IT Investment Research

Enterprise Software in 2012: Plus C'est Le Meme Chose

I took 2011 off from researching the enterprise-software market. (Actually I had a big project in the winter that took all my time and then I took the spring and summer off and then I had a hard time getting back into the swing of things because fall golf was great here on Cape Cod this year. But why bore you with all that detail?).  

Thankfully, a quick year-end Google tells me I didn't miss anything by taking 2011 off from enterprise-software market research. It looks like:

• 2012 will be the year of cloud computing (just like 2010 was going to be!). Now, this time, we will surely see the end the half-century reign of on-premise software providers such as Oracle (ORCL) and SAP!
• End users like Montclair State University are still spending four or more times the license fee of enterprise software such as from Oracle to install the software "turnkey" (just like in 2010 and for a half century before that).  And the end users keep failing. A Hershey kiss anyone? (Speaking of which, where is Leo Whatshisname these days?)
• IBM has a "new" enterprise software acquisition strategy for 2012. Unless Steve Mills buys back Mapics, this sounds like the same old same old to me.(But, really, where is Leo Whatshisname these days?)
• openoffice.org -- the weird word with the dot in the middle, not the actual product -- can't find a home and the Open Source Initiative still can't settle on a license it likes.
• HP (HPQ) can't decide if it wants to be in the enterprise software market. But it will waste a lot of money to find out if there's a market there. In 2011 it was $10 billion on a hodgepodge of decades-old search/BPM technology HP wasted. [But Adobe (ADBE) is bailing out.  That makes sense.]
• Microsoft (MSFT) is going all out for its Dynamics ERP line in 2012 according to  product analysts.  Just like in 2008.  And in 2004. It must be a leap-year thing because investment analysts are actually thinking that Microsoft might be shopping around its failed ERP line but can't find a buyer.  Maybe Doug Burgum will buy it back?  (More likely he's making another fortune in the North Dakota oil fields after shopping SuccessFactors to SAP.)
• In 2012, enterprise software should be like social networking software.  In 2010, that was the mantra of salesforce.com (CRM).  In 2012, all you have to do is add the word "suck" to this tired message and the press repeats the same old BS.
• Suckers sunk a half billion dollars on this idea for a company that grossed less than $50 million in the first nine months of 2011 and lost just about the same amount, giving new meaning to the "we'll make it up in volume" business model.  The usual suspects cashed out as the pension funds, who have to invest prudently, came in. 

That last bullet sounds more like 2000 than 2010 but for enterprise software in 2012, the saying is still true:

"The more things change, the more they stay the same."

The only year-after-year repeating enterprise software headline that I didn't see: 

 "2012 will be the Year of the Linux Desktop."

The headline that gave me the biggest laugh:

"NetSuite (N) is Pushing into Enteprise Software."

-- Dennis Byron

Red Hat's Goal to "Own" 50% of the Market Now Faces Oracle

Red Hat (RHAT) CEO James Whitehurst led off the March 23, 2011 conference call announcing the operating system and middleware provider's annual results with the low key:

"Red Hat's growth indicates that we are continuing to gain market share." 

Talk about understatement. I would guess so given that I doubt if any comptetitor of any size had more than Red Hat's 20% revenue growth (more to come as we begin to review the Gartner and IDC share tables that will be coming out in the next month).

But remember.  Red Hat's stated goal isn't simply the mundane gaining "market share."  It wants a 50% share (as measured by instances I think but it's been a while since I dug down on this) of both the operating system and middleware-stack markets by 2015. I didn't see any mention of how Red Hat was doing against that benchmark in the conference call. But I didn't see Red Hat backing off that goal either.  

