Mr. Williams: The way I look at enterprise software is from the perspective of e-business. So I'm looking at all the big software companies that we all think of when we think of enterprise software, but also a lot of the smaller guys that provide either components that fit into the larger e-business picture, or some of the aggregators that are buying up companies in order to provide important aspects to the overall infrastructure and applications that you need in order to conduct e-business.
TWST: If we look at the big picture, is anything major going on in terms of the software that's being used in this space?
Mr. Williams: We think so. We think that we are just coming into a very interesting period of time for enterprise software. Thinking back about 10 years ago, for perspective sake, we had theorized that there would be a device that would be the result of convergence from maybe 500 software companies at the time. And the idea was either it would be - you can put it simply - e-business-in-a-box. Over the course of the 10 years, we've seen a couple of trends that have had a big impact on the evolution of software. One of them is integration, which is taking two different enterprise applications, like database and ERP system - ERP is kind of like the Quicken for a corporation, and it would be commensurately more complicated than Quicken will be in your home. But tying that together with the database, it has been lightened in terms of complexity by taking two swimming pools of spaghetti and connecting all the ends - unimaginably difficult. And then if you try to do that with another enterprise application on top, like CRM, which is customer relationship management, or supply chain solutions, it just quickly goes beyond belief how difficult it is. And integrating became very onerous, so companies like Andersen Consulting or Accenture, or IBM made their fortunes to a degree by providing that connectivity. And then customers rebelled, and in that rebellion, they forced the vendors to start providing the integration themselves, because who better can understand a software program to make it connect to another one than the people that wrote it?
So over the course of 10 years, we have seen integration first move into what we called an "integrated suite." If you think back 10 years ago, you could buy antivirus. Today when you go to Norton, or McAfee or Trend Micro, you are not buying antivirus, you are buying a protection suite and everything is connected. So that's kind of what we are thinking of when we a say an "integrated suite," and we have seen that throughout the enterprise software space. More and more vendors have moved to provide their customers multiple components in the product that they ultimately sell. We've been waiting for companies to finally put all the pieces together and then be able to sell e-business in a fully integrated stack. Our thinking is that it's finally coming to test. About two years ago now, SAP had talked about its Business byDesign and Business One products that have been targeted at the low end of the market, the small and mid-sized companies, and it was intended to be the type of product that would give virtually all of the enterprise software that a smaller entity would need, and bringing together with it the ability to do e-commerce. In the ensuing two years, they have run into a lot of trouble, a lot of problems getting everything to work on an economic and technical basis. They say they have got maybe 100 or more customers using it, and they think that 2010 will be the year that it really comes into the marketplace.
Meanwhile, Microsoft has been hard at work with their Dynamics product line, which basically is taking a lot of pieces and putting them together in a form that can be used for small and mid-sized business. So you might remember back, Microsoft, maybe 10, 15 years, I can't remember exactly when, a while ago, tried to buy Intuit - Intuit, the maker of Quicken - and it was effectively to put together this e-business in a box for the small and mid-sized business. But the Justice Department wouldn't let it go through. They have kind of gone full circle and acquired four different ERP players, put them together in their Dynamics solution, and I think they are working towards a million and a quarter users now. So it's becoming more of a force. Maybe the biggest headline of all is the Sun and Oracle merger. Oracle bought Sun and closed on it about a week ago. We think that is a very big moment in the evolution of enterprise software. A bit of a story that goes along with how this all came to pass, because if you roll the calendar back a year, IBM was in the midst of negotiating with Sun to buy them. And it was pretty much a hardware-to-hardware kind of acquisition, and they couldn't settle on terms and so that deal broke. As soon as the deal broke and the arbitrageurs were licking their wounds, then all of a sudden Larry Ellison showed up. And what we think occurred - they may tell a different story - but we've never heard them tell a story, so we have to put up with what we know. We think what happened was that they came up with a bright idea for database machine, the most recent version of the Exabyte database machine.
Effectively what that is, is Oracle, which is a database vendor, the foremost database vendor in the world, they take their database, and they load it onto a server. Now every database has to run on a server in some form or other. They optimize the software and hardware to get the best possible performance, and then sell that as a unit. What they discovered, and it was a big surprise, as best we can tell - and that's true of both the HP guys that worked on the server part of it and the Oracle guys that worked on the software part of it - they sold those things like hot cakes. Larry Ellison recently said it was the best new product that Oracle has launched in 30 years, and that goes all the way back to when they first launched their Oracle database. So what we think that's told us is that there is a very active need for extremely high-performance and low-integration software solutions, software and hardware solutions. Once Sun and IBM broke up, and database machine was selling like hot cakes, we think the people at Oracle put their heads together and came up with a pretty revolutionary idea - because we know back in 2002 and 2003, Larry Ellison was talking about the same e-business-in-a-box concept we were peddling at the time. So they decided to go after Sun, and it was a revolutionary move because software companies really never go after a low-margin hardware company, because it doesn't fare their margins too much. There is no way to get similar margins anywhere near Oracle's 45% software margins; those are operating, not gross. So what has come to pass then is that the EU finally let them get away with it. They have now managed to grow. The only other rapidly growing database in the enterprise marketplace, MySQL, along with everything that Sun represents, which is JAVA first and foremost - that's essentially the code that's used to write most enterprise applications, as well as a number of different capabilities, such as storage solutions and a bunch of different software products - but first and foremost, it is their hardware that has got very high-quality servers and an operating system, rather a Solaris, to run those servers on smart chips. So when they take Oracle software and optimize it on those servers, it creates what we think is a killer product.
