Amazon.com Widgets

Apple and IBM

July 16th, 2014

Apparently, Apple has decided to partner with IBM in selling to the enterprise, as reported by CNBC and the Verge. Apple is open to new distribution channels, i.e. IBM, to expand sales of its iOS devices into the enterprise.

There are a number of striking elements and open questions about this partnership.

Jobs vs. Cook

It is highly unlikely this partnership ever would have taken place under Steve Jobs. Referencing Ben Horowitz who was paraphrasing the Godfather, an Apple employee was quoted only last week in the WSJ as saying that Jobs was a wartime CEO, while Cook is a peacetime CEO.

Steve Jobs viewed IBM as the evil empire. He delighted in tweaking their nose, mocking their culture and being everything they were not. The phrase “Think Different” meant different than the old boring guard, Microsoft and IBM. Indeed, in the movie Pirates of Silicon Valley, a young Bill Gates manipulates Jobs into doing what he wants by threatening to “work with IBM.”

Whether this move is good or bad, it is vintage Cook and absolutely not Jobs.

Distribution Channel Culture

Apple has always kept tight control over product placement, preferring to sell directly to retail when it can, and going through well-controlled channels otherwise. IBM is a different beast. Granted, Apple is much larger now than it was when it had to shun standard corporate channels, and therefore can pull its weight with IBM in ways it could not even a decade ago, let alone in the 1980s, but IBM has certain ways of doing business that will not change materially due to selling iOS products. An iPhone or iPad is still one quiver in the IBM arrow, who will make much better margin selling WebSphere or Lotus than Apple Keynote for iPad.

Indeed, IBM’s entire business model is built around fewer high-margin sales. It has no idea what to do with an order for two $500 iPads, or even 1,000 $500 iPads with each configured slightly differently (a.k.a. personalized).

Will IBM be able to successfully sell these products given its structure?

Corporate Devices vs. BYOD

BYOD, or Bring Your Own Device, is the mantra that more businesses have been using for the last 7-10 years. iPhones (and later Android) were sold to consumers, and they wanted to use them. So rather than have an entire department inside IT to procure, manage, provision, update, recover devices, let people bring their own devices, and give them the software they need to work safely with corporate services.

Indeed, BYOD fits perfectly with Apple’s culture and image, of being a rebel, different, individualized, unbound by the stifling shackles of corporate culture and IT.

It seemed – and continues to seem – that the backoffice will continue to be dominated by enterprise software and hardware, whether sold by IBM like WebSphere and Power+AIX, or open-source and commodity, like JBoss and x86+Linux; it isn’t a space where Apple can or does play. But the user-facing front-end - phones, tablets, laptops – is Apple’s strength.

The combination of Apple innovation with user pressure and eventually corporate acquiescence to BYOD would appear to make it a strength of Apple’s to avoid standard enterprise channels.

Clearly, Tim Cook’s Apple felt there were many enterprises where BYOD simply wasn’t happening, primarily due to culture and sales channels. It could not be technology, since whatever IBM will load and configure is identical to what would happen – and for a much lower price – to a user who brought their own iPad and had their corporate IT add profiles and apps.

Cultural Cross-Pollination

Will IBM influence Apple? Will Apple influence IBM? I suspect that – after many clashes – the groups dedicated to working with their counterparts will be influenced. The IBMers will become a little more innovative, open and relaxed; the Applers will learn more about process, corporate sales and channels and locked down requirements.

But those are a small subset. Over time, one would need to become more like the other, and neither is going to be swallowed or materially affected.

Predictions

I don’t like making predictions – it is so easy to get them wrong – but my estimate is that it will fall apart within 2 years from one of 2 directions:

  • Slow sales: Some mix of IBM culture not structured to sell Apple devices or companies that didn’t want BYOD being too wary to take them, even from IBM will make the cost of maintaining the partnership too high in light of relatively low sales via the channels.
  • Cultural Conflict: Apple will continue to market its products as hip, edgy, futuristic, individualizable… everything IBM and corporate IT are not. Apple will continue to push individuals to demand BYOD. Eventually the IBM sales staff will complain enough about encountering responses like, “we don’t need this from you; our people bring them on their own.”

