Marketing Memos

So, when will Oracle buy Brocade?

Well, they might buy Juniper, Alcatel or maybe even pick-up Nortel on a distress sale, but I’m pretty sure they will jump on Brocade to secure their data center dominance.

Several vendors have been assembling stacks in attempts to become one-stop shopping centers for CTOs.  Cisco shocked many by getting into the server business, HP by buying 3Com, and Oracle buying Sun and not realizing the mess they had gotten themselves into.  IBM is oddly the laggard, evidently content to rake in huge margins on services instead.

But IBM may well buy what Oracle doesn’t.

Let’s ignore applications, if for no other reason than to give Larry Ellison a reason to panic and read this blog.  The major components of the data center infrastructure stack include servers, storage, operating systems, management suites and networking.  HP has all of the above, and wedding ProCurve, 3Com and Openview will possibly put them ahead of Cisco as a favored network gear vendor.  Cisco has most of the stack sans storage, though not many folks are jumping through hoops over Cisco’s server solutions.  Oracle is missing the networking piece almost entirely, and given their new market position for servers and storage, not having data center networking gear seems to be a hole in their whole.

Whole product definition that is.

This is a rather gaping gulf for a company that, upon completing the Sun acquisition, said they were the 1960’s IBM of the new millennia.  Given how their competitors are maneuvering, Oracle will eventually need to get into the networking gear business, though they likely will focus only on data center bit pipes.  As with SPARC and x64 systems, Oracle is optimizing gear for the huge database and application servers many enterprises need.

So the question is which network hardware vendor has an adequate product suite for Oracle and can be had for a good price. Many alternatives are simply too big or have too many non-data center products to sooth Ellison’s digestion.  Juniper has a market cap equal to Oracle’s cash, so they are out.  Nortel could be had on the cheap though they remain radio active and have a lot of telco products that Oracle wouldn’t need or want.  Extreme isn’t, lacking core technologies essential for mega servers.  That leaves Alcatel and Brocade, with Alcatel being twice as expensive mainly because it is holding a lot of cash.

So Brocade has the best product line and price match.  With most of that nasty little backdating scandal is behind them, they don’t present unreasonable risk. The only real question is if IBM will move before Oracle or the other way around.

Market trends and marketing go hand-in-paw.  The trend in IT is consolidation, at least in the hardware space.  Some of the big boys (Cisco, HP, Oracle) are attempting to offer solid stacks.  This trend cannot be ignored, and the eventual winners will be those who offer something beyond hardware.  After all, in an x64 and Ethernet world, raw horsepower differentiation is disappearing.  Other factors, such as service, support and reputation will sway buyers (and herein, HP may have a great advantage since nearly everybody believes they make unbreakable hardware).

The wild card – as always – is Oracle.  They dominate the application space, and since hardware only exists to run applications, this factor cannot be ignored.  Early Sun integration shows an Oracle propensity for optimizing the stack between components.  It remains to be seen how obscene application-to-hardware optimization might become.  Aside from lower prices (which means lower margins, which means an instant veto from Larry) application/hardware optimization becomes a core hardware differentiator.

If When Oracle buys a network gear vendor, we may see the largest new barrier to entry for anyone in the enterprise IT space since IBM dominated everything.  Innovators and start-ups will need to find ways of making their products a strategic add-on to HP, Cisco, Oracle product lines with acquisition exit strategies.  The days of enterprise IT IPOs may be behind us, though the future of corporate venture capital is looking mighty good.

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The mighty fall, upstarts rise, and nothing is guaranteed.

