IT Investment Research

Fair Issac To Cut Economic Troubles in Half

(Sometimes a PR person just hands you a blog.  This one's from the "padlock manufacturer announces new design" after the horse is out of the barn collection.)

Fair Issac (FIC) announced on January 29 that its infamous FICO scoring software (as in how all those bad loans got made) now

"provide(s) up to twice the improvement in predictive power compared with previous revisions to the model."

If we had had the new FICO a few years ago, there would only be a trillion dollars of bad loans instead of two trillion.

Auto dealers are finding the new version especially important.  They do not complain about some of the slower processing speeds given that they seem to have plenty of time on their hands.

Is this PR person living in the real world?

-- Dennis Byron

Did Geithner Use Intuit TurboTax to Cheat or Did TurboTax Cheat Him?

Did Timothy Geithner, President Obama’s nominee to be U.S. Secretary of the Treasury and therefore boss of the Internal Revenue Service, cheat on his tax returns between 2001-2005?

Or was he simply unable to use a pretty simple piece of consumer software called Intuit (INTU) TurboTax?

 

Based on the incomplete online record available on the Senate Finance Committee web site, it looks like the answer is yes to one of those two questions. I could not tell from the replay of the Senate committee confirmation hearing whether he received a W-2 or 1099 or both from the International Monetary Fund (IMF), where he worked during those years. But even if he simply unintentionally mistakenly carelessly used the very user-friendly TurboTax, he does not deserve to be U.S. Treasury Secretary.

 

There is more to this story than we’ve heard so far.

 

-- Dennis Byron

BBC Buys into Sun Spin on Open Source Software

Some technical editor at the BBC has been snookered three ways by Scott McNealy of Sun (JAVA) in this January 21 “news” story.  The open source blogoblatherers in European Union are multiplying the effect.

First, there’s the sentence in the article that says McNealy has been asked to “prepare a paper” by the Obama administration. Assuming the U.S. government works like the rest of the world (not necessarily true as U.S. taxpayers are well aware), being asked to “prepare a paper” is probably like saying “Don’t call us; we’ll call you.”

Second, the jist (or is it gist) of the BBC article is that, according to McNealy as quoted by the BBC:

“It's intuitively obvious open source is more cost effective and productive than proprietary software. Open source does not require you to pay a penny to Microsoft (MSFT) or IBM (IBM) or Oracle (ORCL) or any proprietary vendor any money."

In fact that statement’s not at all obvious, nor is it even true (in multiple dimensions). There is no reason you should expect open source to be more cost effective since the open source concept relates to “free as in air, not free as in beer.” And since software is software, how can the way it is licensed make it “more productive.”

Third, it’s Scott McNealy promoting open source!!! He’s arguably the most proprietary guy in IT industry history since…. I dunno, maybe old Tom Watson. He's glommed onto open source to try to save Sun and its billions of lines of "proprietary software" from going down the tubes.

He’s backed in the BBC story by quotations from a Red Hat (RHAT) vice president.  See a trend here: Red Hat and Sun want to sell hardware, storage, software and services to the U.S. Federal government.

I hope they are successful. And I don’t have any concerns that IBM, Microsoft, Oracle, SAP (SAP) and other open source software suppliers larger and smaller than Sun and Red Hat don’t know how to play the game with the U.S. government too. (Actually some of the smaller suppliers of open source software might think things happen “before someone sells something.” But not the smart ones.)

But this article makes the BBC staff look like pretty naive

-- Dennis Byron

Why Companies "Turn to Open Source Software"

I blog primarily to set the information technology (IT) investment-research record straight in response to out-of-bounds or misleading marketing claims from leading software suppliers.  I consider it penance for the 20 years I spent making  out-of-bounds or misleading marketing claims for two of the leading software suppliers back in the day.

Most such claims are in press releases or SEC filings but occassionally I run into press articles that "round up" a half dozen such marketing misdirections from various marketing departments in one place. The December 1 BusinessWeek article called "Cost-Conscious Companies Turn to Open-Source Software" is such an article. And it's the second such multi-marketing-oriented misdirection article I've seen this week. I think it's because editors are trying to link IT to the economic downturn.

To be clear, I am a big fan of the open source culture. But this BusinessWeek article and similar articles are so full of misleading points that they put open source in a no-win situation: Open source cannot deliver on the hype that suppliers and PR writers are weaving around it and as a result the culture will suffer in the long run. This hype also misleads investors although that trend has been seriously tamped down since the 2007 peak when Yahoo (YHOO) paid a zillion times revenue for Zimbra.

