Software Blog (beta)

Ray Ozzie Has Been Assimilated

Unbelievable.  According to Computerworld, Ray Ozzie was quoted at Goldman Sach's tech conference as saying,

"Ever since the [dot-com] era, technologists have been trying to see how much of the Office experience we could take up into a browser and make usable in some form," Ozzie said. "Yes, there's Google Docs & Spreadsheets, there's ThinkFree, Zoho -- there are a variety of different instances of people taking the tools and kind of replicating them up into a Web environment... In the pure Web model, the trade-offs are fairly substantial. You have to be online to use them."

This runs counter to the November 1, 2005 internal email from Ozzie and Gates stating that the next disruptive wave in computing was the "Services Wave" and they better get it right or else.  However, Microsoft are now singing a different tune.  To clarify his earlier comments, Mr. Ozzie said,

"The way that I view the services opportunity related to productivity is really about more than just taking what's on the PC and putting it up on the Web.  I think there are high-level scenarios that if you consider you've got software on PCs, services in the cloud and devices -- mobile devices -- as the power that you can work with, and you try to envision the value of productivity and what you're trying to offer, you end up with a different result."

Ok, enough bluster on my part.  What this is really telling me is that the Microsoft Live strategy will integrate tightly with the desktop applications and SmartPhone technology.  Taking shots at Google by saying Docs and Spreadsheets are weak because you have to be connected is just plain silly.  Wireless connectivity is ubiquitous.  (Now - if I am in Outer Mongolia with my laptop, then I might want my Excel in order to do my DCF's, but that is a remote scenario!) 

Reading the tea leaves on this, I feel even better about Salesforce.com.  I have been a bit concerned about the entry of CRM Live as it would compete squarely with the SMB business that is the lifeblood of Salesforce.com.  Now it appears that Microsoft is trying to a) tie in their legacy desktop strength, and b) add in cool new features such as mobile devices and "services in the cloud" for their Live strategy. 

In other words, they are trying to one-up the industry standard by out-featuring them while maintaining a strong umbilical cord to the core Windows/Office franchise.  In other words, they're building the Zune of CRM suites.

Keep buying CRM shares.

The Instincts of a Monopolist Die Hard

I have to hand it to Microsoft.  Despite years of legal issues and the inevitable maturation brought on by the passing of time, they still bust out their basic (and illegal/unethical) playbook. 

This is the classic move where Microsoft allies themselves with a vendor who provides functionality they need.  They then reverse engineer the functionality and release a competing product that is inferior.  The future releases of the product access undocumented API's in the OS until magically Microsoft's product loads faster/performs better/whatever than the previous "partner" who gets aced out.

It's happening in Vista regarding security.  McAfee and Symantec are crying foul and howling.  The EU is interested.  And Microsoft is calling them - their critical partners - liars. 

My favorite anecdote to this story is the "glitch" which prevented the Symantec team from their meeting with Microsoft - is the Microsoft employee who set the meeting up a complete moron?  Is LiveMeeting that hard to master?  Should we all buy WebEx?

S&P Disagrees With Me

Forbes reports that S&P analysts Gary McDaniel and Steve Kessler find Microsoft "notably undervalued" based on anticipated earnings from online advertising. 

I haven't seen their model but my gut says they are quite optimistic about MSN behaving like Google in the near term.  My empirical senses did notice they cut their price target from $33 to $31. 

Put your money to work elsewhere.  Try BEAS, TIBX, WEBM for SOA plays. 

Microsoft the Stock

Microsoft is the dark center of the software universe.  By any metric, they dominate.  And despite being threatened by open source, litigation, and a bevy of new competitors, they will continue to print money for the forseeable future. 

The Windows operating system and the Office suite are a symbiotic monopoly that Microsoft leveraged to destroy all comers with only a few exceptions (attaboy Adobe!).  I will not argue that Microsoft won a fair fight on a balanced playing field because that is pure fiction.  They had a compelling market advantage and they did what nobody else could do.    

For the stock, this has huge ramifications.  Even today, Microsoft is fundamentally just a desktop software monopoly with more cash than they know what to do with.  Anyone investing in this name is essentially investing in the growth of PC shipments and/or the expectation of a dividend.

Microsoft's latest quarterly income and operating margin numbers:

• Client (Windows) : $3.187B in revenue, $2.478B of operating income for an operating margin of 77.8%
• Information Worker (Office): $2.946B in revenue, $2.087B of operating income, 70.8% operating margin

Pretty nice to have a monopoly, eh?  For those of you scoring at home, companies who actually compete for business are thrilled to find operating margins north of 20%.  Most are in the low teens. 

So now the rest of Microsoft's business.  These are the business units that actually compete against real rivals and can not leverage the desktop monopoly as effectively.  Although they do try.

• Server and Tools (SQL Database): $2.845B revenue, $1.068 income, 37.5% operating margin
• Dynamics (ERP Solutions): $216M revenue, $-13M income, -6% operating margin
• MSN: $561M revenue, $-26 income, -4.6% operating margin
• Mobile and Embedded Devices (Windows CE): $89M revenue, $-14M income, -15.7% operating margin
• Home and Entertainment (XBox): $1.056B revenue, $-388M income, -36.7% operating margin

The competitive businesses sum to $4.767B of revenue, $627M of income, and 13.2% operating margin.  That is still a staggering quarterly revenue number, and you have to call the Server and Tools business a success, but every other line of business is funded by the Monopoly.

