IT Investment Research

"Under $600!" The New Software/Technology Marketing Mantra

Soon in the U.S., enterprises will have to report every business transaction over $600 to the government.  I'll have to tell the government when IT Investment Research buys a new computer from Best Buy (BBY) and Best Buy has to tell the U.S. Internal Revenue Service (IRS) that I bought one.  And maybe even Mastercard (MA) has to tell the IRS it "financed" the deal. (If I buy that new TV I'm thinking of, I can't call that a business expense but do the other two parties still have to comply?)

And that's not to mention the effect on eBay. 

And is that before or after the Massachusetts sales tax?

That will make "Under $600" the new mantra for enterprise software and information technology distributors and retailers. That demand will filter out to the manufacturers and they will need to lower their prices at the beginning of the supply chain for all kinds of business equipment. That new U.S. government mandate will drive down overall information technology (IT) and enterprise software market revenue in the short term but it may expand the IT market in the long term as lower prices help meet the pent up demand.

Will larger enterprises have to report each monthly subscription maintenance fee paid to IBM, Oracle (ORCL) and SAP or can they just report the yearly total? And vice versa for the leading enterprise software providers.  Do HP and Xerox (XRX) have to break out each business printer companies buy or simply total them up when they send in their tax returns.  As much as this mandate is going to test marketeers, it's got to be a goldmine for tax lawyers.

Luckily my small business  doesn't have to spend that much for its accounting and tax software.  Or for this blogging engine. But maybe that's  going to change now that SixApart has been acquired.

-- Dennis Byron

(no financial interest in companies mentioned)

SaaS Just a Sliver of a Splinter of IT Spend

I posted recently about how the concepts enterprise software market, software as a service (SaaS), public cloud computing and open source are so often mixed up and treated as though they are different IT investment opportunities. When the post appeared on seekingalpha.com (see link below) -- as some of my posts do -- Kevin Dobbs posted a reply saying that SaaS was different.  I repeat his comment and my reply below on how I think they are linked.

But in thinking about my reply to Kevin it dawned on me that my analysis that SaaS is only 5% or so of enterprise software spend is misleading.  Given that SaaS subscription fees also cover a CIO's personnel costs and hardware costs as well as software license and maintenance (content update) costs, the better way to analyze it is to look at SaaS as a percentage of overall IT spend--which could be somewhere north of $10 trillion depending on what you include.

Looked at this way, SaaS so far represents much less than 1% of IT spending.  But I still believe it will grow to dominate.  To dredge up the old utility analogy, there's still too many CIOs building and running their own dynamos. 

George Westinghouse, where are you?

-- Dennis Byron

(no financial interest in companies mentioned)

Comment received September 24:

Dennis, you are replaying the common wisdom that most of the old line analyst firms are touting. One point of clarification is that Software-as-a-Service is actually a different business model than the license software business model. SaaS companies deliver products that are more like consumer-based software (think Facebook), and have a different approach to sales, marketing, services and support. The best in class firms are much different than Oracle, SAP, IBM, HP and others. Customer buying preferences are trending towards a subscription model and that's why you are seeing all of the technology master brands moving in this direction.

Kevin Dobbs
Montclair Advisors

Reply posted on SeekingAlpha.com

 

Kevin, thanks for your comment even though I am about to disagree with you totally.

First of all, I am not replaying the "old-line analyst" opinion. As the picture shows, I am the old-line analyst. I have been saying this for 20 years. (However, I make a subtle distinction: I am an IT market researcher, not an analyst in the sense I think you mean: I have not been the type of analyst that gives users advice since I left Datapro.)

When I started in IT marketing 40 years ago, SaaS was called timesharing, then service bureaus, went through a few more iterations and by about 1999 was called application service provision. I am not proud to say that I participated in coming up with that term. We had the numbers right at IDC back then but basically too much hype got generated over what we clearly said were low numbers as a percent of total market spend (as I mentioned in my article above).

There is nothing new about SaaS as a business model or otherwise although some market researchers looking for differences (which is good; that's their job) parse things -- like multitenancy and whether the software is exclusively available as a service or also available under a perpetual license -- to see if there are differences. But in the end, the difference is so minimal as to have little effect on market dynamics. The user is going to pay x over seven years for y functionality. It doesn't tend to matter a lot whether the user pays 5% of x on day one -- the licence price -- and then the remaining 95% monthly over the next 84 months -- the subscription maintenance to keep tax tables, etc. up to date, the hardware costs, and most significantly the personnel costs. Or whether the user just spreads the whole 100% out over the 84 months.

