WRFest 25Feb08(Tech):Dropping Outlook vs Climbing Competition
Well spreading the news excerpts does give us some chance to slice and dice 'em. Here we'll focus on the technology news, some of which we've either already mentioned and/or have been covering for a few weeks now. Primarily that the various analyst shops (Forrester, Gartner, et.al.) have abruptly lowered their spending outlooks for '08. Below you'll find the first outlook that anticipates a negative growth rate for Q208. Bear in mind these surveys are based on bottom-up work talking to IT departments so they reflect reality on the ground but a reality which tends to lag big picture economic cycles. By combining that with our top down look at macro-trends you get a bookend perspective - and those trends have been suggesting declining capex outlooks for a while now. So when John Chambers shows up on CNBC and says things are going well he's talking about the quarter just past and the sales activity and order stream he can see right then. NOT an outlook - keep that in mind.
The other little thing we thought we'd insert into our discussions is a way to sort and filter the tech news as the jumble of acronyms floats by. So we're going to introduce you to the infamous "stack" picture of how all the pieces in the tech industries fit together. Then to show what it's worth talk a little about some industry examples, e.g. Oracle's merger spree and then try to apply it to this week's stories. You'll have to judge whether this is useful or not.
Thinking in "Stacks" 
If you'll take a look at the picture on the right we provide a very simple version of the infamous stack, which you may have heard folks refer to. The stack is all the things you need to make a computer (or a phone for that matter work). Simple but a powerful sorting hat because it'll tell you who's in what House and how they're linked. The PC on your desk incorporates the top four layers. Likely an Intel/AMD processor which then has to have a bunch of other chips, power supply etc. IBM's announcement today of a major new mainframe will define the new large-scale server standard for some time. To make that PC or server work you need an Operating System (OS) which on your PC is likely Windows but on the server is something called MVS, or Multiple Virtual System. All this hoorah about Google's huge server farms and virtualization software - well the big guys have been doing it for three decades and your life depends on it in the sense that most banks, airlines, etc. are running on very large servers.But all the OS does is let the machine talk to itself it's what's called Middleware (MW) that sits between the machine and the applications that lets interesting things be done. So when Oracle buys BEA what you're seeing is a further consolidation in the MW space where BEA was the first provider of a Java application "server", i.e. a software machine commercially even though Java was created by Sun. Unfortunately BEA wasn't able to match IBM's inventiveness over the last decade and has lost those wars. In fact if you take IBM's analysts reports apart their growth engine for several years, for profits as well, and anticipted to be in the future is software. And when they say software they mean middleware. Finally the thing you talk to is the application - though you can debate for example whether or not a spreadsheet is an application or middleware in a sense. But when somebody talks about ERP, CRM, Sales Automation, etc. etc. they're talking about big bundles of code sitting on top of the MW that actually process the data, talk to the user and get things done.
Using the Stack: a Little History
Just as a little bit of history Oracle got it's start in life as a MW company by introducing the first commercially viable relational database management system (DBMS) which was invented by IBM but...well you've heard that story. Now though IBM's DB2 is the dominant player, at least in some circles. As the DBMS market matured though Oracle moved up the stack to start creating business applications using their database software. An approach many mimiced or had done first in other forms. But building an application on top of a DBMS is easier, faster, higher quality and more flexible than building all the functions into the application. So when you heard about all those ORCL acquisitions in the last several years, e.g. J.D. Edwards that was one big application company with some o.k. applications buying a smaller one with great apps. Here's the rub though - they're technically incompatible. What Oracle did was buy markeshare in a maturing (slowing market). And now faces the problem of either continuing to invest in all those incompatible application portfolios or re-write them to a common standard. Which'll take billions in either case. And bear in mind they're making most of their money these days off of maintainence fees instead of selling new apps. SAP on the other hand continues to grow itself organically with judicious acquisitions to fill in small holes. It's also gotten a major leap ahead of Oracle by building it's own middleware so that it can re-develop its' ERP suites on a common and sharable platform. Meanwhile Oracle's me-too project "Fusion" isn't going so well.
We could go with either or both companies or switch to HP, MSFT, Dell, Intc, etc. stories. Or talk about the Telecom Wars, Verizon, ATT vs each other or the cable guys. The convergence of voice and data that allows the big Telcos to migrate from their old switched network to the new IP networks but at the same time opens them up to competition from the cable guys. Or we could compare HPQ vs IBM vs Dell and find out that they play in very different parts of the stack and in very different markets.
But as you read the stories below you can use the stack to analyze and interpret each one of them. And should because it fits that little piece into a larger whole.
Interpreting the News
The first except talks about slowing spending which we don't really need to interpret but just for fun we'll call it the shrinking stack sydrome. Where it's important though is the reactions in the markets where the major players in the tech stocks are not only getting hit but hit hard because too much hot air got blown into their balloons - as in this'll never end. But the stack and the size of the market pie change all the time so, for example, the story about toys which are increasingly using embedded chips to become more intereactive and controllable thereby opening up a whole new set of end-markets for the tech guys as well as finding new avenues for the toy makers who were running out of one more warm fuzzy (maybe). Since the toys also now connect to computers (what does that say about culture change) with 2 year olds in front of them...well ?
