Posted on October 31, 2007
Filed Under Companies, Markets & Finance, Software, Technology & The Web | 1 Comment
Microsoft is worth more than the sum of its parts.
Yeah, Microsoft’s growth is not Web 3.0-based yet and it’s not virtualization-based yet and it’s not cloud-computing-based yet and it’s not open-source-software (OSS)-based yet. But that’s a good thing. The fact that Microsoft (MSFT) does not yet depend on Web 3.0 or virtualization or cloud computing or OSS (or pick your favorite buzzword du jour) is a plus. If you are one of those that love to hate Microsoft and are therefore betting that Microsoft has missed the waves tied to all these concepts, you have to bet that Microsoft is going to miss out on all of them. Not likely.
That Microsoft has grown revenue and profits the way it has, quarter after quarter, is much more meaningful from an analytical point of view than buzzword-based analysis. The software market size is about $250 billion a year worldwide according to IDC (according to published documents), growing around 7% per annum. Owning about 20% of a dynamic market, while growing faster than that market (15-20% on a trailing 12-month basis), also has to count for something. Especially when Microsoft is also growing faster than the next three largest software suppliers, IBM (IBM) Software Group, Oracle (ORCL) and SAP (SAP). And is also larger than those three combined.
I haven’t run the Google quarter-three 2007 numbers yet but I assume Google (GOOG) has cracked into that software market leadership group as well. And Google is still growing faster than Microsoft. So, in my analysis, I am conceding one loss. Monetizing software revenue via advertising is a trend that Microsoft will not win at. (But looking at it the other way, it would really count for something if Microsoft is able to crack that “advertising revenue as license fee” nut as well; it certainly does not appear that Microsoft will stop trying.)
Look at any other of a dozen trends important to the software market and Microsoft is strong or gaining ground quickly. Microsoft is settling up with OSS world (which accounts for less than 1% of the software market anyway). It is settling up with governments that have tried to change Microsoft’s business model (in favor of OSS and nationalized software firms or just because the governments are socialistic). Microsoft is acquiring its way into Web 3.0. Microsoft promises integrated virtualization 6 months after Longhorn rolls out (and I bet it will be more than simplistic server virtualization).
Name your buzzword: Microsoft has it covered. Microsoft needs to be working on all these fronts. The client software cash cow has another year or two left in it; server and tools has maybe five. Paul Kedrosky and others are talking about a break-up to increase shareholder value before the cows dry up. But I look at Microsoft as most valuable viewed as a single value proposition, rather than a group of business units. If it chooses to, Microsoft is able to change the user’s total information technology (IT) experience in a way no other software supplier can. Microsoft can combine the role of the user who is at once a consumer, an information worker, an individual looking for entertainment or personal information, and so forth.
This is true however only if you assume, as I do, that Microsoft’s still unspoken strategy is to become a services company. If that is not the case, if Microsoft prefers to be a strong software technology provider equivalent to Cisco in communications, Intel in chips or Adobe in document management, then split it up so its pieces can better compete with the others. But life for us analysts would become so boring.
–Dennis Byron
Tags: Microsoft, Oracle, SAP, IBM, Google
Posted on October 26, 2007
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Sometimes you have to help clients understand how to use your services. Microsoft is a great example as are recent updates on Akamai, Limelight and Citrix.
First of all we published an positive update on Microsoft in our May monthly (free) pointing out the fact that most people, especially in the investment community were missing some fundamental improvements in the Microsoft product set in part because everyone focused too much on Vista.
Then on October 23rd we published an email alert to clients about switching out of Google and Apple into Microsoft.
Although just a short-term move thusfar it’s been very potent from a return standpoint. Linking longer-term fundamental shifts with near and medium-term investment opportunities is exactly how our work is best used.
The October update also had similarly effective short-term recommendations on Citrix, Akamai, Limelight and Tibco which have collectively done quite well over the same period and are linked to prior fundamental reports on content delivery networks (AKAM, LLNW), virtualization (CTXS) and Business Intelligence (TIBX). – Kris Tuttle
Disclosure: We still own AKAM, LLNW, CTXS, TIBX and MSFT although we are trimming positions.