They could surprise us, though. It is possible Apple is seeing leading indicators of BYOD slow-down, or large pent-up demand for devices from corporate IT if only they could get them pre-configured the right way and through the right channel. Time will tell.

Is Greed Good?

July 14th, 2014

I always find it interesting when I visit Europe and find Europeans fulminating over the American penchant for “excessive greed” by sellers and consumerism by buyers. This past week, I had the ironic experience of overhearing precisely such a conversation… in the business lounge in Zurich Airport, where Internet access is terribly slow, and only available for one hour, even for business travelers and paying lounge visitors. After that, whoever you are, you must pay, 6.90 Swiss Francs, if I recall correctly, for each 30 or 60 minutes of Internet.

At heart, true, beneficial self-interest – the more civilized form of “greed” – is one that understands that the best way for me to benefit myself is by serving my customer. As long as I keep my customer happy, they will keep buying from me. But that requires continuous investment in benefits that I would otherwise have my customer pay for. In other words, being “greedy” requires acting “less greedy.”

Therein lies the great secret of Adam Smith’s capitalism. By creating a system wherein the best way to benefit myself is to best serve you, we create constant growth through… self-interest. I had the pleasure of having this explained to me by the late Sanford C. Bernstein over lunch at mutual friends a little over 20 years ago. As an arrogant and dumb college kid who thought he knew something, I had the temerity to argue with him over it, but he was quite right.

I have never much liked American airport lounges, although they seem to be making a bit of an effort lately. For example, the new United lounge in Boston is quite nice, as is the whole renovated United terminal. But wherever I go in an airport lounge in the US, I know I will get solid Internet access. Without it, no airline can possibly stay competitive. The number one user of lounges, business travelers, use that precious lounge time to catch up on emails between flights, Skype with loved ones who are hundreds or thousands  of miles away, or download music, books and videos for the upcoming flight.

At the same time, the various continental European airports I have visited over the past several months have been rather paltry in food selection and comfort and downright miserly in Internet access. I will still use the lounges when I have free access, but I would not ever recommend anyone pay for access.

A little “greed” can go a long positive way.

Pricing Lessons from a Groupon

July 10th, 2014

Last week, I had a lovely “prix fixe” dinner with my wife at a very good steak restaurant for 50% off, courtesy of Groupon. The Groupon was definitely valid when I noticed it, but the terms and conditions required that you check with the restaurant for a particular date, just to make sure it was available and open. I called, spoke with the hostess.

“Sure, it is valid, and tonight is fine, but we stopped selling that groupon a month ago. You can redeem it if you bought it, but you cannot buy it any more.” I didn’t bother arguing with her – after all, I had just spent the money – but I found it strange. What are the chances that an expired promotion not only would be available but would be the prime promotion on Groupon for that day? Of course, I knew otherwise, since I had successfully bought it.

I checked again a few hours later, and the Groupon was still available for sale.

Apparently, the restaurant owners either intended to limit the sale to certain dates and failed to do so, or intended to go back and cancel it later and plain forgot. Either way, it shows the power and danger of flash sales, and just about any form of promotions.

A seller creates promotions – Groupon, discounts, whatever they are – in order to drive revenue, market share or awareness in a particular set of circumstances. If the restaurant intends to be 50% off all of the time, it won’t do a Groupon; it will simply slash prices and be done, or constantly run promotions. Of course, there is an element of price discrimination, which allows them to capture those who would not have gone without the discount at the discount price, and also others who are willing to pay more at the full price.

But those promotions and discounts are a double-edged sword. When those circumstances no longer are extant, it is important to stop the promotion, or they will take on a life of their own. Clearly this happened.

