IT Investment Research

Microsoft: Good or Bad News?

I'm taking a few days off so I didn't listen to the Microsoft (MSFT) conference call. But I can't help watching enterprise-software press reports go by. So what's up with the contrast between these two opening sentences:

• ZDnet says "Fueled by Windows 7 and a strong PC upgrade cycle, Microsoft topped estimates for its March quarter."
• Bloomberg says "Microsoft Corp. (and Amazon.com Inc.) fell after releasing earnings reports that showed a rebound in technology spending by companies and online buying by consumers is less robust than analysts had predicted."

Dessert topping or floor wax?  Wait, it turns out they're both right. It's just that Bloomberg held Microsoft to a higher standard.  It didn't meet the higher end of analyst expectations.

Bloomberg found analysts that were looking under the covers to compare consumer vs. enterprise software spending.  The former wasn't as strong as hoped they said and the the latter is still weak. I agree in general--remember I did not listen to the specific conference call or read the transcript--and a Microsoft PPT reprinted in ZDnet shows that its outlook is tied to overall server system results, which it won't predict. On the other hand, I think Microsoft has a history of setting expectations low in its third quarter, the period just ended, and then closing its fiscal year ending in June strongly.

And don't compare Amazon (AMAZ) with Microsoft, at least not before 2015 or so.  Microsoft is well positoned to take advantage of the conflation of consumer and enterprise computing. And it's saying all the right things about making a transition to developing and marketing the technology-enabled business and consumer services it would take to make such a transition successful.  But the execution so far has been abysmal and the competition will not be stodgy "old" information technology companies but real marketeers.

(As an aside, for a Cape Codder, the southern end of the Outer Banks of NC is the Cape Cod Seashore Park on steroids and well worth the drive.  Point Reyes CA still wins the battle of national seashores but that's an upcoming post on my travel blog.)

-- Dennis Byron

(No financial interest in any company mentioned except for the $12 a year I pay Microsoft for Office.)

ERP Value Proposition: The Pendulum Is Swinging Back

There was a telling conflation of web postings the week of March 22 that hint that the value proposition behind ERP enterprise software is making a comeback in the market. Note that I said value proposition. Actually I doubt if it ever lost its lustre but that's hard to tell because the trade press and blogoblatherers always emphasize the negative (that's just human nature). 

• Here we had a couple of hackers explaining why "enterprise software sucks."
• Here we had IDC research saying IT users are happy with the much maligned by blogosphere rabble rousers enterprise software maintenance they receive.
• Here we had Rich Veague of IFS explaining the ERP value proposition from the ground up.

Rick's article could have been written 20 years ago but instead of the implied criticism of best of breed CRM and logistics software the article would have talked about the drawbacks of freestanding BOMPs or process manufacturing packages.

The anonymous "hackers" whomever they are seem to be old enough to remember this; they point out that the problem is not with the software but with irrational business process flow.

This is not an on-premise supplier vs Software-as-a-Service (SaaS)/cloud/ondemand/I-don't-know-what-I-am supplier discussion although SaaS vendors such as Taleo, RightNow (RNOW) and salesforce.com (CRM) like to position it that way because they are one-trick ponies. [NetSuite (N) is an exception because it offers ERP on demand but let's face it, Netsuite is really Oracle (ORCL).]

Instead this is a value proposition discussion.  It will lead in two directions: better middleware and better business process management (BPM), which is what I think of in place of what Veague calls "extended ERP."

-- Dennis Byron

(no position in companies mentioned but I have done market research for many of the companies mentioned.)

What Is the Future of Software?

Over on searchSOA on April 14, Jack Vaughn asks

"What is the Future of Open Source Software?"

The real important question for investors is "What is the Future of Software?"

Only a very small part (I mean low single digit small) of IT spend is specifically for software.  As an aside, only a very small part of that relates to software that is licensed under open source terms and conditions (Ts&Cs). 