Looking at both sides of that ambition: 

• On the operating software side..
  • Red Hat wants to end up driving over half the world's servers by 2015. That seemed very doable in 2007 when announced because all it meant was mothballing a lot of Digital UNIX, AIX, Solaris and HP-UX systems. (Email to Microsoft (MSFT): You keep your Windows share and we'll take everything else.)
  • That was both logistically and technically sensible. In the process Red Hat saw its products becoming a mainstay on the mainframe as well. Also contributing to reaching the goal: there will be a lot of justifiable double counting as stacks like Red Hat's (and so far it's the only real game in town) forms the underpinning of virtualized Windows and VMware servers.
  • However Oracle's (ORCL) acqusition of Sun changed the dyamics. A very different player enters the mix offering a more intergrated approach up and down the stack.  That doesn't mean the goal should be changed but it affects both the operating system and middleware-stack sides of the equation.
• On that middleware side, holistically, to reach its 50% goal...
  • 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. (NOTE: The open-source vs. closed-source characterization is not meaningful in understanding or measuring the market but I use it because the open source zealots still insist on drawing this distinction. Red Hat is not a zealot but simply uses open source terms and conditions very effectively as research/development and marketing techniques.)
  • To literally accomplish its goal, Red Hat would need to displace 50% of the $20-$30 billion worth of IBM (IBM) CICS and Oracle (formerly BEA, formerly Novell, formerly the real AT&T) 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 IBM WebSphere and Oracle WebLogic and Application Server shipped in the last 15 years, the $10-$20 billion of Oracle, SAP, IBM and so forth integration servers, development tools, ESBs, portals, and so forth. Now we're talking about a real challenge and that assumes you do not define middleware the way Oracle and IBM do, including business intelligence and collaboration software and just about everything else -- including databases -- except ERP and customer relationship management.
  • 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).
  • In addition, competitively Red Hat needs a database product because as many times as not, that is where the decision is made and the operating system and middleware stack decisions flow from that.  Monty, where are you?

 But the good news.  I don't think Red Hat lost any ground against its ambitious goal in 2010.

-- Dennis Byron

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.)

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

Like Oracle Said, It Was All about Java Enterprise Software

If you followed the almost 12-month-long battle Oracle (ORCL) waged to acquire Sun in 2009, you probably remember a lot of hot air from the European Union (EU) about the MySQL enterprise software.  You might forget the fact that Oracle said all along that the acquisition was really all about Java enterprise software and that the U.S. Department of Justice (DoJ) briefly held up the acquisition in order to better understand Java licensing terms and conditions. 

What the DoJ was asking about in June 2009 finally played out in the information-technology (IT) marketplace on December 9, 2010 when one of the purest of open source purists -- the Apache Software Foundation (ASF) -- pulled out of the pseudo-open standards and code-sharing efforts that have surrounded Java over its 20-plus-year history.  The JAVA community coordinating effort is currently called the Java Community Process (JCP).   The ASF and JCP have been loosely linked since around 2000 and around 2002 the ASF convinced the JCP and Sun to become more open, in that Sun would give up some of its intellectual property (IP) rights to the community, something the ASF always interpreted to mean Java was becoming open source as defined by the Open Source Initiative. 

But Sun never gave up all of its IP rights and Oracle never intended to become more open after it acquired Sun (and probably always intended to be less open given its opinion that Java was the jewel in the Sun acquisition). In particular Sun and now Oracle maintained "field of use" restrictions on its Java framework that said -- for example -- that a programmer of JCP-framework-derivative software is

"prevented from freely using that software and that hardware in any application where the computer was placed in an enclosed cabinet, like an information kiosk at a shopping mall, or an X-ray machine at an airport."

On December 8, the JCP essentially voted to explicitly accept this previously implicit type of license condition in the next version of the Java framework.

But although the ASF is one of the purest of the open source purists, it is not just a bunch of programming guys hanging around the Elks lodge that is the open source community. The ASF is best known as the sponsor of what is probably the most successful open source software project ever, the Apache HTTP (web) Server.  Apache in turn is sponsored heavily by Facebook, Google (GOOG), HP (HPQ), Intuit (INTU) and other IT investment household names.  IBM made significant in-kind donations from the beginning although it is not listed as an official sponsor. And Microsoft (MSFT) also sponsors the ASF primarily to help it meet its EU Competition Commission obligations vis a vis Windows interoperability. (Oh by the way, many of the same companies make up the executive committees of the JCP, minus Microsoft plus Red Hat (RHAT).)

What does that mean for IT investors?  Not a lot.  The 10-year ASF/JCP relationship was always just a licensing terms and conditions/IP discussion.  The relationship among all the players that you would invest in stays the same and might even be considered stronger in that Oracle and IBM had agreed in October to work on a "limited field of use" Java framework project that would compete with the ASF's unlimited use Java framework project. Sun always made it clear that it owned Java. When very late in its history Sun sort of called Java and other of its IP "open source," it was a marketing ploy. In fact, most companies that tout open source do so as a marketing ploy but Sun even went so far as to change its stock symbol to JAVA.