As some of these technologies have changed they've cause other industries to change enormously as well - Media & Entertainment will never be the same again though it's not clear what it will be. The forms, content, applications etc. are still in an accelerating rate of flux. A couple ofthings to remember though...first off this exact thing happened before. The Media businesses got locked into their old "stacks" and thought they world would never change. Newspapers were defined as we still know them in the late 19thC - notice that when they first went online they imitated that layout. The only challenge they faced was the introduction of whole new stacks, radio and TV, which didn't seem to do too much damage though print journalism shrank considerably as TV caught on. Now they're all having to move to the same stack and nobody's coping very well.
The ripples from all this show up in the news stories where the Yhoo/MS merger war is really a strategic debate about what's the best way to turn Internet eyeballs into advertising money. Notice that paying for media access, where you're paying for the large set of resources that gather, report, write, edit, etc. the content which will NOT go away, is a model invented by old...old media. So this debate is over whether or not putting ads around content you want to see (display) or as the result of a search is the best model. Several of the next stories fit right into this line of inquiry - two on the NYT and whether or not it has a future.
The story on the wireless firms offerring flat rates is a big.....big deal, in at least two ways. First off it means that the "old" fixed line into your home might be going away and secondly that they're anticipating new forms of competition they're not telling you about from VoIP on wireless data networks which could replace their proprietary and expensives ones over time. And the other "Pipe War" is the ones between the cable companies and the phone companies over who gets to control your house because you sure don't need two fat pipes.
Technology Industries Readings
Corporate IT Spending Goes Negative Overview: ChangeWave’s latest corporate IT spending survey points to a negative growth rate for 2nd Quarter 2008 – and confirms U.S. business spending has already entered into a recession. A total of 2,013 respondents involved with IT spending in their organization participated in the survey, conducted February 11-15, 2008. 2Q 2008 IT Spending: Nearly one-in-four respondents (23%) say their company’s IT spending will decrease (or there will be no spending at all) in the 2nd Quarter – 3-pts worse than the previous ChangeWave survey in November 2007. Only 15% say spending will increase – an unprecedented 9-pt drop from previously. A Picture of Negative Growth: As seen below, the percentage projecting decreased IT spending for 2nd Quarter 2008 is far greater than the percentage projecting an increase. You have to go all the way back to August 2001 to find the last time a ChangeWave corporate IT spending survey projected negative spending growth.
- Three of the Nasdaq Four Horseman Are Limping Apple (AAPL), Google (GOOG) and Baidu (BIDU) -- three of the NASDAQ FOUR HORSEMAN -- have been coming up gimpy since their FusionIQ timing sell signals (triggered at much higher levels several weeks ago). These stocks have fallen precipitously since those Sells.
Small world increasingly a virtual one The furry animals of Webkinz helped jumpstart the craze two years ago, and now, "I'm seeing every single toy down to pre-school," that connects to the Internet, said Jonathan Samet, publisher of the Toy Book and Toy Insider. Kids play differently than even five years ago, and it's evident at the American International Toy Fair, which kicked off Sunday. With kids sitting behind computers as early as 2 years of age, technology is playing a larger role in toy designs, with toy makers creating a number of virtual worlds to nurture pets, create fashion shows, race cars, and dress dolls. Internet plug-in toys make a physical toy virtual with a USB port that connects to a PC or a special pass code that comes with a toy and is typed in at a specific Web site. The larger U.S. toymakers, Mattel Inc., Hasbro Inc., and Jakks Pacific Inc., all have something for 2008, whether it's a new product or a refresh of a popular toy. Mattel is making Barbie more virtual, while Jakks and Hasbro are pushing further into the pet kingdom.
Microsoft's play for ad display Courting of Yahoo is a $44.6 billion bet that plain, old display advertising will rebound online, yield bonanza. Is there a method to Microsoft Corp.'s madness? The answer most often is yes. In the case of Microsoft's courting of Yahoo Inc. to the tune of more than $40 billion, the software giant could reap huge benefits in plain, old display advertising on the Internet. Market demand for such ads, Yahoo's forte, are expected to grow sharply for several reasons. Faster broadband connections open up the potential for "rich" media -- defined as video or anything other than just static display. Further, companies that have resisted Internet marketing in the past have started to, sometimes grudgingly, warm to the medium. They're often more comfortable with display or video advertising compared with search ads, which are links generated through Web searches. In many instances, companies find display advertising more conducive to their purposes. As a result, they're likely to stick with that method as they make the shift to online campaigns.
Open ware policy Microsoft reiterates it's moving toward opening software to outside developers. Microsoft Corp. on Thursday responded to continued regulatory scrutiny by reiterating promises to make information about its products more easily available to software programmers, while vowing not to sue those who use such information for noncommercial purposes. The move underscores an ongoing shift for the tech behemoth, as it has sought recently to present its technology as increasingly open to outside developers and compatible with competing products. It also comes only days before delegates from an international standards body are scheduled to convene in Geneva to discuss Microsoft's Open XML file format, which has been derided by critics as insufficiently accessible. Rivals have long complained that Microsoft has jealously guarded its intellectual property, while elbowing competitors out of the computer-software market. That's raised the ire of antitrust officials, particularly in Europe.
