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.

 

Does Adobe Want to be an Office Productivity Apps vendor?

It is funny how Matt and I can read the same article and come up with different conclusions.

I read this article and thought that Adobe’s entry into the Office applications market has little to do with OSS or Open Standards, so no need to blog about it here.

Matt says:

“The only thing better would be if Adobe, Apple, and OpenOffice could get together….In fact, don’t you think that it makes a lot of sense for Apple to acquire Adobe, given the similar corporate mentalities/competencies? Me, too.)”

Apple, likely the most closed vendor on the planet is supposed to be the “last great hope against Microsoft’s Office franchise”? Maybe Matt is down to half a glass of OSS Kool-aid daily and doesn’t care if he’s supporting a Traditional or OSS vendor in the “good fight against Microsoft’s hegemony”.

All kidding aside, I can’t wait to see what Adobe has in this market. I am a MS Office user. I tried OpenOffice and even Google Docs, but neither seemed to fit my needs vs. the tradeoffs to switch. I wonder if the problem is that OpenOffice and Google Docs feel like they were designed by developers. On the other hand, Adobe products feel like they were designed by designers. Watching an Adobe AIR demo or app created with AIR most of us think “ooh, ahh” (Note: I hate reading text on most Flash websites - I just needed to say that).

As Cote says in the Wired article:

“It’s not a technical question, it’s a cultural question,…All the geeks and everyone like myself would love to play around with an Office competitor from Adobe to see what that would be like. But when I talk to normal office workers who use Microsoft Office, they don’t get all warm and tingly like I do with the prospect of different office software….People who use Microsoft Office are into using Microsoft Office.”

How true.

It’ll be interesting to see what Adobe does here. Putting on my strategy hat: Entering the Office Apps market is only a step towards their broader goal to drive extensive adoption of Flex and AIR. So, look for an open API that allows designers/developers/ISVs/customers to extend the Adobe Office suite. By expanding the reach of Flex & AIR, Adobe can sell tools (not just IDEs) to designers & developers that want to create AIR apps. In essence, AIR (and Flash before it) is a runtime environment just like the Java JDK and MS CLR. It just so happens that AIR is for client-side apps (vs. predominately server-side for JDK) that look sweet and deliver ease of use vs. traditional client-side apps (i.e. predominately MS CLR). As this occurs, I suspect that customers and vendors will start looking for a standards body around the AIR runtime technologies. So, maybe there is a Standards tie to this story after all :-)

 

VMware IPO

VMware IPO’s tomorrow and is estimated to be oversubscribed by as much as 25x the number of shares available according to MorningNotes (via TheStreet.com).

The 33M share IPO at $29 will bring in $957M, and that’s only for an 11% stake in VMware. EMC, who purchased VMware for $635M in 2004, will retain the majority of the remainder. I don’t know if the Intel & Cisco investments in VMware are from the 11% or the 89%. In any case, at $29/share, the market is valuing VMware at $8.7B. (Just fyi, this would represent a 100%+ annual rate of return for EMC over the past 3.5 years). Considering the anticipation behind this IPO, it wouldn’t be a surprise to see the value increase well into the $10B range before this week is up.

Now here’s the fun facts:
- Founded in 1998
- Revenue increased 92% YTY in two most recent quarters
- On track to break $1B in revenue for the fiscal year (a little less than 9 years from founding)

To keep things in perspective, Red Hat was founded in 1994 and is expected to break $1B somewhere between 2010 and 2015 (based on High & Low revenue estimates from Financial Analysts). These two dates represent 16 & 21 years from the founding of Red Hat to hitting $1B in revenue. Yes, I understand that OSS drives revenues on a different timeline than Traditional software. But I doubt this matters much to an investor or a VC who is solely evaluating returns in the shortest period of time. Also, Red Hat’s valuation/market cap is $4.21B today and was a maximum of $6.1B in the past.

