IT Investment Research

Open source blogosphere needs to get the Linux/OSS numbers straight

The open source blogosphere is all a twitter April 17 about the Standish Group International statistics released on April 16, which I mentioned here. 

I'm sure these bloggers are good PHP programmers and know the Apache HTTP server inside out. But they are totally misreading the numbers and conflating them with the Linux-Foundation-sponsored IDC white paper released previously. Not surprisingly some enterprising journalists are reporting on the blogospherists' opinions rather than going back to the source and checking with Standish. Apparently stroking the open source software (OSS) community "sells more papers" than getting the facts straight.

For some reason that I cannot fathom the journalists also seem to think that Microsoft (MSFT) might have sponsored the Standish research.  This, of course moves the journalists from just hip shooters into the blogospherist category of Microbasher (which I define as someone that attacks the person who wrote the blog rather than the words in it, says the person is paid off by Microsoft, picks some absurd opinion such as "Microsoft software is expensive" and states it as if it came down from Sinai, and then parrots some IBM (IBM)/Sun (JAVA)/Google (GOOG)/Red Hat (RHAT) propaganda against Microsoft).

Let's cut through the blogobull.  Here are how the numbers line up:

In 2007, I estimate that there was about $2.5 billion of software and software-related (mainly subscription maintenance) revenue "sold" with OSS terms and conditions. My estimate is based on a June 2007 IDC press release concerning OSS revenue in 2006. This includes all OSS, not just Linux, and is probably mostly middleware-related OSS subscriptions.

On April 8, 2008, the Linux Foundation released a white paper it sponsored with IDC that says the size of the Linux-related software market in 2007 was $10 billion out of a total of $242 billion (4%). By comparison, Windows-related software totalled 53% of the market in 2007 according to IDC. The Linux-related software market includes some of the estimated $2.5 billion of OSS software mentioned above, if it runs on Linux, but it is mostly non-OSS software running on Linux (e.g., the Oracle database or SAP R/3). This does not include any Solaris-related OSS revenue (but that revenue is included in the $2.5 billion; anyone want a Venn diagram?).

The Linux-Foundation-sponsored IDC whitepaper also estimated what IDC called "the Linux ecosystem," which includes software (including non-OSS software), hardware and professional services. This $21 billion is part of an overall total over a trillion according to other publicly released IDC data. (Standish uses the same overall IT market estimate but I do not know what source Standish used.) This number does not relate to the rows about and below it in the chart.

Based on reading the Standish press release (I did not talk to Jim Johnson about this), Standish feels the 2007 software market would have been larger if not for IT departments using OSS without subscribing to maintenance (and possibly other software-related services).

The factoid that is gaining all the attention: Standish estimates that by some point in the future, the delta between reality and what might have been will be $60 billion.  I don't see that happening to that degree (that would be 20% of the market in 2012) but some such fall off is very likely (and Standish has a good track record of seeing such trends). 

Yesterday I attended a webinar at which Casey Coleman, CIO of the U.S. GSA, spoke.  She mentioned that a particular OSS knowledge management package she used was so stable (and her department's use of it was so stable) that the GSA has stopped subscribing to maintenance. This is not money taken away from Microsoft (and if it were, why would Microsoft sponsor Standish's report?)

Drip by drip, that's where the $60 billion would come from.

Ok?  There'll be a test at noon.

New open source statistics might raise a warning for IBM, Sun and others

Last week we heard from IDC that the Linux-based software market (including both the open source and proprietary products within it) would more than double over the next few years. That was good news for those IT suppliers that have crossed over from a dependence on legacy and Unix-based solutions. That company list includes IBM (IBM), Sun (JAVA) and others.

This week, we see an indication of the flip side of the ongoing transition from Unix/legacy software ecosystems to open-source-based ecosystems. The Standish Group says:

"... while it is only 6% of estimated trillion dollars IT budgeted annually, it (open source) represents a real loss of $60 billion in annual revenues to software companies."

The software companies so affected are all on that same list.

As I indicated on ebizQ in January, I have not seen signs from the supply side of that kind of fall off in software-related services revenues. But the Standish Group has been doing its sort of user-based research for almost 25 years so I don't discount it. In fact, as I said back in January:

"In IT market research, it is important to understand if true free-as-in-air OSS is displacing traditional subscription maintenance or SaaS revenue streams, and thereby decreasing overall software market size. From current ebizQ research, there is no indication that such displacement is happening but the market will never get a truly accurate picture unless a census includes all software, not just software licensed under one set of terms and conditions or another. "

It's just coincidence that on April 16, OpenLogic formally kicked off the census project it had announced in October 2007. It promises to make the aggregate census data publicly available so sometime sooner rather than later we can begin to see if what the Standish Group is seeing plays out in the market. I'd rather have a total census but the OpenLogic effort is a good start.

-- Dennis Byron

Red Hat, ACLU are no friends of software patents

Red Hat (NYSE: RHAT) has joined the American Civil Liberties Union [ACLU] and others in filing friend of the court briefs in U.S. Federal Court. They both oppose the fairly new (a little more than a decade old) idea in the U.S. of granting patents on concepts instantiated in software. The case the two are getting friendly about is called In Re Bilski and is probably wending its way to the U.S. Supreme Court because the Federal Appeals Court involved has broadened the case's scope to include revisiting the late 1990s rulings considered to have enabled "software patents" in the U.S.

Interestingly (based on reading third-party information because Red Hat had not actually released its brief as of this writing, only a press release about the brief), the case in question does not appear to involve software. It appears Red Hat, like the Appeals Court, was simply looking for a place to take a stand. According to its press release (and many of its past SEC filings), Red Hat says patents stifle innovation. Red Hat applies for some patents itself but only in self-defense.

Red Hat's press release says patents stifle open source software (OSS) innovation but my research says there is nothing unique in the "open source developement process" that would make it any more (or less) likely to be stifled. The press release appears to be a cry to help the "poor software artists" working somewhere in a garrett but a recent Linux Foundation study showed that most open source development, at least on the Linux kernel, is done by the same large corporations where all other software development takes place. Developers of code that will eventually be licensed under an Open Source Initiative or similar license (there really is no such thing as an open source developer) appear to have the same access to intellectual property (IP) legal advice as any other software developers. And, I believe, all developers will need to do the same due diligence relative to respecting others' IP if the industry reverts to using copyright law (which is the way it used to be in the U.S and still is in most places outside the U.S., I think).

Investors want to begin to reconsider (or begin to consider) how to value software companies' patent portfolios. Any change in legalites would not affect the millions of dollars many of the largest IT providers make on patents related to more substantive things like hardware. And also consider that the major innovation that a change in software patent rights might kick off is burying software down in a "hardware device" often called an appliance (and then patenting the combo). The industry is beginning to go that route anyways.

As usual, the U.S. Congress is abdicating its responsbility on this issue by doing nothing and leaving the issue to the courts.

The ACLU is coming at it from an entirely different angle, a free-speech connection. I shamelessly shoehorned the reference to the ACLU into this blog post simply to get your attention and make a comment about Red Hat CEO Whitehurst's recent statement that "George Bush is good for open source" (based on Infoworld article; Red Hat will not provide a copy of his remarks). But I can't think of a comment to make other than that I am appalled by it if the Infoworld article is accurate.

-- Dennis Byron

Boycott "Boycott Novell" -- Part II

The writer of this blog post at a site called Boycott Novell is intentionally lying about me. I have never read his blog posts but his readers should assume that he is lying about everything else he posts as well. Someone like myself from the old school is trained to say, "thanks for spelling my name right," and to otherwise ignore such foolishness. But given the viral nature of the Internet, the rules have changed. As politicans such as John Kerry have learned the hard way, you must correct the record quickly and vigorously.

Until March 17 when the author of this blog post first lied about me (to the best of my knowledge it was the first time), I had never heard of Boycott Novell. When I read his first lie, I searched comments on my various blog sites and found nothing from this author or anything to do with Boycott Novell. (NOTE: I am assuming he is a he but many bloggers on these front-group web sites purposely hide their identities.) Now that he says as part of his latest lies that he and I communicated in the past via an email exchange (which made no mention of Boycott Novell), I now know what he was talking about.

The following is the extent of my dealings with someone I "knew" only as the email address s@schestowitz.com and only for one day in September 2007. The exchange reveals the lack of substance behind his rants, a problem that is all too typical of many pro open source software (OSS) blog posts to the detriment of the OSS movement (see this recent article from Australia). For brevity's sake, I have deleted the substance of the market-research discussion. I would be happy to send the entire exchange to anyone that wants it.

