IT Investment Research

Happy/Sad Thanksgiving from Cape Cod

This is Personal with an IT Connection

This is my annual ‘personal’ blog post, which I permit myself because I live near where the U.S. Thanksgiving tradition began. But if you make it to the end of this post, you will find there is an information technology (IT) connection.

 

The rock that five of my grandchildren are standing on (the other four can't stand yet) in this picture from last summer is not Plymouth Rock. But it is on a beach along which the first English colonists in this area sailed in 1620, according to their records, looking for the harbor they finally found in Plymouth.

(See mayflowerhistory.com for all the details--from the colonists' point of view--and more pictures like the above.)

The colonists possibly even walked along the above beach in 1620 but it wouldn’t have taken them long to realize that that big sand bar in the background behind the kids would make it hard to get from their ship, the Mayflower, to the shore.

Truth in advertising

In addition, I am definitely not a Mayflower descendant. Most of my ancestors were growing potatoes and stealing each others' cows in Ireland at the time of the first Thanksgiving. Because they are mostly “Western Irish,” unlike the Cape Cod Native Americans (called Indians by the politically and geographically incorrect), the colonization of my ancestors’ lands by the English had not yet officially begun at the time of the first Thanksgiving in 1621. The official colonization of Ireland by the English did not start until 1650 (although they and the Scots had been encroaching since the 1500s).

Meeting the Mashpee Indians

This week, because I was passing through and not because of any particular Irish-Indian anti-colonial affinity, I stopped for breakfast at a welcoming-looking “townie” breakfast place in Mashpee village/town, where many of the remaining Native Americans on Cape Cod proper still live. I thought I’d mingle in honor of the Thanksgiving holiday. I say Cape Cod proper because there is also a Native American village/town on the island of Martha’s Vineyard off Cape Cod’s south shore. Mashpee is on the south (that is, the ‘protected’) side of Cape Cod; the native Americans obviously knew something about which way the tides ran and the winds blew, and where the fish were. I live and fish on the north side; I think it’s my Irish ancestry.

For non-U.S. readers that don’t get the connection between all of this and the U.S. Thanksgiving holiday, it was the Cape Cod Native Americans that ‘greeted’ the first European immigrants to land in this part of North America (if you want to call running away after being shot at a “greeting”). The colonists landed first on Cape Cod and shortly thereafter moved 30 miles across the bay to North America proper in what is now called Plymouth harbor, named in honor of the English town from which they—called (not sure by whom) Pilgrims—had sailed.

The first winter (December 1620-March 1621) was hell for the Europeans. About half of them died.  But with the help of the Native Americans (also according to the Pilgrims records), the colonists planted in the spring, had a good harvest and celebrated by feasting with the Indians “to give Thanksgiving” sometime in September-October 1621 after the crops came in.

They certainly would not have feasted in late November.  Although today is a typical late autumn day on Cape Cod with a skim of ice on the ponds to start with and a likely high temperature 3 (Celsius)/10 (Fahrenheit) degrees about freezing, I have dug my way out of two-feet of snow on Thanksgiving in order to get to grandmother’s house. (Of course, I’ve also played golf some Thanksgivings before going to grandmother’s house.)

As a sign of how things have changed on Cape Cod in the last almost 400 years since the "First Encounter," despite its outward appearance to me as I drove through Mashpee, the welcoming-looking breakfast place in the “Indian village” was a Dunkin Donuts. It was welcoming though.

The IT Connection

As I promised, there is a real information technology (IT) connection to this blog post. One of the Mashpee village/town/tribe’s ‘chiefs’ (actually called President) was the late Russ Peters, a marketing manager at Honeywell back when the idea of marketing IT had just begun. He left Honeywell(where he regularly beat me in the golf league) in 1974 to work on various Native American affairs full time.

Here are his bittersweet Thanksgiving comments from 1998 on what the Wampanoag call the National Day of Mourning (instead of Thanksgiving). I say bittersweet because Peters said in these comments that the original Thanksgiving did prove that everyone could get along for at least one generation. 

