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It was just back in early March that Steve Ballmer gave his “for the cloud, we are all in” speech at the University of Washington and sent an email along those same lines to all Microsoft employees.

Like many, I had more or less given up on Microsoft but thought that maybe the release of Windows 7 and a realization by the company that they really needed to do something different might change things. In addition, many Microsoft executives that I spoke to or saw present were being very honest about their shortcomings and lack of answers in areas like mobile computing and security. (Even Ballmer admitted yesterday that Microsoft was now “number five” in the mobile race.) So for a time I was open to thinking that maybe Microsoft in general, and Steve Ballmer in particular, was waking up.

Ballmer is infamous for his ham-handed antics as a CEO in the past and some of these are documented on YouTube. His head-in-the-sand stubborn attitude was shown also in his home where he reportedly doesn’t allow his family to have devices like the iPhone or use Google search. But at his U of Washington speech he seemed like he had lost a few pounds, was wearing glasses that made him look smart and, well, I thought… maybe.

In just two short months Mr. Ballmer has made it clear that he is beyond repair or reform as a failing technology company CEO. His inability to see the changing technology world around him will drive Microsoft ever lower in the food chain.

Ballmer doesn’t seem to understand mobile computing and the fact that it is fundamentally part of the cloud. My guess is that this stems from a view that is still rooted in the idea of a PC that uses the cloud rather than being inside the cloud itself. This is a very big problem if you are a technologist and responsible for the direction of a company like Microsoft. It means you see everything through a lens that distorts what is going on in the market.

Even Ozzie, another ray of hope introduced into the Microsoft darkness some time ago, appears to have a mistaken view of Android versus Chrome because he underestimates the power and potential of the mobile platform when combined with the cloud.

What Microsoft will have left are updated versions and upgrades to their declining (but still very large) franchise like Office, enterprise development and productivity applications. The company will remain important by virtue of their size and its tendrils in areas including gaming and smart cars.

Steve Ballmer seems to be unable to strike out no matter how many large technology industry shifts the company misses. Ballmer was recently able to make the statement that Microsoft “missed the whole cycle” in mobile computing as if it was a minor thing. Ballmer goes so far back at Microsoft that he is unlikely to be replaced. But after so many profound misses, the only chance Microsoft has is to do something akin to what IBM did when they brought in Lou Gerstner.

On the plus side, this is very good news for Google and Apple, who will continue to be competing with a giant that can’t see.

[Disclosure: The R2 model portfolio has long positions in both Apple and Google at the time of this writing. The author has a position in Apple.]

Investors have clearly been voting with their feet when it comes to the battle for the Mobile Internet between Apple and Research in Motion (RIM). This comes at a time when it’s become crystal clear to all (including them) that Microsoft desperately needs a strong play in mobile but is too far behind to catch up without a major acquisition.

Put simply RIM is suffering from negative investor sentiment. Not only is it coming from Apple in the form of the iPhone but also in the shape of software and services under the Android umbrella from Google. Motorola appears more competitive thanks to Android. To add insult to injury people are starting to take Nokia more seriously in the space based on more claims by senior management about what’s coming in the future. (This from a company who for the first 16 months of board-level reporting had grouped “smart phones” into the “design and fashion” category instead of full-featured data!)

Based on Intrinsic Value (IV) RIM is the most undervalued company in the mobile space right now. And that’s factoring in all the present investor fears of slowing growth and lower margins for the next few years, almost dialing in a worst-case scenario. We admit that it doesn’t make RIM “cheap” as an acquisition but it does begin to make it look reasonable and potentially non-dilutive for Microsoft to consider.

The fact is Microsoft *NEEDS* more than just a strategy and technology, they need a footprint. The choices are few but Microsoft is large enough to buy any of them including Nokia. But Microsoft doesn’t need to be in the cell phone business the need to be in the mobile Internet space which is the world of the iPhone, Blackberry and Android class of device. Palm has some good technology but doesn’t come with a footprint, especially in the enterprise. Motorola has too much baggage in non-phone businesses and what they do have is now based on Android.

Boiling it down to price is the hard part. On current numbers RIM is trading at a bit over 1x 2015 revenues. But the market will look at current revenues and there will have to be an acquisition premium of at least 20%. That would translate into a P/S ratio of around 4x and result in some near-term punishment for MSFT stock and investors focus in on near term dilution.

