Sunday, August 21, 2011

The Verticalized Enterprise Stack: Why HP Needs to Merge with SAP

This post was also published in VentureBeat.

HP has had to face tough realities this week. Fortunately, there is a way for it to survive: Embrace the inevitable trend favoring “vertical” companies.

In the first part of the 2000s, IBM and HP went in two vastly different directions: HP acquired Compaq to bolster a horizontally-integrated PC business, while IBM sold its PC division to Lenovo and focused on creating a vertical stack of enterprise products.

In the early 2010s, HP’s decision to attempt to dominate PCs has come back to haunt it. Even though HP is the number one PC seller, the low-margin business doesn’t pay, so the company is exiting both the desktop and mobile consumer computer business.

Now HP needs to act fast to remain competitive in the enterprise.

Rule of three

Earlier I described how the consumer computing business is consolidating based on the “rule of three” economic theory and that three big players would dominate the industry: Apple, Google and Microsoft. To play in this market requires a full vertical stack, offering customers everything they need from hardware to applications. Competitive companies will need the ability to extract efficiencies between and from each layer: mobile operating systems, mobile devices, desktop operating systems, personal computers, web browsers, productivity applications, content distribution and cloud services.

Given the vertical integration required to play in the consumer computing business, it is no surprise that HP decided to exit. In order to compete, HP would need to build out cloud services, a desktop operating system, and more. Microsoft, with its domination of the desktop PC and productivity applications businesses, has already spent years and billions of dollars filling its gaps, and will continue to spend billions until it wins the number three spot. HP, and in particular its raucous shareholders, have neither the financial gumption nor a base of technology for an attempt to be the number three in the consumer market.

So it is a wise move for HP to exit the consumer computing business and focus on its enterprise business. However, HP is jumping out of the frying pan and into the fire, as IBM, Oracle and Microsoft have been aggressively building integrated enterprise stacks over the past decade. The rule of three is applying itself to the enterprise space as well, and HP is getting left behind.

Owning the stack

The importance of owning every piece of the stack is increasingly critical. When Oracle decided to end support for the Itanium processor, HP had no database of its own to fall back on and resorted to suing Oracle to support its platform. Both IBM and Oracle are optimizing their databases and middleware to run super efficiently on their respective operating systems, processors and storage. IBM started the verticalized enterprise trend in the early 2000s by widening the memory bus to its PowerPC machines in order to extract more performance out of its DB2 database, forcing Oracle to acquire Sun in order to match database performance.

IBM and Oracle verticalizing enterprise software and hardware is much like the consumer verticalization. Apple’s ability to create efficiencies by building its own iPhones and iPads is a big part of what forced Google to acquire Motorola Mobility. HP board member Marc Andreesen may be right that software is king in his new cloud investments like Facebook and Zynga, but in the hardscrabble world of enterprise and consumer computing, IBM and Apple have verticalized software and hardware and clobbered HP in both the enterprise and consumer markets.

So how will HP build a complete enterprise stack? HP’s acquisition of Autonomy is a great start and fills the gap in enterprise search to compete with IBM’s OmniSearch, Oracle’s Secure Enterprise Search and Microsoft’s FAST. However, HP still has huge gaps compared to its competitors, including collaboration software, business applications, analytics, middleware, and database.

HP’s gaps are perfectly filled by SAP. And SAP’s gaps in services, enterprise search, operating system, processor, storage and management are all filled by HP. A merger of SAP (valued at $60 billion) and HP (valued at $49 billion) would create a $109 billion behemoth capable of competing with IBM ($188 billion), Oracle ($125 billion) and Microsoft ($201 billion). Large mergers like this can be a disaster, but HP’s CEO Léo Apatheker used to be the CEO of SAP and worked there for twenty years, so there is one person who actually knows both organizations.

HP needs to move fast. HP should dump its printer business along with its other low margin hardware businesses, merge with SAP to get a full stack, and then go on a shopping spree to shore up the weaker parts of the combined HP-SAP stack such as EAServer, StreamWork and HP-UX.

We are about to see a scrum amongst all of the larger enterprise players to acquire companies at every layer, such as TIBCO, Teradata, Jive, Salesforce, Red Hat, and likely even my own company, analytics vendor Webtrends. Microsoft may even take another try at Intuit now that it is no longer a monopolist.