The real issue for investors is that software sales are really about service.  In the Gartner 2010 forecast that got all the buzz last week, of the quarter-trillion in software spending mentioned, 67% of that is software subscription maintenance spending. And hardware sales are really about service.  Of course if it's really complex hardware and software it's all about service. And if it's simple hardware and software like sales activity tracking, you can sell the whole bundle as a service, which is even better.

I don't agree with Jack that there is a pendulum swing in progress back to smaller, not-for-profit projects in the open source culture.  He doesn't provide any research for that finding.  But, on the other hand, as someone that does IT investment research, I don't go looking for not-for-profit open source projects. I'm sure they exist in academia and among hobbyists just as they have for decades before the term open source was invented.

But historically, there is no pendulm then/no pendulum now/no pendulum tomorrow. The guys we know and love--Google (GOOG), HP (HPQ), IBM, Oracle (ORCL)--have used open source Ts&Cs to reduce research expense forever. We used to call them user groups.  Microsoft (MSFT) got on the open source bandwagon about four years ago and will be the grand marshall by the end of this decade. But it has always made major similar usage of its developer network without the Ts&Cs. Adobe (ADBE) and SAP have been very slow on the uptake and are paying for it.

But it doesn't matter.  The successful software suppliers form an investment point of view are the ones that realize they don't sell software, they develop software to sell services (and increasingly appliances sold with a time-series value, and other bundled services-oriented packages of technology).

-- Dennis Byron

(no financial interest in companies mentioned)

Does Gartner 2010 IT Growth Number Measure IT? Or Growth?

Ususally I warn information technology (IT) and enterprise software investors to read the fine print in Note 10 on page 100 of the 10-K.  That's not the issue with the Gartner press release on 2010 IT spending growth dated April 12 that is getting such wide play on the blogosphere this week.

The headline reads "... Worldwide IT Spending to Grow 5.3% in 2010."

Whether you run right out and invest in HP, IBM, Microsoft (MSFT), Oracle (ORCL)and SAP based on that stat depends on what you mean by IT.  And what you mean by growth.

I can't blame Gartner, just the headline writers and the bloggers. In the press release itself, the facts are all laid out in clear English in about 10 paragraphs.  For example:

• IT, by the Gartner methodology, includes personal cell phone purchases. I think it even includes your home phone and cable bill. 
• 80-90% of the spending is on ongoing, probably already purchased IT services, not IT stuff. The Gartner press release makes it clear that 70% is on services; the rest you have to "impute" from knowing what is counted in software spending.
• The projected 5.3% growth is almost totally driven by a weakening dollar. Activity in Europe in declining and North American spending on all this is flat.
• IT is now just an index for overall economic activity.  All bets are off if--as I believe--we double dip. Or as some are predicting--perhaps fittingly--get a "W" recession.

I don't fault the Gartner methodology and definition of IT either. Gartner anticipates the increasing conflation of personal and enterprise computing, the most important trend of the 2010-2019 decade. That trend means nothing but good things for Microsoft and HP and probably--the jury's still out--for Google (GOOG). It also reflects the long time importance in IT and enterprise software of services, which is why IBM spent the last decade exiting the IT business.

And there is one little gem that may make it worth your while to subscribe to Gartner to find out more. Kathryn Hale, research vice president at Gartner, says: 

"In the face of... ongoing strong pressure to renegotiate contracts, and in the absence of equivalent pressure from stockholders, we believe vendors will generally choose to maintain margins over revenue growth."

I am not sure why stockholders will be concerned with maintaining margins but I'm not sure how you do that if you renegotiate contracts.

-- Dennis Byron

(No financial interest in the companies mentioned except for the $12 a year I pay Microsoft for Office.)

IBM, Please Proclaim Your Middleware Dominance a Little Louder

It doesn't surprise me that IBM is "proclaiming its middleware dominance," which is what Dave Rosenberg says in his blog April 12. After all the enterprise software market-share silly season rolls in with the buds on the Forsythia bushes in Armonk.

