The Demise of Traditional Software - 3Q07

Some of you know that I’ve decided to track the demise ;-) of the traditional software market on a quarterly basis using IBM’s WebSphere branded revenue as the basis. I use the WebSphere division for no other reason than it’s the part of IBM that I report into. Here are the 2Q07, 1Q07, 4Q06 and 3Q06 posts if you fancy. IBM announced 3Q07 results today.

A few points of interest from 3Q07:

1. IBM Software grew at 6% (or 3% at constant currency: i.e. if currency exchange rates were fixed to equal their 3Q06 rates)
2. WebSphere branded middleware grew 10%
3. IBM’s other Software families grew 9%, 3%, 5% and 9% for Lotus, Rational, Tivoli and Information Management respectively

WebSphere middleware growth of 10% is the lowest we’ve reported in the past year. However, considering the growth we attained in 3Q06 (i.e. 30% Y/Y vs. 14% in 3Q05 & 3Q04), it’s not surprising that 3Q07 growth wasn’t in the 15%+ range. Remember that the 10% is growth off a large revenue base, which unfortunately, IBM does not make public. But, if you have access to Gartner or IDC data, you can easily get to a ballpark number of total WebSphere branded revenue.

WebSphere Branded Middleware Quarterly Revenue Growth:

Quarter	Y/Y Qtr Growth	From:
1Q04	24%	Source
2Q04	N/A	Source
3Q04	14%	Source
4Q04	18%	Source
1Q05	11%	Source
2Q05	18%	Source
3Q05	14%	Source
4Q05	4%	Source
1Q06	26%	Source
2Q06	17%	Source
3Q06	30%	Source
4Q06	22%	Source
1Q07	14%	Source
2Q07	28%	Source
3Q07	10%	Source

Fourth quarter is going to be interesting!

 

IBM’s Outsourcing Patent Application Withdrawn

Net/Net: The patent application for “outsourcing of services” was filed 8 months before a new IBM policy to reduce business method patents. This one slipped through the cracks of the “new policy”. Our bad.

Via Bob Sutor’s blog (oldish news):

“IBM has put into the public domain and withdrawn its application for patent number US2007/0162321 - Outsourcing of Services. This patent application covers analyzing work flows, skills, economic costs, etc. Here’s why we are withdrawing it — IBM adopted a new policy a year ago to sharply reduce business method patent filings and instead stress significant technical content in its patents. Even though the patent application in question was filed eight months before the policy took effect in September, 2006, had the policy been in place at the time, IBM would not have filed the application. We’re glad the community pointed this application out so IBM could take swift action.”

Two IBM posts in a row…sorry. I thought you’d want to know that we (as is the case with most vendors) generally listen to the community. We (as in all vendors) may not always act, but we listen.

 

IBM IMS, 40 yrs Strong

I ran into this piece of PR from IBM today.

“Initially developed to power the Apollo space program, IMS is recognized as the industry’s first modern database and transaction management software. Over the past three decades, the reliability, security and performance of IMS has led it to become the backbone for much of the world’s corporate data. In fact, almost ninety five percent of Fortune 1000 companies use IMS for their most critical IBM System z data management needs with more than 50 billion transactions running through IMS databases on a daily basis.”

I only highlight it because IMS (database & transaction processing system) is nearly 40 years old and customers still see value in it. IMS has added new features and capabilities to remain relevant to customers, but 40 years is a long time for any piece of information technology. Alternatives to IMS that have emerged, but few (if any?) provide the performance and reliability of IMS for a certain class of applications.

Just another reason why a one size fits all approach in the IT world doesn’t make much sense.

 

IBM Launches Lotus Symphony

InfoWorld reports:

“IBM is to offer the world a free word processor, spreadsheet, and presentation program in yet another bid to upset the dominance of Microsoft’s Office suite.

…

IBM says it will contribute 35 programmers to the Symphony-cum-OpenOffice development effort….”

The Lotus Symphony FAQ states:

“Lotus Symphony is based on the Open Document Format (ODF) standard-which means you’re not locked into proprietary file formats, software licensing agreements and upgrades”

Lotus Symphony products are standalone versions of products that are being bundled in Lotus Notes 8, and are built from OpenOffice technology.

