IT Investment Research

In Enterprise Software, It's Deja Vu All Over Again

I came across two headlines on Google in the last couple of days and assumed they would lead me to some long-forgotten 2004 or 1994 articles, the sorts of stray dogs that Google search dredges up from the depths of the Internet every once in a while even when you filter by "last 24 hours."  Over on the web site of my long ago IDC big boss Dave Vellante, wikibon, I found "Open Source is the Future of Software." And on IDG News Service there was "SAP Enters Complex Event Processing Market." 

I found it hard to believe but the two articles were datelined February 2011 and -- although the articles covered two different subjects -- it was old/questionable news in both cases.

You can look at the open source headline, a quote by an MIT professor, two ways:

• From a market research perspective, open source has been around as an enterprise software market dynamic since decades before it was even called open source.  More here. So it can't be the future.
• But more apropos to investing in enterprise software companies, the MIT professor says the reason is that the cost of sales for software deployed with open source terms and conditions (Ts&Cs) is less than the cost of sales for software deployed with different Ts&Cs. I can find no research that backs up that claim and I wouldn't expect to because:
  • The major providers of open-source-licensed software are also the major providers of non-open-source-licensed software: HP (HPQ), IBM, Oracle (ORCL), a lot of long-time second-page-of-the-leaderboard software suppliers, and increasingly Microsoft (MSFT). 
  • These companies do not employ separate salesforces depending on the type of license. (Microsoft can't be fairly compared because most of its software flows indirect, although that percentage is shrinking.)
  • The professor uses Red Hat (RHAT) as an example of "the future" but its "sales and marketing" expense looks like Oracle's to me as a percent of revenue (in fact, Oracle's is lower but there's a lot of reasons for that). Overall, Statements of Operations look roughly similar allowing for different tactics and sizes. That's not a criticism of Red Hat. Red Hat is successful because it is a good software company.  The fact that Red Hat sells open-source-licensed software exclusively is just a marketing tactic.

As for SAP entering the complex event processing market, I swear they told me that in 2004. (It was somewhere in Arizona.  It was late fall in the northern hemisphere. I got in my last round of the golf season as the November sun set over the desert. But I digress because I am sitting here watching a wild February New England rain storm.) The IDG story says the latest product is based on a Sybase product but I swear Sybase also told me it had CEP in 2004 too. (It was right off I-80, across from the old PeopleSoft complex.  There was a Starbucks in the strip mall across the parking lot.  But I digress because I could be describing anywhere in the Bay area.) File this one as "The CEP buzzword is making a comeback." Anyways, my point is

"Don't buy shares in an enterprise software company because a news headline implies the news is "new.""

-- Dennis Byron

(No financial interest in companies mentioned but I have done consulting for Red Hat and about all the others in the last year.)

ERP Software Player Unit 4 Announces Strong 2010

I am just starting to look at the ERP market-share results of the major-league enterprise software suppliers such as Infor, Intuit (INTU), Microsoft (MSFT), Oracle (ORCL), Sage and SAP for 2010.  Probably because I am thinking in terms of the opening of baseball spring training in Florida and Arizona, I was interested to see one of the ERP-Triple-A league leaders, Unit 4 (UNIT4) Agresso, announce impressive results. 

Of course my baseball thinking breaks down given that Unit 4 is primarily a European Union player. But it plays the ERP game with companies such as JDA, Lawson (LAWS), McKesson's hospital information systems, Micros Systems (MICR), Misys, Siemens Medical and the like at the level below the major leaguers and is starting to make noise that it would like to get "called up to the bigs."

I shouldn't call it Unit4 Agresso anymore because it officially changed its name to just Unit 4 during 2010. But I find it confusing that it went through that trouble for branding reasons but keeps the good old Coda brand name hanging around to represent onsite financials while fully ramping up the financialforce.com accounting software as a service (SaaS) site with salesforce.com (CRM). I mean we're not talking Progress (PRGS)-level brand confusion here but it runs the risk. Especially when it took the trouble to tell me in its press release that it would have been more profitable if not for financialforce.com.

Unit4 marketing guys credit its Vita architecture, which I have described previously as stealth business process management (BPM), to be among the reasons for the good year. The Vita technology is a result of Unit 4's 2000 acquisition of Agresso. Unit 4 believes the technology is well suited to the mid-size company that it claims to be serving in the ERP-Triple A league (of course the problem is that Microsoft, Oracle and SAP have "B" squads playing in that league as well).

