Marketing Memos

Interesting question. The IT software market has been fundamentally reshaped thanks to the overlapping forces of the Internet and Open Source. We are witnessing a divide between enterprise and mid-market focused vendors, and a few vendors managing to overlap all three approaches to the market.

But enough of this teaser. To read all about the fate of the IT software market, download our latest white paper.

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A popular (though inaccurate) definition of the word insanity is "Doing the same thing over, and over again, and expecting different results."

So what are we to conclude about SCO chief Darl McBride when after announcing another spectacularly bad fiscal quarter said "Despite our revenue decline and net loss, we remain committed to and optimistic about our business strategy"?

(Note to Darl — your business strategy has been losing money for three straight years.  Time to call your shrink.)

And the news was grim even for SCO.  Their net losses were doubled, mainly due to an unexpected $3.8M in new legal expenses.  This took their diminishing shareholders by surprise as SCO management had previously announced that the legal team that lost the election for Al Gore had a cap on their legal fees, which should have been met millions of dollars ago.

SCO is burning through $4.7 million a quarter.  With only $18.6 left in the bank, and assuming their losses through software license defection don’t slide faster than before, SCO will be bankrupt in about one year.  And that last assumption concerning revenues is critical given that SCO revenues were down 23 percent from the same time last year.

So in another "gamble it all" maneuver, SCO is throwing what little money they have at the mobile market.  The critical flaw in their strategy is that the mobile market is a moving target with a bewildering array competitors, but ones chanting the open standards mantra.  SCO wants to be in the edge services market, but telecom service providers are clearly wed to Solaris and Linux as edge platforms, and leverage web technologies (HTTP and Java mainly) to do their bidding on handsets.  For SCO to win in this market they would have to push aside standards and open development tools, which no one company –  not even Microsoft — can do.

SCO doesn’t have nearly enough cash to make this sea change, and SCO lawyers won’t let them keep any more than necessary to keep the host organism alive.

All companies must create value.  SCO has not created value for UNIX, choosing instead to litigate over fairly flimsy claims. They create opposing value in the edge services for mobile market.  And they produce negative value for shareholders.

But they do provide value for their attorneys.

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California is a fast moving place.  When an earthquake strikes, you can
move quite a distance while standing on the same piece of ground.

The same applies to technology markets.  Once in a while, there is a
seismic shift that fundamentally realigns vendors and buyers, creating a new
landscape and toppling some established structures in the process.

The lesson, which I intend to make painfully obvious herein, is that if a

marketing strategy attempts to fight a seismic shift, it will be swallowed
into the rupture and buried forever.  Technology companies today are
experiencing a seismic shift called Open Source that is changing the marketing
landscape along a very visible fault line ( can I stretch an analogy or what? ).

Seismic shifts in the technology market is not a new phenomenon.  A
number of huge shifts, with an equal number of corporate casualties, have been
seen over time:

• A shift from expensive, centralized mainframes to distributed minicomputers left IBM, Honeywell, Siemens, and others homeless.
• A shift to personal corporate computing and client/server integration crippled DEC, Wang, and others.
• The shift from proprietary server operating systems to UNIX left the OS fields littered with names likeMPE, VMS, and BTOS.

The common thread in this graveyard of technology is that many of the
companies suffered temporary or permanent impairment because they failed to see
and respond to a seismic shift.  IBM was the most visible of these firms,
having held firmly to their mainframe focus to the point of near bankruptcy. 
Each of these firms chose to stand their ground, raise their hands, and try to
retard plate tectonics.

Dumb, dumb, dumb!

Now comes Open Source — a seismic shift — and we see various powerhouses
either ignoring the shift (Microsoft), waiting way too long to accept the shift
(Sun), or swiftly profiting from the shift (IBM).  Expect to see new
quarterly reporting carnage from Open Source for the next three years as certain
firms attempt to stop the inevitable.

Which brings me to my belabored point.  Some market situations can be
controlled, spun, and even defeated.  Depending on your size, market
dominance, or bankroll, you can overcome minor market moves and competitive
threats.  Microsoft is a champion at this, using their might and artful
FUD to modify
buyer behavior.

But a seismic shift — one where the very foundation of the earth moves — is
one where a company must change and lead the shift, not fight it.  Open
Source is such a seismic shift, and we already see survivors and casualties
forming:

Survivors:

• IBM:  They lead the shift to Linux and a lot of Open Source
  infrastructure and development tools, moving their revenue base to services
  and high-volume sales.
• Oracle: Larry is heading for higher ground, becoming an
  application vendor.
• HP:  Bill and Dave’s shop has become the Switzerland of
  infrastructure, and is winning the battle by not fighting at all.
• JBoss, MySQL, SugarCRM, etc.:  These firms base their very existence on Open Source.

