Marketing Memos

The days of appliances for software distribution are numbered.

I have held suspicions about the long-term viability of appliances, which for the uninitiated are servers shipped to customers with software suites pre-installed. As servers became commodities and thus a minor part of the total cost of deploying a solution, many bright vendors realized that they could make customers happier (less deployment work) and reduce tech support expense (fewer customer deployment mistakes) by bundling everything on a box that could be racked, powered-up and added to the local network.  This also generated a great deal of customer good will through rapid success with the product, which in turn generated good buzz, more recognition, more sales, etc.

Appliances however predated mass acceptance of virtualization and clouds, which have removed much of the value add of appliances. Even small organization rack all new servers with virtualization installed. The reasons for doing so are numerous but the side effect is that technical buyers now provision virtual computers for all projects. They even install hypervisors to support single instances of an operating system in order to buffer hardware variations from machine to machine (one analyst recently quipped that you can buy 1,000 servers with identical SKUs from the same vendor and not get 100 identical servers).

Hell, I run VMWare on my laptop.

Will appliances disappear? Not entirely. Oddly enough appliances will go down-market, being offered to smaller and smaller buyers whose tech staffs have trouble tying their shoes much less installing Linux, MySQL and applications. In other words appliances will eventually become an option for the least sophisticated buyers.

With SaaS the growing rage, appliances may not be lucky enough to even go bottom fishing.

My first hint that appliance fortunes were going south was SugarCRM. For a long while they touted being able to buy Sugar as a service (SaaS), as on-site installable, or as an appliance. Oddly that last option has disappeared from their home page list of alternatives (click the pic to see the SugarCRM homepage of this morning). On-demand and on-site, but not on-hardware. The product (known as the Sugar Cube — how cute) still exists but appears to be in the first phase of phasing out. Perhaps I speculate too much, but pulling the appliance from the home page, removing it from the main product page and making it a footnote elsewhere is not a strong statement of support.

What should you do? That depends on your product’s market and segmentation. If your segments indicate buyers are likely users of virtualization or SaaS, then appliances will gather dust on your selves, tying up your cash. Conversely, if you have a product from which customers rapidly receive benefits and if SaaS alternatives are not readily available, there may be demand for appliances. If you are in a competitive market and your competitors do not offer appliances, you may find low hanging fruit and a modicum of differentiation.

Otherwise appliances may be a dying solution.

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The FCC has created the next big technology gold rush, literally out of thin air. Chip and mobile technology mavens are the first folks who will strike the new mother load, but others will follow.

In between existing television channels are buffers collectively called “white space”. The FCC established these buffers in the Bad Old Days™ because back then television broadcast equipment was less than precise. A broadcast signal could drift a little up or down the frequency spectrum causing recliner-bound fathers to order their children to adjust dials, knobs and rabbit ears (if you do not know what “rabbit ears” were, then you are too young to be reading this). Basically white space buffers kept channel 2 from clobbering channel 3.

But with television broadcasts going digital this February and the unused white space spectrum being valuable, the FCC has opened it up for “unlicensed” use. Unlicensed spectrum devices do not require getting FCC approval for every user. Your home wi-fi, your kids walkie-talkies, your BlueTooth toys are all unlicensed gear. Unlike all these gizmos, signals for devices in the white space 700MHz band can travel for miles and go through walls, which is why your old television worked indoors even if your kids couldn’t tune it properly.

The FFC’s idea is to open white space for unlicensed data devices. Being unlicensed, there is little restriction for what this space can be used. As long as the device follows FCC mandated rules for not interfering with other devices, anything goes. Think of it as wi-fi without the limitations of wi-fi. Think of a long distance wi-fi connection that runs between 10-20 megabits a second (slower than home/corporate wi-fi but significantly faster than 3G mobile data). Think of it as a huge arena where devices will freely communicate with other devices in an all but unregulated environment.

Think that this market is 100% untapped.

Like the Internet itself, profit in the white space derives from its unregulated nature. When the cost of entry is low and the variety of uses nearly endless, potential and profitability are mind boggling. Chip makers will be obvious early winners, and I expect Intel will quietly shift some of their WiMax investments to WhiteSpaceMax in 2009. Cisco no doubt has engineers soldering away on breadboards today. Since Google pushed hard for the FCC to allow white space exploitation, they likely have an advertising revenue backend already mapped.

These are the obvious profiteers. The yet identified winners fall into two categories: companies that understand new uses of data and companies who redefine “devices”. We have to look at these in inverse order.

What is a “device”? An automobile is a device. So is a toaster. I can think of about 100 useful ideas on how a car with free long distance wi-fi could benefit from data. So far I’m drawing a blank on how toasters would benefit from having fresh data feeds (maybe my brain needs some toasted carbohydrates to restart the idea factory). Creative minds who view “devices” as an abstract, and who can leverage the wealth of data available via the Internet, going to make some money.