Tags: Microsoft, Akamai, Citrix, Limelight, Tibco, Software
Posted on October 23, 2007
Filed Under Companies, Markets & Finance, Software, Technology & The Web | 1 Comment
When disobedient, my generation was “taken to the woodshed,” even though this was long after oil tanks had replaced coal bins, which had replaced woodsheds. With my grandchildren, on the other hand, disobedient children seem to get sent to some ethereal “timeout,” which apparently can be served anywhere outside of the sight of their parents. On October 22 Neelie Kroes of the European Union Competitive Commission (EU CC) either took Steve Ballmer and Microsoft (MSFT) to the woodshed or sent them to “a timeout.” You decide.
Her most recent rant is related to the Hackers vs. Hackers battle that has gone on for years between parts of the open source software (OSS) community and Microsoft involving client/server (C/S) interoperability. Specifically the EU CC ruled in 2004 against Microsoft, and that ruling was upheld on September 17, 2007 by the EU’s Court of First Instance (CFI).
I call it “hackers vs. hackers” because ’suits’ simply would not have let this side show go on this long. And I use the term "side show" because the EU investigation and court case discussed had other aspects, most notably the bundling of Window Media Player, which were settled long ago. Even the C/S interoperability issue had been settled in the sense that Microsoft had already announced a Workgroup Server Protocol Program (WSPP) and priced the protocols. The only open item for some time has been the quality of the C/S interoperability documentation already released by Microsoft and the ridiculously high prices Microsoft wanted to charge anyone to license its interoperability technology.
Now Microsoft has announced that they will not appeal the CFI September ruling and that the EU CC says “Microsoft is in full compliance with the European Commission’s March 2004 decision.” According to the Wall St. Journal, Kroes said, “… Microsoft has previously offered to license this information to developers on terms that the Commission thought wholly unreasonable… (but as of October 22):
· Microsoft has slashed its requested royalties for a worldwide license (to related) patents from 5.95% to 0.4%.
· Microsoft has now abandoned its demand for a royalty of 2.98% (for access to interoperability information) to a nominal, one-off payment of €10,000.”
The blogosphere leads with all kinds of “Microsoft caves in” stories but it sounds to me like Microsoft’s tactic of going into the C/S-interoperability negotiations with ridiculously high royalty rate proposals has paid off because the EU CC’s previous position was that the patented technology and information was of no value and should be given away. It was a no brainer tradeoff to put up with some scolding by the old schoolmarm—now Eurocrat—Neelie.
Still the devil is in the details. The Microsoft WSPP web site does not seem to be updated yet but I read somewhere that Microsoft will charge for about 41 of its protocols. That does not seem to be a lot different than the existing WSPP terms and conditions, which already made many of its protocols available under Microsoft’s OSS-like shared-source program.
Some of the protocols may now even be released on one of the two Microsoft shared-source licenses that the Open Source Initiative recently approved as “officially open source.” Kroes is quoted as saying she “told Microsoft that it had to make interoperability information available” to OSS developers. But Microsoft has been on a major campaign for months to mend fences with the OSS community so no news there.
Kroes also said she told Microsoft “that it should give legal security to programmers who help to develop OSS and confine its patent disputes to commercial software distributors and end users.” Well sure, if you mean Red Hat (RHT) is a commercial software distributor. Who else would you go after, some kid in a walk up in Helsinki?
One irony seems likely if I have the timelines right. Apparently around the same time in the last month that Ballmer was again railing against OSS projects violating Microsoft patents, this time in London, he was meeting for breakfast with Neelie near her home in the Netherlands.
–Dennis Byron
Tags: Microsoft, Red Hat, Open Source, EU, Nellie Kroes
Posted on October 22, 2007
Filed Under Software, Technology & The Web | 2 Comments
Except among investment analysts, no news is good news. For investment analysts, no news brings out the worry beads. So it seems with SAP (SAP). Investment analysts were all over on-target Q3 results and slightly improved full year guidance from SAP at an October 18 quarterly conference call. They peppered SAP executives with number-crunching questions, picking apart changes in expectations by row and column. For example, compare license revenue in the Americas but back out last year’s $31M reversal? What about Business ByDesign (BBD) capital expenses vs. milestones announced two years ago? Wasn’t Germany soft? (Yeah, it was summer in the Northern Hemisphere in Europe.) But if full year 2007 is going to be x-metric better than 2006, doesn’t that mean Q4 2007 is going to be softer than Q4 2006? One analyst wanted SAP to release local costs in local currencies.
