Marketing Memos

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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Who would have thought Oracle would lead the SaaS market.

Not that I hold perfect confidence in the source of these numbers, but a report at venture capital focused SandHill.com shows Oracle at the #1 slot for companies using and considering vendors for SaaS deployments.

In fact, top-shelf companies fill the top shelves of the SaaS vendor list. Oracle, SAP, Microsoft are all players. The early-advantage entry — SalesForce.com — scores a trailing 11% compared to Oracle’s 16% and Microsoft’s 14%.

Sarah Friar — the Goldman Sachs analyst who wrote this report — tells me that the focus of the survey was at the application level. I would have automatically believed her numbers had  databases and infrastructure management tools been included. But focused on applications, Oracle’s dominance caught me by surprise.

This spells bad news for SaaSy start-ups. Mature markets are dominated by an average of three vendors. This is based on some groundbreaking research by General Electric in the 1960’s and my personal market observations. When three vendors together consume 2/3rds or more of a market, that market is definitively saturated.

Though Sarah’s report did not break-down the sources of these market share numbers, we see four competitors taking 53% of the current SaaS market (which may grow as time continues). This is far from saturation point, but the market space is dwindling and the gorillas are starting to beat their chests. This means in certain segments of SaaS, opportunities will begin to shrink — at least in the B2B SaaS space. The consumer space will remain a Wild West frontier for quite a while.

Does this mean you should abandon your SaaS start-up and stash your stock option warrants in the toilet paper dispenser? Not at all. Oracle has to buy somebody. Like Microsoft before them, Oracle is slowly slipping from the innovator caste to that of aggregator, conglomerate and Borg. This is a natural effect of the changes in the B2B technology markets and still remains your best exit strategy.

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I want to brag about a client of our for something they did on their own (kinda).

We have had a relationship with Open-Xchange since our days advising SuSE Linux on their North American marketing strategy. Open-Xchange is groupware with highly usable features uncommon in other groupware offerings and with all components well integrated to make collaboration dirt easy. I routinely recommend the product to everyone I meet.

Like many companies they started by selling on-site server software and had a tough time of it. Going toe-toe-toe with the likes of Microsoft Exchange, Novell Groupwise and Lotus Notes is no easy feat. Despite a better over-all design and vastly better usability, Open-Xchange did not find the huge adoption it deserved.

This was in part because the high end of the market was saturated. Online collaboration was recognized by top enterprises as a necessary tool. Thus the installed base was dominated by the market’s gorillas by the time Open-Xchange was whelped, much less by when it was refined and differentiated. While SuSE as a reseller, we devised what wedges we could into the established enterprise markets, but recognized and advised Open-Xchange that the down market was their mid-term objective.

The problem is that the SMB market is running away from self-managed IT faster than Rodney King from an LA Police officer. Whenever possible SMB customers are opting for managed services. I can’t blame them — here at Silicon Strategies Marketing we outsource everything IT. In fact we regretted not being able to use Open-Xchange ourselves due to the inability of our hosting service to provide a Java servers.

So Open-Xchange made the decision a while back to make a SaaS version of the product, offering it to Internet service providers (ISPs) and hosting companies as a value-add to their customers. In other words, they found a relatively unexploited niche for addressing the needs of SMBs through partnership.

Their strategy is working.

This month you can acquire Open-Xchange via the largest of hosting services fronting in North America, that being 1and1. Unfortunately it has been re-branded as MailExchange, though Open-Xchange did receive some on-page branding rights. frankly, “MailExchange” short-sells the capabilities of the product.

Many things make Open-Xchange’s revised strategy work:

• It provides outsourced services to SMBs, the sector of the market where current strong demand and lack of an installed base exists.
• It provides the solution in the form that target buyers (SMBs) want to acquire - as an outsourced service.
• It gets 1and1 and other hosting companies to do the heavy sales work.
• It gets the product and brand to the public in the most direct way possible.

The marketing lesson herein is that knowing and serving the available/addressable market — the market not saturated by gorillas — is critical to making traction. Open-Xchange identified and created products for that market, and deserves kudos and success for doing so.

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You gotta love loath Larry.

Ellison’s Oracle has been on a buying spree, snapping up enterprise infrastructure and application companies at a rate that makes even aged Silicon Valley watchers blink. Nothing, not even the Federal Trade Commission, could sate Oracle’s acquisition gluttony. Only Microsoft was outside of Ellison’s financial grasp (or perhaps simply dislikes peddling highly defective products).

The array of acquired companies is broad in scope. BEA, Hyperion, Agile, Siebel, PeopleSoft, Innobase … and the list goes on. Two common themes appear in these acquisitions: the acquired products are either essential to the management of IT, or a set of acquired products comprises all the top-tier competitors. Larry has single-handedly consolidated much of the industry and captured most of the server stack above the operating system.

In other words, Larry has the average enterprise CIO by the short-and-curlys.

Throughout Larry’s market-vacuuming process, many competitors and many more customers expressed fears Oracle was showing monopolistic tendencies, with the inevitable outcome being that prices would rise given an artificially shrinking market.