As for the ASF, it sponsors dozens to hundreds (counting projects in incubation) of other open source projects.  Some programmers may continue the ASF Java Framework work just for the sport of it. Or Google, which is having its own IP battle with Oracle, might encourage such an effort. But the ASF is likely to move on and use its resources where they are appreciated

-- Dennis Byron

(no financial interest in companies mentioned)

Wikileaks Drivel on Enterprise Software

I first looked at wikileaks in March 2009 when it breathlessly released some supposedly secret document about Microsoft (MSFT) and open source software  supposedly being secretly influenced by some supposedly secret front group in America. The supposedly secret document was being written by some supposedly secret working group in the former European Union. The document was amateurish drivel full of demonstrably false data.

That being said, I defend wikileaks right to distribute such drivel. 

Based on the press reports the week of November 29 about the release of U.S. State Department cables and what they supposedly contain, it does not appear that wikileaks.org did anything different than the NY Times did in 1971 relative to the Pentagon Papers. The U.S. Supreme Court said then that the press had the right to print stuff that was leaked to it, drivel or not. I define most everything I've seen since from wikileaks as drivel because I have yet to see anything about either information technology or the U.S. government or anything else that has not already been widely reported or opined about. That's my definition of drivel; repetitive innacurate or irrelevant background information.

Daniel Ellsberg -- who gave the Pentagon Papers to the press in 1971 -- argued on November 30 that the Pentagon Papers were important but that the diplomatic cables wikileaks distributed were drivel.  I believe Ellsberg was later charged with espionage but that the charges were dropped because of U.S. government misconduct in prosecuting him.  The U.S. government employee or employees that leaked the State Department cables should also get his or her or their day in court.

But that does not apply to wikileaks today anymore than it applied to the NY Times 40 years ago. In fact, strangely, wikileaks says on its web site that it -- unlike the NY Times -- does not solicit leaks.

I looked at the wikileaks site today and find that the 2009 Microsoft/open source memo does not even seem to make its list of important drivel leaks as described on its "about" page. I also could not find the Microsoft/open source memo  itself on the site and the link from my March 2009 post seems to be broken (possibly because of heavy traffic on the wikileaks site or possible denial of service attacks or possibly because wikileaks decided to delete the Microsoft/open-source drivel after lack of press interest). 

That is, I also cannot find any contemporaneous reporting of the Microsoft/open-source document (but this wikileaks mirror site discusses it from an open source zealot's perspective and there are a few other blog posts in addition to my own). It appears that in general the press doesn't like leaks about enterprise software that aren't first leaked to it.  That's not surprising because that is how leaks work.  Just putting out a billion bytes of gibberish to everyone doesn't inform anyone. That applies to investment research as well as to foreign policy.

By the way, in case you have any juicy tidbits about Microsoft that you cannot get a reporter to bite on, wikileaks is also not accepting new drivel as of December 1, 2010. According to wikileaks that is because it is "re-engineering" its site (but see above vis a vis heavy traffic and DOS attacks or possibly a new understanding of the lack of importance of drivel). 

-- Dennis Byron

(no financial interest in companies mentioned)

Manzi Right about Enterprise Software Economy for Wrong Reason

Jim Manzi released a criticism November 18 of economists of the liberal persuasion. 

I agree with his conclusion but I'm not being intellectually honest because I disagree with his major proofpoint, which -- naturally -- is based on his experience in enterprise software. Note that this Jim Manzi is not the Manzi of Lotus fame. That Manzi would know better because he was in the thick of the enterprise software industry back in the day. 

Here is the observations that bothers me:

"A series of technical/business-model innovations — most prominently, Software-as-a-Service (SaaS) and open-source — is transforming the software industry, but the rational incentive of the incumbent managers is to suppress the innovations or, at best, slow-walk them and channel them in directions consistent with their current business models. So, right now, entrepreneurs, incumbent company management teams, and the capital markets are jockeying to seize the potential value that these innovations are unleashing. 

