seeing a little bit more robustness in Europe than in the U.S. and both see boom times in A/P.
So sit back, and breath the salt air. The snow will fly soon enough.
(And for all of you readers in the southern hemisphere, most of you have nice weather all year round anyways so forgive my geographic incorrectness.)
–Dennis Byron
Tags: IBM, SAP, middleware, ERP
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