The VMware valuation of $8.7B+ seems out of this world to me, but I hadn’t realized that they were on track to hit $1B in revenues. It’ll be interesting to see how VMware reacts to OSS virtualization alternatives. Investors don’t seem too worried. But what do they know? :-)

In any case, the excitement around VMware’s IPO indicates that the Traditional software market is alive, healthy and not going away anytime soon.

 

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 value of source code

In the past week I heard about two fairly large companies who are in a bit of a jam. Back in the days of the Internet Boom, they purchased an “E-commerce server” from one of two separate niche software vendors (i.e. ISVs). These two ISVs were amongst the leading providers of e-commerce middleware in 2000. Many companies chose to deploy their initial online commerce sites using software from these two niche ISVs. Then came the Internet Bust. Then came larger software vendors, who entered the e-commerce server market late, but caught & surpassed the product function/features/benefits offered by these niche ISVs.

Customers saw this development and began to deploy their new or expanded online commerce sites using offerings from the larger software vendors. The increased completion led to depressed revenues, depressed stock values and layoffs for these niche ISVs. They’re still around, but not truly considered viable in the eyes of current or potential customers.

Because of code escrow agreements, today, more than a handful of customers have access to the source code from these niche ISVs.

Great, Company XYZ now has this source code in their hands. What’s the value of this source code? I submit that the value is equal to the value of the CD/DVD/USB key that the source code is on. Company XYZ, isn’t in the middleware or packaged software business. They don’t want to be in the business of maintaining or writing an e-commerce server. Now what?

1. Find a 3rd party to maintain and further develop this code for them & other customers in a similar situation
2. Band together with customers in a similar situation and maintain/develop the code using internal IT resources
3. Cut their losses and migrate the company’s online store to another ISV product

Everyone tells you there’s great value in having source code access. There can be, especially when you’re waiting for a defect fix of a new feature that you (think you) could develop yourself in a weekend. But these are edge cases for most companies.

I write about these two companies to illustrate a simple point: access to source code is often a red herring (unless your company wants to enter the packaged software business).

When an OSS advocate tells you that access to source code is critical, think twice. I’m not saying that having access is necessarily bad. It’s just not all that that it’s cracked up to be.

 

Responses to “Why Microsoft should buy Red Hat”

Earlier this week I wrote a “what if” post suggesting that Microsoft buy Red Hat. The comments here and on Open Sources at InfoWorld were lively to say the least.

Many comments were a variation of the “wow, you’re clueless” theme. I approved every single one of these comments.

Some readers suggested that it would never happen because of the DoJ & EU. A valid point that I hadn’t even considered when I ended the post with:

“PS: I truly doubt this deal will ever happen, but it’s interesting to think about the possibilities.”

Private email discussions I had on the topic suggested that Microsoft’s culture would severely limit any hope of a positive outcome. Valid point. But corporate cultures evolve.

I was somewhat surprised by how strongly readers debated the very notion of such a deal based solely on Microsoft’s history towards open source. Don’t get me wrong, Microsoft has done plenty of clueless things in various open source areas. But, to judge the possible outcomes of a Red Hat acquisition based only on history is, I humbly suggest, missing the point. (Again, keep in mind that this acquisition will likely never happen, but stay with me for a second longer). For Microsoft to even consider this acquisition, they would have to dramatically change their historical views on open source. For companies like Microsoft, change is a lot easier than holding steadfast to outdated strategies.

Change doesn’t happen overnight. However, the impacts of a threat like open source are not felt overnight either. It’s taken Red Hat nearly 15 years to get to where they are today, and the open source movement has over 40 years under its belt. The results have not been industry shattering on either front. I am not minimizing the success of Red Hat or the open source movement by any means; I’m only putting them into perspective.

Sometimes we build deep rooted views about technologies and companies that don’t allow ourselves to consider situations in which the technologies or companies evolve. Is it really “clueless” to think that over the next 5 to 10 years Microsoft could increasingly adopt open source strategies into their broader corporate strategy?