"Large company growth will disproportionately come from adding not just more of the current “capacity” (mostly people) but the different kinds of capacity that are required for these new business models. For example, more software engineers trained in traditional languages and accustomed to working on large, structured projects are less useful for  growth than engineers with experience in web-focused technologies and used to working in a so-called agile development environment. And it’s not as simple as incumbent companies simply changing their hiring specs; it’s difficult to transform settled company expertise, systems, compensation plans, culture, and so forth to operate in this new environment." 

As I've written often here, including most recently concerning Red Hat (RHAT), neither supply side nor demand side market research back up the other Jim Manzi's observation.

Addressing Manzi's statements just from the demand side, there is simply no way you can say that IBM slow walked adoption of and adaptation to open source license terms and conditions given its seminal support of the Linux Foundation and the Apache Software Foundation over 15 years ago. Instead IBM -- and most other enterprise software market leaders -- co-opted the open source licensing approach in the mid 1990s as a brilliant way to control through-the-roof software development costs and to increase profits. As a result, IBM has surpassed Red Hat in that (I contend artificial) market. Microsoft (MSFT) was late to that party because it had an open-source-like community of its own given its desktop market dominance but even Microsoft had pretty much come around by the mid 2000s.

Similarly it's hard to question Oracle (ORCL) sofware as a service (SaaS) bonafides when you look at how early it co-opted the IBM term OnDemand to mean SaaS and how Oracle invested in -- not surpressed -- Siebel's struggling SaaS efforts after the acquisition.  As a result Oracle will do about $500 million in SaaS revenue in 2010 and is likely second only to salesforce.com (CRM) by that metric. There is a tendency of armchair analysts to accept the propaganda of the salesforce.com CEO about such things rather than digging into the data (by the way, I have no problem with Benioff's propagandizing and have complimented it often).

I find no indication that these software market leaders are having trouble adopting web-based technologies (they invented most of them), hiring agile developers (another crock buzzword anyways), or otherwise given the user what he or she wants. There is much data from the demand side to knock down Manzi's assertions.

The one issue that open source and SaaS caused for many of these leaders (not IBM) is that they have slowly had to change their revenue recognition away from a balance of one-time upfront perpetual license streams and subscription services streams to a heavy does of the latter. (IBM was always heavily rental so the change was not a big deal and so insignifcant to its overall revenue that it is not reported anyways.)  They still recognize that same amount of revenue (with a little lag) but just to have put it in a different bucket.  Pay me now or pay me later as the old motor oil ad used to say. Services -- including professional services -- always made up 70% of most of these companies' revenue -- with the exception of the company formerly called CA after it was called Computer Associates -- so the transition has been no big deal.

And as I said, I still agree with the conclusion of Manzi's blog post:

"Despite the confident assertions of academicians, the Law of Unintended Consequences remains in force."

In this case, the unintended consequence was that the market leaders quickly took over tactical innovations that the venture capitalists thought would spawn new IBMs or new Oracles.

-- Dennis Byron

(no financial interest in companies mentioned)

Red Hat Is Last Man Standing

I took flak recently concerning a blog post that said that Red Hat (RHAT) was no different than IBM, Microsoft (MSFT), Oracle (ORCL), and most other enterprise software suppliers in terms of business model, despite statements to the contrary by Red Hat CEO James Whitehurst. My blog post was not a criticism of Red Hat, just an observation.

Most of the flak was knee-jerk open-source-zealot stuff with no IT investment research implications. But the comments got me thinking back to a more than three-year-old IT investment research project in which a client asked me to provide various investment-related characteristics of the then “leading” open source projects.   In doing the research I could define “leading” anyway I wanted to but I knew the client was looking for ways to cash in on the then imminent boom in “open-source-software vendor” IPOs. Therefore some of the most important characteristics were that the “open source software” was not managed by a company that was already publicly held and that the software participated in a part of the software market characterized by growth and vitality. 

I identified about 100 projects to look at as part of a first cut. (During 2007, non-client-protected versions of this research showed up on ebizQ.net, research 2.0, and my own web site and the original sanitized research is still sitting out on the web at slideshare.net.) I had to tell the client that he was out of luck on both major fronts. I hope he took my findings to heart although I never know if clients accept the research except in the general sense that they come back for more. 

