esofto

Stacks

Understanding how enterprise software, or any software, fits together is largely a matter of understanding how software stacks. As the name implies, a software stack is an orderly heap of code. Software at the top of the pile depends on support from software at the bottom of the pile. The reason software is designed this way is partly historical and partly pragmatic.

From the very beginning of computing continuous efforts have been made to make computers adapt to humans although the result has more often been the other way around. The very first computers required technicians to pull a cable out of one connector and plug it into another to program. That was quickly replaced by switches that were controllable from a console and the industry has never stopped trying to make the computer easier to control since although at the cost of making them ever more complex.

Pragmatically it never made sense to reinvent the wheel from the very lowest level instructions to up every time you designed new program. So the programmers of applications depended on the programmers of databases who depended on the programmers of operating systems who depended on the programmers of microcode who depended on the engineers of machine instructions – some of whom are now old enough to have retired or passed away.

This has a very important consequence for the economic of the enterprise software business. Although applications are marketed and sold to a large extent as an independent entity, in fact they useless without the parts of the stack below them . So the sale of an application inevitably results in the sale of a database which results in the sale of an operating system. But the reverse is not a case. The sale of a layer in the stack is not dependent on the sale of a layer above it. For example if you purchase a database you require an operating system to run it but an operating system does not need a database to function. This puts certain companies in the industry, like SAP, which are dependent on competitors like Oracle for a part of their stack below them at a disadvantage. Although Oracle is not the only database that SAP can run on top of, and the company does not officially encourage its users to run Oracle, but Oracle is still the most popular database to run SAP on top of., so the sale of an SAP license usually results in the sale of a database license for Oracle.

Another economic consequence is that when software lower in the stack is changed or replaced software above it must also be changed or replaced which creates a need for new upgrades and creates a strong maintenance stream of cash flow.

Although there are many examples of stacks – OSI, TCP/IP, the most useful example for our purposes might be the LAMP stack. LAMP is an acronym coined by Michael Kunze to describe a stack of free software used to run web applications, specifically:

• L - Linux,
• A - Apache
• M - MySQL
• P - PHP or Perl, Python, or other the programming languages like Ruby.

Its important to note the originators of each of these programs did not design them to work with each other. The combination has become popular because of its cost and widespread distribution.

SAP Bets Its Future on BusinessByDesign

SAP’s new on-demand solution for the midmarket is a natural if risky step for the company. Building on SAP’s years of experience in the applications business Business ByDesign includes state of the art innovations, and from an engineering perspective already represents a tremendous leap forward for the German company.

Unfortunately for it, to make the Business ByDesign competitive SAP has had to change its business model. Traditionally the company sold new software as a perpetual client premise based license giving it many of the attributes of a product. In contrast, Business ByDesign will be sold on subscription basis and will be hosted by SAP itself meaning it will have many of the attributes of a utility like telecommunications or electricity.

Although this promises a rich reward from investors if successful it also has the potential to touch off a civil war within the company between the old school engineering culture in Waldorf and the new age marketers in Palo Alto.

The market SAP plans to enter is certainly a ripe one - companies between 100 and 500 employees. This is the market segment that made IBM’s AS400/i-Series a best seller. In total SAP estimates there are 60,000 companies of this size in Germany and the United States alone with worldwide potential market of $15 billion.

The problem is that SAP may not be able to limit Business ByDesign’s appeal to just this segment. Larger and smaller companies may be interested in hosted solution as well and this creates channel conflict not just with the company’s partners but within the organization itself.

Relations between the aging German engineers responsible for the company success so far, and upper management which whole heartedly believes the company must draw on talent across the globe to be competitive has already been tense. When the engineers threaten to unionize, upper management threatened to move the company out to Germany. The recent departure of Shai Agassi, poster child within the company for internationalization, highlights the fact that his battle is not one-sided.

If companies adopt or threaten to adopt Business ByDesign instead of SAP ERP, Business One, Business All-in-One or the Business Suite that creates additional tension within the organization and management will have decide who gets sacrificed because in the long run the company can not survive with a mixed premise and subscription business model.