-----------

1. In early September 2007, Savio Rodrigues commented on a report by Heather Bellini, a financial analyst for UBS. Heather’s report and Savio’s post was about Linux penetration into the market. It was the classic debate: should market analysis count revenue or instances.

2. The Boycott Novell author (again, not identified as such) commented on Savio’s post:

“These 'analysts' drive me nuts. Not so long ago, someone from TheStreet said that "Microsoft was cleaning (sic) with Windows"…

“Never mind, the analysts just look at money, money, money... and spin figures their own way, sometimes to please someone that pays them.

“By the way, Barron's got caught shilling for Microsoft several times recently. I reported this as well.”

Posted by: Roy Schestowitz at September 5, 2007 02:35 PM

3. A frequent reader of Savio’s blog, I commented on s@schestowitz’s comment:

“In defense of analysts everywhere, Heather is a financial analyst and unless you are Swiss, a druglord, another very rich person, another large bank or a pension fund you are unlikely to be dealing with her firm, UBS. It is unlikely that a gnome got up yesterday morning and told her to put out those statistics to move a little Microsoft stock out of UBS' portfolio or to lower the price of Red Hat..

(I then commented on Heather’s methodology and provided some public IDC numbers and its methodology in contrast. It was pretty innocuous stuff.)

Posted by: Dennis Byron at September 6, 2007 01:37 AM

4. Boom! The Boycott Novell author then changed his mind about who the bogeyman is. It’s not the thestreet.com, or Barron’s, it’s IDC. (I of course subsequently learned that he attacks IDC on Boycott Novell all the time but I only knew of him as the email address s@schestowitz.com):

“It is fairly well established (I'll provide references if you require them) that IDC and InformationWeek are very close to Microsoft. Their figures, 'studies', and deliberate omissions were identified before.”

Posted by: Roy Schestowitz at September 6, 2007 04:38 PM

5. I then posted a reply and also emailed the reply to him directly at s@schestowitz.com as follows

“Not sure if you are the Roy that posted to Savio's blog on InfoWorld about Heather Bellini. If so, I commented on your comment. ..send in your references or post them and I'll take a look.

“But I dispute that it's "fairly well established" that all the disparate sources you attack are in the bag for Microsoft: IDG's IDC, UBS' financial analysts such as Heather Bellini…, thestreet.com, …Barrons, … Information Week (probably not original research since the latter three are news organizations), and so forth.

“I am not sure what kind of scientist you are but I hope you are one that looks at the numbers dispassionately. Of course, studies are almost always skewed one way or the other. And you can argue (as I get paid to do) about methodologies and taxonomies. But that is not the same as the statistics themselves: the numbers are the numbers. Umpires just call 'em as they see 'em.

6. He replied on September 19, 2007, changing his accusation. Apparently because he had been confronted directly by an analyst, he then said that it isn’t analysts he’s concerned about, it’s “paid-for studies” and “known media placement.” (I am still not sure what the latter term means.)

“Hi Dennis,

“I have been reading your articles for quite a long time and I enjoy them. I keep track of them using Yahoo's RSS feeds. Thanks for contacting me.

“I was referring to paid-for studies and known media placement, which are often shown to have hidden the unwanted part of the results or some key facts. I'll confess that I do not trust the press much. I know what I see and, trust me, I explore this a lot.

..

“if (sic) you search the Web for 'schestowitz' with the words 'idc' or 'gartner' or 'informationweek', I'm sure you'll find quite a few references that I have been providing. I oppose a world where even academic studies are back by industrial interests.”

“I hope I didn't sound too rude. Please just drop me a line to say everything is OK.

7. I replied:

“Roy, per your suggestion, I ran a search of your name filtered by IDC and came across this page. I looked quickly at the underlying references. I saw only two references with any IDC numbers in them.

(BYRON NOTE: I then tried to convince him, with specific details of which I am personally familiar, that his accusations were false.)

“Other than that, your examples of bias seem to relate to IDC's analysts giving quotes to Microsoft for use in its press releases or to the press in a way you consider biased for Microsoft. I guess that's what you mean by "known media placement?" They are "known" but they are not "paid for?"

“When at IDC, I personally did as many such quotes for Red Hat and other open source software (OSS) suppliers as I did for Microsoft. In fact, within reason, we would do them for anyone, even non clients. Unless the quotes are statistically based, they are always ambivalent ("On one hand,… but on the other hand…"). I don't think you can show me any IDC examples... where facts were hidden.

…

8. The Boycott Novell author then replied changing his accusation a third time, citing journalists and lobbying arms. Of course, it is kind of silly to accuse lobbying arms of bias—that’s what they are supposed to do—but I will defend journalists against his venom

“Hi Dennis,

“Placements that I had in mind do not come from analysts, but from various journalists and lobbying arms such as ComptTIA and ACT. …

… (He asked a question or made a point about methodology.)

9. Finally (all of this occurred on one day, 9/19/2007), I replied:

“Believe me the methodology is as easy and effective as calling up people and asking them what they use (and what they used before). But clearly you'll never be convinced of that so let's agree to disagree.

-----------------

When challenged personally to back up his outrageous lies, he cannot. I didn't mean analysts, he says, I meant journalists. Ok, Mr. Boycott Novell, I am writing to you now as a journalist, give me some examples of journalistic malfeasance and I will analyze those examples also. Why do I have a feeling he will change his tune for a fourth or fifth time?

Finally and as an side, for the record, I never accused IBM/Cognos of corrupt practices. The Boston Globe and the State of Massachusetts inspector general did. If he or someone else has an issue with that they are welcome to comment on my blog.

-- Dennis Byron

IBM and cloud computing: Back to the future

Back to the future. What goes around comes around. Circle of life. Déjà vu all over again. And so forth.

I spent two days this week at an analyst meeting listening to and talking with some very smart IT men and women, a group of marketing and development managers at The IBM (IBM) Company. The meeting’s title was “Next Generation Linux and Open Source.” But to these IBM managers and executives that phrase is redundant. Linux and adjunct open source software (OSS) is already the next-generation technology. And these guys also said that OSS is only a technology tactic, which I was happy to hear from an investment research point of view. For these IBM folks, OSS is a means for getting to the next generation of computing, cloud computing.

Coincidentally this week, I was looking for a 2-year-old white paper of mine that I knew was on the web but was not on the laptop I was carrying with me. While googling my own name, I came across a 13-year-old document, Moving Mainframe VM Users to a Distributed UNIX System. The article is available on the Association for Computing Machinery [ACM] portal--subscription required--and its author apparently used some of my 1995 research into client/server computing acceptance in the market to make his point. In the cloud computing era that IBM sees coming, large enterprises and organizations serving IT resources to small and medium enterprises—let’s call these organizations Service Bureaus for lack of a better name—can reverse the process described in the title of the 1995 ACM document. Already I was told at the IBM Linux/OSS analyst meeting, users can move distributed applications (be they UNIX, Linux, Windows or legacy) back to a VM mainframe, the latest IBM Zseries system.

But for me, that 13-year-old research at the ACM site is only one third of the way back to the future. As IBM described its view of the cloud computing, I flashed to the Multiplexed Information and Computing Service (Multics), one of the first IT products about which I ever did research. According to its alumni web site, Multics is a timesharing operating system begun at MIT in 1965, used in production (marketed by Honeywell and subsequently Bull) until 2000, and now available from MIT under open source terms and conditions.

But while Multics was groundbreaking for its virtual memory, IBM’s cloud features virtual everything, including administration. Multics was all about Utility Computing but had no “dynamo;” IBM’s cloud features content and context as well as the transmission lines. For Multics the last mile, at least originally, lead to a very small number of primitive terminal (initially a teletype device) for use by programmers. IBM’s cloud potentially interfaces billions of individuals, trillions of sensors and (whatever the next order word is) of bytes of data.

But from an IT investment research perspective, the question is “Can IBM put the PC genie back in the bottle after all these years?”

In 1965, before the Multics operating system itself was even written, two members of the Multics team wrote a sociological view of what utility/cloud computing would mean. Its findings/warnings ring pretty true today. Read its description of a theoretical automated tax-calculation program that might be written to be used on the Multics system. The implication was that the government would write and possess this Big Brother application. The sections in the 1965 paper about The Threat to Privacy and the Cult of Impersonality say it all 43 years later.