During 2010 Unit 4 acquired Apprio via financialforce.com and Teta, for some increased presence in Eastern Europe. I don't think either contributed a large amount on a backcast basis so Unit 4's reported 11% growth in euros is probably really impressively up in the high single digits on an apples to apples basis.

Play ball!

-- Dennis Byron

(no financial interest in companies mentioned) 

Open Source Software Penetration in Enterprise Surprisingly Low

Gartner is out with a press release on February 7 that I find surprising.  It says that about half of enterprises use open source software.  I would have thought the penetration would be much higher. After all, suppliers have been providing software under open source terms and conditions for over 50 years, since long before the mid 1990s when the term was co-opted by the software industry from the intelligence community.

I am not surprised that the Gartner survey found that only about 33% of organizations had a formal open-source-software policy. Back in the day, IT shops didn't have a policy on the number of sprocket holes in printer paper either.  It is what it is.  Open source -- like I say, long before the term became popular (see this timeless article I wrote on the history of open source) -- is just a fact of life. I am also not surprised that Gartner said:

"Nearly one-third of respondents cited benefits of flexibility, increased innovation, shorter development times and faster procurement processes as reasons for adopting OSS solutions."

Open source is not about free and it's not about ideology.  It's about what's best for the business.  Open source is a license term and condition that delivers three of those four benefits explicitly.  (I am not sure what "increased innovation" means; as compared to what?)

Then the question becomes "Is open source something you can invest in?" 

Not specifically because all the leading enterprise software suppliers understand this decades-old market dynamic.  In addition, IBM, HP and a few others actually co-opted the 1990s-era term for it shortly after it was invented by heavily funding the different consortia and groups that promoted the concept and specific code available under the various (dozens) open source licenses. 

Microsoft (MSFT) was late to the party but pretty much joined unofficially early in the last decade and officially joined in 2010 when it became a large contributor to the Apache Software Foundation and separately settled its war with the European Union Competition Commission. Of course, Microsoft -- because of its size as leader of the enterprise software market -- long enjoyed the benefits of an open source community (reduced research and development costs) without having to have a battery of lawyers keeping up with its terms and conditions. (The lawyers were all busy fighting the EU.) 

At one point in the past, Oracle (ORCL) might have been concerned with Gartner's findings that data management is a key application of open source. Bur Oracle now "owns"/markets both the flagship open- and closed-source data-management code sets.  So not to worry.

The one thing I would ask of the methodology is the size of the companies surveyed. Gartner says it conducted its research of 547 IT guys in 11 countries. That indicates to me that the survey is really only talking about large IT organizations and not mid-size and smaller enterprises, where open source pentetration is likely lower. 

-- Dennis Byron

LinkedIn's a Zero Sum Media Game; Not an Enteprise Software or IT Opportunity

For the first time in a long time I had a must-read S-1. LinkedIn filed on January 27. How 20th century of them. LinkedIn actually transparently (as much as any S-1 is transparent) laid out some positioning, development plans, marketing tactics, and financials instead of sending rich people in Dubai an email on New Year's Day and asking them to mail in a check for $2 million.

Still -- from reading the LinkedIn S-1 -- this is not an enterprise software or information technology investment opportunity. It's more like an eBay or Amazon, a traditional business that is based on technology, not selling technology. LinkedIn says its approach is: 

"... to invest, innovate and pioneer in unexplored segments of our industry to increase the value proposition of our proprietary platform and extensive data."

The trouble is its "industry" (which I am reading to mean market) includes both everyone and no one.  Certainly, as the S-1 says, monster.com (MWW) and careerbuilder -- a joint venture of Gannett (GCI), Tribune, McClatchy (MNI) and Microsoft (MSFT) -- are key leaders for the talent part of LinkedIn's revenue stream. But the list for classified-business-ad competitors is endless.

Everyone from Google (GOOG) to Facebook (FU) to Twitter to Disney (DIS) to Viacom (VIA.B) is a competitor or sort of a competitor or possible competitor for advertising dollars. And again, that short list under-explains the competition LinkedIn faces by a couple of orders of magnitude. 

That leaves the third leg of the stool: the market for increasing professional productivity. LinkedIn is clear elsewhere in the S-1 that "professional" is the key part of its mission. But that differentiator means it's going head to head with Microsoft, salesforce.com (CRM), and many other leading traditional enterprise software providers.