Second, it is important to be careful to strengthen the element of time-boundedness of the promotion. People quickly learn to expect promotions, and then refuse to buy any other time. Will I go back to this restaurant? Probably, but at full price it is quite expensive, and will be a rarity. For example, I buy all my dress shirts from Brooks Brothers, as the quality is excellent… but only during their twice-annual sale. They are worth the relatively small premium during the sale, but not at the regular price. If you aren’t careful, people learn to value your products and services only at the promotional prices.

Striking the balance between offering sufficient promotion to capture the more price-sensitive consumer and avoiding expectations of constant discount, and the balance between offering incentives when beneficial given the circumstances and removing them in a timely fashion – neither too soon nor too late - when circumstances no longer dictate their placement, is one of the great challenges in pricing.

A Free Nest?

July 8th, 2014

Over coffee this week, I was discussing technology, startups, markets and business models. One of the topics that came up is Nest, the smart thermostat company that Google bought in January of this year for just over $3BN.

At first blush, it seems a strange match. Google is not a hardware company by any stretch, nor does it sell almost anything that masses of consumers buy at retail outlets, with warranties, return policies, and all of the headaches. Sure, it has the Nexus line of phones and tablets, but that is more about getting prototypes in the hands of real customers to see what they can do, as well as pushing the industry in a direction they believe is important. They also own Motorola, but that is largely managed as its own division.

My friend made the important observation that Nest is not really about the thermostat; it is about the data. Actually, everything Google does is about the data: search, Gmail, Google Apps, even Google Voice is really all about gathering massive amounts of actionable data on voice, voice patterns and human interconnection. Google makes its money on advertising, but at heart, Google is a data monetization company.

Given that they are willing to lose money on users – when was the last time you paid for search? – to make it back in spades on data, here is a radical idea. Why doesn’t Google give away Nest for free? With Nest thermostats gathering millions points of data about heating and cooling in what could be millions of homes, Google must be able to find a way to use that data or it would not have bothered buying Nest for $1MM, let alone $3BN!

PCI, POS and RTH (Road to Hell)

July 7th, 2014

Two interesting events came to light in the last week for me. First, I am working on getting a company towards compliance with the Payment Card Industry Data Security Standards (PCI-DSS or just PCI). These are the standards that govern the technology and processes you use to protect data when you handle credit or debit card transactions. An auditor checks your questionnaire or audits your systems and people, “recommends” changes if necessary, and then issues a PCI certification, which must be renewed each year. Despite the fact that the company itself never touches sensitive data such as card numbers or expiration dates or security codes, it still is subject to PCI for 3 reasons:

  1. Optics: Its Website is where consumers go to pay, even if they are then sent to a standard payment service. If consumers do not see the “PCI Secure” logo, they may be reluctant to use the service.
  2. Sales: If the company does not have the certification, vendors may be reluctant to sell through them.
  3. Indirect touch: Despite the fact that they don’t touch data, their Website does send consumers to a payment site. If their Web site is subtly hijacked, it could send customers somewhere unsafe.

Given the circumstances, I happen to agree that all such services should be subject to PCI certification, despite the headache and ongoing expense. The key phrase here is, “given the circumstances.” More on that in a moment.

The second event is more point of sale (POS) breaches. POS are the systems used (surprise!) at the point of sale, where you swipe your credit or debit card or pay by cash. These systems are highly networked to link your sale to the payment processors, the retailer’s inventory system, their marketing analytics, etc., as well as support. You may also recall POS as the system that was compromised in last year’s massive Target stores breach. They came in through the HVAC (heating, ventilation, air conditioning) systems and networks, but it was the POS they infected to steal all of the card numbers.

According to this NakedSecurity article, ISS, a major supplier of POS systems uses remote access to log into point of sale systems and provide maintenance and support. This is not uncommon in many systems, from routers to servers to, well, POS. After all, it would be prohibitively expensive for ISS to send individual technicians onsite to every place there is a card swipe machine, from the dozens in a Target store to the single one in a small curio shop in a small town in the Massachusetts Berkshire mountains! The problem, of course, is that each remote access may be subject to breach, provides another area of potential weakness, what is called a “attack surface.” And sure enough, ISS apparently was less than diligent in securing its remote access, providing a door to hackers, who just read card numbers as they were entered or swiped.