The problem for so-called open source software vendors was that most of their projects were in un-dynamic, commoditized sectors of the software market and worst still, the leading enterprise software suppliers had already co-opted the concept as of early 2007 (Microsoft had not yet announced its then-new position vis a vis open source terms and conditions but it was clear that they were about to do so).  The way I expressed it at the time is

“There is no open source market.”

I later added

“There is no such thing as an open source supplier.” 

Of course only a few open source “products” are ever intended to be productized in the commercial sense of that word. Most are one-off activities in support of a specific enterprise’s specific need. Estimates at the time said there were as many as 100,000 open source “products” but Optaros had identified about 300 as enterprise ready. As an indicator of what happened in the intervening three years, Optaros now seems to downplay its open-source-culture roots on its web site although it still maintains the enterprise open source directory which I used to cross-check my work at the time.

As mentioned there were about 100 projects in my original study and the 2007 table referenced above boiled that down to about 50 I saw as having some chance of going public some day. Compiere, Greenplum, Logicblaze (and then Iona, which acquired Logicblaze before itself being acquired by Progress (PROG)), MySQL, Xensource, and Zimbra have all been acquired. Canonical, Jaspersoft (backed by Red Hat and SAP), OpenBravo, Pentaho, Sugar and a few others are still going through the motions.  And I still see possibilities for Alfresco, Acquia, whomever is trying to monetize Ruby, and a few others that were not on my original list because they didn’t exist yet. 

But Red Hat -- which of course was already public -- is the exception that proves the rule. In fact it has made a few of its own acquisitions since then, including acquiring closed-source products and re-releasing them under open source terms and conditions.  Based on the table that you can look up on slideshare.net, I find that Red Hat is in fact the “last man standing.” One general rule of market dynamics is that if there is only one participant in a market it is not a market. Put the idea of an open source market (or business model or supplier) on the same shelf as the open source desktop.

-- Dennis Byron

(no financial interest in companies mentioned although I have done recent consulting work for Red Hat)

Red Hat's Just Like IBM, Microsoft, Oracle, salesforce and SAP

James Whitehurst, Red Hat (RHAT) CEO, received a lot of IDG-based press during the week of October 18 about a trade-show keynote speech in which he reportedly said

""The business models between customer and vendors are fundamentally broken" when it comes to enterprise software." 

I did not attend the conference so I’m depending on these IDG press reports for the following opinion. (Truth in advertising: I am a former IDG employee so I trust the reports completely. This is an exception to the rule of not believing what you read in the newspaper, or at least the technical press.)

I think Whitehurst’s opinion is important more because of his former role as COO of Delta than for his current role at Red Hat. In particular, this quote rings true based on my demand-side research:

"Vendors have to guess at what [customers] want, and there is a mismatch of what customers want and what they get. Creating feature wars is not what the customer is looking for."

On the other hand, some of Whitehurst’s reported logic (possibly reported incorrectly) is shaky based on my supply-side research.  The press says his opinion about a broken business model is based on the fact that Red Hat is an “open-source software” company, and that others sell "commercial" software or have a different “software sales model.” 

I reject “open source” as an enterprise-software business model or sales model category. But if it is, isn’t Red Hat the only company in it?

Whitehurst’s logic flaw, if reported accurately by IDG, is that Red Hat’s business and sales model is the same as every other leading enterprise software company. 

• The very largest enterprise software companies -- IBM, Microsoft (MSFT), Oracle (ORCL) and SAP in alphabetical order -- have multiple-revenue-stream business models:
  • perpetual and various types of limited license revenues
  • subscription maintenance revenues (remember: software maintenance is about content not fixing things)
  • revenues from services that combine the license and maintenance with administrative support and the necessary hardware horsepower (so-called SaaS but increasingly also mislabeled as cloud computing)
  • revenue from services that combine SaaS with outright business-process services such as administering human resource benefits programs (so-called BPO)
• Large suppliers such as salesforce.com (CRM) license and sell only via the SaaS method while suppliers such as ADP use the BPO approach almost totally.
• Red Hat – last time I checked – makes its numbers via the first two methods (perpetual license with subscription maintenance), with the gotcha that its licenses are almost 100% made up of open source terms and conditions (Ts&Cs). But, oh by the way, IBM, Microsoft, Oracle and SAP also license some of their software with open source Ts&Cs.
• All of the above software suppliers -- and thousands of others -- also provide professional services such as training or implementation support for a fee.