Strategically however this would be a masterful stroke for Microsoft. Almost no matter what Windows 7 Mobile looks like it will appear too late in the game to gather any meaningful share and attention. Mobile is too important to settle for that as the best outcome.

Of course RIM doesn’t need Microsoft to make their business work or for the stock to reach our IV estimates. But there is no question that the company needs to continue to execute well. RIM has advantages in both the enterprise and the consumer space that can be used to fend off Apple and Google but they are going to need to protect and extend these in order to win.

In addition we’d expect other large firms like HP and IBM are now appreciating the almost overwhelming importance of mobile and both companies know RIM well and would be able to acquire the company fairly easily.

[Disclosure: The Research 2.0 model portfolio has positions RIMM, AAPL and MOT.]

Pardon my French but de jure information technology standards such as the Open Document Format (ODF) suck and never achieve their intended goal. Especially when they are just the creation of one company using the standards movement, and complicit governments, to try to make up for total failure in the marketplace.

To the extent that Eurocrats want to waste their time on standards, so be it. Talk about activity having a negative effect on economic development (but does it matter since the EU will shrivel to nothing as an IT market shortly anyways?)

But Microsoft (MSFT) continues to waste shareholder value on standards too, trying to placate Brussels. It’s a bunch of European academics trying to dictate that the little thing that turns on the automatic windshield washer in your car always be on the left hand side of the steering column… from the same people who cannot agree on where the steering column should be in the cabin. Or what side of the road to drive on.

Please Microsoft, for the sake of your shareholders, let these hypocrites adopt Sun’s (JAVA) and IBM’s (IBM) “standard” Open Document Format. Tell the world that this is a company vs company thing that goes back to the dirty tricks played by them in Massachusetts four or five years ago. Then let the market decide the way it always does. What’s the current score? Something like 12:1 in downloads (measured in millions) with Office with OOXML leading Sun and others’ ODF.

– Dennis Byron

Tags: EU, open standards, ODF, OOXML, interoperability

The year-end IDC Worldwide Quarterly Server Tracker factory revenue numbers were released February 27. From an operating system perspective, there’s really no new news in them (but see the press release or the relevant IDC report for vendor and other characteristics). But we mention them here for comparison with the quarter-by-quarter results we blogged on in November, September and May 2007.

For 2007 vs. 2006, the net-net is Microsoft (MSFT) Windows-based systems continued to gain share primarily at the expense of “Other” (primarily legacy mainframe-operating-system based). Unix/Linux-based server revenue was basically flat year over year with Linux open source systems continuing to displace UNIX systems as expected. Linux gained slightly more than a percent of share while UNIX lost just under a percent of share.

As we noted in November, it appears from eight quarters of IDC data that the Unix/Linux share of the market is stabilizing in the 40-45% range, although they hit 46% in quarter 4 2007 only. We will need to watch to see if this is an upward trend or a seasonal issue.

Although overall Windows-based server revenues are gaining at the expense of “Other,” such as IBM (IBM) mainframe operating softwre, the trends went the other way in quarter 4, so that is something else we will watch. I believe that blip was totally seasonal because end of calendar year buying is a 40-year pattern for legacy systems.

— Dennis Byron

Tags: Microsoft, open source, Windows, Linux, IBM

As we’ve been noting since mid-2007, Microsoft (MSFT) is making every effort to put its anti-open-source baggage behind it. This is covered in detail in our annual Microsoft report released in December. On February 21, Microsoft announced sweeping open-source interoperability “principles” related to its volume software products (Windows Vista, the .NET Framework, Windows Server 2008, SQL Server 2008, Office 2007, Exchange Server 2007, and Office SharePoint Server 2007) that basically put its agreements with the European Union Competitive Commission, announced in October 2007, into Microspeak.

The announcement has three implications:

First, previous tactical opposition to open source software (OSS) has been a distraction to Microsoft’s “Software Plus Service” strategy, which hopefully will become more about providing IT and business services than mundame closed or open technology terms and conditions. This means “Software Plus Service” is misnamed (but don’t get hung up on words, as the U.S. presidential candidates are saying to each other). The Software Plus Service strategy has been a work in progress since Ray Ozzie joined Microsoft and dropping all the anti-OSS tactics makes that clearer to investors.