To be fair, the analysts are nervous about the information technology (IT) market overall, and SAP is more likely to give out more useful detail than other IT suppliers. So there is a tendency to ask SAP questions that if answered help analysts fill in cells in overall IT market models.
But the net-net for SAP at the end of Q3 2007 is threefold. SAP said it will grow faster in 2007 than in any of the last three years. Key revenue metrics are growing at the same rate as key competitors adjusted for currency. (SAP gets a negative effect from the Euro appreciation vs. the dollar whereas U.S. based competitors gets an extra bump.) User counts—the metric SAP wants to be measured by—continues its upward trend.
Basically, nothing has changed positive or negative since many of the same questions were asked and not answered at last week’s TechED, the announcement about acquiring Business Objects (BOBJ) a couple of weeks ago, last month’s BBD announcement, and last quarter’s conference call. So naturally the non-answers haven’t changed either. SAP would not comment on Oracle’s (ORCL) bid to acquire BEA (BEAS). In fact, it wouldn’t even comment much about SAP’s bid to acquire Business Objects.
Investors do still have to cut through SAP’s possibly misleading core enterprise applications vendor share claim as well as the statement that “we would have made more money if we weren’t rolling out BBD but we’re investing in the future.” The latter statement isn’t very actionable for investors because presumably every successful company is investing in the future. As for the former, is NetWeaver growth somehow included in SAP’s “enterprise applications” calculation? Are Netsuite and Salesforce.com (CRM) considered competitors? Still, the SAP market share claim is no more egregious than Oracle’s claim about its place in the middleware market as Oracle defines it.
In both cases, the companies do not release the numbers needed to verify the claims. So ignore them. Do not invest in SAP simply because you think it is gaining ERP market share; it is not gaining share in ERP vs. Microsoft (MSFT) and Oracle.
But the rest of the news is that there was no new news.
–Dennis Byron
Tags: SAP, Oracle, NetWeaver, middleware, ERP
Posted on October 18, 2007
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It’s just in the curious category (Leopard, market share gains and unlocked iPhone look very good) but worth noting.
The AC adapter for the MacBook Pro breaks like previous models. The problem is, you can’t get a new one. There isn’t a single one to be found in France and even Apple quotes 2 to 4 weeks for delivery.
When we tried to purchase one in the US we were only able to find one in the Boston area through a reseller and according to Apple they are not available anywhere but nobody knows why.
The problem of course is without the adapter your Mac is totally out of commission. It’s not very viable to wait a few weeks a new one.
Are power adapters that hard to make and stock? Does Apple have some odd problem with supply?
Puzzling.
Tags: Apple, AC Adapter, Mac
Posted on October 16, 2007
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There is a “corporate/social responsibility” initiative at the November Oracle (ORCL) shareholders’ meeting that merits IT investor attention (and not just the attention of Oracle investors). A pair of experienced corporate/social responsibility advocates has put a proposal on the Oracle proxy that requires the Oracle board to “issue, at reasonable expense, an Open Source Social Responsibility Report to shareholders by April 2008 that discusses the social and environmental impacts of Oracle’s existing and potential open source policies and practices.”
The Oracle shareholder responsible for the ballot question is Lawrence Fahn, a long-time environmental activist and former president of the national Sierra Club. The prime mover behind the question is Jonas Kron, a lawyer with experience in the procedures required for activist-investor efforts. He says he is acting in this situation as a supporter/admirer of the open source software (OSS) movement, not just as a legal advisor.
I think Mr. Kron and Mr. Fahn are asking the wrong question to the wrong company at the wrong time. I asked them why.