The Wampanoag on Cape Cod Today

The ultimate irony is that because the U.S. Federal government recognized the Wampanoag as a tribe in 2006, 30 years after Peters began his effort to get the recognition (and after he passed away in 2002), everyone here on Cape Cod with the remotest DNA link to the tribe now wants to be considered a Native American.  The tribe had 800 recognized members when he started working on Native American affairs in 1974; that number has grown to around 1500 by 2000 and another 2000 or so are on the waiting list to be “voted in.”  That’s because—also for the benefit of our non-U.S. readers—with U.S. Federal tribal recognition comes ownership of legal gambling via  casinos funded (to really close the circle of oppressed people) by South Africans.

Real World Explains Differences Between Microsoft and Open Source

There is an interesting contrast between the real world and the open source world evident in two blog-post/comment-threads popping up on my “open source” Google (GOOG) Alert as of November 22.

Over at Ostatic there is consternation and concern about the investment prospects of three “public open source companies,” Red Hat (RHAT), Sun (JAVA) and Novell (NVLL).

But there is no such thing as “an open-source company.”  I have reams of research that says that that term in meaningless from both an investment- and market-analysis perspective. That’s because, using RHAT as an example, Red Hat’s business model is no different than that associated with most IBM (IBM) and CA (CA) business, for example. And Red Hat’s model is only different than the Oracle (ORCL) model in that Oracle asks for half of its software-related revenue up front. 

But then for the article to lump Sun and Novell, two companies that came to the open source party after the candles were blown out, with Red Hat is an insult to Red Hat.

• The latter two companies’ problems in the stock market have nothing to do with their newly found fondness for open source as a marketing tactic. The world has simply passed them by.

• Red Hat's problem, on the other hand, is that it has not been able to grow out of its operating-system niche to a broader software portfolio fast enough. In better economic circumstances, it would have been given the time by investors to make the transition.  Red Hat’s situation would be the same no matter what license terms and conditions—open source or traditional executable—it used.

Meanwhile over in the real world on LinkedIn (no-charge membership required I think) there is a discussion that illustrates the other reason there is no such thing as an “open source company.” Real IT folks don’t acquire open source software because it is open source (i.e., because the source code is available and because it comes with some more or less unusual license terms and conditions).

At Linkedin, a member writes:

“I just started being exposed to the Open Source world of software. OpenOffice is a big (example of open source), as I understand it, and they are working hard to compete against Microsoft. Do you believe that the open source industry will force Microsoft and other (legacy software) companies to deliver better products? Do these companies pay attention to the "open source world"? Is open source a real threat to licensed software?"

Among the answers are some of the following quotes:

• “I feel Microsoft is doing its best to deliver great products now, to increase our productivity and allow us to get more done, while making money for shareholders and rewarding their employees.” - Louis D-Risk Reporting Developer at MetLife (a guy who has never been exposed to open source blogoblather no doubt)
• “Some companies even embraced open source getting involved in its development and offering services that include open source software (just think of IBM, Novell and others). BTW, open source software is licensed as well, it just uses different licenses.” - Massimo L, Owner, Thule Enterprise
• “Not likely, Microsoft's marketing strategy is too strong, and the majority of users aren't techs who know about Open Source sites [or even what OpenSource is for that matter]; they're normal folks who happen to need to use a computer at work or at home.. So, I would say that Microsoft is safe from OpenSource code for now. - Theresa L, Executive & 6Sigma Champion.
• “I run a very large installation of Open Source software from Linux, Java, Perl, Liferay, et al. However, I still use multiple Microsoft, Oracle, and IBM solutions in the same environment. 1) I do not believe it is a question of better products. It is just that some products perform certain things better than others. The big vendors would have you believe they can do everything; however, the reality is much different.  2) Of course (the legacy suppliers including Microsoft) pay attention to the Open Source world. Many help support it. I applaud the movement and encourage my teams to contribute when/where appropriate. 3) No it is not a real threat. Open Source has a different licensing model than the commercial software licenses. However, each product has different capabilities and specialties and often the uses may call for a commercially licensed solution over the Open Source.” --  Jeffrey H Senior Vice President at Nomura International LTD