A Good Point

"It's tough to compare us right now to almost 40 year old software companies"

Steve Cakebread
CFO
Salesforce.com
Thinkequity Conference
September 19, 2007

No Conflict here, Not that it Matters

In law, the appearance of misconduct often counts for more than the misconduct itself. Netsuite’s IPO marketing creates the appearance that they compete with Oracle. The logic works like this: Netsuite positions Salesforce.com(NYSE:CRM) as its primary competitor. Salesforce competes with Oracle on large deals and in big companies therefore Netsuite competes with Oracle. Yet by the same logic Pétrus (France’s most expensive wine) competes with Coke because they are both drinks.

Netsuite actually competes with Oracle the same way Jack-in-the-Box competes with G.E. commissary services. Yes G.E. sells food to its employees at a profit, and yes sometimes G.E. employees go to Jack-in-the-Box instead of the commissary. But G.E. is only in the food business so its employees can be more productive building higher margin products like Locomotives, Airplane Engines, and Financial Derivatives.

Oracle is in the applications business primarily to leverage the sale of higher margin products like databases and consulting and the typical Netsuite customer is so small that Oracle would sell to them only grudgingly.

Netsuite is, in fact, a valued customer of Oracle and a good chuck of the money raised in Netsuite's IPO will find its way to Redwood Shores.

While I don't believe Larry Ellison wouldn’t lose any sleep even if there was a conflict of interest the appearance of a conflict of interest might be enough to spawn a cottage industry of lawyers suing him and the Oracle board.

Takeaways

• Netsuite’s marketing creates the appearance of competition with Oracle
• Netsuite is only a very marginal competitor to small one part of Oracle’s product line
• Netsuite is a big consumer of Oracle’s products
• Despite this Oracle and Ellison may see a series of lawsuits

Disney Buys Club Penguin

The Walt Disney Company (NYSE: DIS) has acquired Club Penguin for $330 million upfront and a $330 million earn out. Launched in October 2005, Club Penguin has more than 700,000 paying subscribers and 12 million members primarily in the U.S. and Canada. It has achieved this growth with very limited marketing efforts, mostly relying on word of mouth. Club Penguin features animated penguin avatars that inhabit a snow-covered virtual world, where they can converse with other users, participate in group activities and create and furnish a virtual home with currency earned inside the game.

“We have been actively searching for an organization that not only shares our values and concerns for children, but also has the ability and desire to help us bring Club Penguin to more children throughout the world." said Lane Merrifield, one of Club Penguin’s three founders. “As a former employee of Disneyland, I’ve always had a great respect for what Walt created.”

Club Penguin, which will be called Disney’s Club Penguin, will retain its URL (www.clubpenguin.com) and will remain based in Kelowna, British Columbia, Canada. The company’s three founders, Lane Merrifield, Dave Krysko and Lance Priebe, will join Disney and remain the senior management team of the unit. Merrifield, Club Penguin’s chief executive officer, will become an executive vice president of The Walt Disney Internet Group (WDIG), reporting to WDIG President Steve Wadsworth. Disney plans no immediate changes to the operation or business model of Club Penguin.

Until now, Club Penguin’s user base has been primarily located in the United States, United Kingdom and Canada. By leveraging Walt Disney Internet Group resources and experience, Club Penguin plans to create international versions in Europe and Asia, as well as in the Americas.

Club Penguin is designed primarily for kids ages 6 to 14. Club Penguin and features a velvet rope model of usage. While users can play for free for an unlimited time and enjoy a portion of the virtual world’s geography and functionality, a user must subscribe in order to achieve status rank in the game, take advantage of certain features or make purchases of in-game goods such as furnishings for an avatar’s igloo home. A subscription is $5.95 a month or $57.95 a year . In addition to subscriptions, Club Penguin also generates revenue from sales of merchandise online, such as plush versions of penguins’ pet puffles, t-shirts and gift cards.

Rainmaker Goes To Capital Markets Again

Rainmaker Systems (NASDAQ: RMKR), a provider of sales and marketing solutions announced that it has closed a follow-on public offering of 4,165,690 shares of its common stock at a price of $8.50 per share. The Company received proceeds from of $27.3 million after payment of expenses relating to the offering.

