Tech Trends I (Readings): Big Picture to Key Players
Oddly enough the logical next step from international economic news is considering how that might impact business, specifically big technology businesses. The linkages are threefold - a slowing US economy further slowed by feedback from slowing foreign economies will lead to lower capital spending, which we've talked about. That's a little in-direct though. There are two direct impacts to consider. First, all the big tech companies have been claiming that major portions of their growth comes from abroad. That means there's a direct link that will see foreign sales start to come under pressure in the next periods. Not something that's being factored in by executives, investors or the markets so far, as best we can judge. Second - all those foreign earnings have enjoyed huge currency conversion benefits. If foreign earnings went up 13% half of that was currency. Now even if the dollar just flattens out or drops back to the level it was at the free ride is over. In other words you might be looking at a 50% drop in foreign earnings, which might be 35-50% of total earnings, for many of the big tech players. And that's without any real economic impacts.
Well there's something funny beginning to happen in the Tech Markets that popped up last week and got reinforced a bit this week. In case you didn't notice the NDX didn't drop relatively as far as the SPX, by a longshot, climbed rapidly back and has been relatively immune to the gyrations of the more traditional businesses and their stocks. All on the thesis that earnings would hold up. We think the market's beginning to notice because there's several days recently where the tech indices have in fact gone down while the oldline indices have not. Most of which you can see on this chart of the NDX, if you believe it's a decent tech proxy. Thought notice that the XLK ETF which mirrored it for so long is considerably below recently. Telling us that the big names are holding up while the industry is starting to hurt, perhaps ?
We'd like you to keep that in mind as we swerve to the other side of the Tech road and talk about the "inside baseball" issues which impact all of that nasty stuff like how much you actually sell and how much money you make off it. After the break you'll find two collections of readings. The first on "big picture" industry issues and the second on news on specific players. The former sets the stage for the latter in many cases once you translate what you're reading into guidelines for evaluating it. Which, hopefully and perhaps the Industry Dumbbell will help with.
What it tries to show is how well tech industry customer's requirements are satsified where those requirements are defined by the stack picture we've put up before that layers them together. Starting with the box (chips, OS, etc.) at the bottom, with middleware like databases, integration and development tools, etc. next, followed by applications and then the interface on top. For very small businesses often something like a spreadsheet, a contact manager and a word processor plus QuikBooks solves their entire problem and runs easily on a bunch of PCs. For very large businesses things are orders of magnitude more difficult, complex and expensive. But strangely enough their needs are satisfied by huge servers, say mainframes from IBM, ginormous database programs from Oracle or IBM, huge suites of ERP and other software and so on. The poor schmoos in the middle have hard, complex problems but the stuff at either end doesn't scale very well, either up or down. And none of the attempts to work around those problems have worked out very well. In particular below you'll find:
1. The whole Software as a Service, i.e. hosting it on a server ala the old-style time-sharing services, doesn't work well when you actually try to solve real business problems and get multiple different packages to work together. Which creates huge barriers for such folks as Salesforce or GOOG's attemps, even when it's liteweight apps. And also explains why SAP backed off their mySAP efforts years ago.
2. Meanwhile the big software packages turn out not to solve every problem (the gap between what's claimed, what's delivered and what businesses needs could fill up several textbooks - in fact it does but never mind for now). And in those niches you're finding a lot of small companies busy trying to make some money. And oddly, they're using a lot of very good programming talent from India, Russia, Eastern Europe and so on. Hm....
3. Meanwhile the mid-size Tech departments who are the most under-served. Someday somebody will crack that code and make a lot of money.
4. At the same time when Intel and the rest ran into speed limits on single-core chips they created something with multiple-cores. Unfortunately they forgot to tell the software people how to write for the new architectures so your fancy new "Intel Inside" isn't much faster than your old box. Hint, hint. On the other hand the big server guys have been solving these problems for decades. Gee, what happens if the big-server guys figure out how to scale their boxes down to go after the medium-sized companies that the PC-farms can't handle very well.
Looks to me as if every layer of the Dumbell is up for grabs over the next few years. Wonder what that does for earnings ? As you read thru the excerpts we suggest you keep both sets of factors in mind - the external economic ones and the internal technical ones. Both are telling us that some wild rides may just be getting started.