Of course, the complex government-owned application that the Multicians described in 1965 became available to the masses 20 years later on Wintel PCs from companies such as ChipSoft/Intuit and Meca. As a result many people now prefer to control their own IT destiny, and especially things like their own tax data. If cloud computing as IBM envisioned it is to become pervasive, these same concerns need to be considered vis a vis documents, search histories (I assume that train has already left the station?) and all other aspects of our lives. Businesses share the same concerns as individuals in terms of sending their crown jewels out into the ether but on a different scale.

Whatever happens to the IBM cloud computing vision, there is no doubt its technology will provide a very real payback for large enterprises, like IBM itself, with thousands of servers deployed. And it was great to see something that was just a concept so many years ago finally coming to life.

(Oh by the way, to close the circle with a double knot, prehistoric IT campfire storytelling tradition has it that the name UNIX derived in a backasswards way from Multics. Thompson and Ritchie lost access to the Multics system, on which they did some prehistoric gaming (as well as some real work) when Bell Labs dropped out of the Multics consortium in 1969. So supposedly they wrote a much simpler operating system to take its place, which colleagues called the un-Multics, or Unics for short. A more professional version of what happened, written by Dennis Ritchie himself, is available here.)

Huh? Boycott this Boycott Novell baloney

Some web site called Boycott Novell (NOVL) has inexplicably posted an ad-hominen attack on my recent commentary on Microsoft (MSFT) wasting shareholder value by spending time on the so-called Open Standards effort.

Except that the blogger also seems to be attacking Microsoft? I'm actually not sure what his or her point is because the blog post is a little incoherent.

Anyways, To whom it may concern, despite what the Boycott Novell website says:

1 . I do not work for IDC

I did work for the Datapro division of McGraw Hill and IDC from 1991-2005. When I worked for IDC I did more work for Red Hat, IBM, Oracle and other proponents of Open Document Format (ODF) than I ever did for Microsoft, probably at a 10:1 ratio.

(Not that it matters, but the author of this ad-hominem post seems to have some obsession with IDC.)

2. I prepare a full-length magazine article a week and five blog posts a week and have done so every week for two years. In that period I have commented on ODF about five times.

(I therefore wouldn't put too much faith in his or her ability to get facts straight before writing a blog post about my obsessions--they have nothing to do with technology.)

3. My major research is primarily aimed at investors. A key issue for investors is the concerted effort by Sun (JAVA), Red Hat (RHAT) and others to lock SAP (SAP), Microsoft and others out of certain government markets through legislation, government regulation and so-called "international standards" bodies. A good example of that this month is the day by day drip-drip-drip PR effort by Sun, Red Hat, Google (GOOG), IBM (IBM) and others to derail International Standards Organization approval of Office Open XML (OOXML) because a vote is in progress. When I have mentioned ODF or OOXML in the last few weeks, it is an example of how these useless standards efforts lessen shareholder value.

(If the writer of this blog had actually read my blog posts, he or she would realize that my major criticism in this matter is against Microsoft. He or she would also see that I am against all so-called "Open international Standards," not ODF)

4. I have never seen this Boycott Novell web site before this morning (3/17/2008) and I do not know the author of this blog. I checked both my blogs and the Research 2.0 blog where I posted until last month and I cannot find any mention of Boycott Novell. Therefore I have not accused him or her of anything.

Microsoft sure brings 'em out of the woodwork.

-- Dennis Byron

IBM Cognos gets sweet deal from Massachusetts pols

UPDATE 3/12: The state of Massachusetts has cancelled this contract according to the March 12 Boston Globe (may require subscription other than on day of publication)

UPDATE 3/11: The third to last sentence has been changed since the original posting. I am using a new blogging engine and sent it public before I had checked a fact. I do not know if the then Massachusetts IT director, who later resigned over alleged travel-expense irregularities, had Sun appointed to the taskforce or whether Sun's appointment was arranged by someone else. Also I do not believe Cognos was part of IBM when the sales process described in the Boston Globe article referenced below began.

For all the "open IT" crowd out there disturbed that Microsoft bribed a bunch of Swedish kids into voting for the Open Office XML document format, read the March 10 Boston Globe (possibly only available by subscription other than on the day it ran). As usual Massachusetts shows you how the big boys play ball. Here's the lead:

"The state inspector general has found that a Canadian software company was improperly awarded a $13 million contract last year in an unusually rushed deal in which House Speaker Salvatore DiMasi had an active interest. At almost every turn, DiMasi, his aides, or his friends played a role in either creating a demand for Cognos ULC's computer software or in pushing Cognos to the head of the bidding field. DiMasi personally met with the state's chief information officer to push for the kind of software that Cognos produces. A middleman in the deal, Joseph Lally, portrayed himself to key state officials as DiMasi's friend. A longtime DiMasi friend, Richard McDonough, was hired as a lobbyist for Cognos and was paid $100,000 by the company."

It goes on from there to allege all kinds of corruption. Open IT types are always talking about the Sun/IBM attempt to railroad ODF through the Massachusetts state legislature. Massachusetts quickly saw that its “independent” IT taskforce was run by IBM Global Services on a consulting contract and jury rigged by having Sun appointed to it. Even the Massachusetts legislators, the guys that perfected hardball political machination, were appalled. The ODF standardization ploy never even made it “out of committee.”

Enterprise Content Management Investment Opportunites Still a Few Years Off

The exhibit floor at the annual AiiM show from March 3-6 in Boston is an instructive walk around for the information technology [IT] investor. AiiM is now known as the Enterprise Content Management [ECM] association but we greybeards will always know it as the Association for Information and Image Management.

For a technology junkie like me it is always instructive to be reminded that that the ‘I’ in IT, the information, is really more important than the ‘T.’

So if you’re thinking of investing in ECM, which is arguably something easier to get your arms around in terms of investment research than technology lower in the stack (because ECM is closer to an enterprise’s executives and users in most companies), then AiiM demonstrated that there are no real ECM-specific investment opportunities out there right now. But watch for a few open source software [OSS]-based IPOs one to three years out.

What happened to the pureplay ECM investment opportunities? Stellent became Oracle (ORCL), Documentum became EMC2 (EMC), CA (CA) bought MDY, and so forth. Microsoft (MSFT) ECM features are all wound around and integrated into Sharepoint. IBM (IBM), which bought FileNet last year, was not at AiiM, confirming my theory that IBM didn’t even buy Filenet for its ECM features. I didn’t see Interwoven (IWOV) either but maybe I missed an aisle. Google (GOOG) was there, nibbling around the edges of ECM, wanting a bigger piece of anything with “enterprise” in the acronym.

There is always an exception of course: Day is listed in Switzerland and Kofax/Dicom in the UK. And Captaris (CAPA) might consider itself a pure play but that’s not the message it gives out via emphasis on business process management. Ditto OpenText ((OTEX) and in Toronto) and its various product lines.

As for some ECM investment possibilities in the out years, open source companies such as Alfresco were exhibiting and not only positioning themselves as replacements for the Stellents and Documentums of the world but as companies that will redefine ECM. Alfresco was founded by John Newton, also one of the co-founders of Documentum. I didn’t see Nuxeo but Alfresco, Nuxeo and other new OSS ECM players such as Jahia are covered in this free research document available at ebizQ.net. Although not specifically OSS, SpringCM (originally founded in 2005 as DocExchange) will presumably test the IPO waters sometime soon.

Running its own little exhibit within an exhibit in Boston were the founders of the Drupal OSS content management project (but be careful: that’s not the same as enterprise content management), who this week rolled out more details of their for-profit open source effort called Acquia. And there are still some legs in old-school ECM perhaps; BankTec is making noises about coming out again sooner rather than later.

So if you want to invest in ECM take a breather for 2008 but add the above company names to your Google Alerts.

(As an aside, AiiM is co-located with the On Demand Conference and Exhibition so I went looking for cloud computing and software-as-a-service suppliers only to find I had walked back into that Ozzie and Harriet-era past where people actually printed things and carried around physical representations of intellectual property. On Demand in this case refers to the ability to just print one or two copies of a book, brochure or whatever without having to “fire up the presses.” “On Demand” is already on my confusing buzzwords list but now I have to add a sentence to the definition.)