The Company has agreed to sell up to an additional 624,853 shares of its common stock at the same public offering price per share if the underwriters exercise their over-allotment option

Rainmaker combines proprietary, on-demand application software and analytics with outsourced sales and marketing execution services. Rainmaker clients include large enterprises from a range of industries such as computer hardware, software, telecommunications, and financial services.

TheHub Closes

Wal-Mart has closed TheHub, the Bentonville, Arkansas company's attempt to capture the MySpace market. Although WalMart is many things including:

• The world’s largest retailer with $312.4 billion in sales,
• The No. 1 company in the FORTUNE 500 rankings,
• Visted by than 176 million customers per week worldwide, and 127 million in the United States,
• Operator of 3,800 facilities in the United States and 2,600 in Argentina, Brazil, Canada, China, Costa Rica, El Salvador, Germany, Guatemala, Honduras, Japan, Mexico, Nicaragua, Puerto Rico, South Korea and the United Kingdom.
• Employeer of 1.8 million people worldwide and 1.3 million in the United States alone*

it never came close to understanding how social networking systems work.  Both Wal-Mart and MySpace are wildly successful because they address basic human needs. In Wal-Mart's case the need for cheap goods from China. In MySpace's case the need to appear cool and connected. The one thing Wal-Mart is not is cool. Do gangs of kids ever get dressed up and hang around Wal-Mart the way they hang around malls? Why did they ever think the brand would work differently on-line?

Yet Wal-Mart did and does have an opportunity to create a robust social networking site by concentrating not on customers but employees. Its 1.8 million associates presumedly have enough in common that if the company paid them all to spend an hour or so a week networking with other employees it would almost overnight build up the nucleus of a very successful social networking site.

* Source: Wal-Mart.com Corporate Fact Sheet October 4th 2006

Startups

Startups are about people more than ideas. We want to see the person. Investors invest in ideas, but it's the character of the person that matters in the end.

Bambi Francisco

CRM may be Dead but There Are Still Opportunities to Treat Customer Better

Nothing illustrates why the CRM market is dead or why treating customers better is still an opportunity than this story from a friend:

"Last night at 11:09 I got a call from a company pushing a 6-day class in Microsoft CRM. They are the experts, etc. I called them back today. The reason for the late-night call was that they hadn’t broken out the list by geography. I told him that this didn’t leave me with much faith in his company’s ability to provide quality CRM training."

Onyx Goes Private

Onyx Software Corporation (Nasdaq: ONXS) has agreed to be acquired by M2M Holdings, a private company jointly owned by Battery Ventures and Thoma Cressey Equity Partners. The public company will go private in a cash transaction valued at $92 million or $4.80 per share.

Founded in 1983, Battery Ventures is a leading venture capital firm focused on investing in technology companies at all stages of growth from seed to later stage and tech buyouts. With a team experienced investment professionals, Battery leverages its people, expertise and capital to help guide companies to category dominance. The firm has invested in over 180 companies worldwide across information technology industries. From its offices in Boston, Silicon Valley and Israel the partnership manages over $2 billion in committed capital.

Thoma Cressey Equity Partners (TCEP) is a leading private equity investment firm that has been providing equity and strategic support to experienced management teams building growing companies for more than 25 years. The firm originated the concept of "industry consolidation" or "buy and build" investing, which seeks to create value through the strategic use of acquisitions to accelerate business growth.  TCEP’s investment focus is on companies in the software, healthcare, business services and consumer products industries. In the software industry, TCEP has completed 21 acquisitions across seven platform companies with total revenues in excess of $1.3 billion.

M2M Holdings primary asset is Made2Manage Systems Inc., an enterprise software and services firm. The parties anticipate closing the transaction in the third calendar quarter of 2006.

"We believe that this transaction is the right decision for Onyx shareholders, customers, partners and employees," said Janice P. Anderson, chairman and chief executive officer of Onyx. 

Orlando Bravo, managing partner of Thoma Cressey Equity Partners, said, "We see an outstanding opportunity in the relationship between Onyx and Made2Manage Systems as consolidators of the CRM and ERP software markets.”

Dave Tabors, general partner of Battery Ventures, said, "We take a long-term perspective on Onyx's growth.”