The download process requires that users enter an IBM developerWorks or PartnerWorld ID. I know this sucks, and we deal with this issue when users want to download WAS Community Edition. However, we’re required to adhere to export laws, exclude downloads to embargoed countries (i.e. North Korea), and IBM’s legal team is a little more cautious when distributing OSS-based products for some reason ;-).

 

Using OO.o to Beat MSFT in Other Markets

I just read the JS post about the continuing rise of OpenOffice.org.

Why do vendors like Sun, IBM (officially now), Google, etc. support OO.o? Well, providing customer choice and openness are two of the key reasons quoted. These are definitely great reasons that we all want to see OO.o succeed.

Most vendors backing OO.o compete with Microsoft in markets other than Office Productivity software. So, what about the competitive benefits for vendors supporting OO.o? Let’s face it, $1 diverted from MS Office could become $0.70 diverted from the budgets of Microsoft’s other business units.

Here’s a look at Microsoft’s 2006 FY financials by reporting division:

- MS Office is inside of “Information Worker”
- MS Windows Client operating systems are inside of “Client”
- MS Windows Server operating systems are inside of “Server & Tools”
- MS SQL Server is inside of “Server & Tools”
- MS Ad revenue is inside of “MSN”

When you look at the operating margins of Microsoft’s business units, it’s quite easy to see why attacking MS Windows profits with Linux and MS Office profits with OO.o is the strategy of choice for vendors that compete with MS in other markets.

PS: I should state: “The postings on this site are my own and don’t necessarily represent IBM’s positions, strategies or opinions.”

 

Is Sun Exiting the Server Business?

Dana’s post on the Sun & IBM deal has two very interesting statements:

“This is part of Sun’s exit strategy from the server business.”

And:

“In many ways, Sun is becoming Red Hat.”

On the conference call, Schwartz & Zeitler spoke about early work to get Solaris running on IBM mainframes. This work is very early and nothing may come of it, but it was apparently kicked off because of customer requests. Keep in mind that RHEL & SLES both run on IBM mainframes already. Maybe Dana’s right; Sun is becoming Red Hat.

Dana’s prediction on Sun’s server exit centers on:

Why stay in the hardware business with X percent profit margins when the software business has nearly 3X the profit margins? (Based on IBM results - See pg. 27/124 )

With KKR’s investment in Sun, this is a question I’m sure has been asked. However, such decisions are never so cut and dry. The majority of Sun’s revenue comes from their hardware business. I wasn’t able to find a HW/SW/Services split of Sun’s revenue. If you take their FY06 revenue of $13.068B and use IDC’s estimate of 2006 Sun software revenue you end up with a little less than 15% of total revenue is driven by Software. What’s more, the majority of Sun software revenue is attached to Sun hardware. While deals like this one with IBM will help to reduce the SW+HW linkage, I suspect Sun software revenues will remain largely (85%+ ?) driven from Sun hardware. Remember that Schwartz claims that Sun isn’t a hardware company, they are a System’s company. If Sun’s goal is to be a System’s company, then there is no way they can “exit the server business”.

I think that this deal is simply Sun’s realization that Solaris is a valuable asset that has been tied to Sun hardware for the most part. This would be fine if the market only used Sun hardware. According to Gartner estimates, in 1Q07, Sun’s server share was 10.3% of the total market spending. Remember when Apple came out with iTunes & the iPod for Apple systems only and then expanded to support Windows to address a larger market. Same story here; it just took a little longer for Sun to consider expanding the market reach of Solaris.

So, maybe Sun is becoming Apple? Nah ;-)

 

IBM to OEM Solaris on x86 Servers

I really try not to write about IBM news but this one is more about Sun than IBM…..

IBM & Sun announced:

“IBM will distribute the Solaris Operating System and Solaris Subscriptions for select x86-based IBM System x servers and BladeCenter servers to clients through IBM’s routes to market.”

This definitely sounds like Sun isn’t competing with Red Hat ;-) Note that I believe that there is nothing wrong with Sun (or anyone) competing with Red Hat. Competition is good for customers and good for vendors.

The deal is essentially an OEM relationship in which IBM sells the hardware and, based on customer requirements, could sell Linux, Windows or Solaris. If customers choose Solaris, the support subscription is delivered by Sun. IBM is compensated by Sun for their part in driving the sale of the Solaris support subscription. Note that the deal is different than what IBM or HP are currently doing with Solaris on x86. Yesterday, neither IBM, nor, HP were able to OEM or sell support subscriptions to Solaris on x86 servers. Today (well in 90 days apparently?), IBM becomes the only OEM vendor for Solaris on x86.