While buying Red Hat may never happen, what if Microsoft launched a Linux distribution, maybe even based on RHEL? Ahh, but what about Microsoft patents and GPLv3. True, but what if Microsoft realized that the revenue potential from shipping “Microsoft Linux” is 2x or 10x the revenue potential from licensing their “Linux patents”? These are the types of decisions that companies like Microsoft make daily. The point isn’t whether Microsoft, its culture, or employees hate Linux/OSS. The point is that Microsoft, its culture and its employees are interested in the future success of the company and making as much money as they can. To date, Linux/OSS has been seen as a risk towards this goal for Microsoft. In the future, Linux/OSS may well be a driver towards this goal.

Change happens.

PS: The *most* surprising thing about my post is that Dave Rosenberg had a similar post encouraging Microsoft to buy JBoss and/or Novell….back in 2005. Sigh…and I thought I was an original thinker…. :-)

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

 

Microsoft in India

Zack asked:

So perhaps a question that might be worth asking is if Windows and Office only costs $3 in China, how sustainable are it’s prices in other markets?

I remember reading about multinational companies consternating about selling online in the early days of the Interweb. Most companies sell at different prices in different markets. But until the dawn of widespread e-commerce, purchasers in different geographies couldn’t easily compare prices across geographies. Today, I can easily find the price of an iPod for American customers vs. here in Canada, but I’ve never checked. I know that the US price won’t change my decision or acquisition strategy.

Is a $3 Windows & Office package for students going to have a marked impact on comparable prices in other parts of the world? Sure, to some degree. But I’d argue very little. The growing concern about open document standards may likely have a larger impact.

Now to the larger question of Microsoft’s strategy in India (& China):

This is based on a sample size of 2 cousins in India. One completed a business & IT degree and the other completed a degree in computer engineering. As they tell it, having a MCSE designation is critical to getting many IT jobs in India.

My cousins have grown up with Microsoft Windows & Office in their homes and in the local internet cafes. Most kids learned to use Office & Windows in university. Because of their educational backgrounds, my cousins also learned Visual Studio, VB, SQL Server and fun stuff like administering W2K.

Playing Microsoft Strategist, I’m happy to sell Office & Windows to students for $3 if it means I have them hooked on an end-to-end Microsoft technology stack. Training the next generation of workers on Windows & Office makes it more likely that employers will purchase Windows & Office. Don’t underestimate training & support costs that can be minimized.

No here’s the kicker…the kids love Microsoft. We may want to believe that OSS would be best aligned with emerging countries especially because of the code freedom and lower costs. When I questioned my cousin why they weren’t using Linux at his company (Large bank), he asked: “Is Linux as secure than Windows?”

Again, remember this post is based on a sample size of 2.

 

Bloated Shelf-ware

I’ve been catching up on some reading and found the comments to a post from Dana very interesting.

Here’s a summary (although the comments are worth a read):

1. Dana writes about Zenoss, an open source IT management vendor
2. Zenoss CEO, Bill Karpovich, comments that: “(1) we provide strong coverage of what organizations are *really* looking for and are expanding rapidly (2) we will never do 100% of what the Big 4 does since much of it has resulted in bloated, shelf-ware, and (3) we will do many things that they can’t/won’t do.”
3. Tarus Balog, a contributor from a competitive open source IT management provider (OpenNMS) questions whether Zenoss is really enterprise ready

Okay, is some software bloated? Sure. Are there features inside of <insert_your_fav_sw_here> that you don’t use? Sure. But I think the Bill’s comment on “bloated, shelf-ware” is a bit broad. Maybe he meant to apply his analysis against small or medium sized customer requirements?