But Dave, I can't find a mention of this data anywhere else on the web except your blog. What's up?

Anyways, according to Dave, IBM says it has 75% of the services oriented architecture (SOA) market and 31% of the overall middleware market. Not really any new news there.  IBM has had 10% of the overall $250-million plus enterprise software market for a long while now, since whenever Microsoft (MSFT) passed it to move into number-1 slot.  Now with the acquisition of Sun, Oracle (ORCL) might have slipped into number-2 position, but that depends on how much Sun slipped before it fell.

But that's only looking at the elephant from one end. Because IBM doesn't sell ERP and other types of enterprise application suites, IBM actually has maybe 15% of its total addressable market (TAM), which include such things as operating systems, database management software, development tools, application servers, collaboration software, network management, and so forth. 

And you need to slice and dice even that number a little more.  In IBM's 15% of its TAM, it has as much as 90% of the mainframe-based enterprise software market. (Florian Mueller has been reminding us of that for the last week, receiving everlasting damnation from the open source community for his efforts. Worse, they are calling him a Microsoft lapdog.) 

Hell, last time I ran the numbers--admittedly it's been a few years--IBM was still doing a billion a year in CICS, giving it maybe 99% of the TP monitor market. But that means that IBM has less than 10% of its remaining addressable market.  Its middleware dominance could all be CICS for all I know. Is CICS SOA?

So when we see the numbers later in the spring, we'll get into it a little deeper.  But so far, as expected, it does not look like anyone changed places in 2009 enterprise software market share rankings vs. 2008.

-- Dennis Byron

(No financial interest in companies mentioned except for the $12 a year I pay Microsoft for Office.)

 

Tongue-Twister EU Standards Body Supports Microsoft by Accident

It used to be easy to follow a simple organization with a simple name such as the International Standards Organization (ISO) to know all you needed to know about the implications of standards on enterprise software market dynamics.  And thereby all you needed to know about standards relative to investing in enterprise software suppliers.

Then seemingly out of no where (although it has been around under various inexplicably funded consortia acronyms for years) comes the Transatlantic Conumer Dialog (TACD) Intellectual Property (IP) Policy Committee. Really, I don't make up these names. These are same type of European Union (EU) wonks as the WEP/INSEAD/Global Competitiveness Network/Industry Partnership Program that gave us the fun blog post that said it was best to start a business in Iceland and Finland recently. 

The TACDIP is complaining

"If Internet users are to be truly free to choose whatever software and applications they desire to use,  we need an established norm for open standards as a prerequisite for both consumer friendliness and easy market innovation in an fair, anti-monopoly environment."

It's kind of like the firestorm on the blogosphere in early April 2010 about net neutrality now that the second highest court in the U.S. has ruled that the U.S. Federal Communications Commission (FCC) really has no authority vis a vis the Internet. That's not surprising to anyone except apparently the FCC.

But indecipharable-acronym groups like the TACDIP don't really do anything but issue white papers so their effect on the market for the shares of companies such as IBM, Microsoft (MSFT), and Oracle (ORCL) is more subtle than the DC Circuit Court's April 6 ruling in favor of Comcast.

Let's jump over the obvious flaw in the TACDIP whine. Internet users are already free "to choose whatever software and applications they desire to use."  No open standards are required from the European Union (EU) or anyone else.  Similarly, standards have never been especially supportive of user friendliness or market innovation.  In the case of market innovation, failed standards efforts such as the Object Management Group's Common Object Request Broker Architecture, slowed down the development of services oriented architecture (SOA) for a decade.

So what TACDIP really cares about, when you cut through the bullcrap, is its idea of a monopoly environment. It wants the EU to screw over Microsoft some more and screw its own taxpayers and citizens at the same time.  Ironically in the same week when so-called "Open Massachusetts" is incenting its citizens to learn Microsoft technology for free, these Eurocrat camp followers are urging the EU apparatus itself (the powerless quasi ubergovernment that regulates the shape of fruit in Europe and has other important functions not left to the EU's constituent nations) to cowboy up in favor of standards. 