February 2008 posts that appeared on Research 2.0

NOTE: The following blog posts appeared originally at www.research2zero.com and were later syndicated to Seeking Alpha and elsewhere

Server operating system indicator says both Windows, Linux gains continue
Posted on February 29, 2008

The year-end IDC Worldwide Quarterly Server Tracker factory revenue numbers were released February 27. From an operating system perspective, there’s really no new news in them (but see the press release or the relevant IDC report for vendor and other characteristics). But we lay them out there for comparison with the quarter by quarter results we blogged on in November, September and May 2007.
For 2007 vs. 2006, the net-net is Microsoft (MSFT) Windows-based systems continued to gain share primarily at the expense of “Other” (primarily legacy mainframe-operating-system based). Unix/Linux-based server revenue was basically flat year over year with Linux open source systems continuing to displace UNIX systems as expected.

Linux gained slightly more than a percent of share while UNIX lost just under a percent of share (not shown).
As we noted in November, it appears from eight quarters of IDC data that the Unix/Linux share of the market is stabilizing in the 40-45% range, although they hit 46% in quarter 4 2007 only. We will need to watch to see if this is an upward trend or a seasonal issue.

Although overall Windows-based server revenues are gaining at the expense of “Other,” such as IBM (IBM) mainframe operating softwre, the trends went the other way in quarter 4, so that is something else we will watch. I believe that blip was totally seasonal because end of calendar year buying is a 40-year pattern for legacy systems.

— Dennis Byron
Tags: Microsoft, open source, Windows, Linux, IBM

Microsoft keeps trying to put its open source background in the background
Posted on February 21, 2008

As we’ve been noting since mid-2007, Microsoft (MSFT) is making every effort to put its anti-open-source baggage behind it. This is covered in detail in our annual Microsoft report released in December. On February 21, Microsoft announced sweeping open-source interoperability “principles” related to its volume software products (Windows Vista, the .NET Framework, Windows Server 2008, SQL Server 2008, Office 2007, Exchange Server 2007, and Office SharePoint Server 2007) that basically put its agreements with the European Union Competitive Commission, announced in October 2007, into Microspeak.
The announcement has three implications:

First, previous tactical opposition to open source software (OSS) has been a distraction to Microsoft’s “Software Plus Service” strategy, which hopefully will become more about providing IT and business services than mundame closed or open technology terms and conditions. This means “Software Plus Service” is misnamed (but don’t get hung up on words, as the U.S. presidential candidates are saying to each other). The Software Plus Service strategy has been a work in progress since Ray Ozzie joined Microsoft and dropping all the anti-OSS tactics makes that clearer to investors.

Second, although at the February 21 press conference Microsoft specifically said this announcement had nothing to do with the proposed Yahoo (YHOO) acquisition, that acquisition has everything to do with bringing Microsoft services to consumers just as most of the current available Microsoft “Live” services support enterprises. Microsoft is uniquely positioned to support both enterprises and consumers. More importantly, it can support each individual in his or her enterprise and consumer roles as those roles change during the day.

Third, the announcement covers all interfaces used by Microsoft itself in tying its volume products to “other Microsoft products.” That means it will be easier for open source software (OSS) providers to connect to the BizTalk integration engine (if that’s considered separate from Windows Server 2008), the Greats Plains heritage application software (even the smallest OSS ERP provider can write its version of SAP Duet), and more.

Apparently when it crossed all the t’s and dotted all of the i’s on the agreement Microsoft made with a free-software-oriented organization called the Protocol Information Freedom Foundation in December 2007, it decided to just open the kimono and eliminate the middle man.
Can you say this means Microsoft is now open source? No, and Microsoft took time in the press conference to spell out its intellectual property rights (licenses will be reasonably available but not freely available). But anyone who argues about the differences at length (and many long-time Microbashers will of course) is strictly splitting hairs.

– Dennis Byron
Tags: Microsoft, open source, EU, Windows, Protocol Information Freedom Foundation

Red Hat needs to get red hot to make these numbers
Posted on February 14, 2008

Expanding on a plan it announced in November 2007 by which Red Hat (RHT) said it would capture 50% of the operating system market by 2015, the company announced on February 13 that it intends to also capture “50% of enterprise middleware workloads by 2015.” The goal comes as an interesting juxtaposition with the Alfresco Barometer Survey announced February 12 at the JBoss user conference. That survey indicated that JBoss was not even the most popular open source application server. If the latter is true Red Hat will have a tough row to hoe.

Let’s start with how Red Hat is defining middleware. The answer is very broadly (“more than just the application server alone”). To accomplish this goal using Red Hat’s broad definition of middleware, Red Hat would have to not only displace other potentially more popular open source middleware (e.g., Apache HTTP software) but billions of dollars of “closed-source” software currently in use across the world between now and then. (NOTE: The open-source vs. closed-source characterization is not meaningful in understanding or measuring the market as spelled out earlier in this blog post but the open source devotees still insist on drawing this distinction.)

To literally accomplish its goal, Red Hat would need to displace 50% of the $20-$30 billion worth of IBM (IBM) CICS and BEA (BEAS) TUXEDO shipped in the last 30 years, the $20-30 billion worth of MQ Series, TIBCO (TIBX), etc., shipped in the last 20 years, the $20-$30 billion worth of WebLogic, WebSphere and Oracle (ORCL) Application Server shipped in the last 15 years, the $10-$20 billion of BEA, IBM and so forth integration servers, development tools, ESBs, portals, and so forth. Add business intelligence software (if you use Oracle’s definition of middleware) and collaboration software (if you use IBM’s). Sorry but the aircraft carrier just does not turn that quickly.

As for how Red Hat is defining “50%,” the company says it means of that year’s “deployments of middleware technology.” Hopefully us reserachers will have some license-agnostic census software to measure that number by 2015 but to get there, do the math. No matter how you measure 50%, Red Hat would have to displace existing installed software at an astonishingly rapid rate over the next 6 years to reach its goal because the overall software market is only growing 5-6% (and the middleware market basically tracks the overall software market).

At the press conference announcing its intention, Red Hat said that its subscription model makes comparison with other middleware suppliers impossible. That is not accurate and part of the litany of open source movement claims that can be misleading to investors. Most of the current installed base of middleware has subscription maintenance revenue associated with it just like Red Hat’s.

In fact, at the press conference Red Hat showed an IDC estimate of $15 billion of middleware revenue in 2011; about 66% of that number represents subscription maintenance just like Red Hat’s (the other 33% in any given year represents license revenue for totally new business and add-ons/upgrades to the installed base). The equivalent IDC number for 2008 is probably in the $11 billion range, of which Red Hat’s total is less than $50 million.

(I am just guessing. The only access I have to IDC middleware market share data is via its press releases. On the other hand, it is a very educated guess since I popluated that database for many years and still do IDC backcasting and operating environment splits in my sleep.)

– Dennis Byron
Tags: Apache, open source, JBoss, middleware, MQ Series, Tuxedo

Slow and steady course for SOA on Wall St.
Posted on February 12, 2008

Leading bank and investment-firm CIOs, IT directors, staff technology gurus and the like spoke February 11 at the New York City conference “Web Services/SOA on Wall Street” Their theme could have been “SOA is not on Wall St. yet” but that’s probably good news for the supplier community that packed the conference with new technology value propositions. The slow uptake of SOA means the large systems suppliers such as IBM (IBM) and HP (HP) have not run away with all the services oriented architecture (SOA) business already.
Listening to the Wall St. information-technology (IT) gurus is important because they and their peers in The City and Switzerland and Singapore are usually two or more years ahead of the curve in terms of IT implementation. When it comes to investing in (or marketing) IT, finding out how it plays in Peoria first is not good advice. So in that light, where does SOA stand?

The general feedback from the presenters, most of whom are in varying stages of evaluating or implementing SOA for their firms, is that Wall St.’s own culture of silo operations is going to make SOA a tough sell. SOA helps eliminate IT silos but if the business itself is siloed, it does not want to share its IT resources with the other departments. The speed of migration to SOA by industry may be determined by the extent it is or wants to remain siloed for business rather than technology reasons.

Secondly, SOA does not mean web services to these guys. All of the buzz about mash-ups and social computing has a bad feel to it if an enterprise has concerns about governance, security, and risk aversion. Or has governments breathing down its necks with those concerns. That’s certainly true of Wall St. but increasingly, it’s just as true of Main St.