Once again, I am reminded that the entire edifice of payment cards is broken. Payment cards are a plastic version of checks / cheques, a paper or plastic or electronic authorization to withdraw or “pull” from someone’s account, in the hope that they will only withdraw the approved amount. This structure means:

  1. Anyone with sufficient account information – like a credit or debit card number – can withdraw funds from your bank or credit account; therefore:
  2. Every time you give those card numbers to someone – Target, your cable company, Swiss Airlines – provides an opportunity for theft, another attack surface; therefore:
  3. We expend enormous amounts of effort and treasure trying to protect every single one of those systems.

An edifice built on sand will constantly require more and more supports and effort to keep it from collapsing entirely, let alone actually standing upright. An edifice built on concrete drilled into the bedrock will stand for a very long time indeed.

In the age of electronic communications, it is time to discard the entire edifice of authorizing a vendor to withdraw or “pull” from my account if only they have sufficient secret information. All transfers of funds to someone else, like a retailer, should be “push” only. I, and only I, go to my account location – credit card provider, bank, savings & loan, whatever – enter the seller’s account information and the amount I want to send, and it goes instantly. Not in 2 business days like an ACH transfer; not in 1 business day like a wire transfer; but in seconds. This is the only way to bring sanity back to the payments process. Once this is done:

  1. Go ahead, let everyone know my account. Breach your systems. I don’t care! The only thing you will be able to do with my account information is send me money and not take money from me.
  2. If I no longer have to worry about the confidentiality of my account, 98% of PCI goes away! It is hard to overestimate how much PCI is costing industries worldwide year after year. The security auditors, or QSAs, are making a mint providing a service that is currently necessary but could go away. Vendors are expending untold sums adding protection above and beyond what is necessary, e.g. encrypting account information in databases, and, as we can see, it still is not enough.
  3. I no longer need to carry around lots of cards. I can have 0, 1, 2 or 20 accounts without needing the card.

Unfortunately, lots of businesses will, inevitably, go out of business. So be it. As Frederic Bastiat showed in the 1800s, let people spend their money where they find best. These still can be credit and debit accounts; I can push $100 to Target using a specific account that gives credit, collects end of the month, and gives miles. Or I can push using my regular old checking account. But it is high time that the entire infrastructure built around authorizing a seller to pull money from my account joined the horse and buggy in the quaint dustbin of history.

Netscape, SOX and the Price of Housing

June 30th, 2014

Between the terrible events of 11 September 2001 and the financial crisis of 2008, US – and eventually global – housing prices rose to absurdly high levels. It is interesting how quickly people become used to high prices as “natural;” when I was selling property in 2009 in a bad market, just about everyone advised me to wait it out until prices returned to “their natural levels.” For some reason, housing prices of 50% higher than their long-term average against income are considered more “natural”, even though they had been that way over a very short span of time, versus their, well, long-term average!

The following graph, courtesy of the Economist and available in interactive format here, shows US housing prices vs average income.

housing-vs-income-economist

As can be seen very clearly, for some reason, from around 2002 until 2008, housing prices rose dramatically as compared to income, as well as in real terms. A question that has vexed me for quite some time is, why? There are a lot of potential answers, and the Fed’s pumping of money into the economy was always part of the answer. But a few days ago I read an interview with Marc Andreessen explaining why “the IPO is dying.” As Marc explained it, a mix of factors, but especially the heavy burdens of Sarbanes-Oxley (or “SOX”), have made it very difficult for smaller companies to go public. Since the costs of SOX are largely fixed at millions of dollars per year, you are far less likely to go IPO until your operating margin is much much larger, and you can absorb the SOX costs better.

For example, a $100MM revenue tech company that is growing quickly but only has an 8% operating margin (it is growing, after all), only has $8MM in free cash to play with. If SOX costs $4MM, they have just lost half their profit! On the other hand, a $4BN revenue company, even if it only has 10% in operating margin, has $400MM to play with. Even if SOX costs are double those of the smaller company – they do not rise linearly with company size – it only hurt their profits by 2%.

