Marketing Memos

Business models are beautifully tragic things.  Like Shakespearian
economics in action, we see mighty kings brought low by pivotal character flaws. 
Fundamental weakness will draw heroes or villains to ruinous demise.

Which may be how Matthew Szulik, CEO at Red Hat feels today.

To the surprise of very few, high tech’s own Darth Vader, Larry Ellison,
found a way to take command of the entire IP stack with little investment, a lot
of grand media attention, and the fulfillment of his own
addiction to winning for the sake of it.  For months Ellison had
pondered publicly about the desirability of adding Linux to Oracle’s portfolio,
and thus providing to enterprises every element of the server stack above
hardware. 
Ellison found a way to do that by legally swiping the hard work of others
(i.e., by hijacking Red Hat’s Linux distribution) and discounting competitor
support pricing.  Indeed, all Larry and his buccaneers have to do is 
provide adequate support, at which they failed in the first week.

There are so many technology marketing parable at play in this saga that
volumes will undoubtedly be penned and published (hmmm, perhaps I should write
another book).  The ones worth examining include Red Hat’s fundamental
business strategy mistake, Novell’s lucky coincidence, and where demand and
branding play in customer buying.

Red Hat is a one trick pony.  All they offer is repackaged Open Source
software and support to go with it.  I won’t argue if their products are
good or bad, because
I have financial biases toward the SuSE brand.  But Red Hat’s business
model has a genetic defect in that all their revenue comes from
a single, and very exploitable fount.  Red Hat placed all their
financial eggs into one market basket, leaving them vulnerable to the effects of
usurpation by more dominate forces.  And if there is a more dominate force
in the IT technology business than Larry Ellison, I don’t want to witness it.

Red Hat’s weakness was more profound than proprietary software vendors in as
much as what they sold was, by deign of the underlying license, free to poach. 
Within a day the financial markets scrubbed away 26% of Red Hat’s market cap,
which likely caused everyone at the newly acquired JBoss to weep in despair
given that part of the
acquisition deal involved Red Hat stock and
saved JBoss from Ellison’s clutches, a fate that may be reversed in the
future.  Investors understood the implications of having $96B in capitalization compete against Red Hat’s, which is now only 3% of Oracle’s.  If Red Hat were more diversified, the impact
and the discounting of their share price might have been lessened.

Take Novell as an example.  On the same day that Red Hat’s stock was
chopped up like so many characters in The Bard’s plays, Novell fell only a
fraction.  Granted, Novell’s Linux revenues are small compared to Red
Hat’s, but they are also vastly more diversified.  Despite proclaiming
being the vendor of "Software for the Open Enterprise", Novell still peddles
proprietary goods in prestigious amounts.  The market punished the
weak in Darwinist fashion, penalizing Red Hat’s pure bread genetic defects and
being more kind to Novell’s mutt genealogy.

Open still is the question of the ultimate outcome from Ellison’s maneuver.  Within IT circles there has always been a desire to have "one
throat to choke", a quaint and semi-violent way of showing preference in buying the bulk of
your IT technology from one vendor, and by doing so having one source for fixing
problems.  This is Larry’s gambit – to
give IT buyers a driving reason to choose
Oracle.  If you actually implemented an OS-to-application stack from Oracle,
and assuming you were not previously institutionalized,
nothing short of a hardware failure would fall outside of Oracle’s sphere of
responsibility.  This is attractive to CIOs as it reduces variation in the
data center, and gives them mighty leverage when negotiating with their master
vendor.

Shrewd too was Larry’s decision to purloin Red Hat’s code. 
Red Hat is the Linux market leader, and Ellison is now offering Red Hat
Linux and support for less.  IT buyers get the Red Hat brand and Oracle’s
throat.  IT benefits. Larry benefits.  Red Hat gets dirked faster
than Polonius,
which shows the real value of being true to thine’s own self.

It will take time to play out, but if Ellison’s strategy works and IT buyers
flock to Oracle for Linux bits and backing, then Red Hat’s revenues will
decline.  This will inevitably lead to fears of their stability, dropping
of share price, and I’d wager Larry executing a hostile buyout at deeply
discounted share price. 

Oddly the two companies likely to benefit the most
from Larry’s New War are Novell and IBM, who have been so tightly entwined that
rumors of romance between
Hovsepian and
Palmisano persist.  Novell will pick up refugee Red Hat customers who loath
Larry and all he stand for.  IBM wins as their services group makes money
from any messy situation.  And I have few doubts that the two are already
collaborating on how to take advantage of any technological breakdown and
violation of the Open Source mantra that may arise from Oracle butchery of Red
Hat code, or Red Hat attempts to prioritize any Open Source.

Indeed, misery acquaints a man with strange bedfellows.