Economic News
Durable-Goods Orders in U.S. Unexpectedly Climbed 1.3% in July on Exports Orders for U.S. durable goods unexpectedly increased in July, indicating growing demand from abroad is still helping companies weather a slump in consumer spending. Sales overseas have helped U.S. factories withstand the three-year housing slump and tighter lending rules that have caused Americans to cut back. Still, economies abroad are now also weakening, signaling companies will not be able to count on sustained gains in exports. `Exports have thrown manufacturing a lifeline,'' Ryan Sweet, an economist at Moody's Economy.com in West Chester, Pennsylvania, said before the report. ``The big question for exports and manufacturers is how long the global economy will hold up.''
Tech Industry Issues
SaaS's Impact on the Enterprise ERP Market A recent report from Gartner throws a big bucket of cold water on software-as-a-service ERP hype, especially for larger enterprises. Gartner analyst Denise Ganly writes in the "SaaS Impact on ERP" report that enterprises' dire need for a suite of integrated ERP solutions is not something that SaaS vendors can reliably deliver right now. "Because of the complexity of ERP suites, SaaS offerings for administrative and operational functions typically have provided functionality that is confined to one domain, such as sales force automation, or one business process, such as payroll," Ganly writes. "Thus, ERP SaaS suite offerings are still immature." (To read about an on-demand ERP provider's nascent efforts, see "PeopleSoft Vets Born Again: Can Two Legacy ERP Guys Get IT Executives to Buy into On-Demand Applications?".) Some of her other findings include: SaaS ERP suites won't be viable options for large enterprises during the next five years. "Except for use in two-tier ERP deployments," she notes, "large organizations should ignore this space."
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Helping Thousands of Software Firms Bloom Reading the business pages, one might get the impression that every software company in the world had been rolled up to be a part of Oracle or some other giant. Not so. While scores of mid-sized companies have been gobbled up, thousands of small programming shops are springing up around the globe, many in India, China and Eastern Europe. They might not be putting SAP out of business, but they are developing all manner of programs–to run Web services, make animated creatures appear on cellphones, run doctors’ offices and government agencies. Who says so? Well, one is Ray Lane, the onetime No. 2 man at Oracle who is now a venture capitalist at Kleiner Perkins Caufield and Byers. “I would say the best developers in the world are now independent developers,” he tells us. Programmers at big companies are mostly extending existing products, making incremental advances–“taking out the garbage,” as Lane describes it–while the little guys are trying the risky ideas, taking the big chances. Lane’s views are shared by Kim Polese, a former star among fans of the Java programming language world and his partner in a startup called SpikeSource. “Five years ago people were saying software is dead,” she says. “We see a huge disruption and incredible innovation and expansion of the software industry.”
Life Is Tough for Midsize Tech Departments Information-technology leaders at midsize companies say they could compete with bigger companies, if only they had more money. And staff. And the freedom to focus on long-term projects. Instead they’re fighting to keep up. That’s according to a survey of 200 tech leaders at businesses with 500 to 3,000 employees by Arrow Enterprise Computing Solutions, which sells computer gear to the consulting companies and resellers who target these companies. The survey doesn’t paint a pretty picture of life in the midmarket. The tech leaders surveyed are trying to get by on limited resources. For example, when asked who they rely on for advice, the top response was–no surprise–internal staffers (59% of respondents). But that was followed by cut-rate alternatives: Forty percent said they relied on Internet research; 31% said peers at other companies; and 30% said magazines and journals. So it’s not a shock that tech leaders at these midsize businesses aren’t wholly satisfied with the job they’re doing. Only 19% said they’re very satisfied with how their business addresses IT (71% are somewhat satisfied) and only 20% are very satisfied with how they’re going about cutting costs, which is far and away the top priority for these businesses. Only 65% of tech leaders said their businesses are keeping pace with technology, while 21% said they’re behind the times. One bright spot: The slumping economy doesn’t seem to have too much of an impact on midsize companies – perhaps because they’re already bootstrapping it. A plurality said the economy has just made their jobs more stressful (43%) while 34% say it’s had no impact at all. And 61% anticipate being able to spend more on IT next year.