I don't get the "SaaS products are like Facebook" thing at all. I know you are parroting the Marc Benioff party line but as I went into in detail in February 2010 (see byrondennis.typepad.co...), that's just good PR. I complimented CRM for it.

I am not sure which software suppliers you mean by "best in class" firms but as I explained last year (see byrondennis.typepad.co...) the only difference between IBM, Oracle, etc. and the so-called SaaS pureplays is that the latter are not really pureplays. All began trying to sell their software via a perpetual license and failed. And conversely, Oracle may already be second only to CRM in SaaS revenue (and if not, it will be within a year or so to be followed, depending on corporate strategies by SAP, Microsoft, Intuit and possibly -- although it's a special case because of its mainframe business -- IBM).

All the indisputable market research issues aside, as I said in my article above,

"I believed then and still believe that SaaS will again become a dominant enterprise software delivery method, just as it was when I entered the business 40 years ago."

It's just that that trend has nothing to do with a different business model, Facebook, different sales or marketing techniques, technologies, or pureplay vs. stack.Thanks again for the comment

Enterprise Software, Cloud, SaaS and Open Source Not Separate Markets

Autumn begins in North America on September 23. You wouldn't know it from the daytime temperatures from Phoenix to Poughkeepsie on this last day of summer. Instead, the giveaway is the slew of enterprise-software user conferences being held or planned around the U.S. and the reams of paper and millions of keystrokes being generated on related press releases and blog postings.

So it's time for the annual warning: don't invest anything on the basis of the misleading PR and blogging that says something along the lines that enterprise software is dead, while the public cloud, SaaS and open source are replacing enterprise software. Here is a typical offending blog post from GigaOM touting Amazon (AMZN). I choose it because it picks up on three out of the four misleading memes I mention above and even uses Gartner data that proves otherwise as its lead. But it's only one example among many.

The referenced article defies enterprise software market dynamics. It leads with the Gartner statistic that says the enterprise software will grow to $232 billion in 2010 and then says that enterprise software will be replaced by public cloud computing without referring to the Gartner statistic that says private clouds will be much more prevalent than public clouds.  Gartner does not seem to put out a press release on the size of the public cloud market (my guess is that that is because the metric is quite small) but Gartner says that SaaS -- which is often mixed up with public cloud computing -- is a $8.5 billion market in terms of enterprise applications.  That's 10% of enterprise apps spending worldwide according to Gartner and -- my guess again -- only 5% or less of all worldwide enterprise software spending. 

Ten years ago when I used to help Amy Konary measure SaaS as a percentage of total spend at IDC, it was already 3% so we're not talking breakaway growth rates here. (I believed then and still believe that SaaS will again become a dominant enterprise software delivery method, just as it was when I entered the business 40 years ago.)

But more important to investing in enterprise software companies such as IBM, Microsoft (MSFT) and Oracle (ORCL), the cloud, SaaS and open source metrics simply represent pieces of the enterprise software pie.  They are not cake and cookies. Here's how it works:

• Enterprise software is the market.
• Cloud computing is a deployment technology for enterprise (and consumer) software
• SaaS is a delivery methodology for both
• Open source is a license term and condition (T&C), mainly for enterprise software (like public cloud computing and SaaS, these Ts&Cs are used in a very small slivver of the enterprise software market as it faces the user)

IBM, Microsoft and Oracle -- along with possibly SAP -- will continue to dominate the market and the technology and have long histories with the delivery methodology and the license Ts&Cs.

-- Dennis Byron

(no financial interest in companies mentioned)

Why Not Wait 'til December? Gartner Predicts 2010 Enterprise Software Revenue

Gartner is out with a press release September 20, 2010 predicting $232 billion in enterprise software revenue for 2010. Having been in the software-market forecasting business a long time, I admit nothing beats doing predictions two-thirds of the way through the year. But in fairness to Gartner, the predicted $232 billion was included in a January 2010 press release as well.  Gartner has lowered its growth rate prediction from almost 5% to 4.5% for 2010 but apparently only because somewhere along the line it raised its measurement of 2009. 

Still there's a couple of interesting tidbits in the press release for investors. There is also the rarely mentioned elephant in the room, 90%-plus of this revenue has been locked in for a long time because it's subscription maintenance revenue for enterprise software bought years ago. Or it's upgrade/add-on revenue for that same long-installed application and infrastructure functionality. 

