IT Investment Research

Now Let's Move On

"It is difficult to imagine that a nation which began, at least in part, as the result of opposition to a British mandate giving the East India Company a monopoly and imposing a nominal tax on all tea sold in America would have set out to create a government with the power to force people to buy tea in the first place."

-- Judge Vinson,
Senior Federal District Judge,
Northern District of Florida,
Pensecola Division,
January 31, 2011

Rimini Street Shows How Enterprise Software Market Works

I speak and write frequently about

• how the enterprise-software market is more about maintenance services revenue than product revenue
• that enterprise-software maintenance service is more about content than fixing things, and
• how you shouldn't invest in the enterprise-software market without following the maintenance services money trail. 

I've been making these speeches and writing reports and blog posts about these subjects for 20 years and am pretty frustrated about how hard the real revenue flow is to explain to people. For me at least.  Investors still want to get all excited about a single quarter's new product revenue or last week's hottest technology buzzword. 

Then -- thankfully -- along comes the privately held Rimini Street with a January 11 press release on its 2010 results that should make the issue crystal clear to investors.  I'm off the hook.  Here's how Rimini explains its revenue flow:

• "(Rimini) exceeded $25 million in annual revenues for fiscal 2010 (ending December 31, 2010)...
• "Sales booking backlog increased from $149 million to $220 million... (in other words, almost 10 times most recent annual revenue)...
• "Rimini Street's average contract term increased 22 percent from nine to 11 years (that's "years" and I wish they had put it in upper case to make my job even easier)...
• "Client retention rates increased for the third consecutive year to more than 95 percent..."

The way it works for Rimini Street is how it works for Oracle (ORCL) -- which is why Oracle is suing Rimini -- and SAP and most of the other leading enterprise software suppliers.  It's a little different for IBM because of the interconnection between its services revenue streams and its management consulting business on one hand and its legacy "mainframe rental" business on the other.  (But it's almost totally different for Microsoft (MSFT) because it has historically sold software either literally or virtually shrink-wrapped (what you see is what you get; no almost automatic add-on revenue for years guaranteed)).  

So in general, when in doubt about how the enterprise-software market works go back and read this Rimini Street press release.

-- Dennis Byron

(no financial interest in companies mentioned)

Massachusetts High Tech Sinks to New Low

Recently I came across a Massachusetts state government bureaucracy called the Massachusetts Technology Collaborative dedicated, according to its web site to fostering 

"a more favorable environment for the formation, retention, and expansion of technology-related enterprises in Massachusetts."

Is such a government bureaucracy really needed in the state that spawned the following businesses without any government intervention (thanks to the web site, route128history.org, for help filling in the blanks from back before my time):

• Alliant
• Analog Devices
• Apollo
• Applix
• Baird Atomic
• Banyan
• Compugraphic
• Computervision/Prime
• Cullinane
• Datamatic (which eventually became Honeywell Information Systems, first employer of Paul Allen before he went back to Seattle to form an obscure startup with a fellow nerd from high school)
• Data General 
• Digital Equipment
• Edgerton, Germeshausen and Grier (EG&G)
• EMC
• Groove Networks (later purchased by Paul Allen's little Seattle-based startup)
• High Voltage Engineering
• Lotus
• Netezza
• Polaroid 
• Radio Shack
• Raytheon (got a lot of government contracts though)
• Thermo Electron
• Thinking Machines
• Transitron
• Tyco
• Visicalc (Software Arts)
• Wang Laboratories

I am sure there are a lot of other Massachusetts-based entrepreneurs outside the information technology market, with which I'm familiar, that should make such a list. I am leaving out companies like Bolt-Beranek, Itek and Mitre that received a lot of federal government funding. I am also leaving out companies such as Sylvania and Novell that had/have a large presence in Massachusetts but did not demonstrably have their "formation" here.

It's a sad reflection of the state of high-technology affairs on Route 128, which the state doesn't even call 128 any more. 

Or it's a sad reflection on Massachusetts state government. 

