IT Investment Research

Let's count 'unlicensed PCs' as 'Linux sales'

Reading the Microsoft (MSFT) third quarter FY 2008 conference call transcript confirms my April 24 opinion that Q3 FY 2007 was too tough of a compare and an earnings report designed to take a lick.

Every company with its track record gets a pass for one quarter and this is Microsoft's turn. [Of course, Microsoft would argue that it doesn't need a pass; just do all the arithmetic about the "technology guarantee," it says. But that's a lot of IRbabble.]

But the color on top of the 3Q FY 2008 Microsoft numbers is more interesting:

1. An emphasis on "unlicensed PCs." A lot of discussion on the conference call centered around how well Microsoft client software (i.e., Vista and XP) sales were compared to overall PC sales. Microsoft's theory is that when its client-division sales growth outpaces PC growth including sales of "unlicensed PCs," it is doing a good job combatting piracy. That has been the case in the fiscal year ending June 2008 but Microsoft and financial analysts are predicting the numbers will turn around in the second half of 2008.

Another explanation for the growth of "unlicensed PCs," if it occurs later in 2008, might be the growth of open source software such as Linux. Perhaps these PCs are not unlicensed (so that pirates can put Vista or XP on them) but just unlicensed in terms of a Microsoft operating system product?

2. Growth outside the U.S. Microsoft now says it is getting two thirds of its business from outside the U.S. Some of that is currency fluctuation based but it still represents a large change from a few years ago (whereas other IT Top 12 suppliers such as IBM and Oracle have achieved more than 50% of their revenue from outside the U.S. for years).

Obviously, the reason is that that is where the money is. 15% of its revenue is coming from what Microsoft called "high-growth emerging markets" (that is, not the EU, where Microsoft is losing money by the bucket full as it continues to pay off the EUrocrats to play a game that is less than zero sum).

Microsoft Q3 financials: I hope they are stuffing business back in the drawer

It looks to me like Microsoft decided that the "technology guarantee" reveal was holding down the compare of Microsoft's third quarter of FY 2008 with 3Q FY 2007 so much that the company just stuffed business back in the drawer.

In fact, when aQuantive results from the first calendar quarter of 2007 are backed in, I think the compare is negative.

At least I hope that is what is happening because otherwise there might be signs of the slowing economy in Microsoft's numbers.

But picking the midpoint of their Q4 FY 2008 guidance gets them back on an up curve with a healthy finish to their year (ending June 30). At least I hope that's what's going on here.

In fact, I'm going to skip the conference call and read the transcript in the morning. Somebody will ask them about constant currency I'm sure. Because I sure hope that's all that is happening here.

(I'm waiting for SAP and CA to report during the week of April 28 in order to do my trailing 12-month analysis of the IT Top 12. It still looks like Microsoft will be fourth or fifth among that group. I hope.)

-- Dennis Byron

Open source blogosphere needs to get the Linux/OSS numbers straight

The open source blogosphere is all a twitter April 17 about the Standish Group International statistics released on April 16, which I mentioned here. 

I'm sure these bloggers are good PHP programmers and know the Apache HTTP server inside out. But they are totally misreading the numbers and conflating them with the Linux-Foundation-sponsored IDC white paper released previously. Not surprisingly some enterprising journalists are reporting on the blogospherists' opinions rather than going back to the source and checking with Standish. Apparently stroking the open source software (OSS) community "sells more papers" than getting the facts straight.

For some reason that I cannot fathom the journalists also seem to think that Microsoft (MSFT) might have sponsored the Standish research.  This, of course moves the journalists from just hip shooters into the blogospherist category of Microbasher (which I define as someone that attacks the person who wrote the blog rather than the words in it, says the person is paid off by Microsoft, picks some absurd opinion such as "Microsoft software is expensive" and states it as if it came down from Sinai, and then parrots some IBM (IBM)/Sun (JAVA)/Google (GOOG)/Red Hat (RHAT) propaganda against Microsoft).

Let's cut through the blogobull.  Here are how the numbers line up:

In 2007, I estimate that there was about $2.5 billion of software and software-related (mainly subscription maintenance) revenue "sold" with OSS terms and conditions. My estimate is based on a June 2007 IDC press release concerning OSS revenue in 2006. This includes all OSS, not just Linux, and is probably mostly middleware-related OSS subscriptions.