I think Marc missed a few other elements, especially litigation costs, but the lack of IPOs until much of a company’s rocket growth is well past it, means that equity markets provide much lower returns than they used to. As Marc points out, over the long term, the S&P500 – the broad market – provided 6 to 7 percent annual returns. With compounding, that can be great, even accounting for inflation. But in the nearly 15 years since 2000, the S&P500 has been flat to down. There have been short periods of growth, but those are really just recoveries from troughs. Look at the following graph, courtesy of Yahoo Finance:

sp500

Basically, if you put $1,000 into the S&P500 in 2000, today it would be worth about… $1,000. Once you account for inflation – $1,000 in 2000 is worth $1,382 in 2014 - you have actually lost a lot of money!

When it comes down to it, most people have only one of three places to invest their money:

  1. Equity
  2. Debt
  3. Real estate

Sure, some can invest in gold or other commodities, but large-scale investment happens in those three. Beginning in 2000, SOX made real equity returns were negative, the Fed made real interest rates were negative, and there was a lot of cash waiting to be invested somewhere. Inevitably, the money ended up in real estate, itself a limited commodity. With all of those funds pumping in, prices were bound to rise, a bubble form… and eventually pop.

SOX + negative interest rates = Housing bubble

 

Micros Matters

June 27th, 2014

For those who missed the news, Oracle is making its biggest acquisition since it picked up Sun Microsystems – and one wonders what it has done with the chip/server/OS manufacturer since – in 2009 for $7.4BN.

Oracle is acquiring Micros Systems for $5.3BN.

Micros? Who is that?

Unlike the acquiring company, Oracle, whose name is well-known in general markets both as a tech icon and due to its very public founder/CEO Larry Ellison, and last acquisition Sun Microsystems, yet another tech icon and whose CEO also spoke with, shall we say, some flair, Micros is almost completely unknown by the general public. Who is Micros, and what do they do to make them interesting to Oracle?

Micros sells Point-of-Sale (POS) systems – hardware and software - to retail and hospitality companies. POS are those systems you use to check out of WalMart, the Apple Store, Hilton and Pizza Hut. There are 2 key elements to the POS business:

  1. Flow: Getting the flow right, so you capture exactly the information needed - items sold, payment method, consumer address if necessary, how many minibar drinks they used – in the minimum time necessary is extremely important. Not only does it move customers through the tedious part faster, thus leaving them happier and more likely to return, but the seller has a real – and expensive – human on the other side of the counter. WalMart checking someone out in 60 seconds vs 90 seconds can mean billions in savings across its chain of stores over a year.
  2. Data: POS is where all of the data is captured. There are lots of ways – and lots of software packages – to do analytics, but first you have to capture it correctly. Once you have the data, you can do lots of calculations on it afterwards.

So why does Oracle – famous seller of databases, as well as some back-office financial management systems (PeopleSoft), some hardware (Sun), and some “sort-of kinda” cloud offerings, all to the entire business world, want with retail and hospitality focused under-the-radar Micros?

As an aside, looking at Micros’ annual report, it is incorporated and headquartered in the State of Maryland. It is rare to see a software company headquartered in Maryland, as opposed to the natural locations such as CA, TX, MA, NY and VA, with more lately in CO. More interesting, it is extremely rare to see a company actually incorporated in MD. Companies want to be able to do combinations and transactions, maintain some level of privacy, and deal with outside parties and shareholders. Delaware has always been the best place to do it, which is why so many companies are incorporated there. Either way, Micros will soon be absorbed into (Delaware-incorporated) Oracle.

Sure, Micros’ $1.27BN in annual revenue and $227MM in profit are a pittance compared to Oracle’s $37.1BN in revenue and $10.9BN in operating profit; its margins are actually smaller at 17% vs 29%!