A chip too far? Could faster chips translate into slower computers? That's the sales-threatening prospect furrowing brows in every corner of the PC business, from industry titans such as Intel, Microsoft, and Apple (AAPL, Fortune 500) to major centers of academe. For decades the PC industry has juiced performance - and sales - with a regular two-step dance. First, chipmakers jacked up the speed of their latest offerings. Then the software brains figured out how to turn all that processing power into faster operations and cool new functions. But the latest generation of chips, known as multicore, are so complex and so qualitatively different from their predecessors that they have flummoxed software developers. "We've gone through changes in the past," says Craig Mundie, Microsoft's chief research and strategy officer. But this one, he says, is the most "conceptually different" change "in the history of modern computing." The change was set in motion four years ago when Intel (INTC, Fortune 500) and others reached a point where they could no longer make single processors go faster. So they began placing multiple processors (or "cores") on a single chip instead. That design, however, dramatically raises the level of difficulty for software developers. If they want to get the full oomph out of multicore chips, their applications need to break tasks apart into chunks for each core to work on, a process known as parallel computing. (Programs running on supercomputers have employed this technique for years to simulate atomic explosions or model complex aerodynamics.) But programming in parallel is simply too complex for the average code writer, who has been trained in a very linear fashion. In conceptual terms, traditional coding could be compared to a woman being pregnant for nine months and producing a baby. Parallel programming might take nine women, have each of them be pregnant for a month, and somehow produce a baby. That's a dramatic change, and battalions of techies from Redmond, Wash., to San Jose are struggling to figure it out.
Key Players
A Bellwether Rings True The rest of the world wants laptops, too. That’s one of the takeaways from H-P’s earnings. One product that had a big quarter: laptop computers. Sales of the machines grew 26% year-over-year, while sales of the desktop variety only grew 6%. Printer sales were down, servers and storage devices sold to businesses were up somewhat; sales of software and consulting services were up big. H-P’s earning also reassert the company’s role as a bellwether for the technology industry, albeit a bellwether that consistently outperforms the competition. On Monday, tech researchers Gartner released an updated forecast for worldwide tech spending. It was as if they got a sneak peak at H-P’s balance sheet. Software sales are up across the industry, albeit 10% globally compared with 29% for H-P. But in both cases, they only represent a small fraction of total sales. Hardware sales make up a much bigger percentage of the overall tech spend, and a much bigger percentage of H-P’s revenue. In both cases growth is slower, 7% globally, compared with 5% for H-P. (This isn’t quite apples-to-apples, because H-P counts PC sales separately and doesn’t distinguish between sales to businesses and sales to consumers.) Many of the corporate tech leaders we’ve spoken to say that they’re delaying hardware purchases until the economy get better. Lastly, businesses are buying more and more tech services. It showed up globally, where Gartner forecasts services growth of 10%. H-P reported an increase of 14% in sales of these services from the year-ago quarter. Expect this number to increase sharply for the current quarter when H-P will finalize the acquisition of consulting company EDS.
Dell's comeback machine Over the past three years its position in the PC industry has gone from dominator to underdog, as shoddy customer service, weak international distribution, and outdated designs have cost it the title of global market leader. (That isn’t all it cost, as investors will tell you; Dell has also lost nearly $35 billion in stock market value since December 2004.) One of the clearest signs of change is this redesigned Latitude laptop, the company’s flagship model, which will be its first business laptop line to come in rainbow colors. The laptop’s core design gets updated only every four or five years, making its debut a supremely important moment. Get this right, and Dell can shore up a weak spot where rivals have taken market share, and surge ahead as corporate buyers upgrade from desktops to laptops. Get it wrong and the company can kiss its comeback goodbye. Michael Dell himself was clearly aware of the stakes a couple of weeks ago when we talked about Dell’s future –he singled out the Latitude as a strategically important product. Once it started losing ground and its stock dipped, the detractors piled on with all the old put-downs: Dell doesn’t innovate. Dell’s marketing sucks. Dell designs machines with corporate IT departments in mind, not real people. Back when Dell was whipping everyone in the PC industry, it was easy to shrug off the insults. Dell innovates where it matters, execs would say, in the supply chain and with its direct sales model. Now it’s easy to imagine the talk is hitting a nerve. Why? Because in a maturing PC market, Dell’s traditional weak points have become must-win areas. In the early days of the PC market, when computers were expensive, every new Intel chip offered a major performance boost and every Microsoft operating system seemed to offer must-have features. Back then, Dell’s IT department focus, direct-sales efficiency and price leadership trumped everything else. But these days, chip and OS upgrades are no longer major events, and PCs are mainstream enough that much of the growth is in the consumer market, and consumer trends even influence business purchases. Now, design, innovative features and broad distribution matter more than price cuts, and Dell is scrambling to adjust.