As is often the case, the vendors sponsoring the conference wanted to push the IT users on to the next set of buzzwords. To heck with the title, “Web Services/SOA on Wall Street,” how about complex event processing and Enterprise 2.0? Wall St.’s answer, “let us walk before we run.” One of the best lines of the day: Look at the complexity of the Google (GOOG) infrastructure. And that’s “just simple event processing.”
The implications of this, as I have written about here and here and elsewhere, is that SOA is going to permeate the world’s computing infrastructure slowly, just as client/server computing did beginning 20 years ago but probably not reaching a tipping point until after the Y2K scare passed. Similarly, by the time SOA happens, the industry will be on to a whole new set of buzzwords. SOA will eventually have a major technological impact but very little impact on investment strategy.

– Dennis Byron
Tags: service oriented architecture, SOA, Enterprise 2.0, mashup, CEP, web services

Middleware indie/open source Iona says its biting the dust
Posted on February 8, 2008

UPDATE: Or maybe it’s Novell? (NOVL)”

Iona (IONA) announced February 8 that it is likely maybe possibly thinking it might get acquired.

It’s a two-fer winner for this analyst’s recent predictions in that the likely acquisition is

• An example of another independent middleware player biting the dust after the Oracle-BEA acquisition and right on the heels of Workday’s acquisition of Cape Clear on February 5
• A likely example of an open source software (OSS) supplier pairing up with a proprietary supplier

I do admit that the first prediction–the rapid reduction of independent middleware choices for users–is not that earthshaking. It’s the natural result of the commodization and coagulation of the middleware stack that I began researching at IDC in 2000. Also I appreciate the comments on my earlier blog post by Giva Perry of gigaspaces who points out that there is a new generation of middleware emerging that could change the market dynamics. I will dig deeper into Giva’s ideas in upcoming research.

The second prediction vis a vis Iona is a little more out there. There’s nothing in the press release saying the possible suitor is a “proprietary” software supplier or even a software supplier. Apparently under Irish or EU law, we’ll know pretty soon who the suitor is. It could be Red Hat (RHAT) in which case my prediction is wrong. More likely it’s IBM (IBM), TIBCO (TIBX) or Sun (JAVA). Most likely, it’s a telecom (where Iona has a big presence) or a packaged applications suppliers, acquiring Iona for the same reason Workday acquired Cape Clear.

Of course there’s another disconnect: Although Iona has positioned itself as an OSS player for the last few years, it is clearly in the camp we describe in our research as proprietary/OSS hybrid (see summary feature articles that we release via ebizq.net). So when the OSS blogosphere goes crazy congratulating itself after the likely maybe possible deal goes through, don’t ratchet up your OSS valuation charts. Iona has been in the middleware business since even before the term middleware was widely used and has only adopted an OSS facade in the last few years.

– Dennis Byron
Tags: Iona, open source, TIBCO, gigaspaces, OSS, IBM

Sun speaks SOA for feds
Posted on February 7, 2008

Sun (JAVA) ponied up some real money this week to join the Object Management Group (OMG)-administered SOA (service oriented architecture) Consortium. Other sponsors include Cisco (CSCO), IBM (IBM), SAP (SAP) and Sparx Systems. I believe BEA (BEAS) was a sponsor when the consortium began in March 2007 but it does not seem to be listed any longer.

Sun’s press release raised two questions in my mind:
The SOA Consortium is the group that said at its founding that it was going to go out of business in 2010 (“a closed-end operation” was the term the OMG used). So why did Sun join now?
Who to hell is Sparx Systems and what are they doing in the pool with those sharks?
The SOA Consortium says it is all about “Redirecting the industry conversation to business-driven SOA.” I think the SOA Consortium—perhaps because of IBM’s apparent instigating sponsorship—is trying to overcome the common technical use of the words “services” and “architecture,” trying to position SOA as a business strategy as part of an IBM marketing messaging tactic.

The better analogy in my opinion is to compare two eras:
In 1995: client/server was the architecture behind a business process re-engineering (where have you gone, Michael Hammer?) business strategy

In 2010: service oriented architecture is the architecture behind a business process management (BPM) business strategy

BPR was all about using a single large monolithic package such as SAP R/3 in an enterprise. BPM is all about tying together multiple packages within and among enterprises.

As part of its kick off in 2007, the SOA Consortium interviewed CIO and CTO focus groups. I interpreted the consortium’s findings in the BPR vs. BPM context to mean that SOA would cause a fundamental market change for packaged application providers. In the client/server generation, suppliers gave away the platform (e.g., ABAP, PeopleTools) to sell the application modules (R/3, PeopleSoft HR). Users say they expect application developers to do the opposite in the SOA generation: give them the services (SAP ESA) if they acquire the SOA platform (NetWeaver).

Perhaps that’s why startup ERP SaaS provider Workday acquired the Ireland-based Cape Clear middleware maker this week. (Oh by the way, scratch another independent middleware player off this recent list.)
The answer to why Sun is getting involved with this evolving SOA buzzword game seems to lie in the Sun executive quoted in the press release. It didn’t come out of the Sun front office but from Bill Vass, president and COO of Sun Microsystems Federal. So there’s probably a tactical U.S. government opportunity somewhere in there with the pony.

As for the second question, according to an excerpt of an IDC report released as a promotional piece by Sparx in May 2007, it is a private 10-year-old Australian software development tool maker that is not even that well known in Australia. Its tools are mostly deployed into midsized development organizations according to the IDC article.

Sparx’s product is based around Model Driven Development and the Unified Modeling Language and is platform agnostic. That is, it works with the Eclipse/Java-oriented guys that Sparx is in the shark tank with at the OMG, as well as with Microsoft (MSFT) Visual Studio and Visio.

Interestingly, I can’t find the term SOA anywhere in the IDC report on Sparx? Go figure.

– Dennis Byron
Tags: Microsoft, SOA Consortium, Sparx, Object Management Group, UML, SOA

NYC financial analysts just “can’t handle the truth”
Posted on February 4, 2008

Steve Ballmer, Microsoft (MSFT) CEO, and Chris Liddell, CFO, presented to financial analysts in New York City on Monday, February 4, 2008 as part of a long-scheduled event.

It would have been kind of hard to top Friday’s news about Microsoft’s unsolicited bid for Yahoo (YHOO). And they didn’t. But they did fill in some of the financial blanks on their plans for Yahoo two to three years out and they explained dollar for dollar plans for Microsoft’s future. To be discussed, the investment potential had to top $750 million in future potential contribution margin.

Ballmer’s and Liddell’s claim is that Microsoft is the only technology company currently with the assets to mash consumer and enterprise computing together. I agree with the underline on “currently.” They also say buying Yahoo is just a means of getting them to their objective of profitable scale and capacity faster. I agree and believe it to be the best indicator yet that Microsoft wants to move rapidly to services provision from technology provision (otherwise the Yahoo acquisition makes no sense). This move from technology to services is the opinion reflected in the current Research 2.0 Microsoft report, released last month.
One problem is that Microsoft still calls itself a technology company rather than a services company. I think that’s because Ballmer and Liddell believe that the NYC financial analysts want to hear Microsoft described that way. Like Tom Cruise in A Few Good Men, they just “can’t handle the truth.”

At least I hope that’s the case because unless the Microsofties say it out loud a few times, a services mentality is hard to internalize.

A few other tidbits:
I think they succeeded in conducting the whole hour-long presentation with Q&A without saying the word “Google” (GOOG)
Look for very aggressive pricing for the virtualization functionality within Server 2008. Ballmer is looking at the pricing as an investment in buying market share.
Microsoft thinks it took market share away from Linux in 2007. Actually Research 2.0 studies discussed here say both Microsoft and Red Hat took share away from Unix suppliers (meaning the old-line systems suppliers)

The Software plus Services strategy is being renamed the Microsoft “cloud computing” strategy. Same strategy but new buzzword.

– Dennis Byron

January 2008 posts that appeared on Research 2.0

NOTE: The following blog posts appeared originally at www.research2zero.com and were later syndicated to Seeking Alpha and elsewhere

Lost, gained, held its place. What are the answers to the important SAP market share questions
Posted on January 30, 2008

We can crunch the numbers SAP (SAP) released today from now until when the SAP 20-F comes out in March or April, and still not explore all the modeling possibilities. I have applauded SAP in the past for its transparency in meetings like this—both explaining past results and future plans—with pretty solid numbers. And simply because modeling nerds such as me like having this kind of data.

But I have been critical of SAP’s Core Enterprise Applications Vendor Share metric, most recently at the link noted. One interesting factoid that I saw in the SAP presentation January 30 was a list of the vendors it uses in its Core Enterprise Application Vendor Share market claims. Perhaps this list has been released before but I don’t recall seeing it.

