08.19.04

Are We Having Fun Yet –Part II

Posted in Technology Market Trends at 2:07 am by Tony Baer

It’s a natural thing to ask: over the past month, Microsoft announced it’s throwing $75 billion back to investors, while Google’s IPO finally happened. This is a lot more money than the tech sector has seen in a while. Does any of this indicate that the good times are coming back?

Not like the old days, if you mean 1995 – 2000, when a perfect storm hit tech: (1) there was all that Y2K-related work; (2) the Internet emerged; and (3) thanks to the temporary Peace Dividend and booming economy, a lot of money needed a place to go. Obviously, none of this is true today.

Consequently, Microsoft and Google are the exceptions that prove the rule. Both are household names — just like Cisco, Dell, EMC, IBM, Intel, and SAP — that tend to snuff out competition by force of critical mass. Both held huge events that are one-time occurrences. As we noted yesterday, the underwhelming Google IPO shows that there is a new outbreak of rational exuberance.

And as we noted last month, the tech industry is becoming a more “normal” business. Looking at software, with search technology excepted (there’s still room for new approaches), most enterprise system functionality is pretty mature.

Not that there aren’t innovations on the horizon. Microsoft is taking about radical changes to the core platform with Longhorn, while IBM talks about computing on demand. Other innovations are occurring at the edges of enterprise systems, such as real-time reporting, analytic data mining, methods for orchestrating functionality and other areas.

Maybe these innovations will be broad, but they’re also incremental. For instance, Longhorn will componentize the OS, much like Linux has done for years. Grid computing will make computing more accessible, but in all likelihood, it will bulk up the fortunes of providers already expert at delivering capacity and services. And as for Services-Oriented Architectures (SOAs), they will change the way software connects and interoperates, but won’t result in the break-up of traditional monolithic applications that aren’t broken (or at least not completely).

Instead, we foresee software and tech in general consolidating to a few household brands or “category killers.” For the most part, that’s no different than what’s already occurring in the retail, airlines, automobiles, and media/entertainment. While Wal-Mart and Target are prospering, other retailers are getting left behind in the dust. Consequently, growth is primarily through acquiring market share. Investment is increasingly driven by dividends.

For enterprise software customers especially, the migration toward “safe brands” reflects the fear of buying product that might wind up orphaned — not exactly the best decision to make for the sake of your career. As we mentioned a few weeks back, that doesn’t spell the end of innovation or the end of the software industry. It just means that the software business is becoming more “normal,’ which is probably the healthiest thing we could say about it.

08.18.04

Are We Having Fun Yet — Part 1

Posted in Technology Market Trends at 2:06 am by Tony Baer

In the past month, the tech sector has seen more money floating around than at any time since the end of the dot com bubble. First, Microsoft announced it would redistribute $75 billion over several years to shareholders through dividend and stock repurchase plans. Then came the event everybody was waiting for: Google’s IPO. Is everybody having fun yet?

We’ll first train our eyes on Google (we’ll deal with software later). Yes, the IPO has come, but no, the target price won’t be reached. Yes, Google made a number of missteps on the way to the IPO and alienated much of the investment banking community with its unorthodox auction approach. But no, the IPO didn’t crash and burn because the Merrill Lynches sat on the sidelines or the SEC fired up some warnings.

Instead, the Google IPO was a case of rational exuberance.

A sober reality has descended on the company’s prospects. Nobody subscribes to the idea that online search advertising is a new paradigm, and nobody believes it will be an infinite market. (Anyway, some Google users don’t even notice what’s on the right side of their screens.) However, the company has a real business and track record of success. For now there’s little question that Google has the best search engine, and with few exceptions, it’s stayed focused on its core business.

Consequently, the company has become a household name. The company has become the “Frigidaire” or “Xerox” of searching; by contrast, nobody uses Yahoo as a verb for searching. As for the looming threat of Microsoft, consider that the company has never replicated its platform dominance in the content space. For now, Google’s brand is safe.

But not forever. Although Google has the best search and overwhelming market penetration, the technology is hardly mature. There’s a desperate need to apply data mining techniques economically to make 2-million hit searches more digestible; if Google isn’t the first to get there, it will become the next Alta Vista.

And that’s our point. Google’s IPO reflects a sober realization that money can still be made in technology, but that the sky isn’t the limit. Although the rare exceptionto the rule that software markets are mature (search isn’t), investment professionals still believe that the stock must come down another 30 – 50% before they would jump in.

This isn’t 1999, and fortunately, the IPO reflects that.