The tidbits include:

"Gartner analysts said enterprise software growth in North America is significantly front-loaded to the first half of the year..."

I agree but probably for different reasons than Gartner cites (e.g., pent-up demand). I think it has more to do with leading vendor marketing and fiscal policies.  Three of the leaders, Intuit (INTU), Microsoft (MSFT) and Oracle (ORCL), close their fiscals in the first half so tend to spiff their sales guys to close fiscal years strongly.  Intuit of course has the business tax season in the U.S. driving big first-half numbers as well (ditto for its consumer software of course).  The other market leaders, IBM and SAP, still do much better in the second half; I think IBM financial guys invented the hockey stick term to describe that trend even before  there was such a thing as  enterprise  software.

The analyst firm also says:

"Asia/Pacific (excluding Japan) is expected to have the fastest growth in software revenue of all the regions in 2010. The market for enterprise software in Asia/Pacific is estimated to reach $22 billion in 2010, up 13 percent from 2009 revenue of $19.5 billion."

I'm assuming the $22 billion also excludes Japan which indicates that well north of 90% of enterprise software spending comes from North America, Japan and EMEA, just where it has always come from.  And of course if the total is growing 4.5% and the AP excluding  Japan portion is growing 13%, well... you do the math.

The aircraft carrier that is the enterprise software market turns slowly.

-- Dennis Byron

(no financial interest in companies mentioned)

Dumb, Deadbeat Democrats Get Own Consumer Protection Agency

Elizabeth Warren, the Neelie Kroes of the U.S., has a blog post up on the White House blog congratulating herself for not being appointed Director of the new Dumb Deadbeat Democrat Consumer Protection Agency (DDDCPA). I haven't followed this a lot but I thought we already had a Consumer Protection Agency (CPA)? I guess that current CPA is only for knowledgeable independent consumers; its many rules and regulations are too complex for dumb deadbeat Democrats.

Anyways, Warren says:

"President Obama understands the importance of leveling the playing field again for families and creating protections that work not just for the wealthy or connected, but for every American."

It's the "again" that gets me. What is the DDDCPA going to do "again?" Over the last 20 years (admittedly half Republican years), we leveled the playing field by giving every American who could fog a mirror a mortgage, often an adjustable-rate/balloon-payment mortgage that was underwater from the start because of government regulation and its support of the mortgage after-market. Will the new DDDCPA bureaucracy do away with every type of loan except for the 20% down/straight-line-amortization mortgage? And stop banks from selling into the secondary market. That's bad news for dumb deadbeat Democrats but I'm all for that: back to basics.

Non-DDDCPA-director Warren goes on:

"The new consumer bureau is based on a pretty simple idea: people ought to be able to read their credit card and mortgage contracts and know the deal."

Again, we did this already in the 1980s. Fortunately, in retirement, I no longer need a credit card for credit but only for convenience. But 40 years ago when I did need one, it was one size fit all: 1-1/2% a month on the balance which was limited by my limited income and I had to pay off a twelfth of the balance every 30 days, 20 days after I received the bill. That was pretty simple but expensive. But 20 years ago when I still needed a credit card for credit, my rate was regularly only 6% or 7% per annum and banks were begging me to switch balances to their bank by giving me 1- and 2-month no-interest deals. The terms were a little more complex but only if you couldn't read. Warren wants simplicity. So its back to one size fits all; that's not such a big win for dumb deadbeat Democrats. But I'm all for that: back to basics.

Warren also says

"The time for hiding tricks and traps in the fine print is over. This new bureau is based on the simple idea that if the playing field is level and families can see what’s going on, they will have better tools to make better choices."

But has anyone who paid their credit-card or car-loan minimum payment within the allotted umpteen days been tricked or trapped under the current system? Can't dumb deadbeat Democrats read? And the better choice -- which no one seems to want to tell the dumb deadbeat Democrats -- is not to borrow money you can't pay back. Will the DDDCPA change that basic law of economics?

Then Warren illogically concludes by telling us about her grandmother, a poor woman apparently born in 1873 who was wiped out when over age 60 by the Great Depression. But Warren's grandmother's solution, according to Warren, was to help herself out of the situation, rather than wait for the government. Grandma Warren was apparently not a dumb deadbeat Democrat.

-- Dennis Byron

At Citi, Feds Are Judge and Jury

"U.S. District Court Judge Ellen Segal Huvelle asked SEC attorneys why the bank's shareholders should be punished for the alleged misdeeds of Citigroup (C) executives." 