But as is typically the case with such consortia, TACDIP has conflated open standards with open source.  So despite its stated intention to screw over Microsoft, TACDIP's move to support open source in the Euracracy, if it should suceed, helps Microsoft--which now has Codeplex--and harms Oracle and IBM, both of whom are in trouble in open source terms (Oracle for allegedly re-closing Solaris after the Sun acquisition and IBM for protecting its intellectual property). Microsoft's Codeplex is rapildy becoming the largest Open Source Initiative (OSI)-approved, open-source-terms-and-conditions-based development community and library.

Another proofpoint for the law of unintended consequences!

-- Dennis Byron

(No financial interest in companies mentioned except for the $12 a year I pay Microsoft for Office)

News Alert: InformationWeek Finds Long-Lost Enterprise Software "Funny Money"

There is an article by Bob Evans running over on InformationWeek as of April 5 that illustrates the importance of enterprise-software investors ignoring technical journalism in making investment decisions. The headline--which Evans may not have written--is one of the almost weekly journalistic statements that enterprise software is dead.¹  The heart of the article--which of course Evans did write--ignores enterprise software market dynamics in many dimensions. 

But because this is an investor site, I'll just stick with some plain old typical tech journalist misunderstanding about accounting. Evans asks (speaking of well-established GAAP/FASB-determined revenue recognition procedures):

"...are these various splits just funny-money accounting exercises...?"

They are not funny-money exercises but they are accounting exercises. Good accounting dictates that the revenue be broken out in that manner. The SEC sends you to jail if you don't do it. (Someone please explain that to the publicity hound congressperson, Henry Waxman, vis a vis AT&T, Verizon, John Deere, and so forth and their accounting for Obamacare's immediate impact on their bottom lines.)

In addition, Evans article's breathless wonder about these accounting practices when it comes to Oracle (ORCL) and by extension to SAP and other enterprise software suppliers is beyond a little odd. I'm thinking he might be purposefully trying to mislead readers except I don't know why or about what.

The revenue splits the articles talk about among software licenses, maintenance subscriptions, and professional services for companies that follow Oracle's former and SAP's still current business model is decades old. If you adopt that business model and are good at it, the only time license revenues exceed maintenance and services revenues is early in your existence.

Oracle adopted this business model in the early 1990s, about 10 years after its founding (when it was more of a professional services/integration firm). By midway through that decade (see Oracle's 1997 10-K; deduct its then systems-integration business revenues from the license line), Oracle's services revenues exceeded its license revenue. Evans' discovery of funny money isn't about something that just started happening recently as implied.

Also to the extent that software suppliers such as these market leaders adopt a Software as a Service (SaaS) delivery model, the trend to more revenue recognized as services is accelerated. I estimate that Oracle does at least a couple of hundred million in SaaS revenue accounted for in its OnDemand line on its income statements rather in its apparent software revenue lines. Now that is "funny money" but the joke is going to be on salesforce.com (CRM), Rightnow (RNOW) and the other ASP/SaaS/on-demand/cloud-computing suppliers that still don't know what they want to be when they grow up. Oracle may be close to overtaking them in their own niche.

But I am being unfair to CRM, RNOW and the rest.  They do know what they want for an end game.  They want to be acquired by Oracle or SAP.

¹Other breathless Evans' headlines  include "A New Era for Software," (Software Vendors are) Fighting for Survival," "Have Oracle and SAP Hit Tipping Point..?," and so forth.  Will you enterprise software guys please advertise more on his site so that he can move on to another subject.

-- Dennis Byron

(no position on suppliers mentioned)

Warning: Odd Web Sites Probably Have a Virus

Do not open links to web sites with the headline

"Unix/Linux Enterprise Software Ecosystem to Grow As Fast as Windows."