With many more comments like that, the LinkedIn site is a reasoned discussion of the pros and cons that real-world IT people appreciate without the Microhate you find in the open source blogosphere and with a grounding in what is really happening in the market. The LinkedIn thread is a virtual-focus-group-like approximation of statistical research I have gathered over the years on the same subject.  It illustrates in real people’s own words (without the statistics themselves, which were gathered for particular clients’ use) that:

• Users want Microsoft and everyone else to co-exist
• Microsoft is not losing business to open source (it may be losing business opportunities but that is another discussion); instead open source is replacing Unix and other legacy software
• IBM and other legacy software suppliers are the leaders in open source (not guys in their attics existing on Jolt)
• Linux users are on the rise, and there are so many good applications now that “myself and many of my friends run exclusively on OpenSource as far as we can. I also use all the Google applications on a daily basis rather than paid for tools. About the operating systems though, Windows still has by far the upper hand.” (in fact, according to some market research, more open source software runs on Windows than on Linux)
• Users understand the difference between license terms and conditions and the need for full support (which leads to business/market dynamics investors should care about)
• The Open Source culture/development model has proved that it is best at one thing, creating excellent replicas of existing software (I don’t have statistical research on this one but it is conventional wisdom and it is hard to find projects that disprove it)
• Open Source has been around a long time, some of it predating the public Internet emergence (in fact predating the term “open source” by a couple of decades).

IBM Acquisition Further Chokes Off IT User Virtualization Choices

Back in June, I introduced you to Transitive via this interview with Transitive’s Vice President of Marketing Ian Robinson. The excitement for me was the cross-virtualization platform provider’s expanding distribution channel, in light of a trend to decreasing virtualization-software distribution options via Citrix’s (CTRX) acquisition of Xen, the oddball EMC (EMC)/VMware (VMW) arrangement, and Microsoft (MSFT) coming to market with its hypervisor embedded in Windows, partially based on acquiring Softricity.

But it turns out to have been a “Prague spring” for information technology (IT) users because IBM (IBM) is acquiring the virtualization startup with what looked to me like IT-user-liberating technology.  For investors, who admittedly have a lot more on their minds, it means another IPO that will never see the light of day. It also might mean another nail in Sun’s (JAVA) coffin as well (although conversely all the nails already in Sun’s coffin probably pushed Transitive into IBM’s arms).

I felt in the spring that “Transitive has a shot at becoming the most important IT company you’ll never deal with directly” (speaking of IT users) becuase of its wide acceptance by systems suppliers. For the enterprise, Transitive—working from labs at what some would argue is the birthplace of IT, the University of Manchester-- developed software to virtualize server virtualization. Transitive had major distributors including Fujitsu-Siemens, Hitachi, HP (HPQ), and Sun as well as IBM. Transitive also has major OEM agreements with Apple and IBM to provide other specialized types of virtualization and that is what IBM is buying into, most likely to the detriment of the server virtualization software.

Transitive’s software — called QuickTransit — sits between the hypervisor of system-supplier choice and many existing non-X86 applications and helps eliminate the need for porting such applications as users eliminate legacy hardware in their data centers. Robinson euphemistically calls this “server refresh,” but it is really the systems supplier’s worst nightmare because it gives users a chance to break the suppliers' lock on them.

On IBM Power systems, as highlighted in the November 18 press release, Transitive's technology works a little differently but the principle is the same: without porting, the software runs “without source code or binary changes,” according to Robinson in June. Transitive has good partnerships with Citrix/Xen, Microsoft and EMC/VMware to make sure the hypervisor layers do their thing. Down at the bare metal, Transitive works with AMD (AMD), IBM and Intel (INTL). 

Surely all of the above list of industry players will dwindle to one-IBM. There isn’t even the usual false hope in the press release that business will continue as before.