What's really surprising is that this article is a BusinessWeek deliverable. It sure doesn't meet the McGraw-Hill standard I had to follow at Datapro. The author is repeating  urban legends, which is not unusual. But the author does not even pretend to substantiate them, by finding an obscure source to quote. Despite what the "Cost-Conscious..." article says or implies, the facts about open source software are as follows:

• Most popular enterprise-level open source software is written by programmers that work for the company that hopes to benefit commerically. As a result, they "...work for one company" (although I am not sure what that factoid was meant to prove anyways).  Thousands of non-commerical, non-enterprise-level open source projects are written by academics and hobbyists and that's what's great about the culture. (Of course they also "work for one company" or organization.)  Open source is a culture that is as old as the IT industry by the way and not a new trend in the last few years. 
• Research does not indicate that the total cost of ownership (TCO) for open source software is any different than for non-open source software. Nor would I expect it to be because software licenses are such a small part of the TCO equation (refer again to the linked blog post about the misleading claims by Ingres' CEO on open source and the economy).
• Particularly, despite the bald statement in the article, there is no indication that users "pay less for a subscription to an open-source product than for its proprietary counterpart." In fact, one of the basic premises of the core open source community is that the software is "free as in speech," not "free as in beer."
• Of course it is hard to find open-source vs. non-open-source counterparts to compare. That is why open source exists. Typically open source software is developed where a given functionality has reached commodity status and there is no particular competitive advantage between one type or another. Therefore systems and software suppliers do not want to invest in separate development and instead they choose some open source functionality to embed in a proprietary product and/or to provide their customers directly as a convenience.
• Where there are price differences between two roughly comparable software products/services, one available with open source terms and conditions (Ts&Cs) and the other not, it relates to the fact that, as the BusinessWeek article says, users "will get a lot less hand-holding than they may be used to. " If you don't need the handholding and the specific open source functionality is what you need, open source is a good choice.
• Typically however IT users want the handholding, even for commodity software.  This is the reason for Red Hat's (RHAT) success, and this is the reason that most enterprises using the Apache HTTP web server (probably the most popular piece of open source software), use a version embedded in a so-called non-open-source suppliers' products [e.g., built into IBM (IBM) Websphere]. 
• By the way, for investment purposes, the distinction between non-open-source supplier and open-source supplier is a canard.  All leading software suppliers including Microsoft (MSFT) distribute software using open source Ts&Cs and almost always have. 
• The BusnessWeek article says "Linux as an operating system for the desktop is much less established in enterprise use, with 39 percent of respondents in the Gartner survey currently using it and another 22 percent expecting to use it within the next year."  While I am sure the Gartner numbers are accurate, the reality is that Microsoft Windows dominates the desktop followed by Apple's operating software.  Linux's share of desktop usage is in low single digits. That's not a criticism of Linux; Linux is UNIX software and UNIX was never intended to be desktop software. In fact, UNIX predates the concept of desktop software.
• There is no research that open source software is more reliable than non open source software.  Or more secure (not mentioned in the article but another popular canard). Open source from a business persepctive (as opposed to a cultural perspective) is basically a set of Ts&Cs and has nothing to do with things like reliability, security or any particular software functionality.
• There are dozens of open source licenses with varying types of restrictions and Ts&Cs. "License management" is specifically not an advantage, despite what the BusinessWeek article says, confusing acquisition activity with license management. In fact license managment is one of open source's drawbacks (see below for its advantages).
• Most software--no matter the type--is test driven first before it is purchased or a subscription is obtainted. There is nothing different about open source software when it comes to "try it, you'll like it" marketing.
• IBM is probably the largest provider of open source software services, not Red Hat. Oracle (ORCL) is coming on strong in stealth mode, actually distributing a Red Hat clone (making money, as Red Hat does, by servicing it) but also distributing Apache software and its own open source database product. Microsoft may also be one of the leading distributors based on an arrangement with Novell (NOVL). When the article says "About two years ago, Office Depot began installing the Linux operating system by Novell on its servers, moving away from proprietary software for a range of hardware including IBM mainframes and Sun (JAVA) servers," that could very well be because of an arrangement with Mictrosoft. Of course Sun also now distributes its software with open source Ts&Cs.