Mr. Kahn and Mr. Kron are, respectively, the executive director and legal counsel to an organization called As You Sow (AYS) of San Francisco. AYS was founded in 1992 “to increase corporate accountability.” One of its aims is centered on Environmental Enforcement Program (apparently related primarily to California). Another is more universal and centered on Corporate Social Responsibility “to use shareholder advocacy and the financial markets to catalyze positive change within public held companies.” However, although the proxy lists AYS’ name and address, Mr. Fahn says that the organization has not yet decided to pursue OSS on an organizational level. Instead, he submitted it on his own behalf after discussions with Mr. Kron.
The pair certainly knows more about placing social responsibility questions on the corporate agenda than I (in fact, I thank them for educating me on the subject). But the wording of the ballot question indicates only a passing knowledge of OSS. The proposal mixes up the OSS and technology standards movements in a way that does neither justice. It also implies OSS can do a lot of things that are way beyond possibility.
OSS is partially a social movement. But as a social movement it is more a virtual network of Elks’ lodges for hackers than it is the Paris Commune. For most of those who analyze OSS as a movement, Dennis Ritchie summarizes the sense of OSS best in describing some of his thoughts during the Unix invention process: “What we wanted to preserve was just not a good environment in which to do programming, but a system around which a fellowship could form.” (source: Alacatel-Lucent web site). There is a small radical (not meant as a criticism) element of the OSS movement called the Free Software Foundation (FSF) behind that barricade over there. But the FSF has nothing to do with the Oracle proxy and in fact even vehemently opposes the words “open source.”
From an investment perspective however, OSS is a research and development model that saves corporations—suppliers and users alike—substantial upfront investment.
In some investment research and analysis, OSS is also a business model that drives technology suppliers to a high-margin services mentality from a dependence on increasingly commoditized low margin products.
Whichever way investors want to view OSS, it can have no more to do with “catalyzing change” within public companies, especially suppliers of IT, than any other technology since it is only a means to an end (and even a means to a means).
The sponsors indicated that proxy-question procedure is partially responsible for the wording of the proposal. SEC regulations forbid ballot questions that simply ask shareholders to vote on company operational aspects. For example, Mr. Fahn and Mr. Kron could not ask investors to vote to have Oracle adopt OSS as its driving technology principle, although that is what they would like to see happen at Oracle and in other corporations. So, instead, their proposal asks for a report on how OSS contributes to Oracle’s social responsibility.
As for choosing Oracle, I was stumped before I talked to the sponsors. Oracle has a respectable place in the OSS community but it not a big user like Google, or a mover and shaker like Red Hat, or the OSS villain that Microsoft is always painted to be. Mr. Fahn’s answer is “time of year.” Because Oracle proxies in the fall and most corporations meet in the spring, it is easier for them to approach Oracle on what they acknowledge is a personal not organizational pursuit. In the spring, they are too busy with AYS initiatives. That answered both my “Why Oracle?” and “Why now?” questions.
Naturally Oracle opposes the proposal because boards always oppose proxy proposals that they didn’t propose. But on the face of it (and I still believe there is more to this under the covers), the OSS movement should oppose the whole idea as poorly timed and too abstract. The blind siding of Oracle also makes the OSS community look bad, although I cannot find any OSS-aligned organization behind the AYS effort.
–Dennis Byron
Tags: Oracle, open source software, OSS, proxy question, social responsibility
Posted on October 11, 2007
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Back in July, I read the IBM (IBM) and SAP (SAP) Q2 conference call transcripts and said it was a time to just lay back and enjoy the sun. The two company’s quarterly financials made for good beach reading. There would be plenty of time when the leaves turned here on Cape Cod to dig deeper, I said.
Hello Columbus Day!
In response to that post, dolphl2man wrote in and said, “Hi Dennis I agree with your feelings on IBM and SAP. There has been chatter regarding these two companies getting together. Any thoughts?” I responded, thinking of comments by SAP founder Hasso Plattner made a year earlier, that it’s always fun to “what if” but I really don’t believe IBM wants back into the “ERP applications” game (having exited in 1991). There are multiple reasons but the most important are channel conflict and IBM’s strategy of becoming almost totally a services provider. Happy and peaceful coexistence.