European Union Frees Veggies; Will Microsoft Be Next?

Perhaps there is hope that if my grandchildren work in Europe 20 years from now they will have access to the advanced information technology (IT) of the day.  Despite the relentless attack on Microsoft (MSFT) and others by Neelie Kroes of the European Union (EU) Competition Commission, I find some hope in the news that the same group has just ended a 20-year ban on misshapen fruits and vegetables.

Do you really want to work or do business in a geography that tries to legislate or regulate the shape of food?

Kroes has taken the same tack when it comes to legislating or regulating the IT market, supposedly to the benefit of EU’s citizens and guest workers but in reality it’s a ploy to create a European software counterforce to “American” software companies.  I believe “Software has no nationality;” in my opinion there are no “American” or “EU” software companies.  IBM (IBM), Oracle (ORCL) and other nominally American IT suppliers get a very large percentage of their business in the EU. Conversely SAP (SAP), Software Ag (Frankfurt TecDAX: SOW) get a large percentage of their revenue in the U.S.

But the EU continues to beat on Microsoft. Kroes has signaled that it would probably stall a Microsoft-Yahoo (YHOO) deal.  She constantly encourages member states to buy “open standards” (code for "not Microsoft" although the concept of “open standards” is absurd).The EU’s attempt to control its citizens’ IT choices has been going on since the birth of the IT market. 

Microsoft on the other hand wants appears to want to bury the hatchet. But Microsoft’s removal of a sentence from its 10-K is not going to change the EU’s 50-year effort to manipulate freedom in the marketplace. I have hoped for the last three years that Microsoft would get out of its money-losing operations in the EU. Although I believe it’s an empty threat Microsoft has also been saying the following in its 10-K for years.

 “We may have to choose (to withdraw) products from certain geographies …”

Rebuttal to "The Shallowest Generation:" Speak for Yourself Quinn

Kudos to James Quinn for clearly hitting a nerve with his October 31, 2008 Seeking Alpha post about the Baby Boomers, titled the Shallowest Generation.  It did a good job of putting together a lot of interesting statistics that I have seen individually in different places over the years (although it was a bit much for a blog post).

 

But as they say, statistics don’t lie but statisticians can. I say that because Quinn’s rant has a major logic flaw: I don’t see any connection between the demographic data and the economic data.  It might be in there and just hidden by the length of the post but I don’t see the proof that it is people between ages 47-62 who are spending the money in the manner Quinn is railing on about (that is, borrowing beyond their means to pay for consumables that should only be owned by people of a higher station in life, running up credit card bills, spending more at casinos than church/temple/mosque, blah blah blah).

 

I am 62 so I’ll be one of the first guys through the chute.  I do worry about my “little brother” (52) and what will have happened to the money “in his social security account” (ha-ha) by the time he needs it.  I have a shot at getting my $200,000 back if I live to about 75. Figure in net present value vis a vis when I paid it in and what it will be worth when I take it all out and I’m getting about what a mortgage-backed security or a credit-default swap is worth today, cents on the dollar. 

 

Of course there really is no “social security account.” The reason is that the “greatest generation,” about which Quinn longingly and admiringly blabbers, got my money. But no complaints here. In my case that included my grandmother who died at 98 having collected for year after paying nothing into social security and my parents still going at 90 having paid in very little compared to what they have received back in the 28 years since they retired.

 

So yeah, I think FDR and LBJ are to blame for that screwup originally.  And Tip O’Neil, Moynihan and Reagan screwed it up further.  I agree with Quinn’s comment about “Baby Boomers have been occupying the White House for the last sixteen years” but we can’t blame Clinton and “W” for what the financial system they inherited from the “greatest generation.” All this pair did in 16 years was explain oral sex and the need for elocution lessons to our grand kids.