In the real world, as opposed to the PR world in which this article seems to spin, companies turn to an open source product primarily because it does (or they perceive it does) something better than the other software they looked at. Often companies take it without handholding as described above but most often they want support and service, making it no different from a market-research (and therefore IT investment research) perspecitve than software with other Ts&Cs.

Secondarily companies choose open source for the benefit of having perpetual access to the source code itself. That's a good reason but is a market dynamic much less often than functionality.  Most companies would not want the hassle of having to maintain code if the creator of the code no longer existed.  It is more important to use increasingly scarce resources, even IT resources, to do things that make the company's product or service different in its own market.

A very small number of companies do choose open source simply because of the way it is developed; that is, for the culture. Similarly some people will only drink French wine or wear Italian shoes.

-- Dennis Byron

Information Technology "Faring Better" in Some Parallel Universe Maybe

The January 15th Economist is out with a headline on the information technology (IT) market that is sure to grab you: 

“(The IT market) cannot defy gravity, but the technology industry is faring better than it did in the previous downturn”

Wow. Is the writer reading the same news and research as I am?

Here is the article.

For the record, IT as a whole didn’t even downturn during the 1970s, 1980s and 1990s, although technology changes caused many individual companies to fail and others to rise from nowhere. The mini rose and the mainframe fell almost in synch with the 1970s oil shocks.  The PC rose and the minis fell almost in synch with the Black Monday of all Black Mondays, October 19, 1987.  And software took over from systems as the driving force about the same time as the “It’s the Economy Stupid” era following the first Gulf War. But through it all, IT spending as a whole kept rising.

In addition, just as the supply side morphed during the continued expansion, during the 90s and this decade much of the personnel costs was shipped to India and Eastern Europe out of North America and Western Europe. But enterprises kept spending.

The last “downturn” that the Economist is referring to is the dot.com bubble.  That was a downturn for venture capitalists and Internet entrepreneurs but IT spending hardly blipped then either. I doubt overall 2001 IT spending went down at all vs. 2000. The Economist article, without citation, says it dropped 6%. But whatever the correct number, it was a 9/11 issue and not an overriding trend.

Compare that with likely deflation of IT spending in 2009 according to Gartner, with one of IT’s leading industries—financial services—in tatters, with all the rest of the industries following suit because they cannot borrow, with large layoffs by IBM and Microsoft (just rumors); and Intel’s fourth-quarter revenues off more than 20% compared with a year earlier.

How is that better than the previous downturn?

The Economist article cites Forrester for a statistic that shows 2008 up 8%, 2009 down 3% and 2010 spending back up 9%.  Someone isn’t calculating in the fourth quarter of 2008 in those numbers (see Intel above) and the 2010 numbers might be correct only if IT gets some TARP funds (which is less likely than the request from Larry Flynt of Hustler).

Supposedly things are not so bad because of “currency fluctuation.” Exchange rates are an important factor in comparing historical market share numbers of individual suppliers but if IT is going to spend less, as it surely is, it doesn’t matter what currency it’s spending less of.

Also, supposedly, “Demand from China and India is expected to continue to grow despite the gloomy economic outlook.”  Huh?  Who’s going to buy their goods and services respectively in order to fund increased IT spending?

A third piece of good news according to the article: “All kinds of enterprise software is now available (under open source terms and conditions), which in most cases means that firms pay for maintenance services, but that the programs are free.” Please explain how paying for the razor blades instead of the razors increases the number of guys that need a shave.

There’s a little side trip into cloud computing but I fail to understand how a return to the way IT was developed and marketed 50 years ago is going to increase demand.  (I do agree that cloud computing is the technological wave of the future, or back to the future.)

Ironically the article ends by citing an analyst at Citi Investment Research, saying “the IT industry cannot defy gravity.” I agree. And I wonder who bought the unit of Citi he worked for? And I hope he’s still there.

-- Dennis Byron

Windows vs. Linux vs. Unix: Old News in More Ways than One

This is old news in more ways than one.  But I post it up to be consistent with quarterly reports I have made here and here over the last year, interpreting IDC's findings about the operating systems server manufacturers ship from the factory.

This is old news both because it was released in early December and I haven't had a chance to look it over.  And it's old news because the finding seems consistent quarter after quarter. 

• Windows is progressively gaining against "other."

• Linux is gaining against Unix. 

 I don't have any hard research but my opinion is that despite the press hype and conventional wisdom, Linux and Windows probably do not meet much in the marketplace.