So, it is entirely unsurprising that Oracle is now jacking-up prices 15-20% … without adding any additional value. Polite people would call this robbery. What impolite people call it is not printable.

Marketing lesson #1: When the switching cost for your customers is very high, then you can steal from them … for a while.

WebLogic, a product acquired by Oracle in their recent BEA plunder, has some unique features that make application servicing more effective. Once these features are used, it is expensive (if not impossible) to implement a different application server. This is why Oracle bumped-up WebLogic pricing 47%. Databases are even more fundamental in the server stack, and Oracle’s DBMS prices were lofted 20%.

Such vendor lock-in drives a lot of revenue in the IT technology market, and is the one gripe most often uttered by CIOs and CTOs. Surveys conducted here at Silicon Strategies Marketing indicate that a prime driver behind IT adoption of Open Source is the liberation from lock-in. However, the higher the switching costs the less likely it will ever occur. For example, much of the banking industry’s current technology is the ugly remnants of 1960’s IBM mainframes — billions of lines of COBOL code are just too expensive to migrate.

Marketing lesson #2: Things do change, sometimes slowly.

One of the reasons enterprises love Linux is that they have faced the vendor lock-in problem for decades, and now have tools for avoiding it in the future. As businesses die and are born, the newcomers learn from the suffering of those who came before. Google runs almost entirely on Open Source as does Yahoo and other new millenia firms. Indeed, their business models could not survive if they had been the groom at an Oracle shotgun wedding.

Larry’s larceny will work — his customers simply don’t have a short-term choice. But it does add pressure (especially in these troubled economic times) to investigate alternatives. Existing companies will avoid committing new projects to Oracle, and new companies will run from Oracle faster than a politician runs from campaign promises.

This will accelerate adoption of more Open Source projects, and in the process improve them. These projects will rapidly come to parity with the commercial products, or even surpass them in functionality (anyone looked at Firefox lately). Larry will make a(nother) lode of lucre in the short-term, but …

Marketing lesson #3: Arrogance (and overly aggressive pricing) will aid your competition over the long-run.

Buy Oracle stock, but be prepared to dump it a couple of years from now.

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One problem with Linux is that nobody really knows how big it is. Like any other virus, you have no idea exactly how many bodies it has infected.

Ignore the sales numbers from Novell and Red Hat. They tell only part of the story, namely the demand by larger institutions who must ensure success and have support. These sales figures do not even come close gauging unsupported replications of subscribed distributions, hosted Linux (which often is self maintained), departmental servers, all the OpenSuse and Fedora installs, and the occasional renegade Linux laptop.

And those are the small markets.

I’ve been watching the embedded space more and more. Silicon Strategies Marketing has clients in the mobile phone business, the Linux business, and now in the embedded Linux space. We have been mapping where embedded Linux is finding traction, and some of the issues within that market.

The question is “where is embedded Linux not being used?”

• A relative of mine who works on Defense Department and “spook” contracts notes that Linux is the favorite platform for all military and intelligence embedded applications. As he phrased it “We can’t afford to reboot a spy satellite every few hours.”
• Linux is used in routers from a lot of different manufactures. Networking is a core Linux strength and with an embedded web server, it is easy to create user friendly interfaces.  And now everything needs to be network savvy.
• Phones are just starting to use Linux, but the open nature of the devices and the ability to plop new native applications on them is a strong differentiators. This is part of the reason Google went with Linux for G-phones.

Devices need to be smarter than in the past. This means they must have logic. It is far better to use an embedded operating system that has broad support. That really means Linux or Windows.

Linux wins mainly for two reasons:

1. It is more stable. Google wouldn’t run their entire product on Linux if it weren’t.
2. It is modular and tiny.

It is that last point that is perhaps most important. Much has been made of Window’s lack of modularity. WE (Windows Embedded) is considered by many to be a poor hack of XP, where fragility was induced by wholesale ripping apart of the operating system. I cannot comment directly, but this is the growing reputation. Some acquaintances of mine at Circuit City’s HQ said a WE deployment on cash registers was abandoned due to endless problems, which supposedly were induced by removing pieces of XP and seeing interwoven parts of the OS die.

Linux is by design module from top to tail. Much of Linux’s success has come by its ability to upgrade (or roll-back) discreet parts of the total package without disrupting other parts. This also means you can remove big chunks of unneeded functionality without much work or fear, creating custom versions of the OS.

This is why Linux will own the embedded space. When whittled down, the Linux kernel can be nearly 10oKB small, which is tiny. Total RAM requirements can be less than 4 MB. This makes putting Linux into nearly any device possible. Add the ability to customize all upper-level packages to operate well within small-device space, and you have something with which Microsoft cannot compete and simultaneously chase dreams of acquiring/integrating Yahoo.

Here’s the kicker: more smart devices are hitting the market all the time. Your dashboard (which soon will have integrated GPS navigation DVD player, Bluetooth interfaces, and more) is embedded. Your cell phone is embedded. Your home network is built on embedded devices. Your oven might require embedded logic to keep you from burning dinner … again. MP3 players need embedded OSs.

The list is endless and growing. The question then is “How do I profit from this?” That’s my secret for now.

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