 

Then Quinn goes on to claim that it is “not all Baby Boomers (who) are shallow, greedy, and corrupt… (only) Boomers with power and wealth.”  But if they have wealth, how have they “lived above their means in order to keep up with their neighbors,” and how have they done anything wrong if they “bought whatever they wanted using debt…” That is capitalism: use someone else’s money, not your own, especially when you have your own. None of Quinn’s data supports his claim that Baby Boomers that have “wealth” are shallow, greedy and corrupt.”  

 

In fact none of his data supports any aspect of his claims. But the charts look convincing. I especially can’t find a source for the claim of 12% savings rate in 1980 (and can find sources that say it isn’t true). But even if it was true in 1980 it must have been a one-year aberration. As for the rest of his “savings/spending” data, baby boomers weren’t saving in the 1980s because we were raising our kids.  Savings rates are likely down now because our kids are raising our grand kids. Or government statistics being what they are, savings rates are down now because all those wealthy 12 million illegal aliens are sending their money back to Mexico.

Quinn does point out some of the legitimate problems faced by those now between ages 35-39. But he goes on to say

“Our economy favors education, entrepreneurship, and creativity. Those benefitting from a good education will make dramatically more money than the uneducated laborers.”

That’s why I remortgaged my house in the 1980s, to pay my 30-somethings’ college tuitions. Boy, that was “selfish” of me. Quinn's bio says he works for a college. Hey Quinn, I helped pay your exorbitant salary.

 

Quinn’s screed then descends into an indictment of government, corporatism, and so forth, blaming Bush and Bernanke. The jury’s still out on who or what caused the meltdown. Baby boomers Corizine and Paulson, successive heads of Goldman Sachs, would make my list of suspects along with Barney and Chris. But “W” and Bernanke are probably the least culpable people in the public arena. One’s an unsuccessful businessman who got his money and his political positions the old fashioned way, from his father and grandfather respectively. The other was a college professor until three years ago (and I’m sure he wishes he still was one). 

 

Quinn takes a little side trip into how manufacturing was outsourced without explaining why and what the alternative would have meant economically.

 

By the way, Quinn, how come you got so many miles on your 6-year-old car?  Don’t you realize that you’re the cause of global warming.

Dean, Duncan Lookahead at 2012 Election Use of Information Technology

Howard Dean and Mike Duncan, chairs of the Democratic and Republican parties respectively, spoke November 5 in a traditional 'morning-after-election' press gathering in Washington (see NPC Luncheon Address with DNC & RNC Chairmen--November 5, 2008 on C-span.org).    There was a lot of wonky political stuff with just enough semi-geeky technology commentary to make it interesting. 

Dean complimented Duncan for showing the Democratic National Committee the way in terms of technology adoption in electionieering.  Dean claimed the Republicans had a 15-year headstart (apparently dating to the Republican takeover of Congress in 1994). Duncan complimented Dean for his ground-breaking use of the Internet when Dean ran for President in 2004.  (The day after an election is that kind of day in the U.S.  It won't last long.) 

Neither wanted to be too specific about what comes next so as not to tip their hands.  But Duncan noted how he had hired his eCampaign director, Cyrus Krohn, who had worked at Yahoo (YHOO) and launched Slate at Microsoft (MSFT), in 2007 to help catch up with Dean.  He hinted at some new wrinkles in the RNC's vaunted data-mining and microtargetting software.  That's business intelligence (BI) software to us but you have to drop the B when it's supporting a political campaign.  He believes getting out the vote and keeping the voter informed in 2012 will involve a new era in narrowcasting.  Does that mean that the next Republican nominee will not emulate the Obama infomercial? 

Governor Dean was more coy.  He mentioned Silicon Valley and said he didn't know what the next big election whatsis was but that someone in Silicon Valley probably does and that it is probably out on the Internet in some rudimentary fashion already.  Dean stressed that the Internet is more than a technology but a community. Well of course you expect comments like that from a Democrat but behind the sociobabble the DNC and its candidate Obama demonstrated a clear understanding of the bits and bytes. That's why it would not be surprising if Eric Schmidt of Google (GOOG) is the first Chief Technology Officer of the U.S. promised by Obama in his platform?