Then after SAP’s Business ByDesign (BBD) announcement, I thought about dolphl2man’s question some more. Rather than getting together, I think SAP might be in for a fight with IBM. At BBD time, I noted that BBD puts SAP right up against its long-time partner Microsoft as well as Inuit (INTU), and salesforce.com (CRM). I noted that SAP also needed to build a BBD ecosystem from among Microsoft, Intuit, Lawson (LWSN), Infor, and so forth partners.
Now I realize that in Lawson, and Infor and that “and so forth,” and after all these years, IBM is still the one. IBM is actually SAP’s biggest competitor in its strategic move into the small/medium enterprise (SME) market with BBD. (For SAP, by the way, SME really means just “M,” the medium enterprise.) Although IBM does not directly “own” the applications intellectual property in this segment, it partners heavily with all those that do. That includes not only the Intentia and heritage wings of Lawson but as many as 10 pieces of Infor, including the original IBM Mapics ERP software buried within Infor. There are also dozens of small industry-specific application suppliers, especially in all types of wholesale distribution, and even the JD-Edwards (JDE)-heritage portion of Oracle (ORCL). These suppliers have dominated the mid-market for decades. To be successful in its goal of doubling its customer count by 2010 with Software as a Service (SaaS)-paying BBD customers, SAP has to “unhook” thousands of IBM AS/400s (iSeries, or whatever).
Of course, ERP is not just MRP-plus anymore but most of these AS/400-heritage application suppliers have kept up by adding supplier and customer relationship management (SRM and CRM) modules that approximate the freestanding SRM and CRM suppliers’ products in functionality. This is the same functionality that BBD touts as superior to Microsoft, Intuit and other more “S” oriented BBD competitors. And as a group the IBM partners cover industry-specificity at almost the four-digit SIC level.
All these suppliers are already moving or will be moving to a SaaS delivery methodology if BBD and Microsoft market dynamics force them. And more good news for IBM and bad news for SAP; these long-time partners will use IBM to help them make that move. IBM WebSphere middleware will underlay much of the necessary software re-engineering to make it happen and IBM’s services groups can even provide the hosting. Looked at as a group, the IBM ERP lineup is much more functionally capable to serve the mid-market than the multiple Microsoft (MSFT) ERP offerings grouped under the Dynamics brand. (Note: Oracle management said as recently as its most recent conference call that it did not want to get into this space, deftly dodging the point that it is already heavily into the space because of JDE.)
–Dennis Byron
Tags: SME, ERP, CRM, SRM, SaaS, AS/400, iSeries, SAP, IBM
Posted on October 10, 2007
Filed Under Software, Technology & The Web | 1 Comment
In acquiring Business Objects (BOBJ), the conventional wisdom is that SAP (SAP) has given in and adopted Oracle’s growth strategy. I actually think the acquisition was still more tactical (what SAP calls “tuck-in”) than strategic. It’s just that the tuck requires letting out more than a few holes in the belt. But, without changing strategy, SAP has bought into many of Oracle’s technical problems. That might be more an issue than if SAP had simply changed acquisition strategy.
First, did the acquisition represent a strategy change or a tactical move consistent with the already announced tuck-in strategy? At the conference call, Henning Kagermann confirmed that this was not a change and checking past conference calls, I agree. Because of SAP’s own presence in business intelligence (BI) and analytics, the acquisition only slightly increases the “addressable market” SAP is aiming at for 2010 (from $70 billion to $75 billion). But it does allow much faster penetration of what SAP calls the enterprise “business user” role, in the first leg of the strategy stool, growing SAP’s business process platform business. Kagermann estimated that the acquisition accelerated time to market relative to the business-user role by at least a few years. SAP made the analogy that this acquisition increases business user penetration in the same way that the earlier Versa, Pilot and Outlooksoft acquisitions did.
The acquisition does not change SAP’s other two strategic legs: entering the small/medium enterprise (SME) ERP market with Business ByDesign (BBD) and growing SAP’s middleware business (already over $1B annually and on target to overtake Oracle). These second two objectives are actually bigger pieces of SAP’s 2010 growth objective than the business-user role expansion enabled by the Business Objects acquisition.