Micros, however, has several key assets that Oracle wants, and a possible signal of shift in strategy:

  1. Cloud: Oracle has really struggled in the cloud (see my previous post). They have managed to sell a significant amount of hosted software, largely because PeopleSoft really is such a pain to install and manage onsite, and, after all, who wants to go back to the capex committee in 3 years for another few $MM. But it has never really gotten the SaaS business. It just isn’t Google or Salesforce or RightNow or anyone who really get the cloud – how to build it, operate it, develop it, market it, sell it. Maybe it just doesn’t want to cannibalize its software business, but everything I hear says it is more cultural than hesitant. Buying a company that actually operates customers in the cloud - markets, sells and keeps them happy there – is a big deal for on-premise-centric Oracle.
  2. Domain: Oracle has always sold “software for everyone.” Oracle 12c isn’t a database for Retail, or Manufacturing, or Software, or anything. It is a database for everyone and everything. PeopleSoft isn’t CatalogERP or GovtERP or AirlineERP, it is everyone ERP. Micros, on the other hand, really knows hospitality and retail cold, and thus will win, 9 times out of 10, against a generic vendor. Does this mean Oracle has decided it needs to build businesses focused around specific industry verticals? This would signal a major cultural and organizational shift for the company.

As always, in the end, it is cultural. I have no doubt that Oracle’s well-oiled acquisition integration machine will pick up all of Micros’ business and grow it. Whether it will be worth the 2-3x or more the acquisition price to Oracle really depends upon how well it can learn from and integrate the cloud culture, with which it has struggled internally for so long, and the domain expertise.

Open the Kimono

June 25th, 2014

Personally, I am not a big Microsoft services user. I use Google Apps (email and online collaboration), iCloud (Apple), Dropbox (documents) and WordPress (blogging), and while I do use Microsoft software when relevant – Word, PowerPoint, Excel – and am grateful for the near-ubiquitous Exchange protocol, I do not use their cloud services very much.

But many millions of people – and businesses – do. So when Microsoft has an extended outage of 12 hours for the single most important service available for any business or person nowadays - email – as they did earlier this week, the level of trust they will receive for the future depends on their level of openness.

Microsoft, historically, is not a very open company, because it didn’t start that way. Its roots are in desktop software, in a new environment where intellectual property protections were few, in any case they had little recourse to attorneys, and keeping the crown jewels – their source code – secret was a key advantage. Over the years, as Microsoft’s operating systems developed, and it both courted developers to write software for Windows and competed with them with its own software, stories abounded of secret Windows APIs available only to Microsoft that let its own products run better or faster.

Thus, it isn’t surprising that when Microsoft has problems with its online platform – in the old days, they refused to call software problems “bugs,” they were just “features” – their natural tendency is to close ranks, hold it in, and tell customers, “just trust us.” They are probably also reinforced by the lack of understanding most customers have. Just as very few customers in the 90s could understand how Word was developed, so few nowadays would understand the difference between DNS failure vs routing tables vs environmental issues vs cache corruption.

But 2014 is not 1994. Many customers have technology savvy, while many others have access to such people as colleagues or friends. More importantly, there are sufficient numbers of highly technical people who can and do write on the Web. These people do analyze the responses of technology companies and whether or not they have truly repaired the issues. And many people do read their reports and trust them.

When Amazon Web Services suffered a major outage due to a botched network upgrade back in 2011, they shortly thereafter explained, well, everything. Their detailed blog posts explained what had gone wrong, and, more importantly, why it won’t happen again. Amazon did not break out their revenue by product line in FY2011, so I do not know if AWS took a “trust hit”, but they have remained the number one cloud choice since then.

If Microsoft wants to maintain its SaaS business, and the trust of its customers, it must explain all, both during and after an outage.

The Oracle of Doom

June 20th, 2014

I definitely will not be the first oracle to see a rocky future for Oracle, nor will I be the last. But the last quarter’s results, released on Thursday, are particularly troubling.