Now I think my criticism is justified. Why Synopsys (SNPS) but not Cadence (CDNS)? Why some financial services software suppliers but not SunGard? Why Cerner (CERN) but not the HBOC-heritage product revenues within McKesson (MCK) or the Shared Medical Services heritage product revenue within Siemens (SI)? Why Parametric (PMTC) but not the UGS-heritage product revenue of Siemens and Autodesk (ADSK)? Why Intuit (INTU) but not Sage (London: SGE.L)? Why Lawson (LWSN) but not Exact (on Euronext Amsterdam)? Why Interwoven (IWOV) and Vignette (VIGN) but not the Documentum-heritage product revenue within EMC (EMC)? And on and on.

I suspect the reason is not a matter of SAP trying to hide anything but has something to do with the availability of the data, much of which is buried in large company financial reports. But that’s the issue. A market measurement needs to include both.

The real important questions from an investment perspective are:
Did SAP gain or lose ERP market share against Oracle (ORCL) and Microsoft (MSFT) in 2007. Probably it lost.

Did SAP gain or lose middleware market against Oracle, IBM (IBM) and Microsoft in 2007. Probably it gained based on the NetWeaver figures released on January 30 (even accounting for the Business Objects (BOBJ) and BEA (BEAS) acquisitions).

Did SAP gain or lose enterprise applications market share against Microsoft’s former Great Plains/etc. business buried within the Microsoft Business Division as well as other SME-oriented enterprise application offerings? Probably it held its place.

The core enterprise application vendor market share metric doesn’t help answer any of these questions. And I am not going to try to correct it because at least 20% of the vendors have gone or will go away (BEA, Business Objects, Cognos, Manugistics and Kronos; the latter because it has gone private).
I say “at least” because it is very likely more of this group will merge or be acquired in the next year.

–Dennis Byron
Tags: ERP, NetWeaver, SAP, Oracle, Business Objects, BEA Systems

Down-stack open source companies starting to pair up as expected
Posted on January 28, 2008

Because of the valuation Sun (JAVA) put on its acqusition of MySQL’s open source database software business on January 16, we said that open source infrastructure and middleware software companies would need to start pairing up with “proprietary” partners fast (see second point in linked blog post). Their value was dropping.

Trolltech of Norway has wasted little time, agreeing to be acquired by Nokia (NOK). The issue for most of the open source software (OSS) folks now is that
– Citrix paid somewhere north of 100x 2007 revenue for XenSource in October 2007, betting it would be 10x 2008 revenue

– Sun paid 20x 2007 revenue for MySQL in January 2008, betting it can take on the market-dominant Oracle (ORCL) database without having to spend the R&D dollars to develop a database from scratch

– On January 28, Nokia looks to have paid four times Trolltech’s 2007 reveue (subject to a guess at Trolltech’s growth in 2007 over 2006’s 174.1 Norwegian Krone and subject to my doing the currency conversion correctly).
If there’s big value in OSS now, it’s in the applications side of the market, exemplified by Yahoo’s (YHOO) 2007 acquisition of Zimbra.

But that window may be closing fast as well.

– Dennis Byron
Tags: open source, OSS, Yahoo, Sun, MySQL, Nokia

Looks like violent agreement with ZD-Net open source bloggers
Posted on January 26, 2008

I am not sure why my last post was shoe-horned into this ZDNet blogpost concerning Dreamworks, Viacom, the NY Times and Wall St. fairy tales but “Thanks for spelling my name right.”

It is hard to follow the ZDNet bloggers’ thought process because a statement about BusinessWeek and Forbes readers links to InfoWorld and a statement about my analysis of the Sun (JAVA)-MySQL deal links to C-Net. (Here is my actual analysis as opposed to Martin LaMonica’s news story.)

The only line in my Research 2.0 post that sort of relates to what I think the ZD-Net guys are saying is “The leading software suppliers, with the exception of Microsoft (MSFT), long ago bought into OSS terms and conditions and development techniques.”

At least relative to open source, isn’t that the same thing the two ZDNet OSS bloggers are saying? I can’t speak to their points about BusinessWeek, Forbes, Connecticut and New Jersey. It’s winter here on the Cape Cod; all those folks have gone home.

–Dennis Byron
Tags: open source, OSS, ZDNet, Sun, MySQL, Microsoft

In comparing proprietary software vs. open source software (OSS), there’s no competition.
Posted on January 24, 2008

In the so-called battle between proprietary (also called closed-source) software companies and open source software (OSS) companies, there’s no competition. We don’t mean one set of companies is better than the other. We just mean that there is not two separate sets of companies arguing over the OSS idea.
The leading software suppliers, with the exception of Microsoft (MSFT), long ago bought into OSS terms and conditions and development techniques.

IBM (IBM), Oracle (ORCL) and so forth have been big users of OSS for years as well as the main sponsors of efforts such as the Apache Software Foundation, the Linux Foundation, and so forth providing both hard cash and in-kind contributions. Now the leading software suppliers are reaping the rewards in revenue. Microsoft got on board in 2007, has already had two of its licenses approved by the Open Source Initiative and even is cooperating with the Samba project (albeit through some intriguing cut-out procedure that would take John le Carré to explain).

The “battle” between open and proprietary, which was pretty much contrived by a few bloggers for OSS-based startups in the first place, doesn’t exist.
Now we’ve put some hard numbers behind that opinion. For example, we estimate IBM realized as much OSS-centric revenue in 2007 as Red Hat (RHT). A report on our research has been released over at ebizq.net. Over at Infoworld, Bill Snyder gives the report a look from the OSS VC’s point of view, echoing an opinion we have noted here at Research 2.0 in the past, most recently around the first of the month.

The ebizQ article looks at the question “Who are leaders in OSS market penetration?” The answer, as one of the article’s headlines says: “The Money was Spent with IBM, Sun and Oracle as Well as Red Hat, Mozilla and mySQL.” More important, we find IT users just want “good software that doesn’t break often. And when it does, they want a substantial company available to fix it.” The report, available for free download, also looks at how the idea of OSS market “leadership” should be calculated.

Now the blogosphere is going to have to find another controversy to obsess about.

–Dennis Byron
Tags: open source software, OSS, IBM, Oracle, Apache, Linux Foundation, Microsoft

IBM didn’t buy enough software from itself in 2007.
Posted on January 23, 2008

As I read it, for IBM (IBM) 2007 represented the first year this decade that the growth rate in internal software revenue (e.g., the Software Group from Global Technology Services) dipped down into single digits. In 2004 and 2006, the internal growth rate was twice the external rate at 12% and 14% respectively. In 2003 the internal growth was three the times the external growth rate at 32%. In 2002, software revenue from down the hall grew 25%, representing a large percentage of the growth of the IBM Software Group that year.

I’m not sure how to interpret that. Maybe somehow when IBM sells itself software it adjusts for exchange rates in a way you can’t do with real money. Therefore the internal growth rates are closer to the constant currency rates that IBM reports. I also suspect it has something to do with the transitional period vis a vis IBM mainframes (a large percentage of IBM software sold deploys on mainframes).

I know part of the reason is because the numbers I’m using for comparison (from the IBM Investor Relations page) are not backcast for IBM’s software acquisitions. That tends to inflate the external growth-rate number vs. market reality. Using a pure apples-to-apples comparison to take into account the 2006 acquisitions of Filenet, Internet Security Systems, MRO, Vallent and so forth might reduce the GAAP-compliant external growth rate of 10% down a point or two. But it would still be higher than the 7% growth in internal software sales.
Maybe the booming services groups are buying someone else’s software, when they win an outsourcing or management consulting contract. I recall a story—surely just a story—about former CEO Lou Gerstner writing one too many seven-figure checks to that company out in Islandia and immediately sending someone out to acquire Tivoli. Who’s looking at the outgoing checks these days?

Or maybe open source software (OSS) is being used in a lot of the contracts won by the IBM services divisions. As I have researched and reported in depth, OSS does not mean “free” unless you have a bunch of highly trained and highly motivated computer scientists on staff. Without expert staff, it is very hard to maintain and upgrade OSS without a service contract from someone. There are very few organizations that have that kind of expertise hanging around but Big Blue’s services organization is definitely one that does. Wouldn’t that be interesting?