Good product management practices don’t usually allow for adding a feature just to beef up the “New Feature list”. Most of the time the feature is something that a large number of customers or a small number of your best customers have asked for. Product managers don’t just dream up these new features (we’re not that smart or creative). Just because a feature is not used by the majority doesn’t make it useless to the majority. A friend used to format headings in MS Word document manually (i.e. highlight, underline, bold, change font size, find next heading and repeat) until I showed him the “Format Painter” icon. Until I showed him what that icon did, it was a “useless feature”. The ability to cluster a web application is “not necessary” or “critical” depending on the customer type and specific project. The ability to consume a QuickBooks data resource is “not necessary” for Citibank, but critical for a smaller sized company (a plug for another friend).

Incidentally, I haven’t heard anyone complain about “bloated” automobiles. I’m not talking about form factor; I mean “too many features” inside this thing that should just take me from A to B. Do we really need rain sensing windshield wipers, multiple temperature zones inside the car, or headlights that pivot during turns? Why don’t we vote with our wallets for manufactures to build something more like the Polski Fiat 126p?

Different customers require different features for different uses. Heck, they even need different levels of quality within a given feature, i.e. I’m happy with a car that can go from 0 to 60 period. My friends in the automotive industry care about going from 0 to 60 in less than 5 seconds.

Let’s be careful when claiming that open source software will cure the world of bloated software without understanding the customer types and use cases that the software is aimed at.

[The pic is from Flickr user sirronwong]

 

What Drives Consumer Software Adoption?

They say you shouldn’t start with a quote, but this one really got my attention:

“It’s easy to miss when you’re writing about open source; it’s impossible to miss when you’re selling it/making a living from it.”

That’s a comment Matt Asay left on Dana’s blog.  Matt wrote of his belief that anything but open source software is a bad vendor move.  Dana pointed out that while enterprise open source usage is growing, open source is having more difficulty in the consumer market.

Matt then said:

“It just takes an itch (”I really need an app to rip movies to my hard drive - what is available? Oh, and I’d like it to be free.”) and then Google helps you scratch it (Handbrake, in this case).”

What is telling is the fact that he didn’t mention “and the software should be open source” as a criteria. I believe that for the typical tech-savvy consumer, free matters more than open source.  But, for a typical non-tech-savvy user, cost is just one part of the decision criteria.

From a non-tech-savvy consumer, when it comes to replacing consumer software XYZ that I’ve been using with consumer software ABC, I’d suggest that Skills, Cost and Requirements are amongst the most important factors.

Skills:
Remember, most consumers aren’t like the folks that talk about software development methodologies, or why the open source business model is good/bad/etc.  They’re like my parents, friends, cousins.  They know how to use certain software packages.  They’ve spent time and energy getting proficient with the software they have today. You want them to use something different, even a little different, then there better be huge advantages on the other 2 criteria.  And often, there aren’t such benefits.

Cost:
Most consumers get software pre-loaded on their computer, through work (legally) or  from “a friend who forgot to take the install disk home so I figured I’d better make sure it works before I throw the CD out”.  Usually, the cost of consumer software you have installed is too low to justify the time in learning to use a cheaper alternative product (i.e. Even though OpenOffice isn’t wholly different than MS Office for the tasks an average consumer needs, consumers aren’t leaving MS Office behind in the millions).

Requirements:
Since the average consumer doesn’t use more than 25% of the features (i.e. 80/20 rule) within a consumer package they’re using today, it’s unlikely that their requirements aren’t going to be met with their current software.  In some cases, your current software may prevent you from doing something you want (i.e. rip a backup of your DVDs or use multiple iPods with the same iTunes library).  In these situations, you’ll balance the cost and skills required to use an alternative product.  In most situations, consumers just grin and bear it, maybe because they don’t know about alternatives.  Mostly because the alternative is viewed as a hurdle vs. what they’re using today.

I’d say that the above is true for “an average consumer”, so the dynamic will evolve as a larger portion of consumers become more technically inclined.

PS: Yes, these 3 criteria also play a prominent role in enterprise software purchases - that’s for another day. Gotta run.