In short: Oracle’s enterprise on-premise software business - Oracle’s core – is simply flat. It did $3.769MM in revenue in 4Q2013… and $3.769MM in revenue in 4Q2014. It hasn’t budged. Sure, its expenses for those sectors may have gone down slightly, but for all intents and purpose, it is no longer a growth engine.

Part of the problem may be the anemic economy, although most large corporations are doing well enough and many have healthy IT budgets. What they have little of is on-premise software IT budgets.

Oracle’s cloud businesses – software-as-a-service (SaaS) and infrastructure-as-a-service (IaaS) – have decent numbers and are growing quite nicely. SaaS grew 25% to $322MM, while IaaS grew 13% to $128MM. Those are very respectable numbers for most companies, especially in the cloud business. But it is hardly sufficient to maintain Oracle at a $189BN market cap.

Oracle’s problems are partially market-driven, and partially self-inflicted.

  1. Market: Companies do not want to put out big amounts of cash as capex to buy perpetual licenses for software they run in-house, and then expensive engineers or database administrators (DBAs) to run them, followed by big annual maintenance fees… and then repeat in 3-4 years. They are much happier buying pay-as-you-go, and having someone else deal with the headaches of running it. Oracle, by contrast, built itself on selling exactly that kind of on-premise software.
  2. Culture: Oracle’s culture is built around its business model, as are all companies’. Oracle has acquired and expanded its way into cloud (depending on how honestly we count their hewing to the terms cloud, SaaS and IaaS). While almost any company will trust Oracle’s software to handle their mission-critical data, most companies will not trust Oracle to run their services. Quite simply, few believe Oracle really can do it. Those who do are entirely in a pre-existing relationship.
  3. Brand: I have lived the technology world for 20+ years, and continue to work directly with all of these providers. Does Oracle even have a serious IaaS offering? Their 10Q is the first time I am hearing about it. If they have $128MM in earnings coming from IaaS, it is news to me. They have never been a contender in any deal I have worked on. There is always Amazon and Rackspace, plus lately Google Compute Engine and some smaller players like Digital Ocean. Oracle? Never.
  4. Self-Inflicted Wounds: For many years, Oracle had the combination of trusted, solid, performant software and, even more importantly, a sales team that knew how to sell enterprise. All of this gave it a virtual lock on the enterprise market… and it sold like a monopolist. Its pricing was brutal, sales methodology aggressive, and it got away with it. While the older generation lived with it, the younger never accepted it, and even the older generation learned to resent Oracle. The mantra “anything but Oracle” has been repeated in every IT shop and startup across the country for years. The people making technology decisions hate, yes, hate Oracle and will do anything to avoid them, not just in databases but in anything. Oracle is one of the most-hated vendors in the IT and startup space.

With $9BN in quarterly revenue and $48BN in current assets vs $14BN in current liabilities (a great quick ratio), Oracle is not dying anytime soon. But it has managed to put itself in a difficult position to grow.

Does Architecture Matter?

June 17th, 2014

Does a good technology architecture matter for a technology firm? Perhaps the better question is, when does it matter?

The technologies that have developed as a direct result of the IT developments of the 90s and the Web developments of 2000s - scaling out instead of up, commodity hardware, loose coupling, statelessness, noSQL, map-reduce, etc. – have all had a huge impact on what it costs and how long it takes to build, deliver and maintain software and services. But it isn’t the elegance of all of these that captures me, or the coolness. It is my 20+ years of experience seeing how it makes a difference.

A good, nimble, modern architecture has three main benefits:

  1. Cost: Quite simply, these designs, over scale, are cheaper to own and operate.
  2. Flexibility: Nimble designs make it easier, cheaper and, most importantly, faster, to build and deploy changes in the product. You can iterate faster.
  3. Stability: Loosely coupled designs respond better to adverse incidents, leading to higher availability. They are also easier to test and change, leading to far fewer incidents due to deployments.

Of course, there are many other ancillary benefits. It is easier to hire top-notch engineers if your technology is built well; investors or acquirers will take a good hard look at how you’ve built your technology and will be impacted directly in valuation and go/no-go decisions based on what you’ve done.