I don't know what the scam is but this blog post of mine--which seems to be being picked up by very fishy web sites in the last month--is a year old. The reference to April 8 is to April 8, 2009.

-- Dennis Byron

Open Source Activist Loses to Oracle, Takes on IBM

I can't question Florian Mueller's bravado although I have consistently questioned his tactics and his objectives when it comes to attempted enterprise-software-market manipulation. Mueller, if the name is not familiar, did the heavy lifting in the October-December 2009 effort by MySQL founder Ulf Michael Widenius (better known as Monty) to stop Oracle's (ORCL) takeover of Sun. Using the highly political European Union anti-trust approval process, the pair probably extended the completion of the Sun acquisition by six months, and perhaps ended any chance Sun technology has of ever making a comeback.

When last heard from Monty was off trying to do the same thing to Oracle in Russia and China.  But Mueller, apparently bored now that he has lost the Oracle fight, has moved on to join others in a six-month-old battle attacking IBM. The issue apparently is IBM threatening the commercialization of a UK open source project called Hercules that has incorporated in France to find friendlier courts.  According to Mueller:

"After years of pretending to be a friend of Free and Open Source Software (FOSS), IBM now shows its true colors. IBM breaks the number one taboo of the FOSS community and shamelessly uses its patents against a well-respected FOSS project, the Hercules mainframe emulator."

 

The issue really is not about Free and Open Source, always written upper case for dramatic purposes (or is it some Germanic thing?) but a patent dispute. No one will ever accuse Mueller of sticking to the facts. Mueller's claim that IBM generates $25 billion a year in "mainframe software sales" is typical of the hyperbole he and Widenius used in the Oracle/Sun campaign in 2009.  IBM only generates about $23 billion a year in software sales overall (including software it sells to itself) and I estimate that less than half of that is currently mainframe-related.

 

To really keep it interesting, IBM in its rebuttal claims that Hercules is funded by that bastion of open source rectitude, Microsoft (MSFT).

 

Stand by for more fun. 

-- Dennis Byron

(No financial interest in companies mentioned)

Follow Job Migration to BPM Enterprise Software

Computer Economics is out the week of April 5 with trend-confirming research on information technology (IT) jobs. The report shows a big time-series-based IT department swing away from application programmers/systems analysts to business-intelligence (BI)/business analysts. I guess I can throw away my 40-year-old programmer's diamond/rectangle template. This report is additional back-up for the research that says business process management (BPM) is the next killer app in enterprise software, the new ERP from my perspective. (Or for customer-relationship/supply-chain management or whatever buzzword you use for integrated enterprise application suite.)

The research is based only on 2007-2009 data collection but my guess is that the decrease in programmers/systems analysts has been ongoing for many years. IT shops depend on companies such as SAP and Oracle (ORCL)--and to lesser extent, Microsoft (MSFT)--for that level of computer science in packaged form. They no longer have to or want to develop it themselves. And IT shops depend on IBM, HP, and so forth when they prefer to get the functionality outsourced or custom written. Conveniently all off these enterprise-software market players, except HP, are well positioned to take advantage of the BPM explosion. 

That is why most of the free-standing BPM software providers such as Lombardi and Savvion have been gobbled up, by IBM and Progress (PRGS) respectively. And Pegaystems (PEGA), although still independent, appears to be reverting to its customer relationship management niche, with its proposed acquisition of Chordiant (CHRD).

With a stretch, the Computer Economics also points to the next next big thing as well.  Because the research counted BI experts, there may be indication that the merger of BPM and BI is underway.  This is a capability that Dan Vesset at IDC and I (beginning when I was at IDC) began calling intelligent process automation in 2004.  The idea, as with the movement from app development to BPM, is to get the human out of the process flow. With BPM, fewer tasks, With BPM integrated with BI, fewer mistakes before executing those tasks.

-- Dennis Byron

(No financial position in companies mentioned)