Otherwise both HP and SAP risk losing the third place in the rule of three to Microsoft. It should be noted that despite its detractors, Microsoft has actually had amazing execution over the past decade and is the only contender to hold its own in both the consumer and enterprise computing stacks.

HP and SAP need to stave off Microsoft as the small- and medium-sized business enterprise player, or they will both wind up being carved up and bought by IBM and Oracle.

Tuesday, August 16, 2011

Good Morning, Would You Like an Apple, Google or Microsoft?

This post was also published in VentureBeat.

While it comes as a big surprise that Google is buying Motorola Mobility, it is just as surprising that Apple launched a cloud service that will eventually fully compete with Google’s services and Microsoft essentially turned Nokia into its own private Foxconn and will compete with Apple’s devices.

All of these moves actually fit economic theory perfectly: Personal computing is now pervasive throughout our society, and the 30-year-old industry is maturing into a “rule of three” phase, where three large players will dominate the industry: Apple, Google and Microsoft are the GM, Ford and Chrysler of our era.

Each of these “big three” players needs to build a full vertical stack and extract efficiencies between and from each layer: mobile operating systems, mobile devices, desktop operating systems, personal computers, web browsers, productivity applications, content distribution and cloud services. Now we know why Apple needs Safari, iWork and AppleTV. Why Google needs the Chromebook, YouTube video rentals, and Motorola. And why Microsoft needs Bing and Nokia.

Each of these products on its own merits doesn’t really make sense, but from a full stack’s gaps perspective, they make a whole lot of sense. It doesn’t matter if each product isn’t best-of-breed, because of best-of-breed just doesn’t matter anymore. What matters is that each player has each product and, over time, can improve that product and better integrate the product into its overall, vertical solution. Apple’s iCloud offering is nowhere near as good as Google’s and Microsoft’s offerings. But it is good enough to keep the Apple fanboys around, and that’s all that matters.

Over the past few years we have seen the same type of “insane” moves in the enterprise space. Why did Oracle acquire Sun and replicate Red Hat’s version of Linux? Because Oracle wants to play in the consolidated big three of the enterprise and had to match IBM with its full suite of business apps, DB2 database, AIX operating system, and PowerPC hardware. There are still some crazy moves left in the enterprise space, such as HP and SAP merging so that they can match IBM and Oracle.

The “big three” computer players now all have massive patent portfolios, and they are not likely to sue each other as it will be mutually assured destruction. However, they will be more than happy to tax niche players into extinction, much like HTC is paying Microsoft for each Android handset it ships. Even IBM, with its patent trove and aggressive IP monetization arm, doesn’t want to play in this fight, and sold its mobility patents off to Google.

So what’s next?

We can expect Microsoft to pick up RIM and HTC much like it picked up Nokia, lock down computer hardware manufacturers with stringent guidelines and add stores to compete with Apple on service. Apple will aggressively build out its cloud infrastructure and beef up AppleTV to fend off the XBox. Google will continue to beef up its productivity apps and focus on consumer hardware. All three will compete on the next generation of answers-oriented, Siri-like search.

Even the carriers could be in play, with former Apple President (and my two time board member and longtime mentor) Jean-Louis Gassée predicting that Google will acquire TMobile. Sound crazy? C’mon Google needs stores to compete with Apple and Microsoft. And owning a carrier just raises the stakes for the other two even further. It’s no crazier than Google buying Motorola. Game on.

Tuesday, August 09, 2011

Why Time Warner Should Reacquire Aol

This post was also published in VentureBeat.

Aol released its earnings today a week after Time Warner, its former dot-com merger partner, announced earnings. The two businesses, once considered completely disparate and deemed one of the worst corporate mergers of all time, are now increasingly complementary as the industry shifts beyond delivery mechanism to content as the value differentiator.

Time Warner reported stellar earnings last week, with income up 14% year over year and strong 11% growth in television networks such as TNT and CNN, 18% growth for premium content such as HBO, and 13% growth for Warner Bros movies.

The one thorn in Time Warner’s side is Time, Inc. — the division grew a moribund 3%. The anemic growth at Time is coming primarily from online revenue, but it is a tough transition since Time does not sit on a premium editorial perch like the New York Times or Wall Street Journal. And although Time is currently profitable, the Time Warner CFO has warned that income will likely fall next quarter.