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Well, I went and did it now. I managed to become a judge for the 2007 CODiE awards. I’ll be covering a couple of categories including groupware. Send bribes to the address on the contact page … just kidding!

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Mark Hurd is a very likable fellow.  I saw him speak at Oracle World this morning, and he is precisely the face, voice, and name Hewlett Packard needs at this point in time.  He certainly appeared more light hearted today than he did while
testifying before congress recently.

Unfortunately he blew it.  Likable or not, he put forth a proposition that tragically miscommunicated the market, and was a not-so-sly attempt to justify greater IT spending for HP gear.  Can’t blame him for wanting to loosen up the taunt purse strings of CIOs everywhere, but his tactic fell flat.

Specifically, Hurd noted that as a percentage of total IT spending, capital investments were on a decline.  He cited HP analysis, but I do not doubt
the veracity of the trend ( click on the image at right to see Hurd’s chart from
the keynote address ).  Hurd also noted that more and more people are being
employed in IT, and that labor cost are rising.  The total labor pool has
risen given the new entrants from India, Russia and China, and given the nearly
insane rate of salary inflation in India, I would not doubt that total IT spend
on humans is going up globally.

But Hurd claimed (in part) that the drop in capital spending was because IT
was holding onto ancient technology and merely pasting band-aids over a
faltering infrastructure.

Equine effluvium!  You will notice by his own chart that capital
spending as a percent of IT’s total budget started falling during the peak — or
should I say pique — of the dot-com boom, when people where buying
servers faster than Michael Dell could bolt them together.  So clearly, the
lowering of proportional IT dollars spent on capital goods was going down not
for a lack of build-out.

What Hurd and HP face is the commoditization of the stack, and thus the lower
cost to the buyer — which is precisely what the buyer wants.  AMD/Intel
servers running Linux, as well as rapid deployment of other Open Source
solutions, have allowed CIOs to shift budget to people, which they desperately
need to install, configure, or code new capabilities.  Despite standards,
IT is becoming more complex given the added value it delivers to the enterprise. 
Thus the need for IT people power is outstripping the need for CPU power. 

I think Hurd was simply misdirecting the audience as he had a secondary point
for his primary agenda.  Using the argument about aging infrastructure,
and painting mainframes as old, outmoded and expensive, he announced that HP, Oracle and Intel would target mainframes for conversion.  IBM has performed amazing feats in keeping the mainframe popular, from dropping total costs for deployment, to long ago porting Linux there.  IBM
kept the mainframe relevant and cost effective, so Hurd needed an argument to
support his mainframe migration announcement, that being the "aging infrastructure" gambit.

I don’t know a single CIO who has not been buying up x86/x64 based Linux
servers in droves, new Cisco routers, and SANs networks, and more.  There
is no lack of investment in needed infrastructure, so Hurd missed the
factual Mark.

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I was recently invited by Novell to write on the topic of how Open Source makes a difference in IT beyond just Linux, and beyond just saving budget.  I had foreseen the day when not only other Open Source projects became important to enterprises, but also the very methodologies of Open Source would have implications.  CIOs have now confirmed my
prognostications and are adopting all forms of Open Source products and mentalities.

And as usual, the news is beginning to bear witness to these not-so-subtle shifts in market forces.  Two news items in recent weeks speak to how the market is morphing.

First and most obvious is how IBM is pushing the Open Source envelope by identifying eight separate areas of software in which IBM wants to drive adoption and innovation using Open Source. IBM has been a leading force behind Linux and Eclipse, securing growing dominance in the two cores of IT — infrastructure and development.  Now IBM wants to expand on these themes by adopting and promoting projects for client-side middleware, development tools, Web application servers, data
servers, systems management, hardware, and even grid computing ( say bye-bye to Sun’s rent-a-grid ).  By driving broader adoption, IBM is effectively reducing (perhaps even eliminating) preference for proprietary solutions, and thus competitive
products.  The differentiator for IT technology vendors then becomes services, the area where IBM established their dominance years ago.

But IBM’s enlightened self interest is incomplete by itself.  The whole world does not buy from IBM.  Now a
survey indicated that channels are profiting from Linux and other Open Source tools, which makes the growing dominance of Open Source more complete.  Channel players working with Linux are profitable (which one might find to be an odd result for a commodity play), and by focusing on core infrastructure issues like the OS and application server.

But most compelling was the insight that Windows accounted for half of operating systems replaced by Linux.  Other reports had shown Linux replacing UNIX, since the management differences between the two operating systems was minimal.  But those same reports said that for new server
deployments, Linux and Windows were in a tie race.