But the bigger issue is that SAP now faces many of the same incompatible architectural challenges faced by Oracle with its many acquisitions. At the conference call, the talk was all about keeping Business Objects independent and only leveraging synergies in business infrastructure. For example, Business Objects might drop salesforce.com (CRM) and become a BBD user.
But product infrastructure was also mentioned with some tantalizing hints that the two entities are already thinking about things like incorporating BI Accelerator into the Business Object suite for example or having the Business Objects suite use SAP’s master data management NetWeaver functionality. The Oracle-like analogy is that Business Objects was only just beginning to normalize the four separate architectures in its suite, and SAP had not yet integrated Pilot and Outlooksoft into BW. The whole line-up is a mishmash of products that were not scheduled to come together for four-six more months even when the companies were separate. Assuming this mishmash can be decomposed into true services and re-hosted in a services oriented architecture (SOA), this will be a good test of NetWeaver’s enterprise SOA capability.
There was also talk of a joint portfolio of industry-specific BI products, which Business Objects lacks as discussed here last month. There was also a lot of talk about that old term, Operational BI, combining SAP’s ERP with BI.
Although not mentioned in the conference call, there was also a lot of blather in the blogosphere about this being some kind of EU play. Let’s see what Neelie Kroes of the EU Competition Commission (EU CC) thinks of the deal? If the EU CC fails to look at this acquisition after squashing GE and Honeywell a few years ago, it will prove that the EU is not anti-competition, just anti-American.
–Dennis Byron
Tags: business intelligence, ERP, services oriented architecture, NetWeaver, EU
Tags: business intelligence, ERP, services oriented architecture, NetWeaver, EU
Posted on October 4, 2007
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Microsoft (MSFT) said September 30 that it had introduced “Online” services and “Live” services to “deliver connected computing options for people and businesses.” I found the announcement one of the most confusing I ever received from a software supplier, from the odd Sunday timing, to the stark bifurcation the announcement made between “Live” and “Online,” to the sentence after the explanation of why a hard difference between Live and Online was important, which used both terms (“Office Live Workspace is among the first entries in the new wave of online services”). If Online services are something different than Live services, which is Workspace?
In the annual Research 2.0 review, I gave Microsoft high marks for understanding that people are people, whether or not they are in their personal or professional roles at one instant in time. The future for IT-enabled service providers is one of a single compute structure that supports us all as our roles change during the day—from looking for directions on the way to work, to our roles at work (be they individual contributor or manager), to paying the bills at home, to looking for entertainment before leaving work, to shopping online (hopefully not while working), and so forth. The principle applies over longer time periods as well. Scratch my favorable analysis.
In a Q&A session provided by Microsoft, where it both asks and answers the questions, I think I learned some of the reasons for this mixed message:
• The left hand at Microsoft does not know what the right hand is doing. This is a Business-division-only announcement, perhaps not even discussed with others in the company. Either it is all about company politics or top management does not really understand the importance of Software as a Service (SaaS) as well as I thought.
• The Microsoft PR people had an inch of space left on the press release. So just for good measure, Microsoft announced Dynamics CRM for the umpteenth time.
• Some of Microsoft’s product managers wondered what “scale” meant in enterprise computing. They therefore announced that “participating… high-scale environments where students, faculty, staff and alumni (in select universities and school districts) have unique requirements that blend digital work with digital life” can participate in a trial to see if they can figure out any thing useful to do with Exchange. Scale refers to a degree of pedigree, right; as in select universities and school districts are not pedestrian riff-raff universities and down-scale school districts? Couldn’t the Education group afford a separate press release?
• With the retirement of Doug Burghum from Microsoft, there is no one in top management who was involved in marketing to enterprises in the 1990s. Therefore Microsoft didn’t know that the following wording purporting to understand newness has been used once or twice before: “… this new generation of solutions can break through the boundaries between the isolated islands of information within many organizations, while also enabling people to connect easily and securely with partners and customers…” Talk about old news. Do I need an Online service or a Live service to get voted off these “islands of information?”
Oh well, with Microsoft it has always been two steps forward, one step back. This announcement was a step backwards.
–Dennis Byron
Tags: Software as a Service, SaaS, Office, Office Live, Windows Live