On April 8, 2008, the Linux Foundation released a white paper it sponsored with IDC that says the size of the Linux-related software market in 2007 was $10 billion out of a total of $242 billion (4%). By comparison, Windows-related software totalled 53% of the market in 2007 according to IDC. The Linux-related software market includes some of the estimated $2.5 billion of OSS software mentioned above, if it runs on Linux, but it is mostly non-OSS software running on Linux (e.g., the Oracle database or SAP R/3). This does not include any Solaris-related OSS revenue (but that revenue is included in the $2.5 billion; anyone want a Venn diagram?).

The Linux-Foundation-sponsored IDC whitepaper also estimated what IDC called "the Linux ecosystem," which includes software (including non-OSS software), hardware and professional services. This $21 billion is part of an overall total over a trillion according to other publicly released IDC data. (Standish uses the same overall IT market estimate but I do not know what source Standish used.) This number does not relate to the rows about and below it in the chart.

Based on reading the Standish press release (I did not talk to Jim Johnson about this), Standish feels the 2007 software market would have been larger if not for IT departments using OSS without subscribing to maintenance (and possibly other software-related services).

The factoid that is gaining all the attention: Standish estimates that by some point in the future, the delta between reality and what might have been will be $60 billion.  I don't see that happening to that degree (that would be 20% of the market in 2012) but some such fall off is very likely (and Standish has a good track record of seeing such trends). 

Yesterday I attended a webinar at which Casey Coleman, CIO of the U.S. GSA, spoke.  She mentioned that a particular OSS knowledge management package she used was so stable (and her department's use of it was so stable) that the GSA has stopped subscribing to maintenance. This is not money taken away from Microsoft (and if it were, why would Microsoft sponsor Standish's report?)

Drip by drip, that's where the $60 billion would come from.

Ok?  There'll be a test at noon.

New open source statistics might raise a warning for IBM, Sun and others

Last week we heard from IDC that the Linux-based software market (including both the open source and proprietary products within it) would more than double over the next few years. That was good news for those IT suppliers that have crossed over from a dependence on legacy and Unix-based solutions. That company list includes IBM (IBM), Sun (JAVA) and others.

This week, we see an indication of the flip side of the ongoing transition from Unix/legacy software ecosystems to open-source-based ecosystems. The Standish Group says:

"... while it is only 6% of estimated trillion dollars IT budgeted annually, it (open source) represents a real loss of $60 billion in annual revenues to software companies."

The software companies so affected are all on that same list.

As I indicated on ebizQ in January, I have not seen signs from the supply side of that kind of fall off in software-related services revenues. But the Standish Group has been doing its sort of user-based research for almost 25 years so I don't discount it. In fact, as I said back in January:

"In IT market research, it is important to understand if true free-as-in-air OSS is displacing traditional subscription maintenance or SaaS revenue streams, and thereby decreasing overall software market size. From current ebizQ research, there is no indication that such displacement is happening but the market will never get a truly accurate picture unless a census includes all software, not just software licensed under one set of terms and conditions or another. "

It's just coincidence that on April 16, OpenLogic formally kicked off the census project it had announced in October 2007. It promises to make the aggregate census data publicly available so sometime sooner rather than later we can begin to see if what the Standish Group is seeing plays out in the market. I'd rather have a total census but the OpenLogic effort is a good start.

-- Dennis Byron

At IBM, Open Standards matter more than open source

IBM (IBM) recently briefed a group of analysts on what it calls its “cross-brand” open source development and marketing activity. That characterization makes the point that open source is as important to the IBM Lotus, information management, and Tivoli brands and products as it is to the WebSphere, Rational and operating system brands and products with which open source is typically associated. At the 30,000-foot level, I took away some good news and some bad news.

Here was the good news. At IBM, the use of the open source software (OSS) community and development model is all about increasing market cap. It’s not altruism. It’s not something for some developers to do 10% of their time like Google’s (GOOG) tithing for technology. It’s not an ad slogan or a manipulation of OSS terms and conditions (Ts&Cs). Most important, it’s not a strategy, it’s just a tactic.