Comscore published their periodic post of positioning between portable platform providers (tell me when you get sick of my constant alliteration … it won’t stop me, but I do like the feedback).  Of interest are instances where major players are advancing, retreating, or showing signs of stagnation.  In Comscore’s latest totable techno tout sheet we see:

RIM:        42.1% rising slowly (+1.3)
Apple:      25.4% stagnant (-0.1)
Microsoft:  15.1% falling fast (-4.0)
Google:     9.0% and rising fast (+5.2)
Palm:       5.4% and sinking (-1.8)

Most noteworthy and yet most predictable is Microsoft’s plummeting while everyone else is either growing or staying steady.  Microsoft’s mobile operating system has been derided, insulted, defamed and dismissed by many, for sound reasons.  Unlike competing platforms, one routinely needs to buy a new handset whenever Microsoft releases a new OS (I say this with my tongue buried deeply into my cheek given that I carried a Windows Mobile 4 phone for seven years, much to the chagrin of my carrier).  A friend of mine who works for Microsoft complains he has to reboot his smartphone hourly.  Rumors have it that Windows Mobile 7 will fix all that … just the way Vista fixed XP security issues and with the same smooth migration path available from XP to Windows 7 desktop.

Google’s rise up the ranks is also predictable given market dynamics.  A certain sector of every technology market wants portability, not wishing to be tied to any vendor.  With Microsoft unable to provide stability, features or upgrades, with RIM being perfectly proprietary and with Apple … well, being Apple and iPhones being the center of a walled garden that rivals Eden … the Android OS was an obvious choice for free range geeks.  Given that Android 2.x is well crafted, that Google added some excellent back-end features, that HTC seems to adore the OS, and that Verizon promoted Droids to death, Google’s rising fortunes are to be expected.  My prediction is that they will continue this pace for a least a few more years, perhaps to a market dominance point.

Most interesting from a market dynamics perspective are RIM and Apple.  Being the big dog and specializing mainly in email junkie codependence, RIM has less growth opportunity than the other vendors.  Yes, they remain competitive, but the core of their market advantage – being perpetually plugged into email pipelines – is not well protected.  All smartphones can do email, and people who do not need spam pushed down into their handsets at all hours do not need Crackberrys.  Thus, the market share upside for RIM is capped given their current whole product strategy.

Apple, however, is oddly immobile.  For all the iHype, iPhones are now stuck.  A unique and perverse set of market forces are at play, conspiring to keep iPhones at their current position.  First, the anti-lock-in crowd wouldn’t own an iPhone even if Steve Jobs was included as a toy prize (if his personal fortune was part of the deal, there might be room for negotiation).  As other vendors provide similar or even superior features, iPhone cachet will fade.  Take the Nokia 5800 Navigator for example, which is arguably a better utilitarian handset for a fraction of the price.  Unless you are an app addict, the iPhone offers no stellar competitive advantage.  Finally, the financials of iPhones, and most higher-end handsets, are driving the unlocked market, which is oddly where Android is well positioned.  It is no wonder that Apple is slightly declining in market share and will stay sluggish until they launch across all major carriers.

Let’s not bother discussing Palm … it is too painful.

Since we do discuss strategy at Marketing Memos, what we are witnessing here are some common strategic marketing moves and mistakes by the various parties.

Trends: One trend in the smartphone market is toward unlocking handsets.  It is an inevitable trend that will affect handset makers and carriers alike (get ready to abandon mandatory data plans AT&T and Verizon – those days are numbered).  When there is a trend you can either ride the trend, fight it, or pray that you maintain your market share.  Apple and RIM are fighting it, Google is riding it, and Microsoft has bigger problems.  One point for Google.

Saturation: Though we are not their yet, the smart phone market (at least in North America) is rapidly saturating.  Chasm theory tell us that within a couple of years, only late adopters and laggards will be left.  Selling to slowpokes (all other things being equal) requires dropping prices or finding mass market plus-one features others overlooked.  Again, Google is altering the landscape by basically giving away the OS, and having it developed with Open Source efficiencies.  This starts the downward price spiral and makes retailing unlocked handsets even more practical.  Two points for Google.

Faddism: All fads die, and if one doesn’t, then it is not a fad (kinda like food and nookie – they never go out of style).  Handsets provide utility, be it playing games, watching videos or posting onto Facebook.  I hear you can even make telephone calls with some handsets.  Once all features desired by all major market segments are available on all mobile OSes, we will achieve a commodity state in handsets.  There is now a horse race to see who can capture the greatest lasting mindshare of the most market segments.  Apple has the fanboys, RIM has road warriors, Microsoft has lost, and Google own the technoids though their eyes are set upon the broad consumer market.  Since Google will make their money tangently via advertising, since their app market will help to create the whole product, and since they are driving down the retail price of unlocked handsets, I would wager that Google will quickly surpass Apple in total market share.  Three points for Google.