In the end, magazine content is just dull and is no match for the online content scrum. Time, with its weekly recaps of the news, has attempted to roll out tablet apps and implement a paywall, but there is no compelling reason to pay. Even worse for Time Inc., Americans are tiring of celebrity magazines like Time Inc.’s People magazine, which suffered a 10% decline in newsstand sales. Meanwhile, online pure plays like Sugar and Glam are growing in the category. So what can Time Warner do to accelerate the online growth of its magazine division?

Aol has significantly grown its content business over the two years since its divestiture from Time Warner. CEO Tim Armstrong has been incredibly aggressive, acquiring the Huffington Post, the leading online pure play for news, restructuring Aol’s various blog properties, and growing Aol video into the #2 video site according to Comscore.

Aol missed estimates today, and the market savaged the company with a 25% drop. However, there was actually some good news in Aol’s earnings announcement: Advertising revenue is now $319 million and growing 5%. The online content strategy is actually working — it is just bogged down by legacy dialup and longer-term initiatives like Patch.

Although on first blush it seems absurd, Time Warner could pick up Aol’s content division at a discount, shut down Patch, and divest the dialup business to Earthlink, just like it divested Time Warner Cable. Aol’s content business would accelerate Time Warner’s online growth, and technology such as Aol’s Editions iPad magazine viewer could help grease existing Time properties. And Time Warner, with its $31.84 billion market cap, can easily afford Aol’s current $1.2 billion price.

If you were betting on the future of news, would you pick Time or HuffPo? Time Warner is going to have to make a move here, and Aol just got a whole lot cheaper than Say Media or Glam.

Monday, August 01, 2011

Just like Google and Facebook, Twitter now Charges Brands to Reach their own Customers

This post was also published in VentureBeat.

You know a web service has reached massive scale when it can charge brands to reach their own customers. Google has been doing it for years, Facebook has been doing it for the past couple of years, and now Twitter has just entered this hallowed territory with its new promoted tweets feature, which lets brands keep their tweets alive in your stream only if you have already followed that brand. The irony here is that you are only seeing these promoted tweets if you already followed that brand – so the brand is paying to advertise to users that already like it.

Now if advertising is usually about getting new customers, why would brands pay to market to their existing customers?

Many years ago, Google had a stroke of genius: to put ads above the search results and then charge brands to own the top spot where the brand inevitably would have been the first result. So when people search for BMW, BMW does not want Mercedes getting the top spot, so it buys placement. Nowadays, it is part of most every brand’s AdWords buy to purchase their own name. MarkMonitor, the digital brand protection company, reported last week that in sectors like finance and travel, nearly half of the ad buys are on the competition’s keywords. Although Google technically does not allow the purchase of trademarked keywords, the practice has become so widespread that some brands such as American Airlines have sued Google.

Facebook then jumped into the fray with its brand pages. First, a brand has to get “Fans” by getting people to “Like” its page. This is accomplished by special ad units on Facebook called Page Ads. Other options include “Like-blocking” an app on a page so that a consumer has to Like the Facebook page in order to get access to exclusive content, sweepstakes or deals. Once a consumer has Liked a Facebook page, the brand can then purchase additional Facebook ads such as Sponsored Stories targeting users that have liked its page, as well as the friends of the user that have liked its page. In effect, the brand is paying to advertise to users that have already said they liked it.

Twitter is following the Facebook model. First it charges brands to be a Promoted Account, which puts a brand in the “Who to follow” box on the Twitter homepage. Then, a brand has to buy Promoted Tweets, so that its message doesn’t get lost in the endless stream of tweets. Again, paying to advertise to users that have already said they liked its brand.

Over the past four years I have run numerous social marketing campaigns for big brands as the general manager of the social marketing platform Webtrends Soicial. We see a 7x increase in clickthrough rates when brands target their own fans on Facebook. Comscore recently released a report showing a 10% friend drag along for brands such as Starbucks, Southwest and Bing. I imagine Twitter will soon add the ability for brands to advertise to people following its followers, just like Facebook lets you advertise to friends of fans.

As I wrote in VentureBeat a couple of months ago, sending advertising to your existing users is akin to email marketing. A Promoted Account is the same as an email opt-in, and a Promoted Tweet is the same as sending your customers an email. Just a lot more expensive.

Very few companies have achieved the scale to charge brands to reach their own customers, and Twitter is now one of them.