Second, although at the February 21 press conference Microsoft specifically said this announcement had nothing to do with the proposed Yahoo (YHOO) acquisition, that acquisition has everything to do with bringing Microsoft services to consumers just as most of the current available Microsoft “Live” services support enterprises. Microsoft is uniquely positioned to support both enterprises and consumers. More importantly, it can support each individual in his or her enterprise and consumer roles as those roles change during the day.

Third, the announcement covers all interfaces used by Microsoft itself in tying its volume products to “other Microsoft products.” That means it will be easier for open source software (OSS) providers to connect to the BizTalk integration engine (if that’s considered separate from Windows Server 2008), the Greats Plains heritage application software (even the smallest OSS ERP provider can write its version of SAP Duet), and more.

Apparently when it crossed all the t’s and dotted all of the i’s on the agreement Microsoft made with a free-software-oriented organization called the Protocol Information Freedom Foundation in December 2007, it decided to just open the kimono and eliminate the middle man.

Can you say this means Microsoft is now open source? No, and Microsoft took time in the press conference to spell out its intellectual property rights (licenses will be reasonably available but not freely available). But anyone who argues about the differences at length (and many long-time Microbashers will of course) is strictly splitting hairs.

– Dennis Byron

Tags: Microsoft, open source, EU, Windows, Protocol Information Freedom Foundation

Sun (JAVA)-MySQL. Oracle (ORCL)-BEA (BEAS). As I said (see in the Oracle-BEA post put up on this site on January 17), there is one major interconnecting theme in the two major software-supplier acquisitions this week: For users and investors the independent middleware market as we know it is going away.

In Oracle acquiring BEA, the thought process behind that statement is (hopefully) clear and explicit.

In the Sun-MySQL deal, which also will lead to the collapse of middleware independence, it’s actually implicit in Sun’s statement that it wants to get into the database market. That really means Sun wants back into the whole infrastructure stack market, offering a framework from hardware up through business process management, and even applications if you count openOffice.

Think about that (“Sun as a competitor against Oracle in the database market”). That makes Oracle the winner in both deals. Now, instead of worrying about competing against a bunch of hungry nerds toiling away in an aggressive freestanding start-up, conducting guerilla marketing worldwide the way Sun did against DEC and Data General 20 years ago, Oracle just needs to think about Sun as a competitor in the database market.

And on the same day, it put BEA out of its misery!!! A two-fer.

But of course that is not Sun’s objective. Sun wants to take on Oracle, IBM (IBM), SAP (SAP) and others and make sure the others think of Sun as a competitor all the way up and down the stack. As Larry said in the context of his deal, it was “a great day for Java.”

Sun CEO Jonathan Schwartz said the MySQL deal was the “most important acquisition in history of Sun” But he also said the MySQL acquisition was complementary to Sun’s JavaDB (Berkeley) and postgreSQL offerings. The latter are other open source software (OSS) projects in which Sun is involved that compete with MySQL. That the competing projects complement each other may be Sun’s intention but that’s just not human nature.

First point: Watch for a tumultuous period starting almost immediately (the deal will be finalized plus/minus April 1) where the multiple OSS database offerings sort themselves out within Sun’s sales force. This will retard MySQL’s growth from what the OSS database might have otherwise achieved in 2008. MySQL may even lose; IT development and marketing guys play hard ball. We have already seen aggressive PR campaigns badmouthing MySQL product and support quality.

Speaking of MySQL’s revenue, the losers in this acquisition were the OSS pureplays and those OSS dual-license guys that still like to call themselves OSS pureplays. Research 2.0 and others estimate MySQL did about $75 million in revenue in 2007. We applaud Sun’s negotiating skill. Even if MySQL only did $50 million in 2007, the lowest estimate we have heard, it means Sun “only” paid 20x annual revenue. In October 2007, Citrix (CTXS) acquired Xensource for some where north of 100x 2007 revenue. To be fair to Citrix, it believes it paid about 10x 2008 revenue for Xensource. But of course we won’t know if that’s true for a year and Citrix won’t tell us if it was wrong anyways.