On this subject, IDC said specifically (in light of the fact that the whole market declined year over year based on the economy):

• "Microsoft Windows server revenue was $5.1 billion in 3Q08, showing a 5.1% year-over-year revenue decline and maintaining revenue market share at 40.8% of all server revenue in 3Q08.

• "Linux servers posted a 2.5% year-over-year revenue decline for a total of $1.8 billion in the quarter. Linux servers now represent 14.0% of all server revenue.

• "Unix servers experienced an 8.4% revenue decline when compared with 3Q07... representing 29.7% of quarterly server spending."

-- Dennis Byron
 

Milking Madoff: Is Massachusetts Looking for the IT Connection

CNN ran a Special Investigative Report on Madoff Secrets on the weekend of January 10/11 but failed to dig into the information technology (IT) part of the story. Admittedly, IT is boring but the scheme that Madoff admits to could not have been pulled off without major IT support from people working for Madoff or for a service-bureau that supported him. Some IT guys had to know.

Massachusetts Secretary of State Galvin, a PR-happy pol, is reportedly wading in with his own subpoena however, into a morass you would think a securities regulator would fear to tread. You would think, that if the SEC should have protected all investors, Galvin should have protected Massachusetts investors. But he doesn't seem to see it that way.  Especially when there is a headline to be had.

In reality all Galvin can do is some weak-kneed administrative stuff (just like the SEC) but as a result he might be stumbling on the answers to the questions CNN did not ask. 

• Who wrote the programs that made up the fake trades?

• Who wrote the program that spit out the bogus statements? 

• Who entered the data that must have changed every month?

• And on and on?

I am sure Galvin is more interested in the sales vs. service side of the equation; there is a lot of publicity up here about the Palm Beach Country Club guys with the MG.  But while he's there, hopefully he'll ask the important questions that CNN failed to investigate.

-- Dennis Byron

(As an aside, as for the victims the TV people keep dragging up, I feel sorry for the millionaire widows and orphans interviewed but it is not correct to blame "the U.S. system."  The entire  U.S. financial system pushes people not to invest in one basket.  Examples include FDIC insurance encouraging people to put savings in multiple banks, SIPC rules to use multiple brokers, and ESOP rules that encourage those over 50 (or maybe 55?) to diversify out of their employers' fund. I don't need  Massachusettspols to tell me that. But that's not really the point of this blog.)

-- Dennis Byron

Vignette License Revenue Down 60%, Pays Price for Buzzword du Jour Marketing

Vignette (VIGN) may be just the first of a long line of enterprise software suppliers to pre-announce (and then formally report) very bad year-over-year and quarter-over-quarter compares.  Or it might be the poster child for losing out in the enterprise-software market by changing positioning almost annually.

On January 5, Vignette said--on a preliminary basis--that its quarter 4 (Q4) 2008 revenue would be down 32% vs. the same quarter on 2007.  Worse, its Q4 license revenue would be down as much as 60% in the same compare.

Although I don't expect any enterprise software suppliers to ring a bell over calendar Q4, these numbers also are the result of a decade of Vignette changing positioning, most often without even changing the products on which the position is based. Follow the bouncing ball as represented by the opening sentences of each year's Vignette 10-K (date of publication; refers to previous fiscal):

• 2000--Provides ebusiness applications

• 2001--Provides customer-driven Internet applications

• 2002--Provides content management software

• 2003--Provides content management and portal software (via acquisition)
• 2004--Adds process to the other two for the first time

• 2006--Process becomes workflow (going backwards in terms of industry use of buzzwords)
• 2008--"The web experience" (i.e., Web 2.0)

Of course this confuse the hell out of investors.  But imagine what it does to potential customers.

-- Dennis Byron

ComputerWorld Reports Google to Market Desktop Linux

At least I think the point of this Steven J. Vaughan-Nichols report in ComputerWorld is that Google (GOOG) will market a desktop Linux using the version of Linux it has included in Android. If not, then the only thing ComputerWorld is saying is that Linux runs on desktops, which is hardly news. Or maybe the entire ComputerWorld article is an excuse by Nichols, a long-time Microhater, to link to an article that says Microsoft should not lay off anyone, which he does in the last sentence.