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Hewlett-Packard Takes Design Cues From Milan to Lift PC Profit, Beat Dell -- Hewlett-Packard Co. is drawing inspiration from Milan designers to maintain its lead over Dell Inc. in the personal-computer market. Instead of building workhorse machines in utilitarian cases, Hewlett-Packard strives to create sleeker, more stylish PCs by looking to the fabrics and shapes in Italy's furniture showrooms, said Stacy Wolff, director of notebook-computer design. ``The notebooks are a lot slimmer and a lot nicer than the big bulky boxes people lugged around three years ago,'' said William Fearnley Jr., an analyst with FTN Midwest Securities Corp. in Boston. ``Hewlett-Packard's designs have helped them.'' Demand for PCs, which account for about a third of Hewlett- Packard's $104.3 billion in annual sales, may help the Palo Alto, California-based company post an 8.1 percent gain in third- quarter revenue today, according to the average estimate of 21 analysts in a Bloomberg survey. Chief Executive Officer Mark Hurd eliminated about 15,000 jobs, or 10 percent of the total, to save $1.9 billion a year. He combined data centers to save another $1 billion and aims to cut real-estate expenses one-third by 2010. Those reductions allowed Hewlett-Packard to match or beat Dell's PC prices while improving designs. Putting form and function before component costs mirrors a strategy by Apple Inc. Chief Executive Officer Steve Jobs, whose aluminum-clad desktops and notebooks have propelled the company to its highest PC market share in at least a decade. In January, the company introduced the MacBook Air, which is less than 1 inch (2.5 centimeters) thick. Hewlett-Packard and Dell announced their own ultra-thin notebooks after that.
Apple Flubbed MobileMe, But the Mac Is Making Inroads Into Enterprise Market In the accompaning video, Henry and I talk about this uncharacteristic misstep for Apple, as well as some better news for the company: A record quarter for Mac sales and a growing presence in the enterprise market. Can Apple fill the gap left by Windows' crumbling hegemony? Or will Dell and HP finally figure out that it's all about design and beat Apple on price?
Microsoft Corp., weary of being cast as a stodgy oldster by Apple Inc.'s advertising, is turning for help to Jerry Seinfeld. The software giant's new $300 million advertising campaign, devised by a newly hired ad agency, has been closely guarded. But Mr. Seinfeld will be one of the key celebrity pitchmen, say people close to the situation. He will appear with Microsoft Chairman Bill Gates in ads and receive about $10 million for the work, they say. The new ad effort is expected to use some variation of the slogan "Windows, Not Walls," according to several people familiar with the matter. Those people say the point is to stress breaking down barriers that prevent people and ideas from connecting. The campaign, said to debut Sept. 4, is one of the largest in the company's history. The attempted image overhaul comes as Microsoft executives privately acknowledge that Windows -- the company's most important brand -- has grown stale and has been battered by Apple's "Mac vs. PC" ads. Those ads, created by Omnicom Group Inc.'s TBWA/Chiat/Day, feature a nerdy PC guy getting upstaged by a hip Mac counterpart. Microsoft's immediate goal is to reverse the negative public perception of Windows Vista, the latest version of the company's personal-computer operating system.
China challenges Microsoft Most often, Microsoft Corp.'s biggest rivals in the Chinese market have been black-market versions of its own products. That could change for the company's Office software suite, a key product that includes its word processing and spreadsheet tools. Wuxi, China-based Evermore Software is expected to release its latest Office competitor in late August. And while EIOffice 2009 is based on a file format standard promoted by the Chinese government and costs a fraction of Microsoft's offering, it also comes with a new legal threat. Evermore Chief Executive Gus Tsao said he's prepared to pursue Microsoft under a new anti-monopoly law that took effect in China on Friday. The law is widely expected to be used to curtail the dominance of foreign companies doing business there, such as Microsoft. Evermore's assault, while coming from a tiny challenger, underlines the sensitive position of Microsoft's Office franchise relative to Windows. While a legitimate rival to Windows for PCs is unlikely any time soon, Office has increasingly attracted competition. Google Inc., for example, has released a rival Web-based product in the U.S. and other markets. In its recently-ended fourth quarter, Microsoft saw weaker sales growth for Office than anticipated, as customers favored lower-priced versions. The unit that includes Office nonetheless produced more than $3.3 billion in profit in the quarter.