Tags: open source software, OSS, IBM, Global Technology Services, Filenet, Vallent, MRO

Sun-MySQL: The winner is Oracle with Microsoft second
Posted on January 18, 2008

Sun (JAVA)-MySQL. Oracle (ORCL)-BEA (BEAS). As I said (see in the Oracle-BEA post put up on this site on January 17), there is one major interconnecting theme in the two major software-supplier acquisitions this week: For users and investors the independent middleware market as we know it is going away.
In Oracle acquiring BEA, the thought process behind that statement is (hopefully) clear and explicit.

In the Sun-MySQL deal, which also will lead to the collapse of middleware independence, it’s actually implicit in Sun’s statement that it wants to get into the database market. That really means Sun wants back into the whole infrastructure stack market, offering a framework from hardware up through business process management, and even applications if you count openOffice.
Think about that (“Sun as a competitor against Oracle in the database market”). That makes Oracle the winner in both deals. Now, instead of worrying about competing against a bunch of hungry nerds toiling away in an aggressive freestanding start-up, conducting guerilla marketing worldwide the way Sun did against DEC and Data General 20 years ago, Oracle just needs to think about Sun as a competitor in the database market.

And on the same day, it put BEA out of its misery!!! A two-fer.
But of course that is not Sun’s objective. Sun wants to take on Oracle, IBM (IBM), SAP (SAP) and others and make sure the others think of Sun as a competitor all the way up and down the stack. As Larry said in the context of his deal, it was “a great day for Java.”

Sun CEO Jonathan Schwartz said the MySQL deal was the “most important acquisition in history of Sun” But he also said the MySQL acquisition was complementary to Sun’s JavaDB (Berkeley) and postgreSQL offerings. The latter are other open source software (OSS) projects in which Sun is involved that compete with MySQL. That the competing projects complement each other may be Sun’s intention but that’s just not human nature.

First point: Watch for a tumultuous period starting almost immediately (the deal will be finalized plus/minus April 1) where the multiple OSS database offerings sort themselves out within Sun’s sales force. This will retard MySQL’s growth from what the OSS database might have otherwise achieved in 2008. MySQL may even lose; IT development and marketing guys play hard ball. We have already seen aggressive PR campaigns badmouthing MySQL product and support quality.

Speaking of MySQL’s revenue, the losers in this acquisition were the OSS pureplays and those OSS dual-license guys that still like to call themselves OSS pureplays. Research 2.0 and others estimate MySQL did about $75 million in revenue in 2007. We applaud Sun’s negotiating skill. Even if MySQL only did $50 million in 2007, the lowest estimate we have heard, it means Sun “only” paid 20x annual revenue. In October 2007, Citrix (CTXS) acquired Xensource for some where north of 100x 2007 revenue. To be fair to Citrix, it believes it paid about 10x 2008 revenue for Xensource. But of course we won’t know if that’s true for a year and Citrix won’t tell us if it was wrong anyways.

Second point: The value of pureplay-heritage OSS hybrid companies, which is what MySQL was, is dropping by that valuation measurement, coming back to earth from the JBoss, Zimbra and XenSource acquisitions. As I said in my initial blog post on this acquisition, the OSS IPO parade band is turning into a quintet and might simply become a guy accompanying himself on a harmonica by the end of 2008. And as I said when MySQL was beating the IPO drum back in July, a good business case is still more important than a buzzword such as OSS.

In my opinion, the investment opportunities—and OSS’s future—lies on the application functionality side of the market, not the infrastructure side. Alfresco, Compiere, Jaspersoft, etc. are still in the parade but the others best get out of line and find their “proprietary partners” as soon as possible.
As for partners, MySQL allies such as Google (GOOG), HP (HP), IBM (IBM), and Unisys might really be thinking twice about Sun’s acquisition. Intel (INTL), Red Hat (RHT) and SAP (SAP) pulled a few dollars out of the deal because they were major MySQL investors. But presumably SAP would have preferred that MySQL stay independent because it was probably going to bet on MySQL as a counterweight to Oracle (it doesn’t like having its major competitor “owning” most of the file systems its customers’ SAP applications access). With this acquisition, SAP will now be equally beholden to Sun. But SAP can still switch easily to Ingres or postgreSQL, or even–although unlikely–its own SAP DB.
Smaller MySQL partners, many of whom are also OSS companies, should be helped by this move, as explained over at my OSS blog on ebizQ.net, where I research about OSS all the time.

As for users Sun believes it can drive new adoption of MySQL’s database in more traditional applications and enterprises. Today MySQL shows up more in embedded applications and “Web 2.0 stuff.” Sun says, “The integration with Sun will greatly extend the commercial appeal of MySQL’s offerings and improve its value proposition with the addition of Sun’s global services organization.” Schwartz said Sun’s research found that the lack of “peace of mind” by large enterprises was holding MySQL back. But some very large enterprises such as Nokia and Google weren’t having that problem.

The companies also said more than 100 million copies of MySQL’s OSS database software have been downloaded. A very large percentage of those were for Windows but MySQL said that by the time the database gets to production (only one in a thousand downloads turn into business MySQL had said previously), most are on Linux, with Windows and Solaris second and third in popularity.
Third point: So even major Sun partner, Microsoft (MSFT) might get some benefit out the acquisition.

But in the end, the real winner is Oracle.

–Dennis Byron
Tags: open source software, OSS, Microsoft, Sun, Oracle, MySQL, SAP

Oracle acquires BEA; users lose middleware choice
Posted on January 17, 2008

Oracle-BEA. Sun-MySQL. Now that the enthusiastic financial-analyst briefings and press conferences have been held (well at least the Sun-MySQL was enthusiastic) and now that we’ve had time to crunch the numbers, let’s look at the details. Who wins and who loses in terms of competitors, partners, investors and users.

I analyze the two deals in two separate blog posts in order to pick up some separate issues such as the depressing effect of the Sun-MySQL deal on open source software (OSS) pureplay valuation and the depressing effect of the Oracle-BEA deal on WebLogic and AquaLogic revenues for the rest of 2008 (and maybe forever).

Oracle-BEA is discussed below. But there is one major interconnecting theme in the two deals: For users and investors the independent middleware market as we know it is going away.

BEA pretty much launched the independent middleware market as a separate entity in 1995 by acquiring several Bell Labs/Novell TUXEDO-based distributors, IMC and ITI. To be completely accurate, investors still have a few choices. TIBCO (TIBX) is left because Reuters spit it out a few years ago. And Iona (IONA)–which predated BEA–and Cape Clear are still standing presumably totally because of Irish hardheadedness. In addition, IBM (IBM) and Oracle have succeeded in changing the definition of middleware such that some might argue that Attunity (ATTU) and SAS Institute make middleware.

When I say middleware, I mean run-time code that’s really in the middle of something. And when I say independent I mean “pure play,” software suppliers not selling other types of information technology.

So what does this sea change mean for the users? In the 1990s, users did not buy from pure plays because they were pure but because they offered a choice other than–at the time–depending on the middleware built into application suites such as SAP R/3, built into their relational database, or spit out as a by product of their mostly systems-supplier-centric development tools. The bottom line for the user community now, as I have been modeling for years, is that because of the end of the independent middleware market each enterprise has to choose whether to get in bed with an application suppliers’ middleware—SAP’s NetWeaver or Oracle’s Fusion—or an infrastruture suppliers’ middleware. (The above paragraph summarizes extensive portions of a Research 2.0 client deliverable, so if you want to dig deeper, give us a call.)

Larry Ellison explained in his conference-call script how Oracle fits in both camps because of his commitment to open standards but that is not the same as open source. And therefore the Oracle approach does not really represent independent choice for the user.

Partners such as smaller ISVs that used BEA middleware in their products and even much larger companies than BEA that use BEA middleware in their services offerings face the same more limited middleware choice as users.
For investors, the independent middleware market was a great leading indicator of the overall IT market. This acquisition makes the challenge easier or harder depending on your investment-research technique. Do you try to understand the upstream/downstream aspects of the market when you are investing in auto makers? If so, your life just got harder because there is no more equivalent of Behr, Dana (DCNAQ), Delphi (DPHIQ), Eaton (ETN), Honeywell/Bendix (HON), Magna (MGA), Modine (MOD), Tower (TWRAQ), ZF and so forth in the IT market. But if you just bet on an auto maker because you like the looks of the latest coupe, and an IT supplier because the user interface looks cool, you’re all set.

The most important short term investment aspect of the deal is that it will probably kill BEA license sales until the deal is signed, sealed and delivered in about 6 months. I think the two companies recognize this, accounting for the difference between the $21 asking price and the $19.375 final bid. And the two companies will probably make every effort to prevent it from happening (but I’m not sure of that given the coldness of the joint conference call).