I seriously doubt that Google (GOOG) will market a desktop Linux (meaning of course they would not go into the business of servicing Linux and related software, which is how a company potentially makes money on Linux, as explained here).  There is very little revenue and no profit in marketing desktop operating software.  All the desktop PC manufacturers exited the market years ago. About 20 years ago, Microsoft (MSFT) began to broaden its product portfolio so that now desktop operating software only accounts for about 10% of its about $60 billion in annual revenue, most of which flows through Dell (DELL), HP (HPQ) and Lenovo. Red Hat (RHAT) never really entered the market and the Suse Linux division of Novell (NOVL), which has some revenue in the desktop space, is propped up by Microsoft. (Microsoft does not outright acquire Novell so as to avoid anti-trust litigation.) Canonical may be making some money at it but it is hard to know since it is privately held.

There is another reason that Google is unlikely to market a desktop Linux.  Despite ComputerWorld’s characterization of Google as the potential “number one PC technology company,” Google has never shown any interest in PC technology. Google is in the business of providing business software to advertisers and publishers. It monetizes these business applications via advertising revenue rather than using the traditional software/service contract.  There isn’t much revenue in packing bill stuffers in with a box of operating system floppies any more. Having invented and perfected personal (as opposed to enterprise) search, Google research concentrates on running some of the largest server farms known to man as well as some patented search algorithms, neither of which has anything to do with PC technology. 

To the extent that the ComputerWorld article mentions web-based this and web-based that, it is referring to browser technology, not PC technology or operating software. Google IS playing around with browser technology research, providing almost all the funding for both Mozilla Firefox and another browser called Chrome. Google is interested because of the browser’s generic relationship to personal search and the possibility—still very much unproven—of tying some of its customers’ advertising to browsers.

But there really is no browser market either (as explained in this companion post, also related to an odd recent ComputerWorld article)

-- Dennis Byron

How Can Microsoft Lose Market Share in a Non-existent Market? And Does It Matter?

Every month, the technical press religiously reports on the state of the browser market and who or who isn’t losing market share.  This is a recent example from ComputerWorld but a variation of this article appears across the spectrum, covering data from what ComputerWorld calls “metrics vendor Net Applications Inc.”.  During 2008, the press and analysts the information technology (IT) press interviewed interpreted this data as proof that Microsoft (MSFT) is losing market share in the browser market.

From my admittedly Neanderthal information technology (IT) marketing background, I don’t see how you lose share in a market that does not exist.  But perception being as important as reality in IT investment, I think it’s worth asking the question “Does losing market share in a market that does not exist matter?”

Basically the browser market does not exist because browsers are free (as in beer, not speech). They are either standalone free or bundled “free” into other software.  In addition, except for esoteric differences only a technonerd can love, browsers fundamentally do the same thing so it is unlikely that anyone is buying the software into which some browsers are bundled because of the browser.  In other words, no one is buying or selling browsers and no is buying or selling something else because of browsers. Marketing 101: there is no browser market.

So what does Net Applications mean when it talks about share?  What it is measuring is usage, not market share (since there is no market). There is also a question about Net Applications’ methodology because only its customers’ data is used. Its customer base seems highly skewed to ecommerce as compared to all sites in the universe. However the sample size is very large and is probably representative of the universe. In addition, Net Applications shows only a couple of year’s data on its web site. 

Does losing market-usage share in browsers matter? It would but in a useful market-research view, going back a decade to look at such an old technology as browsers, I would guess Microsoft has not lost much market-usage share. I cannot find any confirmation but I believe that Firefox--current number two in the Net Applications lineup at 20% to Internet Explorer's 70%--has simply replaced a portion of the former market-usage-leading share held by Netscape, Firefox’s predecessor. Netscape led before Microsoft’s browser had even been introduced. Certainly my opinion is true if one were to compare the market usage statistics of Netscape vs. Microsoft browsers prior to 1999, before Net Applications was founded.  For that data, go see the legal papers in U.S. Department of Justice vs. Microsoft.

So what happened to Netscape means that losing market share in a market that does not exist does matter. But only if the functionality being discussed is an important ongoing factor in the market. Competitors have a long history of chasing Microsoft into markets it is milking for all their worth as it is exiting that market.  I would guess that browsers are such a market (or by my definition of markets, such functionality).  If you want to see what Microsoft sees for human interaction by the middle of the next decade, look to its work in surface computing and the Xbox.  By then browsers, will look to you like green screens look to this Neanderthal.

-- Dennis Byron

(P.S. In my opinion Netscape lost the browser war because it lost a server software market battle with the Apache HTTP server, not because of anything Microsoft did.  But that's a blog post I already wrote, some time before I even knew what a blog post was.