Sorry but none of this ground is "unexplored." In fact, it is saturated with explorers. LinkedIn is coming to market in a 20th century style because it is a 20th century idea.  We called them exchanges back in 1998 before that term got co-opted by Obamacare.

Still it is nice to see someone using the technology term "proprietary" in a non-pejorative sense.

-- Dennis Byron

(No financial interest in companies mentioned.)

What's HTML5 Have To Do with Enterprise Software Investing?

As I said last week, there is not a lot new happening in enterprise software in 2011.  So from an investment research point of view, it's time to look out a year or more (a good way to think of all investment research, no?) and see if there are any investment implications in the "next hot thing?" One of the next hot things is HTML5.  Techcrunch had a good discussion February 9 on how HTML5 affects consumer apps and the strategies of Apple (APPL), Facebook, and Google (GOOG). Or not in the case of Apple. 

But what is HTML5? And how does it affect enterprise software companies? 

Simplistically HTML5's just the next iteration of the Hypertext Markup Language that launched the worldwide web almost 20 years ago (skip to section 1.4 of the linked web page).  Usually rev. 5's of anything are pretty ho-hum.  But when development of a standard takes a hiatus for a decade and then re-emerges, that means there probably is some market demand. As W3C, the lead standards group responsible for HTML, says:

"The main area that has not been adequately addressed by HTML is a vague subject referred to as Web Applications. This specification attempts to rectify this, while at the same time updating the HTML specifications to address issues raised in the past few years."

So the Techcrunch article, as thorough as it is on the consumer side of the software market, might make it sound that this is all about releasing a better version of iFart. But enterprise application suppliers such as IBM, Oracle (ORCL) and SAP have long struggled in getting key parts of their collaboration, ERP and similar applications running on the web in a non-jury-rigged fashion.  And these three (numbers 2-4 in the software market) have long had similar issues with middleware's fit on the web. For example:

• IBM has the emerging standard covered with its Boilerplate project.
• Oracle, as with the way Google is described in the Techcrunch article, is playing both sides of the fence -- HTML5 and its own Java (which is the reason it bought Sun, remember)
• So far, SAP seems to be depending on its developers network but that might not be a bad play given that its R&D efforts need to be tied up in the core for the next few years.

Can an HTML5 development tool supplier come out of nowhere and provide a great investment opportunity the way Powersoft did in the 1980s and Borland did in the 1990s for other programming tools? It's highly unlikely because of the way the development tool market has declined since those good old days. Now all the leaders mentioned above and others give away the tools to sell the platform or the app. Instead watch for an IT services oriented company -- a latter-day CSC -- to make a big HTML5 play.  Just Google or Bing "HTML5" every other week or so to see what's brewing.

Of course there is that one other small company that crosses both consumer and enterprise like no other, the software market leader, Microsoft (MSFT). It's been all over HTML5 almost since the beginning of HTML's new beginning and Microsoft might have the most corporate representatives on the standards working committee (I didn't count them but they appeared to have more than Apple and Google). Microsoft has been trying to better webify Dynamics since way back in Great Plains days with project like Marco Polo and some other "explorer" (get it?). According to betanews, Microsoft is also putting a big marketing push behind the standard.

-- Dennis Byron

(No financial interest in companies mentioned)

The Business Process Management Market Is Gone

As I wrote just over a year ago when Progress (PRGS) acquired Savvion and IBM acquired Lombardi, I have never considered Metastorm (or Pegasystems -- PEGA, Global 360, Handysoft, or Intalio) pureplay business process management (BPM) suppliers anyway. All had come to BPM from other value propositions and would just as easily move on when BPM ran its course as a buzzword. BPM, like ERP, is more a value proposition than a market but back when there were many pureplays, at least you could measure it like a market.

That's no longer the case. In fact when Metastorm's acquisition by OpenText (OTEX; also OTC on Toronto exchange) was announced on February 3, I didn't think it merited a post.  It looks like OpenText paid two-three times revenue (ho-hum in Facebook days) but that Metastorm revenue stream is itself a mix of various Metastorm acquisitions over its existence, none of which represents a strong BPM flow in and of itself. Similarly Open Text is a mix of its original enterprise content management business plus Vignette and Smartstream middleware and a half dozen other acquisitions during the last decade. There is some revisionist positioning of this acquisition as Open Text's "move into BPM," but Vignette and Smartstream had already been there.