Sure, there are some wildcards to play.  Nokia bought Navteq and now bundles GPS software and maps on their phones, reducing you gizmo collection by one.  For all the jokes, the latest Symbian OS works well, the tactile feedback screen it more usable by broader audience, and Ovi Maps is an interesting value add.  Google requires you buy wireless data to use GPS.  Nokia says you can ignore data because the maps are built in.

The marketing lesson is that markets change, and you must always beware of change agents with different business plans than you have.  Apple, RIM and Microsoft want to make money on software and hardware.  Google wants to make money by owning the experiences of everybody and feeding their advertising engine as a byproduct. This eliminates their software profit motive and thus creates a direct threat to the three top competitors.

If you see a familiar but desperate looking face on a street corner giving away handsets, be sure to say hello to Balmer for me.

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Apple is pushing people to populate their phones with installed applications while Google, IBM and Microsoft are urging folk to remove apps from desktops.

This is not nearly bizarre as it sounds.

The success of Apple Apps for iPhones is slightly more phenomenal than the second coming. The universe seems consumed by the desire to have useful and useless apps installed onto their handsets. Sure, most of the iPhone app rush comes from the rush of playing with a new toy, proving once again the only difference between men and boys is the price of their data plan.

Yet this month shows that the desktop is slowing turning into little more than a SaaS suckling tool, whereby apps are delivered online. Google may have led the pack with early availability of desktop apps-on-tap, but now IBM and Microsoft have tap danced onto the stage.

(The mental visual of Steve Balmer and Sam Palmisano doing a vaudeville soft-shoe act is highly amusing)

IBM’s offering seems to offer what the market would seriously not consider. Big Blue and Ubuntu (say that ten times real fast) have teamed to push applications from a Linux cloud to a Linux desktop via a Lotus leaf. Ignoring the narrow niche of combined technologies, the requisite once-and-future Linux desktop is a momentum killer. Swapping XP for Windows7 will be hideously painful, but slightly less so than a migration to a completely new desktop OS and application package.

Which is unimportant. $3 per user per month is the real news story.

Marketing clouds parted when the rental cost of the solution set was mentioned. Good, bad or indifferent, SaaS apps have caught the attention of application vendors for a number of reasons, the most motivating of which is that steady, predictable revenues streams are far preferable to the old model. Sure, support revenues were the underlying motivation for many software plays, but the agony of product release and upgrade support programs coupled with associated spikes in revenues and expenses made maddening money flows.

Which is one reason Microsoft is chasing the same market.

Though unavailable until next years Office 2010 release, Microsoft is readying a web version of Office. Though pricing and options are not yet known, Microsoft has in the past licensed server-side solutions in creative ways (for example, many ISPs supply SharePoint on a per head rental basis). If Microsoft’s web apps are sufficiently adept, many enterprises might opt for the technical and budgetary convenience of serving applications via a browser than installing every bit on every lap-and-desktop in an organization. Microsoft would certainly approve of monthly/quarterly/annual rental fees since a steady flow of greenbacks makes wallpapering Bill Gate’s den a simpler process.

The question is if enterprises will bite.

Part of technology marketing is knowing how IT technoids work, or would work if they had the nerve to assassinate their end users. After costs considerations are sacrificed, IT’s primary motivation is pain avoidance. The two greatest sources of pain for IT staffs are end user stability and systems stability. Ignoring that no end user is mentally stable, the topic turns to their computing environment stability. Web sourced apps have a number of end user stability advantages, including the inability for end users to augment the program with unlicensed software (a.k.a. malware) and the uniformity of having all users executing the same program and revision.

There will be fewer bald and bleary-eyed IT admins if web apps become the norm.

But no enterprise shop can go 100% web application. One Forrester Research analyst noted that “Our own research shows that a good portion of information workers rarely use all of the tools in their Office arsenal.” True, but there are power users and road warriors aplenty, and they likely can/will not switch to web apps. Web office applications are (likely) less feature soaked than their binary buddies, but are unlikely executable from a back seat somewhere between Baoji and Baoshan.