Does it all matter?  Historically yes.  An organization called ndn.org has done a good job of thinking this through, tracing the FDR era driven by radio through the TV era driven by Kennedy to the Internet era driven by Obama.  In each case it took the other party 20 years to catch up (20 years between Roosevelt and Eisenhower; 20 years between Kennedy and Reagan).  Duncan is all about making sure that it's not another 20 years before the Republicans are back in control. 

(For readers outside the U.S.: government "control' is a loose concept in the United States.  The ndn.org metric is based on major watershed presidential elections but "control" in the U.S is actually driven more clearly by which party leads a bicameral legislature that changes on a different schedule than changes in the U.S. presidency.  In the last 70 years this has happened only six times, in 1946, 1948, 1952, 1954, 1994, and 2006, as measured by changes in the controlling party of the House of Representatives.)  

Microsoft R&D Spending on Vista, etc. Confirms Linux Foundation Theory

I wrote in an October 19 blogpost that HP (HPQ), IBM (IBM), etc. “created” Linux and followed up on October 22 concerning the Linux Foundation (LF) approach to explaining the same statement. LF, which is funded by HP, IBM and so forth had estimated (see its 12-page document here) that the R&D investment in time and money represented in a major Linux distribution… had the work all been done:

• by one company
• using a closed-source development methodology
• from scratch

would have been $10.8 billion.This amount applies specifically to Fedora 9. Six years of effort would have been required (assuming 10,000 developers, documentation specialists, QA staffers, and so forth). Fedora is the community that provides the base code of Red Hat (RHAT) Enterprise Linux.

This effort is much wider than LF. LF takes care of the Linux kernel but Fedora 9—as with many Linux distributions—includes not only the relatively small Linux kernel but many utilities and supporting pieces of software. Examples include the GNU utilities and X Window, among many other pieces of software (for example, the Mozilla Firefox browser and OpenOffice.org).

The LF numbers raise the interesting IT investment research question:

"What does a major software distribution really cost (vs. this theoretical cost)?"

The best way to tell is by comparing the LF’s numbers for Linux with numbers from a software company that still takes on such major software-development efforts independently, with a closed source development model. No one takes on such a project from scratch so a perfect comparison is not possible. There is basically only one such comparison point, Microsoft (MSFT).

Over the period roughly comparable with the development of Linux as defined by LF in its study, Microsoft was developing its Vista client operating software, Windows Server 2007 server software, Office 2007, Internet Explorer 7 and other related software.  Microsoft spent around $14 billion on that effort by my estimate (see illustration; sum of "Est. Comparative R&D" ) making the LF estimate seem reasonable.

 

Whether the two product sets are exactly comparable or whether my estimation technique is perfect would make an interesting debate but I was simply looking for reasonableness. My source is Microsoft SEC filings for the years during which Fedora 9 was developed. I took the overall R&D spending of Microsoft in those years, reduced the total in proportion to the revenues of the client/server/office-worker divisions during those years, and cut that number in half on the premise that those Microsoft divisions were also doing maintenance and documentation and support and other R&D activity on older client, server and office products.  

If you want to assume that only 33% of Microsoft's R&D expense in those divisions was directly related to Vista, etc., then the LF and Microsoft numbers line up almost exactly.  If you want to assume that 67% of Microsoft's R&D expense was devoted to Vista, etc., then the LF supporters such as HP, IBM, etc. got a hell of a deal.  But either way, the LF theoretical model seems to have worked in terms of predicting what the LF ecosystem development expense would have been. 

So now the $64,000 question is:

"How much does Linux's collaborative non-closed-source development methodology save HP, IBM, etc.?"  

And does a significant amount of that saving drop to their bottom lines? More to follow.

(Note: dividing Microsoft's R&D numbers in proportion to the divisions' revenue does not take into account the cash-cow effect Microsoft might be employing and other ways in which Microsoft may have actually divvied up its R&D spending.  It might have spent the whole $28 billion on XBox but we don't have the data to know that.)