Netscape founder on newspaper deathwatch Andreessen has always been a blunt, plainspoken guy. He grew up in a tiny town in Wisconsin, and although he moved to California in 1993 to make his fortune, he maintains a Midwestern intolerance for pretense (and, apparently, fancy lunch spots). He's a legend in Silicon Valley for having founded and sold, by age 36, two billion-dollar companies: Netscape Communications (unloaded on AOL (TWX, Fortune 500) in 1998 for $4.2 billion) and Opsware (a server-management company that HP (HPQ, Fortune 500) bought last year for $1.6 billion). Now he's going for a three-peat: But Andreessen keeps circling back to the media business. I used to think he was obsessed because his browser stuck a shiv in old media, but it goes back further than that. One of his first hacks as an undergrad at the University of Illinois in 1992 was diverting cable to his SGI workstation so that he could watch CNN. Most of the 30 investments he's made since are in media-related startups. Then he went back to his computer and launched a kind of fatwa that was immediately broadcast in the echo chamber of the blogosphere. "I can't take it anymore," he wrote on his blog (blog.pmarca.com). "I hereby inaugurate my New York Times Deathwatch, which will continue until the last Sulzberger has left the building." The piece goes on to rip apart the Times' business strategy top to bottom, attacking everything from the techno-illiteracy of its board of directors (which boasts experts in marsupials and snack cakes but almost no expertise in the Internet) to its recent per-copy price hike. "When you have an obsolete, inconvenient physical product that nobody wants in an era of universal online access, the appropriate strategy is clearly to raise the price," he snarked. (He's not the only one gunning for the Times. A coalition of hedge funds just bought up 10% of the company and wants to install four of its own candidates on the board.)
From Gray Lady to gossip sheet Western civilization may have ended Thursday when the highfalutin New York Times lowered itself to the rank of shrill tabloid with its piece on John McCain. The Times published a front-page story suggesting -- wink, wink, nudge, nudge -- that the presumptive Republican favorite's campaign staff tried hard to keep lobbyist Vicki Iseman away from McCain during his 2000 run for the White House. McCain's people were concerned that her proximity to the Arizona senator might spark suspicions. I don't know what the Times hoped to accomplish when it ran this story. It had worked so hard to climb out of the shadow of Jayson Blair, the former Times reporter who fabricated many stories and became a poster child, along with the Times, for journalism's ills a few years ago. Thirteen months ago, Times Executive Editor Bill Keller couldn't disguise his satisfaction when he told me that he felt "a little vindication" after the 2006 elections because the Times had been attacked like a "pinata." Now, the Times is back under a cloud. The Times violated a basic tenet of journalism: Either you have the story, or you don't. If you have the goods, put the story on page one and shout about it from rooftops. If you don't, delete the flimsy, unsupported stuff. Like my professors at the Medill School of Journalism used to preach: When in doubt, leave it out.
Wireless Firms Offer Flat Rates There's some good news for people who spend a lot of time on their cellphones. Three of the nation's largest cellphone companies are rolling out plans that charge a flat rate for unlimited calling, a significant departure from the traditional model, in which consumers purchase "buckets" of minutes. The new plans cost more than most traditional options and are aimed at the heavy user, a customer that wireless carriers compete fiercely to land. The new plans are a sign that cellphone companies are willing to experiment with the minutes-based model that has underpinned the industry for years. The carriers are increasingly looking at voice as a commodity and viewing data services like text-messaging and Internet access as the major sources of revenue growth.
Comcast Wins Skirmish, Girds for War Fix the easy stuff first. That's what Comcast did last week, when it shrank management bonuses, reinstated its dividend and canceled a pay plan offering five years of posthumous rewards for company founder Ralph Roberts, who remains a director at age 87.Those actions helped touch off a rally in the cable company's beaten-down stock. Talk of a shareholder uprising evaporated in a hurry. But Comcast still faces big challenges. It is torn between two groups of shareholders -- those who like management's ambitious plans to conquer new markets, and those who want the company to return more cash to investors through dividends and stock repurchases. Can Comcast CEO Brian Roberts, Ralph's son, satisfy both camps? He says he can. To do so, though, Comcast will need to emerge as a profitable winner in a dogfight over how American consumers will get television, phone and Internet services. In such battles, underlying technologies change rapidly, in ways that are expensive and unpredictable. As rivals race to install costly new systems, they are hammered by price wars, rapid obsolescence and a need to keep restarting the cycle. All the while, contestants burn through billions of dollars of capital spending and marketing outlays every year.Consider other industries with similar challenges. The computer disk-drive business was famous for short product life cycles and "profitless prosperity" until that industry consolidated. The paper and airline industries have been trapped in that predicament, too. Competing in those fields is like running on a treadmill -- lots of sweating, not much progress.