According to the AP, this what a Federal judge said recently in response to a proposed Securities and Exchange Commission (SEC) hearing. 

At first reading, you have to say the judge obviously does not understand the concept of holding shares, making investments, risk and reward in the marketplace, and so forth. 

But then you realize: Oh yeah, look who one of Citi's leading shareholders is.  It's the Federal government. 

-- Dennis Byron (no financial interest in companies mentioned)

Diebold Software Rigged "Kennedy Seat" Election for Scott Brown

A brilliant piece of August 27, 2010 investigative journalism by the Election Defense Alliance has exposed how Diebold (DBD) and its competitors rigged the January 19, 2010 Massachusetts election in favor of now Republican U.S. Senator Scott Brown. This was the Senate seat held by the Democratic Kennedy family for the previous 58 years, the seat famously described as "the Kennedy seat." The key to the Diebold plot is the way Diebold and its competitors in the voting machine manufacturing, distribution and service business programmed software in their optical-scan-based voting machines to count every nth Democratic vote as Republican and thereby end the Kennedy rule in Massachusetts.

The Election Defense group discovered that:

• Diebold worked its plot through its New England distributor, LHS Associates. According to other sources that follow this meme, LHS is apparently corrupt because one of its voting-machine service guys -- believe it or not -- drives around New England carrying voting machines and parts to fix voting machines.
• Diebold and its competitors and/or LHS and its competitors possibly bribed the 80% of the 351 Massachusetts city and town voting election officials who use optical scan voting machines. Each district has 10-100 such officials, workers and volunteers. (Truth in advertising: I have been such a volunteer in Massachusetts off and on over the years.) Massachusetts does not run elections through county supervisors as do many US states but through each individual municipal government. That of course makes it much easier to fix elections because there are many times the number of officials -- some using Diebold machines, some using competitor machines, some using LHS, some using LHS competitors -- to bribe.
• The loser in the election did not ask for a recount.

The proof of the plot is in the voting patterns discovered by the Election Defense Alliance. The Alliance applied very sophisticated software analysis to discover that Democratic leaning municipalities voted less Democratic than and Republican leaning municipalities voted more Republican than they had when the last Kennedy last ran or than the party registrations would have dictated. "Lean" was defined by voter party affiliation noted in registration records.

So for example, in the towns of Amherst (college town), Cambridge (even more well known college town), Provincetown, and West Stockbridge (home of Alice's Restaurant, where most of the residents are really New Yorkers), where Democrats outnumber Republicans  9:1, 11:1, 17:1 and 4:1 respectively, Brown's Democratic opponent only won 6:1, 5:1, 6:1 and 5:1 respectively. That's the heart of the Alliance's findings.

The Alliance adds to this theory that the towns and cities with optical scan equipment voted in aggregate more Republican than in the last Kennedy's last election than towns and cities without such equipment.  But there are so few such cities and towns without optical scan equipment that they only accounted in aggregate for 65,000 out of 2,200,000 votes cast. It's kind of hard to allege statistical significance using a couple of percent of a vote count that was not selected for statistical significance.

The Alliance's ridiculous defense of such a non-typical sample is that those ballots should have been cast in the same way as those where optical scan was used if they were "distributed randomly" throughout the state.  That's true. But they weren't distributed randomly throughout the state.  The rest of the Election Defense Alliance group's analysis is therefore nonsense.

But the report's flaws don't stop there. The Alliance left out the majority of the state's voters, the independents. The Election Defense Alliance analysis also forgot that we use the secret ballot here in Massachusetts so there is no way to know if Democrats voted Democratic, or Republicans voted Republican. 

More important, although turnout is public information, the Election Defense Alliance sophisticated algorithms apparently were not sophisticated enough to take turnout into account. In fact, I don't think the term turnout is even mentioned in the report. Most theories for the Brown victory and Kennedy defeat -- although they are simply the delusional theories of Democratic political experts -- is that the lack of Democratic voter turnout propelled Brown to victory. Such a silly theory, much less controversial than that of the Election Defense Alliance, would lead to exactly the same statistical results as the Election Defense Alliance discovered through its sophisticated analysis that it so dependent on ties to Diebold software.

Finally in the report, the Election Defense Alliance reveals in a footnote the unbelievable fact -- critical to its expose -- that Diebold is no longer in the voting-machine manufacturing and distribution business.

-- Dennis Byron

(no financial interest in companies mentioned)