As for competitors, well, as I said above, there are none left

– Dennis Byron
Tags: open source software, OSS, middleware, Sun, Oracle, BEA

Sun pulls the lead trombone from the OSS IPO parade
Posted on January 16, 2008

Some open source software (OSS) purists on the blogosphere–and some outright double-dipping conflicted for-profit OSS company executives–have been beating the drum for over a year about the upcoming parade of IPOs that we would see from the OSS movement. But reality happened, market forces intervened, Yahoo bought Zimbra, Citrix bought Xensource (paying way too much) and the OSS IPO marching band kept getting smaller and smaller. Today Sun (JAVA) acquired MySQL, pulling the lead trombone of the OSS IPO parade, out of the line of march. The marching band is about to become a quintet.
A conference call is scheduled for later this morning so news at 11. But two weeks ago I wrote about the rapid convergence of the open source software movement with the enterprise software world’s leading suppliers. Sun had already begun to open source many of its software assets and switch to the subscription accounting that is the primary way of measuring OSS in the market so in a way this means no change to that opinion.

But it does mean the MySQL OSS database is less of a threat to Oracle (ORCL) buried in the bowels of Sun along with SeeBeyond and other piece parts than MySQL was as a separate organization. It does mean that the Google (GOOG) usage of MySQL gets a little more complicated. And it seems to mean that Sun wants back in the game up and down the stack, competing with Microsoft (MSFT) and to a lesser extent with IBM (IBM).

– Dennis Byron
Tags: open source software, OSS, IBM, Sun, Oracle, MySQL

Scheer says it is an “early partner” for SAP’s BBD four months late
Posted on January 14, 2008

Scheer today announced that it is an “early partner” for SAP’s Business ByDesign (BBD) offering to small and medium enterprises (SME) in North America. If it takes four months to line up an “early partner,” when can we expect some BBD partner partners?

The announcement is in line with SAP’s usual lightning speed when it comes to its approach to the SME market and is yet another example of SAP’s keen sense of what it takes to market applications software through partners. The January 14 press release (see BusinessWire; not available on either web site as of time of this blog post) begins with the following:

IDS Scheer… today announced it has signed a Memorandum of Understanding with SAP America Inc. in order to express its willingness to support SAP in its efforts to build a partner ecosystem and distribution model for SAP® Business ByDesign™.

You have got to be kidding me!

I am not sure why any SAP (SAP) SME channel partner would go to Scheer for BPM anyways but I am astonished that the best that SAP can get out of its oldest and most loyal partner–after two years of talking about BBD and four months since formally but tentatively announcing BBD–is a “Memorandum of Understanding” “expressing its willingness” “to support SAP.”
If it weren’t for the fact that Scheer has been a BusinessOne partner for 10 years, perhaps the best SAP could have done was a letter of intent instead of a memorandum of understanding.

I’ve been out of marketing for 20 years but why on earth would anyone publicize such a half-hearted endorsement?

It’s not just big e-tailers looking at Netezza
Posted on January 10, 2008

At Netezza (NZ), the Massachusetts maker of “analytic appliances,” the good news is that the company has its eye on Oracle (ORCL). The bad news might be that Oracle has its eye on Netezza.

On January 7, 2008 Netezza upgraded its appliance family to scale to the petabyte level, and support improved data load speeds and shorter backup windows. At the 10th Annual Needham & Company, LLC Growth Conference on January 10th, company CFO Patrick Scannell says the new technology is all about going after the Oracle installed base, “the holy grail,” because so many Oracle database applications are really transactional solutions jury rigged to handle the query loads that Netezza addresses by design.

Oracle is not Netezza’s only big name competitor. HP (HP) NeoView, a systems/services packaging approach from IBM (IBM), the Teradata (TDC) spinout from NCR, and the Sun (JAVA)/Greenplum partnership are also all coming after the same “analytics” opportunity. According to Scannell, that opportunity is $14 billion annually. He based his market sizing on a $4 billion software market revenue estimate from IDC with a $10 billion uplift for hardware and professional services of unknown source.

Netezza gets to claim to be “the global leader in analytic appliances” because everyone else sells the pieces of the solution as pieces whereas with Netezza as Scannell says, the offering is a “black box:” software, server and storage for one price (average selling prices just north of a $1 million) and no ordering a la carte, no mixing and matching. Currently Netezza is getting 50% of its business (likely to exceed $100 million in its fiscal 2008, ending 1/31/2008) from telecoms and ebusinesses, but it wants to spread that across more industries in the next few years. In particular, it’s planning on targeting pharmaceutical manufacturers and the oil/gas industry. It is also betting on $5 million deals from the U.S. federal government. (At the same time, Netezza is planning to “offshore” more of its R and D, which is already substantially “offshored,” something that is becoming an issue among U.S. politicians during election season.)

Scannell says Netezza was both proud and a little leery when Oracle CEO Larry Ellisson recently mentioned that “little company from Massachusetts” in discussing the market. So when I say Oracle might have its eye on Netezza, I mean as a competitor. But with Oracle, you can never be sure.

Convergence complete: Open Source Software and the leading software suppliers
Posted on January 4, 2008

Open source software (OSS) overtook the leading software suppliers in 2007. Or they took over OSS.

For example,
• By the Research 2.0 taxonomy and methodology, IBM (IBM) probably now realizes as much OSS-related software revenue as Red Hat (RHT) even as Red Hat grew 30%.
• And whereas in 2006, Oracle (ORCL) saw OSS as just a way to stick a finger in Red Hat’s eye, in 2007, Oracle saw OSS for the tactical advantages and reduced R&D expense it provides. Oracle rolled out a virtualization product in 2007 in a matter of weeks because of OSS.
• Google (GOOG) has built its infrastructure on OSS for more than 10 years; in June 2007 it decided to get intellectual property going for its first-generation applications products with minimal cost to its investors using OSS.
• SAP (SAP) is trailing in OSS-related tactics but has made its almost unheard of database software OSS and will probably use OSS more aggressively as it tries to market NetWeaver outside of its own installed base in 2008.
• Adobe (ADBE), perhaps the last holdout to OSS among major suppliers, says it will make its BlazeDS server-based Java remoting and web messaging technology available to the OSS community in 2008 under the Lesser GNU General Public License (LGPL) version 3.
• Sun (JAVA) of course went OSS in 2006.
• I call Adobe perhaps the last holdout to OSS because Microsoft (MSFT) decided earlier in 2007 that all the hoopla over its OSS statements (e.g., “Linux is cancer,” “hundreds of patents violated,” and so forth) was a distraction. Now Microsoft is moving ahead aggressively cooperating with an OSS Linux-Windows interoperability community called Samba, making code available via licenses approved by the Open Source Initiative, and on many other OSS fronts.

No matter which direction the take over happened (OSS of the software market leaders, or the software market leaders of OSS), it’s time to start looking at the implications of the takeover on these companies’ investment outlooks.
And here’s the good news, the implications are practically nil.

In terms of revenue streams, IBM’s, Oracle’s and SAP’s are already heavily weighted to “services” so the fact that they are not realizing some minor right-to-use perpetual license streams on their current or planned OSS “products” is of little consequence in terms of deferring revenue or otherwise making for hard compares. Sun is biting the bullet slowly and the entire services accounting structure is irrelevant to Google. Adobe and Microsoft, although committed to OSS, will just talk the talk for a few years. Eventually they will likely move their entire businesses—not just their “OSS products”—to a “services” context. When that happens, OSS will be the least of the investment-research-related issue.

In terms of user acceptance, the leading software suppliers’ enterprise users are demanding the move to OSS to enable interoperability and to provide more “open choice.” They would have preferred “open standardization” but OSS is just as good a means to the same end. Small and medium business customers and consumers don’t care or will not be affected. Without an IT staff, all the OSS talk is irrelevant.

In terms of competitive environment, because everyone is doing OSS, there is no strength or weakness either way. That’s what OSS is all about to the leading software suppliers: commoditization.

All of the suppliers are likely to be shopping for OSS pure play acquisitions however but there is nothing out there that will have any major dilutive effect.
And, as any old timer will tell you, you can’t beat the “free R&D.” The OSS development model isn’t really free of course and there isn’t any “R” but the OSS development model still holds down expenses wherever a certain software functionality is basically a commodity. This allows the leading software suppliers to dedicate more resources to differentiating functionality. What a deal!

– Dennis Byron