I understand the argument that these are long term investments.  But who really thinks they will ever pay off on any sort of scale?  Every one of those "investments" has significant and well funded competitors who will vigorously defend their turf. MSN is in 3rd place behind Yahoo and Google, and has had enough time to make more of an impact.  Hard to qualify MSN as a success.  Dynamics is a cluster-smack of four different product lines (Great Plains, Axapta, Solomon, and Navision) that still operate like four different companies.  They are focused on the sub- $1B accounts and give the larger deals to their parter SAP.  Nevertheless, the going is very tough against the SMB offerings from Sage, JD Edwards, PeopleSoft, et cetera.  I love my XBox but Sony is a formidable competitor and will not yeild easily. 

But what about the growth?
The growth of computers and peripheral equipment over the past 4 quarters has been 6%, per the US Bureau of Economic Analysis.  The growth of Microsoft's Client was 7.1%, and Information Worker (Office) was 5.5%.  So the vast majority of profit associated with Microsoft is tied to the rate of expansion of PC's.  I know the US numbers don't account for China and India, but the wealthy western nations are saturated with PC's and are basically at a replacement run rate.

This name is a safe place to park your money if you have to have software exposure and believe the rest of the sector is about to disintegrate.  Otherwise, owning this stock is a head-scratcher.

The Quickening?

Obviously I'm an open source bull, and I think of Dan Patrick's line when I consider the current state of Open Source in the software market: "You can't stop it, you can only hope to contain it."  Surprisingly cheesy and accurate at the same time.

There is an article in eWeek today suggesting that Microsoft is about to go to the mattresses with Open Source by attacking the IP via their hoard of patents.  I think this would be a good thing ultimately for the Open Source community because it would clear the air of this implied threat that Microsoft makes from time to time.

It is hard to guess how much headwind this threat creates for Open Source. My guess is: not much. The heart of the community are famous for taking on commercial vendors and probably will not make the distinction between a code war and a legal battle.  In any case, I predict a victory for open source in a legal battle because I ultimately think the community will take the offending code and re-write it under an open license.  As a practical matter, who is Microsoft going to sue? Red Hat? Novell?  VA Linux (ha!). The community is just to decentralized and ownership is diffused literally across the entire globe.  Even if Microsoft destroyed all US-based open source companies, they'd re-emerge elsewhere around the globe, outside the enforcing reach of the USDOJ.

Even I notice that I am not taking a stand on the legal merit of such a move by Microsoft.  Groklaw can do that.  To me, the practical realities seem beyond surmountable. 

If my prediction is right, then this battle will be a temporary containment of open source, and will pave the way for an even more decentralized and difficult to stop movement.

In a future post, I will contemplate the question: "So who makes money off all this anyway?"

IDC: Vista Delay Won't Hurt PC Shipments

eWeek cites an IDC report that contends that PC shipments in 2006 will not be significantly impacted by the delay of Vista.  Money quote:

"The decision will have some impact on PC shipments, but it will be limited, as businesses aren't likely to change their plans-most will evaluate the OS for at least a year before rolling it out-following the change. Consumer PCs will feel the brunt of the blow. But even that could be smaller than originally thought."

Does this mean that the world is saturated with personal computers?  Or that the marginal features in desktop operating systems do not add much value anymore?  My guess: both. 

As long as Microsoft is still principally a desktop OS/productivity suite play, it is a value trap.  The shining star is the server side products, and the promising divisions are Dynamics and Xbox.  Anyone out there with an opinion of their MSN business?  My gut says it could be a cash waterfall for them but they have consistently been a day late and a dollar short compared to Yahoo and Google. 

Microsoft's SaaSy CRM

At their annual ERP customer event, Microsoft announced a hosted version of their CRM product making them the latest entrant to the SaaS market.  William Gates had the requisite ringing endorsement:

"Software as a service [SAAS] is a very important trend," said Microsoft Chairman Bill Gates during his Monday morning keynote at the Convergence conference here. "We believe in it a lot."

Microsoft gets credit for opening up this model to the market.  There are a few wrinkles though.  First and foremost, Microsoft is a partner-centric company.  This point should not be understated and deserves a little more time: Microsoft is a quantum leap beyond any other major software vendor when it comes to partnering.  Not BEA, not IBM, not Oracle can even touch them.  The culture and model are partner-first.  So how can a partner strategy lend itself to the channel? 

It appears that Microsoft is letting the partners do the hosting.  If this is accurate, this creates multiple instances of the server code across the globe.  Synchronizing them all will not be easy, and I will go out on a limb and say that the participatory development model of continuous updates will not be a major reality.  So you get many static versions of Dynamics CRM Live, one per service partner.  Some of the benefits conferred by hosting disappear, principally the ability to update or patch the server software once and let all users benefit from that patch immediately.  This isn't so bad to the end user who only wants to access the product through the browser.  But it is not as agile as a single-source multi-tenant model such as Salesforce.com. 

More on the practical implications of this later.