This good news is not new news; it reinforces past IBM direction. But it is always good to hear it spelled out so clearly by top level managers, “cross brands” as IBM says. You can see OSS now in WebSphere, Lotus, Tivoli, Rational of course (the Eclipse Foundation), Linux and now information management (with the late March 2007 investment by IBM in EnterpriseDB). Ten years after beginning to employ OSS as a tactic with the decision to bundle the Apache HTTP server into WebSphere (in order to overcome an early Netscape lead in the web server software market), the open source tactic is paying off. My research says IBM is doing—conservatively—as much OSS-related business as Red Hat (RHAT). And the OSS development model clearly helps on the expense side as well.

Here’s the bad news: There is an IBM strategy behind “next gen open source” and they call it Open Standards (always upper case). In the Lotus market, IBM managers appear to be betting a lot on international approval of Sun’s (JAVA) open document format. There are also many other de jure standards efforts to which IBM pays a lot of attention.

I could not disagree more with the strategy. I'd rather see more time spent making appropriate IBM technologies lower case standards. Open Standards (always upper case) are an artificial market manipulation that has either no effect or no lasting effect. Even worse is when the Open Standards are combined with politicians. The use of Apache mentioned above from 1997-1998 is a better example for IBM to follow. IBM (and Oracle’s) early adoption of Apache illustrated how standards (lower case) change market dynamics quickly and positively for the company that acts on them. The years of meetings in Geneva can follow once the market has blessed one widget facet or another (or blesses more than one widget facet). Typically these are functions on which users are not going to make buying decision anyways.

But for more than my 40 years in the business, if The IBM Company (back in the day, it was always pronounced upper case) says something is so in the information technology market, I have to think long and hard about betting against it. I think the Open Standards strategy, although apparently being driven by the IBM Software Group probably has a lot to do with what we called the services strategy in our 2007 annual review of IBM.

-- Dennis Byron

Linux Foundation, IDC release new forecasts for Linux ecosystem growth

On April 8, the Linux Foundation [LF] sponsored the release of some very interesting IDC data on the growth of the software market and other aspects of IT spending through 2011. The previous sentence is worded the way it is because although the white paper in which the data appears is "sponsored by the LF," I do not believe the data within it is based on any separate IDC data gathering. Because there is no methodology section, I believe these are crown-jewel IDC numbers based on the time-honored annual IDC methodology for estimating and forecasting information technology [IT] market sizes. Based on historical patterns, IDC has already released 2012 estimates to clients. But the IT market is an aircraft carrier so newer numbers, if they have been distributed, are unlikely to be substantially different than this iteration.

The two major sets of IDC numbers in the white paper estimate the size of the software market itself and the size of the hardware/software/services markets (the ecoystem) that surrounds various software. A third set of numbers looks at the types of workloads that run on Linux servers.

In juxtaposition with the recent open-source related "findings put out by Gartner," which were more qualitative (at least publicly), the IDC white paper and its conclusions paint an interesting postion of how the IT market will evolve over the next few years. Linux-based solutions will replace UNIX- and other-legacy-based solutions as both the Linux and Microsoft (MSFT) Windows ecosystems grow. Underlying that finding, by 2011, IDC estimates that Windows and Windows-based software will have grown to account for 58% of all software spending, from 53% in 2007. Over the same time period, Linux and Linux-based software revenue will triple from 4% of the market to 9% of the market in 2011.

But these two universes could also intermingle and be hard to separate sooner rather than later. The IDC authors hint at possible Microsoft software running on Linux down the road (that is, later rather than sooner). My prediction is that it will happen sooner; Microsoft software has long run on Mac operating software.

A few caveats:
-- Remember Linux does not equal open source. IDC points out that the open-source Sun (JAVA) Solaris ecosystem could also grow during the forecast period, even if the overall UNIX ecosystem contracts.
-- In addition, although it is not clear from the numbers, presumably the Linux ecosystem estimate includes revenue from a lot of non-open-source software such as SAP (SAP) ERP software running on Linux. In fact the projected revenue size of the Linux ecosystem is possibly mostly made up of non-open-source software.