I was pleasantly surprised to hear Schwartz and Zeitler (IBM) that this deal is about customer choice. A few questions on the conference call asked:

“Won’t this deal increase the likelihood of an IBM HW customer who chooses Solaris to later move to Sun hardware? Or a Solaris customer who chooses IBM HW to later choose AIX or Linux?”

The answer from Sun & IBM was:

“You’re better off to meet customers with solutions that they are seeking versus trying to restrict the customer to one stack or another”.

Choice is a wonderful thing.

 

Server and Data Center Energy Efficiency

Slashdot reported that the US Environmental Protection Agency (EPA) delivered a study on Server and Data Center Energy Efficiency. Here is the 13 page summary and the full (133 pg) report. Here are a few highlights from the summary:

“The energy used by the nation’s servers and data centers is significant. It is estimated that this sector consumed about 61 billion kilowatt-hours (kWh) in 2006 (1.5 percent of total U.S. electricity consumption) for a total electricity cost of about $4.5 billion. This estimated level of electricity consumption is more than the electricity consumed by the nation’s color televisions and similar to the amount of electricity consumed by approximately 5.8 million average U.S. households (or about five percent of the total U.S. housing stock).”

“Under current efficiency trends, national energy consumption by servers and data centers could nearly double again in another five years (i.e., by 2011) to more than 100 billion kWh (Figure ES-1), representing a $7.4 billion annual electricity cost.”

The EPA presents scenarios for energy use by servers & data centers in the US from 2007-2011. Based on increasing degrees of server consolidation, adoption of energy efficient servers and power management, the EPA predicts that the *annual* cost savings in 2005 dollars (i.e. excluding inflation) would be between $1.6 to $5.1 billion in the US. Yes, I know that $1.6B to $5.1B is a small figure when compared to the total US IT market spending on energy. I need to think about this more. I know that the “you’re saving the planet” justification isn’t going to fly with everyone (although it would with my sister-in-law :-). I believe that the benefits of cleaner IT will come down to cost savings even with higher rates of IT usage. I just don’t have the data to back this statement yet.

Some of you may have caught the news last week that IBM consolidated over 3,900 servers onto about 30 mainframes running Linux. The move is expected to reduce server footprint by 85% and cut costs by $250M over 5 years. Very cool that Linux & mainframes are being used to save $$$ and reduce the environmental impact of IT.

This is another step in IBM’s Project Big Green:

“The project, involving high-density computing systems that use server and storage virtualization, and energy-efficient power and cooling systems, is part of IBM’s goal to double its data-center capacity by 2010 without increasing energy usage or carbon emissions.”

It will be interesting to see how the server consolidation and virtualization trend impacts Linux adoption. On one hand, Linux on higher-end servers should be attractive to customers running Unix applications and seeking energy and cost savings. On the other hand, Linux has enjoyed its largest success on commodity servers that run at very low rates of utilization. Consolidating commodity servers onto a higher density, larger, more efficient server with higher utilization shouldn’t impact the number of Linux licenses. So maybe the net impact would be minimal on Linux adoption?

Thoughts?

 

The Demise of Traditional Software - 2Q07

Some of you know that I’ve decided to track the demise ;-) of the traditional software market on a quarterly basis using IBM’s WebSphere branded revenue as the basis. I use the WebSphere division for no other reason than it’s the part of IBM that I report into. Here are the 1Q07, 4Q06 and 3Q06 posts if you fancy. IBM announced 2Q07 results today.

A few points of interest from 2Q07:

1. IBM Software grew at 13% (or 9% at constant currency: i.e. if currency exchange rates were fixed to equal their 2Q06 rates)
2. WebSphere branded middleware grew at a very healthy 28%
3. IBM’s other Software families grew 12%, 11%, 33% and 21% for Lotus, Rational, Tivoli and Information Management respectively

I stress very healthy because 28% growth is pretty awesome when you’re growing from such a large revenue base, which unfortunately, IBM does not make public. But, if you have access to Gartner or IDC data, you can easily get to a ballpark number of total WebSphere branded revenue.