If Red Hat and Mr. Whitehurst have something against these multiple revenue-stream or software-sales models – plural – it sure isn’t doing anything about it.

And there is an even bigger logic flaw in the press reports I saw (I only linked to one above but there were dozens). Whitehurst supposedly said

“"Why are costs of IT going up when the underlying costs to deliver those services halves (sic) every 18 months?" The cost of computing should come down, he reasoned, thanks to improving processing speeds and storage capacities. New, more powerful development tools and frameworks should also ease the cost of deployment. Yet IT expenditures continue to go up by about 3 percent to 5 percent a year.”

Unless Red Hat and the other leading enterprise software suppliers and his and their customers and clients are cutting their employees salaries in half every 18 months, processing speeds and storage capacities are not going to make much of a difference. Unless the taxes on the buildings they own or the rent they pay is being cut in half every 18 months, all the programming frameworks and “lower bug density” in computer-science nirvana doesn’t matter.  Along with software spend, hardware and storage costs add up to the $1.4 trillion IT spend mentioned elsewhere in the press reports. 50%-60% of that is annual subscription maintenance on hardware, software and storage and another 20%-30% is user add-on and functionality upgrades (so someone must like the feature lists).

But that entire $1.4 trillion number only accounts for about 10% of the cost of deploying IT in support of business processes. If you really want to cut costs, license and sell software that administers itself and runs on abaci.

– Dennis Byron

(no financial holdings in Red Hat but I have recently done research for Red Hat some of which is reflected in this white paper possibly still available on Red Hat's web site.)

Community Lights Up the Lines Over Open Source ERP

I like to follow open source community discussions because of their implications for enterprise software investment and simply because they remind me of the internal engineering/marketing/sales discussions in all the dysfunctional IT companies in which I cut my teeth 30 years ago. The difference is that those companies did not broadcast their differences to propsects and competitors. Open source infighting is also a strawman for left-wing/right-wing political-junkie talkshows except that you actually have to read what the opponents think rather than just watch MSN and FNC.

The current brouhaha over "why Compiere failed" is a good example. Many of the leading lights of open source have weighed in. On one side, some take the so-called "open core" right-wing approach which says it's OK to offer a core of a open-source- licensed software wrapped with closed-source features and functions. Mark Radcliffe's post to which I link above because it points you to all sides of the discussion is the middle-of-the-road business-like approach. Simon Phipps, late of Sun, takes the far-left copy-left "free software" position saying:

" 'Software freedom' may sound abstract, but it is the system of thinking behind the very practical and tangible benefits that have drawn vast numbers of businesses to use open source. As I have written previously, the four freedoms (to use, study, modify and distribute the software without restriction) have created a vast market by enabling cost-savings and flexibility."

The founder of the Compiere project weighs in on one of the links from Mark's post blaming former Oracle (ORCL) exec and Compiere CEO Don Klaiss. In many places, the relationship of the Apache Software Foundation and underlying Apache open source license to open core gets both credit and blame.

First of all, in a business sense (which is what it's all about after all), I'm not sure "Compiere failed." I don't have access to the inside scoop. It was acquired by a compay named Consona. Dressing it up for acquisition might have been the investors' exit strategy from the start. If so, bravo (that's a pun for you real Compiere insiders).

Second, to the extent that the idea of marketing another ERP package into the most saturated enterprise-software market of all time failed, the reason is explained here.  Clearly the Compiere founders did no market research despite the protestation that they understood that the Kevin Costner "if you build it, they will come" approach is a bad business plan. (Unless you have deep pockets like Kevin Costner and can wait 20 years and donate heavily to politicians who will finally order some bureacrat to use your centrifuge.)

Third, and most important in terms of watching how your money is invested, I repeat:  there is no open source market, "vast" or otherwise.  The open source navel gazers keep deluding themselves about what is on one hand a set of terms and conditions and on another, a fraternity (literally, I still see very few women at their meetings).

Meanwhile Oracle and early Apache supporter IBM laugh all the way to the bank.  They and the other leading enterprise software companies -- including even Microsoft (MSFT), on whose Windows operating system most open source licensed software runs -- took over the movement years ago the same way the leading software companies took over their user groups.

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