Let’s take a really simple idea like GPSs and gasoline. If a GPS maker augmented their product to mine the data at GasBuddy.com, the device could at the press of a button find the cheapest gasoline nearby, guide the driver there, then prompt him to enter-in what they paid and thus update the GasBuddy database. When gas goes back to $4 a gallon, this will be a much sought after addition (note to Garmin, TomTom and everyone else in the GPS business — considered this copyrighted and I expect royalty checks when you implement this).

But GPS toys are existing devices. What previously unimagined gizmo could be mass manufactured and download/upload data? The answer may lie in what data is useful in motion when using a cell phone is not practical. Or better still, when a cell phone is present but passive. Imagine an eye-level billboard that sense that you are standing in front of it, and from some white space signal knows who you are (is told your cell phone number). Based on a database in the cloud, it could tailor an advertisement to you and the location where you are at (“Hungry? Try the Peking Cat restaurant two block east on Main Street. Much better than the Vietnamese food you ordered online last week from Wok my Dog.”)

Combinations of existing devices may suddenly become useful by their ability upstream data. Convinced your kid is abusing his driving privileges? Why not add a camera in the car, tied to the speedometer and GPS system that streams audio/video/location/velocity data back to your PC, and let’s you VoIP him in real time? “Billy, get your hands off your girlfriend and back on the wheel …. NOW!”

White space is a big and very empty world. But it is a largely unregulated world and one ready for profiteering.

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I gave a talk on Marketing Technology in Troubled Times at the recent Software Business conference in San Francisco. Seems that the topic is popular as I have been invited to give the same presentation via webinars in December to the B2B Power Exchange and the Long Island & Manhattan Software CEO Roundtables.

Nothing like a little economic panic to perk people up.

Should we panic? Nobody knows for sure. The devil himself, Alan Greenspan — a man destined to take majority blame for the current crisis — called his economic quagmire “an event that occurs once in 100 years”. The last event of this scale was of course the Great Depression, which by all accounts wasn’t so great for the people who lived through it. Just ask the recently departed Mr. Terkel (click to buy the book Hard Times).

The worst case scenario is that this will be a long a nasty recession. Using the Great depression as a guide, we see a four year decline in GNP (called GDP in modern times) and another four years to get the GNP back to pre-crash levels. But this is the worst case America has ever encountered. So much is different today that such a simple comparison is inappropriate.

This is especially true for the technology industry which not only rebounds before the rest of the economy but may well be a tool for launching the rebound itself. Innovation occurs in times of crisis and nobody innovates more than the American tech sector.

One big change in the current mess is that governments around the globe massively intervened in the financial markets. This likely kept the world from plummeting off the financial cliff but at the cost of trillions of dollars, yen, rubles and shekels being printed. Inflation follows when countries expand their currencies so rapidly. The $700 billion dollar bailout of U.S. financial markets raised the national debt 10% overnight. Never before has such a spike occurred and the effects will not be felt for a few fiscal quarters.

Another difference between the great Depression and today is that we live in a global economy which spreads risk and pain across a larger number of people and economies. The Great Depression lasted a long time because there was no rapid movement of income and business around the planet. Some of the recent shock has been absorbed by investors from Dubai to Dublin to Dongguan. This spreading of risk and pain will shorten the recovery time.

But still … the Big One lasted for eight years (four if you use the start of GDP growth as the official end of a recession). The average U.S. recession only lasts 17 months. That’s a three- to six-fold increase time to market recovery.

Signs of woe in the technology business have already appeared. Analyst groups — who are overly optimistic by nature and design — have scaled back all expectations. The chip market is now forecasted to rise a mere 1% in 2009. Given that analyst groups project higher than reality normally permits, and that we are in the earliest phases of this global market pullback, I expect chip market shrinkage. Polls of CIOs show that a full 50% have already frozen or reduced their budgets and those planning increases are expending their budgets a mere 1-3%, just enough to replace some old PCs. Consumer tech spending has to fall as people face foreclosures, layoffs, and choosing between an iPhone and a Big Mac.

My gloomy prognostications beg the question who will survive and grow in the tech business during this recession? Vendors who will thrive include:

• Security and fraud prevention- theft rises during recessions
• Optimization tools – helping businesses pinch pennies
• New advantage vendors – people who provide stunning new ways of making/saving money
• Corporate competitive shopping – extending competitive price/quote into enterprises
• Companies with cash … and lots of it – continuing R&D and M&A

Most interesting to me is fraud prevention. Recent reports about Microsoft disabling PCs in China that were running illegal copies of Windows shows a coming correction in vendor attitudes. Estimates run as high 36% of all software being pirated and vendor losing more than $40 billion (the latter of which I think is a gross under estimate). The tech industry has long accepted this rate of loss as a cost of doing business, but in an economic environment where new purchases will slow, forcing thieves to pay for what they have stolen is a relatively cheap way to boost revenues. At Software Business I met representatives of New Momentum, a company specializing in fraud, theft and brand protection. They are seeing an up-tick in interest due to the worsening economic situation.

What should you do to weather the downturn and survive a likely period of strong inflation? You’ll have to attend one of the webinars I listed at the beginning of this post.

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