Is Something Rotten at Apple? In its ubiquitous TV ads, Apple claims that its new iPhone is twice as fast as the original version and just half the price. Neither is true. The half-price fib has been obvious for some time: When you add the price of AT&T's required two-year contract, the new phone costs slightly more than the old phone. Apple has reluctantly acknowledged flaws in the iPhone and has quietly promised to correct them, but there's no sign that it's taking the complaints very seriously. The lawsuit might be just the kick it needs to fix the world's broken iPhones. But the company's troubles go beyond the iPhone. Last month, Apple launched MobileMe, a $100-per-year online service that aimed to sync documents and e-mail across computers and Internet devices. MobileMe failed spectacularly in its opening weeks, with some users reporting losing years of saved e-mail. In a widely circulated post, Techcrunch's Michael Arrington claimed last week that Apple's PCs aren't doing so well either. Arrington, a longtime Apple fan, says he's had four new Macs break in different ways—one refused to connect to Wi-Fi networks, one suffered a keyboard flaw, and two shut down mysteriously. Is something rotten at Apple? Is it "flailing badly at the edges," as Arrington argues? Years of savvy brand advertising and a string of genuinely great products have helped Apple build up a well of good-feeling; as a result, people are more willing to overlook the company's occasional failures. Besides, many Apple products still beat their rivals, hands down. You may hate Apple for selling you an iPod with a battery that dies, but what are you going to do when you go looking for a new music player—get a Zune? Not likely. What's troubling, though, is Apple's tendency to milk this advantage—when it does screw up, it prefers secrecy over full disclosure, and it expects customers to quickly forgive any slight.
Google's tough sell to Corporate America Eighteen months after making a push into corporate software, only a handful of Fortune 500 and mid-sized companies have started using Google's programs - mostly anti-spam or calendaring tools - and none have embraced Google Apps in its entirety, preferring instead to stick with Microsoft Office or its distant competitors. Microsoft (MSFT, Fortune 500) last year sold $12.2 billion worth of Office software, according to research firm Gartner. Google pulled in just $4 million from Google Apps. One reason for Google's tough slog is simple inertia. Switching from one set of corporate software to another is hugely time-consuming. But Corporate America's reticence also stems from Google's overarching goal: to replace packaged store-bought software loaded on a desktop with programs that reside remotely on Google's servers and are accessed via the Internet. A lot of companies, from IBM (IBM, Fortune 500) and Oracle (ORCL, Fortune 500) to Hewlett-Packard (HPQ, Fortune 500) and Salesforce.com (CRM), are betting that Web-based, or "cloud," computing is the future of software (consumers already use it to access their Yahoo or AOL e-mail). Merrill Lynch estimates that online business applications will grow to a $95 billion market within five years. Even Microsoft, which has a lock on 98% of the market for desktop office software, is getting into the game.
Shift at the Top Emphasizes SAP’s Bottom Line The company is indeed shifting toward more of a focus on the bottom line, and less on the multibillion-dollar investments in technology that helped make it the market leader in the lucrative field of business software. The goal, it seems clear, is for SAP to show that it can not just produce sophisticated software that companies depend on to run their businesses but also do as well as its American archrival, Oracle, in satisfying the demands of investors. SAP can take heart that it controls a larger market share than Oracle, according to Albert Pang, an analyst with IDC, a Boston-based technology consulting firm. In 2007, SAP had about 10 percent of the $88 billion market in revenue for business software, while Oracle lagged with 6.6 percent. In subsets of the market — like enterprise resource planning, which tries to oversee many basic operations — SAP laid claim to 22 percent, almost twice Oracle’s 12 percent. But, analysts said, investors have seized on the question of margins and SAP has fed the story unabashedly. . Large companies first bought SAP products to manage inventories, track sales leads and handle vacation requests. Later, SAP clients ramped up their use of software for more analytical tasks, like divining sales patterns or ferreting out kinks in global supply chains. And by and large, SAP developed the products itself, eschewing the big acquisitions that were a signature of Oracle. SAP invested slightly more than the industry average of 10 percent of its revenue in research and development. In the last three years, R.& D. spending ballooned to 14 percent as SAP raced to bring new products to the market. In particular, it invested heavily in Business ByDesign, an online software suite aimed at expanding the market by appealing to very small businesses that cannot afford a pricey I.T. department. Now, SAP is betting that it can raise its profit margins without conjuring up, as is often the case in Germany, the specter of mass layoffs to contain costs. Mr. Kagermann said SAP would keep hiring, while curbing its costly use of outside developers. “We can continue to hire people because we continue to grow at double digits,” he said. “You just have to invest less than in the past.” This shift away from a period of rapid investment has raised expectations that SAP, which was born in 1972 when a group of executives bought out IBM’s German operations, is beginning to look a little less German. The company’s heavy spending on new technology may have dragged down margins, but its intense focus on maintaining the spirit of German engineering won SAP a reputation for understanding its clients’ businesses like no one else. On the downside, the programs were so detailed that it often took months to install them and train employees to use them. But SAP products generally avoided the heavy rounds of debugging and fixing that often plagued competitors like Oracle and Microsoft.