Second point: The value of pureplay-heritage OSS hybrid companies, which is what MySQL was, is dropping by that valuation measurement, coming back to earth from the JBoss, Zimbra and XenSource acquisitions. As I said in my initial blog post on this acquisition, the OSS IPO parade band is turning into a quintet and might simply become a guy accompanying himself on a harmonica by the end of 2008. And as I said when MySQL was beating the IPO drum back in July, a good business case is still more important than a buzzword such as OSS.

In my opinion, the investment opportunities—and OSS’s future—lies on the application functionality side of the market, not the infrastructure side. Alfresco, Compiere, Jaspersoft, etc. are still in the parade but the others best get out of line and find their “proprietary partners” as soon as possible.

As for partners, MySQL allies such as Google (GOOG), HP (HP), IBM (IBM), and Unisys might really be thinking twice about Sun’s acquisition. Intel (INTL), Red Hat (RHT) and SAP (SAP) pulled a few dollars out of the deal because they were major MySQL investors. But presumably SAP would have preferred that MySQL stay independent because it was probably going to bet on MySQL as a counterweight to Oracle (it doesn’t like having its major competitor “owning” most of the file systems its customers’ SAP applications access). With this acquisition, SAP will now be equally beholden to Sun. But SAP can still switch easily to Ingres or postgreSQL, or even–although unlikely–its own SAP DB.

Smaller MySQL partners, many of whom are also OSS companies, should be helped by this move, as explained over at my OSS blog on ebizQ.net, where I research about OSS all the time.

As for users Sun believes it can drive new adoption of MySQL’s database in more traditional applications and enterprises. Today MySQL shows up more in embedded applications and “Web 2.0 stuff.” Sun says, “The integration with Sun will greatly extend the commercial appeal of MySQL’s offerings and improve its value proposition with the addition of Sun’s global services organization.” Schwartz said Sun’s research found that the lack of “peace of mind” by large enterprises was holding MySQL back. But some very large enterprises such as Nokia and Google weren’t having that problem.

The companies also said more than 100 million copies of MySQL’s OSS database software have been downloaded. A very large percentage of those were for Windows but MySQL said that by the time the database gets to production (only one in a thousand downloads turn into business MySQL had said previously), most are on Linux, with Windows and Solaris second and third in popularity.

Third point: So even major Sun partner, Microsoft (MSFT) might get some benefit out the acquisition.

But in the end, the real winner is Oracle.–Dennis Byron

Tags: open source software, OSS, Microsoft, Sun, Oracle, MySQL, SAP

All eyes will be on Steve Jobs at MacWorld where he’s expected to announce a MacBook Slim, new music and video offerings and who knows what else.

Probably lost in the shuffle will be the Microsoft release of Office 2008 for Mac on the same day.  For those who don’t know Mac OS is currently restricted to Office 2004 which is a major problem for business users because many important Excel features only work on Office 2007 or later versions.   We still have to test the features but expect them to work and possibly reduce the need to have Windows computers in the shop for certain applications.

Walt Mossberg over at the WSJ recently gave Office 2008 for Mac OS a pretty good review and notes that it’s a solid update for a user population that is badly in need of one.

Why is this important?

1. This helps Apple more in non-Apple environments.  Although Office 2008 on the Mac won’t support key enterprise software like Outlook, it becomes a more capable computing citizen in corporate environments.

2. Provides an important source of application revenue for Microsoft on the Mac.  It’s probably on a few hundred million dollars of opportunity but it’s certainly an incremental positive.

Longer term the question still remains as to how aggressive Microsoft might get with an "embrace and extend" strategy vis a vis Mac OS.  It may make more sense because as Microsoft grows their server side software business and holds on to Office leadership, it might be financially attractive to integrate Mac OS clients.

All in all we see the Office 2008 release for Mac as a fairly positive event for both Apple and Microsoft.   We continue to recommend Microsoft strongly due to low valuation and improving fundamentals.

Research 2.0 has a  long position in MSFT.