This creates a conundrum. Since enterprises have invested mega money into desk-lap-top maintenance systems, would they double their drudgery in order to rent apps? Since upgrade cycles for lap-desk-flat-top applications is about five years, and that the average upgrade cost for a bulk buyer of Microsoft Office suites is around $150, the breakeven costs (ignoring maintenance infrastructure and ulcer medications) is about $2.50 a month per user.

Which is where IBM got their $3/head price.

Web hosted applications may be the wave of the future, but current moment will retard any inevitability. There is a lack of marketing connection at play – a lack of urgency, a dearth of desirability, and a shortage of savings.

It is insane to declare web apps DOA, but one wonders why outfits like IBM and Microsoft sense getting products to market is necessary. I think their main motivation may be less demonstrated enterprise demand and more Google’s goading.

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Lock-in as a marketing strategy is alive, well, and unfortunately growing.

For dot-communists and those raised in the era of Linux, vendor lock-in is the art of keeping customers captive. By making people commit to a technology, and thus raising the pain of switching away from said technology, vendors cause customers to linger even when they do not want to. I know CIOs who for decades have blustered against Cognos and being locked into stiff annual license fees for PowerHouse, Cognos’ ancient 4GL.

Yet they pay the fee every year knowing that rewriting thousands of lines of PowerHouse code is pretty pricy too.

Another variation of vendor lock-in is commonly called upgrade robbery. I encountered such a scam this week when I noticed my ancient (circa 2003) smartphone buttons started to stick. In order to upgrade to a newer smartphone, AT&T insists that I buy $720 worth of wireless data that I do not need or want. My options are to switch carriers (who currently require the same data plans), or buy an unlocked phone for which AT&T may or may not automatically add a data plan for using. More maniacal still is that mandatory data plans are designed to condition cellular subscribers into using data services. Thus, at the end of a two year data engagement, the luxury of wireless data will have become and necessity.

Pretty pricy phones.

Amazon also has a bit of a lock-in with their popular Kindle ebook reader, though their version of lock-in is somewhat friendlier. The data format for Kindle books is proprietary, and Amazon is in no hurry to openly license the format to competing hardware makers. Buying an Amazon ebook means only owning Kindles for reading it, which if you are a typical bibliophile or literary pack rat means you have one and only one upgrade and replacement path – Amazon lock-in.

Pretty pricy e-paper.

Oddly, lock-in rarely lives long, with Cognos being an obvious exception. Customer lock-in is a strategy that invites competition, either with competing proprietary products, or more insidiously with open technology. Just ask Steve Balmer if Linux has caused Microsoft any problems in the market (and if you want to see Steve toss another chair, ask him if Vista caused Microsoft any problems in the market).

Already we see cracks in the each of the lock-in strategies. AT&T and their enabler Apple are repeatedly prodding Google to go nuclear, and recent rumors indicate Google may break the upgrade lock-in mechanism. Google is allegedly entering the hardware business and launching their own phones, to be available unlocked and at retail. Since G-phones are just as slick as iPhones, and since their open source souls allow for a broader range of potential applications, this is a market changing event. In the short term AT&T, Verizon and other lock-in experts will likely gouge customers slipping an unlocked G-phone onto their networks.

And that will be a mistake.

Smaller and hungrier carriers have already adjusted their voice plans to compete with the confusing and costly packages offered by the likes of AT&T and Verizon. Smaller carriers already offer flat-rate, unlimited voice plans and are earning sufficient revenues to expand their coverage maps (the chief differentiator of the major carriers). With over 70 GSM carriers in the U.S., the potential for competition is huge – vendor lock-in is thus a poor long term strategy.

This is where Google aggravates this situation. Currently, unlocked phones are a small business (albeit growing). Amazon sells unlocked phones, but has a special FAQ page due to the confusion factor and a general lack of iPhone-level lust for unlocked gizmos. A Google phone on Wal-Mart shelves with Google-simple instructions for swapping SIM cards will change the demand side of the equation. This will help the smaller carriers and tempt one of the major carriers to drop the data plan requirement.