Casualties:

• Sun: They fought the shift hard, delayed changing direction, and
  still have no solid game plan.
• Microsoft: The growth of Windows Server has been all but halted
  as Linux/Apache dominate new and UNIX replacement buys.

The other seismic shift occurring in IT technology is commodity computing. 
AMD and Intel’s battle, with the help of Linux and Apache, are creating an
entirely new baseline for corporate computing — commodity hardware, running a
commodity operating system, hosting a commodity application server.

Now, ask yourself this: On what side of the fault line are you standing?

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You have to love rumors, especially those about companies being sold. 

This always happens when large and established firms stumble.  Amateur
investors will take a series of underperforming quarterly reports as an omen
that executives will sell-off an entire company to protect their golden
parachutes, look like strategic genius, and avoid being lynched by a shareholder
mob.

This week alone I have received rumors of Novell and Sun being sold … and
these rumors came from people inside of those companies.  I doubt Novell
would sell out at this time, despite Larry Ellison’s recent speculative public
thinking about owning an entire stack.  For Novell to sell they would first
have to deplete their resurrection alternatives (and they do have options) and
they would need a willing buyer (which they likely won’t have unless they
demonstrate better market traction in at least one market/segment).

I also don’t think Sun will sell … at least not in one piece.  Let’s
look at what Sun has, and ask ourselves who their alleged buyers might be.

Server hardware:  Sun makes interesting servers, but was very
late in meeting the market shift to commodity products.  They are the kings
of UNIX servers, which is a rapidly shrinking market.  With IBM, HP and
Dell all exploiting the Linux-on-X86 market imperative, there are very few
people who would want to acquire a non-standard RISC server technology.  No
sale.

Storage hardware: This is a hot market, as Sun’s recent purchase of
StorageTek showed.  But it is a highly competitive market, Sun paid an 18%
premium for the company, and the cost mechanics of the virtual storage market
are forcing pricing pressure.  If this were not gloomy enough,
Open Source stands ready to create virtual storage alternatives, making future profitability risky. No sale.

Operating systems:  Yeah.  Suuuure.  Let’s make money
selling Solaris.  Even Sun isn’t doing that these days.  No sale.

Misc software:  Sun has a mixed bag of software from desktop
applications, to storage utilities, to N1 (to date, the most poorly describe
"solution" ever whelped from Silicon Valley’s womb).  Sun has no broad,
unifying, and complete software set, and thus nothing that an acquiring company
would need to grow their dominance in the market.  No sale.

Java:  This is the one golden egg in Sun’s withering nest. 
IBM would like to own Java as they have invested so much into it and guided
their customers toward adoption.  Oracle would like to own Java as it gives
Larry a key part of the stack that has become nearly indispensable to
enterprises.  Even HP might like to own Java, though they have more
fundamental issues to deal with. 

Yes, Java is the one piece of Sun which has market strength, demand,
dominance, and potential for profitable market control.  And because of
that, it is the one piece that Sun will not consider selling to another firm. 
But given the weakness of Sun’s other offerings, they will have to make more
money from Java in the future.  They may well start charging deeper license
fees once Java becomes nearly ubiquitous and enterprises are fully addicted.

In the meanwhile, Sun needs to bolster profits in ways other than gutting their workforce. 
They have a dichotomy of choices – either expand on what they do well, or find
new paths to profitability.  They may have chosen the latter.

Sun thinks that "Classic IT" may not be worth the effort any longer.
Sun is shifting their R&D budget away from the datacenter to "internet-based
computing".  This seems odd since Sun currently receives upwards of 90% of
their revenues from IT buyers.  Their poorly placed announcement sent
shocks through the few remaining loyal customers, who are now thinking twice
about commitments to Sun technology.  We may well see Sun’s revenues slide
even further over the course of the year as IT buyers reevaluate their strategic
decisions.

Part of Sun’s R&D spending decision appears to be based on the belief that Software as a Service (SaaS) will be a growing trend. This may well be, but SaaS finds traction in (a) serving the SMB market and (b) through sales to a small number of providers (enterprises will still bring technology and talent in-house as it is cheaper, more effective, and reduces risk).  SaaS players are heavy consumers of commodity computing technology, and Sun’s new R&D
will not likely produce commodity products.  So one has to ask who will buy these new products Sun is developing?

Likely nobody.

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