Note 1: To be honest, I shouldn't say all of these companies succeeded without government intervention.  In the 1970s Governor Michael Dukakis tried to get involved in multiple ways, large and small. On the large side, I don't believe any of the companies listed above received the funding described in the linked 1988 Fortune article about private/public partnerships. On the small, 'do-you-carry-a-grudge-a-long-time-Byron' side, the Dukakis administration allegedly gave Ken Olson of Digital Equipment all kinds of infrastructure improvements in that one-horse town Maynard, MA -- near the famous "mill" -- while he wouldn't give Ed deCasto a traffic light on busy Route 9 in Southboro in front of Data General headquarters. 

Note 2: The state bureaucracy to which I object above should not be confused with the more than 30-year-old Massachusetts High Tech Council or the Mass. Technology Leadership Council, which are not government affiliated. The latter was at one time called the Massachusetts Software and Internet Council and before and after that -- I think -- just the Mass. Software Council. It was formed in 2005 by a merger of the Software Council with the New England Business and Technology Association.

-- Dennis Byron

(No financial interest in companies mentioned except a few hundred shares in EMC as I'm waiting for lightning to strike South St. twice)

Are Enterprise Software "Master Brands" Simply Riding Cloud Computing?

Saugatuck Research is out the week of January 10 with a very thorough Research Alert (you have to sign up for the analyst firm's Research Alerts but they are free) that has a lot of good kick-off-2011 information about the trend to cloud computing technology. Saugatuck has been one of the major software as a service (SaaS) fanboys  over the years so it is not surprising that it has morphed its 2008-2009 thinking on SaaS into becoming a cloud computing fanboy in 2010-2011.

Much analysis I see incorrectly uses the words cloud and SaaS interchangeably. But I like the fact that Saugatuck is measuring "NEW" IT spend as well as total IT spend in its research methodology.  Such a view has long been lacking in a lot of research on IT and enterprise software market dynamics.  It is the most useful metric for IT investment once you've done due diligence on the individual IT suppliers' balance sheets. Saugatuck claims 65% of new IT spend will be "cloud or hybrid" by 2015.  The adjective hybrid leaves a lot of wiggle room but at least the hard number provides a starting point from which investors can decide how the market is going to play out during the decade that just started (or did it start 12 months ago?).

The January research alert also has a lot of detail about what Saugatuck calls Master Brands.  All are major cloud computing technlogy players no doubt, at least in terms of how they might be using the technology, but the implication that they are equal or competitive players could be misleading to IT investors and the idea that the group is simply riding the cloud computing wave is even more misleading. 

• EMC belongs on the list if Saugatuck includes EMC's 98%-99% ownership of VMware (VMW). 
• Amazon (AMZ) belongs on the list only if you believe that the retailer is going to move out of retailing to become an IT hosting company.  (At least, unlike EMC, Amazon might provide its shareholder some value some day if it spins off its IT hosting division in a way unlike the way EMC spun off VMware without really spinning it off.)
• salesforce.com (CRM) makes the list only if you conflate SaaS and cloud
• SAP belongs there as a wannabee and Intel as a basic-technology provider to everyone else
• I don't know what HPQ is doing -- in general, not just in the cloud -- and I don't see Apple (APPL), Google (GOOG) or DELL doing much directly

As often explained here, the remaining IT and enterprise software suppliers listed as Master Brands are not riding the cloud. IBM, Microsoft (MSFT), and Oracle (ORCL) are driving the cloud computing technology trend. 

-- Dennis Byron

(No  interest in companies mentioned)

Understanding Enterprise Software Supplier Marketing Strategies in Investing

A social-media/Enterprise-2.0/whatever-the-buzzword-is-today blogger is making the following generalization based on the Rackspace (RAX) share price rise over the 2009-2010 period:

"Evangelists are creating real shareholder value."

The statement reminds me of the old marketing adage:

"Nothing kills a bad product faster than good advertising." 

The reality is that every information-technology (IT) and enterprise software supplier needs good multiple-channel marketing to succeed in the market.  Clearly one of those channels today is social media. But the blog has simply basically replaced the weekly customer email of the last decade, which basically replaced the monthly customer newsletter of the previous decade, which basically replaced the IT-vendor CEO showing up in your office once a year with the local sales rep to tell you what was new.