– Kris Tuttle

Tags: Apple, Microsoft, Office 2008

When I did software marketing back in the day, user group meetings were not major events. The key information-technologist and IT-staff meetings of the year were the spring and fall ACM/DPMA/IEEE/etc. “Joint” conferences in the 1960s followed by the annual National Computer Conference (NCC) in the 1970s and—in the 1980s—the geeky tradeshow that probably single-handedly drove the mob out of Las Vegas, Comdex. From a marketing perspective, every IT supplier was on a level playing field in trying to get the attention of the press and prospective customers.

Beginning in the 1990s, smarter software marketeers than my generation’s figured out it would be much better to deal with a captive audience of already committed customers. Thus IT suppliers began to put the full court press on their own user conferences and the great all-comer IT trade shows faded away.

I noticed today that that idea has lead to another marketing technique. Rather than give the company holding its user conference the entire weekly news/blogger cycle, which this week could have been Oracle’s (ORCL) with its OpenWorld beginning November 12 in San Francisco, the other guys’ PR folks try to come up with a news blast that can’t be ignored. Hats off to IBM (IBM) with its proposed purchase of Cognos (COGN), announced on November 12, and Microsoft (MSFT) with its November 12 rollout of Windows Server 2008 details. Of course, IBM would say that they could not control the timing of the release of the Cognos deal once it was signed and Microsoft is holding its European TechED in Barcelona this week.

So the question is does Oracle have any news blasts itself to counter the IBM and Microsoft efforts? Based on Charles Phillips kick-off keynote, the answer is a resounding “maybe.” In addition to the usual platitudes about market and technology leadership in the various segments of its business (database/middleware and applications) in his keynote, Phillips joined with the “new” head of all Oracle development, Chuck Rozwat to demonstrate some mildly interesting new products. (With John Wookey’s recent demotion/departure, Rozwat now moves into a spot at Oracle that has about the half-life of a baseball manager’s.)

To kick things off, the pair demonstrated:

• Some rehashed applications features which I would summarize as “no news blasts here.”
  • Application integration architecture features that looked like SAP (SAP) BAPIs from the late 1990s, even leading with the order-to-cash example that has had a longer “demo shelf life” than Steve Jobs
• Compliance stuff inherited with the Logical Apps acquisition based on active governance and a lot of last-year yawn on Sarbanes-Oxley
• Former Agile PLM functionality designed to demonstrate Oracle’s best of breed plus suite strategy

• Some possibly interesting infrastructure stuff that might be more important than the demo illustrated. These included
  • Fusion 10g middleware beta (implicitly)
• Enterprise Manager and Software Configuration Management functionality
• Oracle VM, based on the Xen open source virtualization software, which looks like it will let users virtualize both applications as well as servers, including Linux servers

The show goes on all week at Moscone and there maybe a news blast buried somewhere. In terms of investment potential, unless Oracle uses the new Enterprise Manager functionality to more directly take on BMC (BMC) and CA (CA) or the VM product to be more aggressive in its Red Hat (RHT) Linux program, this week’s PR battle looks like “advantage” IBM and Microsoft.

–Dennis Byron

Tags: Oracle, open source software, OSS, IBM, Microsoft, virtualization

We have already writ large our appreciation for the under-appreciation of the investment community for Microsoft’s prospects.  With the stock at $37 maybe it needs time to rest before a sustainable move into the $40′s.

Although RIMM is not a stock we have followed it has been added to our Cloud Computing Theme group in part because of their new product offering that finally addresses the huge market in between the large enterprise where RIMM has long held sway and the individual consumer.

Small businesses can now get the RIMM offerings in bite-sized pieces starting at 5 users.  Also of interest to our positive outlook for Microsoft they are tightly integrated with Exchange (also Lotus but who cares.)   The facts are that Microsoft continues to have a much richer, more secure offering than what the upstarts Google and Apple can offer today.

We remain huge fans of Google and Apple as companies and sometimes stocks but investors are probably over-estimating their near and intermediate opportunities in the business market.  The move by RIMM makes it even more apparent.

The best call we saw recently was the set of points made by American Technology Research in supporting their new higher price targets on RIMM.  They pointed out that low penetration, better carrier strategy, new offerings and huge earnings from replacement phones make RIMM a great long-term growth stock, even at $130.

– Kris Tuttle

Tags: RIM, MSFT, Microsoft, Apple, Google