-- Dennis Byron

Red Hat, ACLU are no friends of software patents

Red Hat (NYSE: RHAT) has joined the American Civil Liberties Union [ACLU] and others in filing friend of the court briefs in U.S. Federal Court. They both oppose the fairly new (a little more than a decade old) idea in the U.S. of granting patents on concepts instantiated in software. The case the two are getting friendly about is called In Re Bilski and is probably wending its way to the U.S. Supreme Court because the Federal Appeals Court involved has broadened the case's scope to include revisiting the late 1990s rulings considered to have enabled "software patents" in the U.S.

Interestingly (based on reading third-party information because Red Hat had not actually released its brief as of this writing, only a press release about the brief), the case in question does not appear to involve software. It appears Red Hat, like the Appeals Court, was simply looking for a place to take a stand. According to its press release (and many of its past SEC filings), Red Hat says patents stifle innovation. Red Hat applies for some patents itself but only in self-defense.

Red Hat's press release says patents stifle open source software (OSS) innovation but my research says there is nothing unique in the "open source developement process" that would make it any more (or less) likely to be stifled. The press release appears to be a cry to help the "poor software artists" working somewhere in a garrett but a recent Linux Foundation study showed that most open source development, at least on the Linux kernel, is done by the same large corporations where all other software development takes place. Developers of code that will eventually be licensed under an Open Source Initiative or similar license (there really is no such thing as an open source developer) appear to have the same access to intellectual property (IP) legal advice as any other software developers. And, I believe, all developers will need to do the same due diligence relative to respecting others' IP if the industry reverts to using copyright law (which is the way it used to be in the U.S and still is in most places outside the U.S., I think).

Investors want to begin to reconsider (or begin to consider) how to value software companies' patent portfolios. Any change in legalites would not affect the millions of dollars many of the largest IT providers make on patents related to more substantive things like hardware. And also consider that the major innovation that a change in software patent rights might kick off is burying software down in a "hardware device" often called an appliance (and then patenting the combo). The industry is beginning to go that route anyways.

As usual, the U.S. Congress is abdicating its responsbility on this issue by doing nothing and leaving the issue to the courts.

The ACLU is coming at it from an entirely different angle, a free-speech connection. I shamelessly shoehorned the reference to the ACLU into this blog post simply to get your attention and make a comment about Red Hat CEO Whitehurst's recent statement that "George Bush is good for open source" (based on Infoworld article; Red Hat will not provide a copy of his remarks). But I can't think of a comment to make other than that I am appalled by it if the Infoworld article is accurate.

-- Dennis Byron

Boycott "Boycott Novell" -- Part II

The writer of this blog post at a site called Boycott Novell is intentionally lying about me. I have never read his blog posts but his readers should assume that he is lying about everything else he posts as well. Someone like myself from the old school is trained to say, "thanks for spelling my name right," and to otherwise ignore such foolishness. But given the viral nature of the Internet, the rules have changed. As politicans such as John Kerry have learned the hard way, you must correct the record quickly and vigorously.

Until March 17 when the author of this blog post first lied about me (to the best of my knowledge it was the first time), I had never heard of Boycott Novell. When I read his first lie, I searched comments on my various blog sites and found nothing from this author or anything to do with Boycott Novell. (NOTE: I am assuming he is a he but many bloggers on these front-group web sites purposely hide their identities.) Now that he says as part of his latest lies that he and I communicated in the past via an email exchange (which made no mention of Boycott Novell), I now know what he was talking about.

The following is the extent of my dealings with someone I "knew" only as the email address s@schestowitz.com and only for one day in September 2007. The exchange reveals the lack of substance behind his rants, a problem that is all too typical of many pro open source software (OSS) blog posts to the detriment of the OSS movement (see this recent article from Australia). For brevity's sake, I have deleted the substance of the market-research discussion. I would be happy to send the entire exchange to anyone that wants it.

-----------

1. In early September 2007, Savio Rodrigues commented on a report by Heather Bellini, a financial analyst for UBS. Heather’s report and Savio’s post was about Linux penetration into the market. It was the classic debate: should market analysis count revenue or instances.