And yet, given the great benefits, I have seen many companies with rigid, monolithic, brittle designs and 1870s-style development processes… with $1+BN revenue streams and no serious nimble competitor nipping at their heals.

I call this the “Architecture Paradox”. Software architecture matters, impacts everything, and yet sometimes doesn’t seem matter at all.

The question, then, is when does it matter? In what circumstances does it make a difference, and when does it, apparently, not.

The answer is it always matters, but it doesn’t always matter now. The difference is in the average size of deals in your market.

There are two kinds of companies by sales:

  • Fewer large deals – enterprise, sell the elephants
  • Many more smaller deals – consumer or SMB, sell the rabbits

In reality, it is more of a continuum, with lots of companies right in the middle of a moderate number of deals of moderate size. But it is the character of the deals that determines when architecture truly matters.

Enterprise

If your market consists of fewer really large deals, you are selling to the enterprise. The primary key to selling to the enterprise is not the feature-functionality of the product, but the ability to deliver the entire ecosystem: professional services, market positioning, engaging with research firms like Gartner, reference enterprise customers, and most importantly of all, knowing how to manage the sales cycle. The barely acceptable product with all of the above almost always will defeat the better product that is not structured to sell into the enterprise.

Further, once the product is in the enterprise, it is in the enterprise. It is extremely hard to remove it for many years:

  • It is tightly integrated with proprietary systems
  • It has corporate training manuals affiliated with it
  • It has corporate processes that depend upon it
  • Most importantly, it has reputations staked on it

Once a product is embedded in the enterprise, it is extremely difficult to replace it, no matter how much better your product is, until at least seven and likely ten years after first install.

Additionally, adverse incidents that affect, say, 10% of the customer base are really affecting only 20 large customers. These are elephants; you already have account executives and dedicated account managers to deal with them. Even if some of those 20 customers are extremely unhappy, it is only, at most, 20 mid-level VPs who are complaining, however loudly.

Small

If you sell a lot of small deals, the situation is reversed. You still need to know how to market and sell, and you still need to understand the sales cycle. But there is much more impulse involved, with fewer people and even fewer reputations. Almost anyone can approve a $1,000 per month deal at a company, and anyone at all can accept a $50/month consumer deal. It is also relatively easy to change providers.

  • It is barely integrated with any other systems
  • It has few, if any training manuals affiliated with it
  • If there are corporate processes that depend upon it, they are few and can be changed easily
  • The small size means little of someone’s reputation is staked upon it; “I tried it, it was good for a year, not what I expected, but it was only $10k. No big deal, let’s try something else.”

The cost of switching is fairly low, relative to the enterprise. A better product on feature-functionality, stability or even just price can peel off customers.

When adverse incidents affect 10% of the customer base, it may be affecting 100,000 customers. Unlike with 20 CIOs, it is impossible to engage one on one with each of 100,000 customers to convince them to stay. Further, if they take to social media or other fora to vent about the product and switching, many will hear it. 100,000 complaints is a lot of online weight!

So When Does It Matter?

In the small deal space, where voices are magnified and switching costs are fairly low, a competitor with faster innovation speed and iteration, higher stability and lower costs of operating can quickly consume an established player. It is extremely difficult to grow or even maintain market share and revenues+profits without being nimble.

In the enterprise space, where a few voices are worth many millions in revenue, switching costs are extremely high and reputations are tied to deployments, a competitor with faster innovation speed and iteration, higher stability and lower costs of operating can eventually consume an established player, but it will take a very long window of time. The value of the newer competitor has to be dramatically better than the incumbent, with at least equal sales and marketing prowess, and even then it may not be enough.

Eventually, even in enterprise, the nimble competitor will be able to take down the rigid, brittle and monolithic incumbent. But the time to get there may be greater than the window available due to limited cash flow or an investor’s patience. As someone (possibly A. Gary Shilling or even John Maynard Keynes) said, “Markets can remain irrational a lot longer than you and I can remain solvent.”