WebSphere Branded Middleware Quarterly Revenue Growth:

Quarter	Y/Y Qtr Growth	From:
1Q04	24%	Source
2Q04	N/A	Source
3Q04	14%	Source
4Q04	18%	Source
1Q05	11%	Source
2Q05	18%	Source
3Q05	14%	Source
4Q05	4%	Source
1Q06	26%	Source
2Q06	17%	Source
3Q06	30%	Source
4Q06	22%	Source
1Q07	14%	Source
2Q07	28%	Source

 
IBM WebSphere Application Server Results:
Some might reply: “come on Savio, you expect me to believe that in the face of open source competition, the application server business is growing at all? Maybe WebSphere Branded Middleware is growing, but the underlying application servers surely aren’t, right?”

IBM provided WebSphere Application Server’s yearly growth in 2006, so we can compare that figure to the growth of WebSphere branded middleware in the table above:

From pg. 34 of IBM’s 2006 Annual Report :

“Revenue from the WebSphere family of products increased 23.3 percent (22 percent adjusted for currency) and was led by doubledigit growth in WebSphere Application Servers (25.3 percent) and WebSphere Business Integration (22.7 percent) software versus 2005″

Translation: The WebSphere Application Server family revenue growth outpaced the figures that you’ll find in the table above.

Yes, even in the face of open source competition, the WebSphere Application Server business is growing at 2-3x the market. How? We’re helping our customers address their business needs to achieve success. In some customer situations, we help customers achieve success through the use of WAS Community Edition (WAS CE). In other situation we help customers achieve success through the use of the traditional WebSphere Application Server family. The results are pretty clear.

 

Is money a good measure of OSS success?

This comment from Stacey (Hyperic) got me thinking…is money a good measure of OSS success?

Before I go on, let me clear something up. My 1.8% comment was not meant to minimize the importance of OSS to the software market or to customers. I disagree with the “world view” that OSS is going to completely revolutionize the software market and lead to the death of Traditional software as we know it. I’m an advocate of OSS & Traditional software living happily together to meet the varying needs of customers. I completely believe that all major software vendors will have an OSS story and a Traditional software story. It’s not a “them vs. us” situation. It’s a “we are them” situation. I’ll fall back on Marten Mickos’ comments from OSBC claiming that there is no OSS business model. That we are all participants in the software market.

Is money a good measure of OSS success? In our free market society, I believe it is. This does not minimize the importance of other measures of success.

Let’s look a little deeper at OSS impact on software spending. I can think of 3 situations:

1. OSS vendor revenue from using OSS with support/license
2. OSS usage erodes Traditional software revenue
3. OSS usage creates new users because of minimized barriers to adoption

Clearly, software revenue shifts from Traditional software to OSS when customers decide to use OSS with support/license. This spending would be counted in the 1.8%.

Next, I accept Stacey’s point about the importance of market spending that OSS erodes from the Traditional software market. But if you ask CIOs about their IT budgets over the past 5 years, most will tell you that they’ve grown. Few will tell you that their budgets have decreased by 26% (i.e. in line with OSS vendor revenue growth predicted by IDC). When a customer decides to use, say MySQL for free over Oracle DB, the savings are generally spent somewhere else in the IT department. In the above example, Oracle loses some revenue, but a large portion of those savings are spent on the backlog of projects that haven’t been funded to date. As a result, another vendor, maybe an OSS vendor, but more than likely (as the size of the software market will attest), a Traditional vendor gets new revenue. This could actually be a situation where the use of OSS drives further spending on Traditional software. I can tell you that we’ve seen this in spades with WebSphere Application Server revenue. Customers like choice, a one size fits all model is really only for sock vendors.

Now, let’s deal with the situation of OSS creating new users who have access to software they previously didn’t have. Again, MySQL users are a great example. Heck, I’m a great example. I would never have used Oracle or DB2 (b/c of complexity, fear, costs - remember, I’m a “hello world” programmer at best), but I do use MySQL for pet projects. Does my use of MySQL represent revenue loss to Oracle, DB2 or SQLServer? One can make the argument that my familiarity with MySQL represents a potential future customer for MySQL. I doubt that is the case, but if I play along, then my potential future spending with MySQL would be represented in the 1.8% also. (Hey, don’t ask me how IDC or other analysts can predict what I, or others, will do in 5 years!)

What’s my point? OSS is very important to users, customers and software vendors. It is however, one component of the software market. Software vendors that accept this reality and build strategies to leverage OSS and Traditional software are the “future” (p=0.8). Gartner customers will recognize this form of pontification :-)