2. The Boycott Novell author (again, not identified as such) commented on Savio’s post:

“These 'analysts' drive me nuts. Not so long ago, someone from TheStreet said that "Microsoft was cleaning (sic) with Windows"…

“Never mind, the analysts just look at money, money, money... and spin figures their own way, sometimes to please someone that pays them.

“By the way, Barron's got caught shilling for Microsoft several times recently. I reported this as well.”

Posted by: Roy Schestowitz at September 5, 2007 02:35 PM

3. A frequent reader of Savio’s blog, I commented on s@schestowitz’s comment:

“In defense of analysts everywhere, Heather is a financial analyst and unless you are Swiss, a druglord, another very rich person, another large bank or a pension fund you are unlikely to be dealing with her firm, UBS. It is unlikely that a gnome got up yesterday morning and told her to put out those statistics to move a little Microsoft stock out of UBS' portfolio or to lower the price of Red Hat..

(I then commented on Heather’s methodology and provided some public IDC numbers and its methodology in contrast. It was pretty innocuous stuff.)

Posted by: Dennis Byron at September 6, 2007 01:37 AM

4. Boom! The Boycott Novell author then changed his mind about who the bogeyman is. It’s not the thestreet.com, or Barron’s, it’s IDC. (I of course subsequently learned that he attacks IDC on Boycott Novell all the time but I only knew of him as the email address s@schestowitz.com):

“It is fairly well established (I'll provide references if you require them) that IDC and InformationWeek are very close to Microsoft. Their figures, 'studies', and deliberate omissions were identified before.”

Posted by: Roy Schestowitz at September 6, 2007 04:38 PM

5. I then posted a reply and also emailed the reply to him directly at s@schestowitz.com as follows

“Not sure if you are the Roy that posted to Savio's blog on InfoWorld about Heather Bellini. If so, I commented on your comment. ..send in your references or post them and I'll take a look.

“But I dispute that it's "fairly well established" that all the disparate sources you attack are in the bag for Microsoft: IDG's IDC, UBS' financial analysts such as Heather Bellini…, thestreet.com, …Barrons, … Information Week (probably not original research since the latter three are news organizations), and so forth.

“I am not sure what kind of scientist you are but I hope you are one that looks at the numbers dispassionately. Of course, studies are almost always skewed one way or the other. And you can argue (as I get paid to do) about methodologies and taxonomies. But that is not the same as the statistics themselves: the numbers are the numbers. Umpires just call 'em as they see 'em.

6. He replied on September 19, 2007, changing his accusation. Apparently because he had been confronted directly by an analyst, he then said that it isn’t analysts he’s concerned about, it’s “paid-for studies” and “known media placement.” (I am still not sure what the latter term means.)

“Hi Dennis,

“I have been reading your articles for quite a long time and I enjoy them. I keep track of them using Yahoo's RSS feeds. Thanks for contacting me.

“I was referring to paid-for studies and known media placement, which are often shown to have hidden the unwanted part of the results or some key facts. I'll confess that I do not trust the press much. I know what I see and, trust me, I explore this a lot.

..

“if (sic) you search the Web for 'schestowitz' with the words 'idc' or 'gartner' or 'informationweek', I'm sure you'll find quite a few references that I have been providing. I oppose a world where even academic studies are back by industrial interests.”

“I hope I didn't sound too rude. Please just drop me a line to say everything is OK.

7. I replied:

“Roy, per your suggestion, I ran a search of your name filtered by IDC and came across this page. I looked quickly at the underlying references. I saw only two references with any IDC numbers in them.

(BYRON NOTE: I then tried to convince him, with specific details of which I am personally familiar, that his accusations were false.)

“Other than that, your examples of bias seem to relate to IDC's analysts giving quotes to Microsoft for use in its press releases or to the press in a way you consider biased for Microsoft. I guess that's what you mean by "known media placement?" They are "known" but they are not "paid for?"

“When at IDC, I personally did as many such quotes for Red Hat and other open source software (OSS) suppliers as I did for Microsoft. In fact, within reason, we would do them for anyone, even non clients. Unless the quotes are statistically based, they are always ambivalent ("On one hand,… but on the other hand…"). I don't think you can show me any IDC examples... where facts were hidden.