So there's very little left to measure. BPM is now basically a feature of everyone's middleware (or application set depending on your definition). That's everyone from the big four plus across the alphabet from Adobe (ADBE) to EMC to TIBCO (TIBX).  It's easier to say who doesn't have a BPM play: Symantec (SYMC), BMC, and the company formerly known as Computer Associates. 

As for BPM as an investment opportunity, Metastorm had looked at going public back in the market trough of 2009 and pulled back. There is no way to invest in them but it appears the only pure BPM pureplays left are very close Microsoft (MSFT) partner Ultimus, close Microsoft partner Appian, and the sort-of agnostic Cordys-- which I think is running on the good will and deep pockets of ERP legend Jan Baan. That means, if you like BPM as an investment idea, invest in Microsoft.

-- Dennis Byron

(No financial interest in companies mentioned except for EMC.)

Nothing New in Enterprise Software in 2011

Blogs are pretty much reactive communications vehicles.  I see something in the news or from the major research houses or from my own assignments that I think might inform investors or potential investors in EMC, Google (GOOG), IBM, Microsoft (MSFT), Oracle (ORCL), SAP, and so forth and I comment in three or four paragraphs. 

But I found very little to comment on in January.  Now I know why.  Gartner says nothing new is happening in 2011 in enterprise software.  Specifically, according to SiliconIndia, Gartner says:

"Business intelligence (BI), collaboration, content management, social software and supply chain management will be the top application software growth segments in 2011. The five long-term, overarching, and interdependent trends affecting the enterprise software markets are globalization, implementation, modernization, socialization and verticalization."

Change "business intelligence" to analytical applications and the variations on "social" to sales/marketing/ecommerce and that's how we kicked off the 2000 enterprise software retrospective at IDC 10 years ago.  As testament to the maturity of the now almost 40-year-old enterprise-software market, what Gartner says for 2011 is true for this year and was true in 2001.  The aircraft carrier turns slowly.

The lack of news and new research is about to change shortly as all the research houses put out their 2010 retrospectives. So I'll comment on it. But knowing what happened last year is not that useful to investing except to the extent that it informs the future. There's no more "a rising tide raises all boats."

So I'll explore some non news that will inform IT investing such as how developments in HTML will change the market, the evolution at Red Hat (RHAT) will matter to IBM and others that depend on open source as their R&D departments, the failure of Software as a Service (SaaS) to take off as the pundits predicted will morph the software deployment rules once again (fourth time in last 40 years), the further consolidation of the suppliers will affect companies such as Lawson (LAWS), Progress (PRGS) and TIBCO (TIB) that are looking pretty lonely in their independence, the strength of cloud computing will be in private clouds where you can't invest in it, and the fact that the enterprise software market is actually disappearing means all the leading companies will have to change their strategies (see the last paragraph of this December 2010 blog post)

-- Dennis Byron

(No financial interest in companies mentioned except for a few hundred shares of EMC)

Start Up America Does Not Waste IBM, Intel, HP Shareholder Value

Hey, everyone else has received a bail-out, why not the venture capitalist business? Introducing the Start Up America Partnership.

Some sort of consortium organization including Intel (INTL), IBM, HP (HPQ), Facebook (FU), and Google (GOOG) along with some VCs and publishers announced itself on January 31.  It claims to be the real-world manifestation of an Obama administration small-business-encouragement program of the same name. Usually these things roll out with hundreds of supporters but the scuttlebutt on the web is that they wanted this to tie to President Obama's Win the Future theme announced January 25.

I think such consortiums are a waste of shareholder money.  This is the third or fourth one the Obama administration has hooked up with. But at least in the case of Intel, IBM and HP this does not seem to be a matter of new money but just a continuation of long-time internal venture capital and/or channel building programs.  Get enough new companies percolating and they're bound to buy some HP PC/printers and IBM servers/software, all of which include or relate to Intel chips.  Google and Facebook weren't clear about what they were doing (but who cares about FU's Russian and other non-US shareholders anyways).

Then you get the ironies of such consortiums. 

How come the Start up America consortium has the Jumpstart America Initiative consortium within it?  Why couldn't the Jumpstart guys get the White House to give them a separate nod.  Must be Republicans? No, they're just Ohioans.

Or how about the fact that the Blackstone Group is not putting any money into this idea.  But its charity organization is.  That tells me something.

Then there's the fact that four of the members of the consortium have no information about them included on the group's website.  Hopefully, those members are not the ones in charge of the consortium's advertising.

-- Dennis Byron

(no financial interest in companies mentioned)