Back in the 1980s, I "bought" advertising time in a then new TV medium called cable, which led to some guy from Atlanta named Ted Turner calling our ad agency and asking if he could buy my boss and I lunch to thank us for the business. The CEOs of NBC and CBS never did that. But Malcolm Forbes and Harold McGraw at least ran good golf outings. (But that's all a story for another blog post.)

My point is that marketing does not drive the share price of IT companies despite the need that IT suppliers have for multi-channel marketing programs. Success in the market drives the share price. And in IT and enterprise software in particular success begins with "the product."  40 years of research says "Functionality rules!"  That was true in the 1970s and it was true in the decade just ended (or did it end 12 months ago?).  Of course "the product" both back in the 1970s and increasingly today is more a service than a physical thing but the same rule of thumb applies. In the interim (the 80s and 90s) and in consumer technology, the product was/is more often a physical thing but the rule still applies.

Microsoft (MSFT) did not grow to lead the enterprise and consumer software market by marketing campaigns but by keeping its leading customers -- IBM/Lenovo (LNVGY), HP (HPQ), Dell, etc. -- satisfied.  Apple (AAPL) -- as good as its marketing is -- does well because of great product.  Oracle (ORCL) and SAP in particular have succeeded with weak marketing campaigns because their key route to market is indirect, historically through the systems integrators. 

And the systems integrators in turn -- just so you don't think I was wandering above with the Ted Turner story -- are successful because of key customer contact and great golf outings. Ditto for a hosting company such as Rackspace.

-- Dennis Byron

(No financial interest in company mentioned)

Goldman Sachs' Important Questions about Facebook, Microsoft, Google

I have never been on Facebook so I don't feel qualified to analyze its latest "news," that Goldman Sachs (GS) invested $450 million and that its clients -- including Digital Sky/Mail.ru Group (LSE:MAIL) -- will invest another $1,550 million in Facebook over time. 

I say "news" in quotes because there does not actually seem to be any formal news about this on either Facebook's or Goldman Sach's web site.  I am sorry but I am so 20th Century. I would like to hear from the principals to help me make up my mind about what's happening. Most reporting on the subject cites people that cannot be quoted. Because I'm not a Goldman Sachs client and/or don't have $2,000,000 to invest in Facebook (nor do any of the others spouting off on this subject), Facebook and GS don't care what I or they think. Anybody that met the criteria got an email about it over the weekend of January 1/2, 2010 (talk about being so 20th Century!).  Was it old-fashioned email or was it that new fangled F-mail?

So all I have is the New Year's Day news blast out of the mainstream media and the blogosphere and all that did for me was raise a lot of important questions that investment-technology (IT) investors should keep in mind about the Facebook/GS news (in order of importance):

• Did Zuckerberg really shat all over that woman, as depicted at the beginning of the movie, and/or does he really have the same girlfriend he's had since high school, as he told Leslie Stahl (or was it Dianne Sawyer)?
• Does Vladimir Putin really own Mail.ru Group and/or is there a chance Digital Sky's founder will also get sent to Siberia?  
• Is the stock symbol "F" already taken and/or might they use FU when they IPO?
• Does all this $50 billion valuation stuff mean Goldman Sachs and its clients now/will own 2% of Facebook and/or a half of a percent?
• What day will Zuckerberg speak at Davos and/or is he just on a panel with Bono,  Warren Buffet, the Dalai Lama and Al Gore?
• Was the Asian-American woman, depicted later in the movie doing the Monica Lewinsky with Zuckerberg in the men's room, just a casual acquaintance and/or is she driving Facebook's marketing thrust (so to speak) into East Asia?
• Are 30% of all advertising dollars already being spent online (per a c-span.org-broadcast seminar from American University) and/or are Facebook and Google (GOOG) involved in a mano a mano battle over a finite and almost exhausted pot of gold
• Does that mean Microsoft (MSFT) turned $270 million into a billion and a half in a couple of years and/or did it already sell off its stake via the under the counter market for Facebook shares
• Is P.T. Barnum right and/or is a company that thinks dedicating 15 engineers to a 1980-era e-mail engine is equivalent to the moon landing really worth more than Boeing?

-- Dennis Byron

(No financial interest in companies mentioned)