This new study now concludes that Windows is actually being replaced by Linux — a shift from stalemate to loss for Redmond.  Why the channel is leading the replacement shift is interesting in as much as the channel typically servers
small and midsized businesses, ones who are not wed to a technology through a consecrated IT staff.  Contrast this to large IT shops who are adopting Linux for the sheer horsepower-per-buck invested.  Adoption is coming from above and below, out of different motivations.  Together these factors will further compel and consolidate the market.

Windows as a driving force in the data center is on the leading edge of
demise.

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Carly Fiorina is spinning so fast she may well achieve escape velocity.

Having spent both my technical and marketing careers in and around Hewlett
Packard ( do you remember RTE and MPE ) I have better than average insights into
the organization, and many friends and acquaintances at many levels of the HP
empire.  So when Carly started stumping her new book, not only was her
message out of kilter with my own observations, it generated loud and disgusted
shouting by HP employees — even those who didn’t lose their jobs. 

Then came the 60 Minutes interview last Sunday, after which these same
employees erupted in a way heretofore known only to Vesuvius.

There are not enough available electrons to dissect for you all of Carly’s
spin, but allow a few observations of spin filtered through inside observations:

Change agent:  Carly contends that the change agent (ie., Carly
in HP) always takes the arrows.  This clearly isn’t true as a number of
executive change agents — like Lou Gerstner at IBM — effected change without
getting fired.  And Lou had a much more difficult job as the IBM corporate
culture was defective, where as HP’s corporate culture was sluggish but
reliable.

Herein lies the biggest problem with Carly’s self deception.  People
will accept cultural changes only when they are involved and see the benefit. 
People within HP who came before, and survived after Carly’s reign note that she
disrupted the HP culture, and did not even try to change it through
collaboration and acceptance — a strategic mistake given the value, history, and
love of the HP Way.

One story is illuminating.  HP has offices on the Microsoft campus,
where the two companies collaborate on products.  One HP staffer noted that
when Lou Platt, Carly’s predecessor, visited Microsoft, you heard about it the
next day after Lou had quietly come and gone.  When Carly showed up, it was
broadcast in advance of her multi-limo cavalcade arriving in rock star fashion.
Her visits dominated the time and attention of all resident HP employees. 
Thus, Carly was more than out of sync with the HP culture … she ignored and
affronted those who held the culture most deeply.  This explains why
recordings of "ding dong the witch is dead" were playing on PCs in HP offices
the day her termination was announced.

Define success:  Carly is now taking credit for HP’s recent stock
price recover, which sank 56% on her watch ( granted, she came about two years
before the dot-bomb era, so not all of that loss can be laid at her pedicured
feet ).  "HP is now a leader, not a laggard," she announced. "We made the
necessary changes." Yet Carly does not explain why the strategy she put into
place succeeded after her departure and not during her tenure.  Some HP
employees I have swapped email with claim that the mere lifting of her
omniscient persona gave employees hope once again, and they began producing more
from relief than from her strategy.

That aside, many people have noted that "strategy is easy, execution is
hard."   Being a strategist I know this to be half correct —
execution is indeed hard.  In Carly we saw not only an inattention to
execution, we saw bad strategy froze execution.  Where as Lou Gerstner took
a highly centralized IBM and decentralized each component, allowing each to be a
more self managing profit center, Carly attempted to destroy HP’s high
decentralized organization, which had allowed amazing things — like their
highly profitable printer division — to flourish.  Indeed, most every
board member and most every industry analyst were saying so shortly before and
after her departure.  The only who apparently doesn’t believe this is
Carly.

Carly is attempting to redefine success away from the two real measures of
employee involvement and shareholder value, the two fronts on which she failed
miserably.

Men did her in:  The 60 Minutes interviews of HP spymaster
Patricia Dunn and Carly amplified Fiorina’s claim that men had ganged up on her
because she is (allegedly) a woman.  Her lightly veiled contention is that
it is still a man’s world into which no woman executive can survive.

What a change a few years makes.  One HP employee I received a note from
reported that when Carly first spoke to the HP masses, she proclaimed "There is
no glass ceiling".  Now, after being canned for canning HP’s share price,
she believes the good-old-boy network thrives.  Carly cannot have it both
ways.  And she might get some pushback from eBay founder and CEO Meg
Whitman, who created a corporate culture and continues to nurture it.

Of all the jetsam I’ve received over the last few days, nothing sums up
Carly’s spinning better that what one fellow wrote about the 60 Minutes
interview:

Watching with my wife, who was an HP employee during that time, was fun … she usually doesn’t talk back to the TV as much as she did tonight!

I guess Carly will just have to wipe away those tears with her $40,000,000
parachute.  Let us just pray that the rumors that she was fielded as a
possible candidate for World Bank president are untrue, otherwise we might kiss
the world economy goodbye.

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