Likewise, Barnes and Noble is teaming up with Adobe to promote open standards in ebook data formats, directly attacking Amazon’s Kindle lock-in and opening the ebook reader market to manufactures everywhere.

So when should a vendor employ a lock-in strategy? It depends on how much of your soul you are willing to give the Devil, but it does have a place in growth strategies. In new markets where you are taking large risks by inventing and promoting new product concepts, lock-in may be necessary to temporarily forestall competition and to guarantee some degree of recurring revenue. Amazon’s Kindle is a good example. Though not a new concept, Amazon was attempting to popularize ebooks and needed to assure that consumers would come to Amazon to buy the books as well as the reader. Publishers also need some assurance that the market would not be confused by too many products spread over too many vendors.

But lock-in is short lived – aside from mainframes and Cognos PowerHouse – and should not be a strategy on which to pin all future hopes. Amazon should have moved toward an open document format with the Kindle II, which in the short run would have cannibalized hardware sales while solidifying Amazon as the place for ebooks and growing the ebook market.

I’d have more to say, but I want to spend some time browsing unlocked phones on Amazon.

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I was unsurprised by Adobe’s Omniture acquisition.

Until I saw the price they paid.

Adobe is sitting on stacks of cash. As is routine with tech companies, cash fat firms buy other outfits during recessions when acquisition prices are normally lower. Omniture was not suffering, so Adobe’s $1.8B buy may be the right price to pay for this strategic move. I asked my acquaintances in both Adobe and Omniture about this … and they wisely said nothing, forwarding me links to official press releases.

I obviously need sneakier friends.

The stock market didn’t think it was a good short-term move. Despite beating the street’s estimates on quarterly earnings, Adobe shares dropped more than 6% on the announcement. Perhaps short-term selling of Adobe stock is warranted because their software sales revenues continue to suffer during the recession. But in the long term Omniture’s less volatile SaaS revenue streams will compliment and amplify Adobe’s Wall Street value.

This is a marriage that should have happened long ago. The enterprise value of analytics is undeniable. It is also an integration nightmare, with many sloppy and incompatible ways of extracting traffic data and many forms of user interaction that are not (yet) measurable at all. Merging the lead source of web creativity with serious business analytic capabilities will soon enough offer a seamless and automatic integration of the two.

Automatic is the key word.

Adobe tools will soon make web analytics a de facto reality. Web engineers and content creators will invisibly have analytics hooks embedded in their work. When management decides to track web activity, all things being equal, they will buy analytic services from Adobeture because (duh) it is already enabled. Adobe is in effect turning every Dreamweaver, Creative Suite and Flash animator into an Omniture sales person.

The other strategic issue that the media missed is microanalytics. Omniture has always been impatient with the state of analytics, venturing from web into mobile and into very tiny parts of the web experience. This is where Adobe will leverage Omniture in a way Omniture could not risk doing it alone. Adobe will be able to generate analytics tags within all Adobe web elements. AJAX calls, Flash files, Cold Fusion back-ends, PDF files. The richness and lower level of detail that will soon be available to marketers will provide very precise insights into web behavior.

This has interesting implications for the market. First, Adobe has by and large been the favored environment for creatively minded web workers and for many enterprises. Integrating Omniture doubles there strength therein. People will have to argue against management to not adopt Adobe for maintaining their web presence.

In turn this means few enterprises will opt for another analytics vendor. This puts great pressure on the few remaining players. Google will own the bottom of the analytics market and Adobe will own the top. WebTrends may get squeezed out completely.

Most important though is how in the long run this will affect marketing. Real-time analytics combined with authoring and host-side tools will allow for instantly aggregating and simultaneously individualizing visitor activity. Hypothesize for a moment that you can tell not only what web page a visitor viewed, but what Flash movie he watched, which part he rewound to, if he stopped watching before the call to action, and what lines in a PDF he copied to his clip board. This level of precision, especially if tied to real-time server-side functions, gives marketers more control over the user experience and better ability to guide them to a specific action.

I’ll wait for Adobe sock to settle, then I’m adding a few shares to my long-view portfolio.

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