…

8. The Boycott Novell author then replied changing his accusation a third time, citing journalists and lobbying arms. Of course, it is kind of silly to accuse lobbying arms of bias—that’s what they are supposed to do—but I will defend journalists against his venom

“Hi Dennis,

“Placements that I had in mind do not come from analysts, but from various journalists and lobbying arms such as ComptTIA and ACT. …

… (He asked a question or made a point about methodology.)

9. Finally (all of this occurred on one day, 9/19/2007), I replied:

“Believe me the methodology is as easy and effective as calling up people and asking them what they use (and what they used before). But clearly you'll never be convinced of that so let's agree to disagree.

-----------------

When challenged personally to back up his outrageous lies, he cannot. I didn't mean analysts, he says, I meant journalists. Ok, Mr. Boycott Novell, I am writing to you now as a journalist, give me some examples of journalistic malfeasance and I will analyze those examples also. Why do I have a feeling he will change his tune for a fourth or fifth time?

Finally and as an side, for the record, I never accused IBM/Cognos of corrupt practices. The Boston Globe and the State of Massachusetts inspector general did. If he or someone else has an issue with that they are welcome to comment on my blog.

-- Dennis Byron

SAP 20-F documents a company milestone: more customers than employees

The 2007 SAP (SAP) 20-F was posted up on the SEC website April 3 and is full of all the great statistical and IR-spin nuggets an analyst loves. And SAP never fails to deliver.

My nominee for SAP highlight of the year in 2008 is as follows. Sometime in 2007, for the first time this decade at least, and I suspect in SAP company history, SAP ended the year with more customers than employees. The document says:

"As of December 31, 2007, we had 46,100 customers in over 120 countries and employ more than 43,800 individuals..."

At the end of 2006, SAP had 38,000 customers and over 40,000 employees. Hopefully the milestone is a sign that the small/medium enterprise (SME) strategy is beginning to kick in. But with headcount up 12% in 2007, there's a way to go before they really have the SME religion.

For perspective, I point out that back in 2005, with "only" 32,000 customers, SAP crossed the 100,000 installation mark. I don't see a comparable statistic in the document this year but presumably that number is north of 120,000 these days. The customer count includes ERP, NetWeaver and Business ByDesign users and I am assuming it doesn't double count. I'll dig deeper in an upcoming IT Investment Research report.

SAP has a goal of of hitting the 100,000 customer mark sometime in (presumably late) 2010. Do they have one of those big plywood thermometers set up on the side lawn in Walldorf so that you can see it from the Autobahn?

-- Dennis Byron

Microsoft: Did you think this whole OOXML thing was over?

Unfortunately, despite the April 2 press release from the International Standards Organization (ISO) reporting that the ECMA/Microsoft (NASDAQ:MSFT) standard for document formats, popularly known as OOXML, has been voted in, we now start a 60-day period when appeals can be filed. After one is filed (is there any doubt?), the appeals process can go on for many additional months, and through four levels of the ISO.

What are typical grounds (quoting from ISO rules:)

11.1.2 A P-member of JTC 1 or an SC may appeal against any action, or inaction, on the part of JTC 1 or an SC when the P-member considers that such action or inaction is:
• Not in accordance with these directives; or
• Not in the best interests of international trade and commerce, or such public factors as safety, health or environment.
11.1.3 Matters under appeal may be either technical or administrative in nature. Appeals on decisions concerning NPs, CDs and DISs are only eligible for consideration if:
• Questions of principle are involved;
• The contents of a draft may be detrimental to the reputation of IEC or ISO; or
• The point giving rise to objection was not known to JTC 1 or SC during earlier discussions.

Does all this hogwash in bold sound familiar. Were Google's (NASDAQ:GOOG), IBM's (NYSE:IBM), Red Hat's (NYSE:RHAT) and Sun's (NASDAQ:JAVA) executives and lawyers building the record for appeal all along with their rabble rousing of the blogosphere?

What a collosal waste for shareholders for all companies concerned.

-- Dennis Byron