Put back in time, there have been killer products at each stage in the development of the computer industry. And perhaps games were the original killer application that created the first generation of video games. And then that turned into PCs, and you had a spreadsheet. Spreadsheet was literally the killer application for IBM PC, then Google, which was the killer application for the Internet. And each of these killer apps creates the mass adoption that you need to finance the industry evolution. And now we've come to e-business. What's the killer app for e-business? We think it is e-business-in-a-box. Oracle now is in a position for the first time to take its entire software's effect, which is represented by, we think, 10 components - ranging from database to security, to mobile apps to ERP, supply chain, CRM, business analytics, and a whole bunch of things that are needed to take a brick-and-mortar business and create its virtual equivalent - so that you can run everything in terms of e-commerce, and make it more efficient than it would be as a brick-and-mortar business.
Perhaps an example might make it a little easier to grasp. The local pizza shop we use, Joe's Pizza, has got a computer system, and we've known them for years and they know our order by heart. But when they got the new system, it recognized my telephone call on the second call, and I entered in my credit card with them and they took my order. And from that point on, every time I call, I literally can hit auto dial, call Joe's, tell them I want the usual. They ask if I want it on my credit card. Yes. And then it is either picked up or delivered, but more importantly that order goes into their e-business solution. From that point, one part of the message goes to the supply chain and tells their suppliers that they are now going to consume another pizza's worth of ingredients, and to reorder those. So the next one will have the ingredients for another pizza added to it. It also goes to the kitchen to tell them, "Go ahead, cook up another pizza." It goes to the finance department to tell them to take the purchase price and hold a part of it as sales tax. It goes into the employee part of the benefits and holds a certain amount of tax for each of the workers' pay for that increment of time. They do all this in real time. For a small pizza shop, they were able to cut 40% of their labor costs and increase their revenue by almost 50% by having this software solution.
In the old days, we used to think enterprise software was really cool, and that it helped you do things. Like the Internet, e-business is a really cool thing to do. What we've learned over the decade or so is that it's all about cutting costs. If you can cut costs by using enterprise software - and the retailers are right in the midst of understanding this equation right now in a big way - then you will out-compete your rivals. The retailers literally have scrambled over the last 12 months and invested heavily, in spite of the fact that this is the one time in the economic cycle that retailers should never - historically, would never - spend on IT; they would shut their IT down. They've put money into it. Just yesterday, the day before, we've seen remarkably good results come out of the retailers, and this is not a surprise outcome. It's basically what everyone has learned.
Oracle - back to Oracle - is in a position where it can sell the entire, I guess, integrated stack is the best way to describe it, going from the enterprise application stack to the middleware, which is an application server. It's a server OS; it's the integration connectors, down to the actual server itself. So one, it is very, very efficient, and they can do it at much lower costs than the normal way of going about and putting together an e-business stack, where you buy a dozen different software products and put them together with three different middleware products, and then a hardware platform, and put them all together, and then pay third-party consultants to come in and make them work. So costs savings are first and foremost the reason why this stack is so interesting.
Now the thing that makes it very intriguing is that you can slice and dice these things. Instead of just buying servers, which is the way the business was done 10 years ago, today when Microsoft builds out its absolutely monstrous data centers that literally are - each one of those is maybe a quarter of Amazon's total computing power; giant shipping containers hold the servers - they don't even take the servers out of the shipping containers. The shipping containers have air conditioning built in, and they have the plugs on the outside; you don't even have to put these things inside a building, you can leave them out on a parking lot and plug them in, and you have 5,000 servers online. And they will order another shipping crater if they need to fill out the necessary capability. And they put these huge data centers near any kind of power supply that's a very reliable power supply - so a dam, a hydroelectric dam or a big power plant.
What we think would the compelling part of this whole Oracle effort is that they can sell their e-business stack by the slice. They can sell it to any of the global 5,000 or 10,000 companies that are all major companies. They can sell either one complete stack or 1,000 of them put together. Or they can sell slices of capability as big or small as those companies want.
Now entering to the cloud, cloud computing is - Larry Ellison wants to say it is the biggest lingo shift that in effect was meaningless that he has seen in his lifetime. What it really comes down to is that the technology that is embodied by cloud computing has been around 30 to 40 years or more. It is just that with each new generation of capability, you have to have new names for things to make them cool and interesting. So cloud computing is this year's handle for computer capability that is going back toward the mainframe era. The mainframe era is that you can get extremely low-cost computing and you can do it every easily. Twenty, 30 years ago, if you needed computing power, you call up IBM, and you'd connect into your T1 line. And they'd be on other end of the T1 line, and they could put as much computing power through that line as you needed, and you just rented however much you needed. That is the concept of the cloud. So the cloud is going to be similar, where you plug in your jack, and then you just tell them how much capability you need, and they rent it to you on a permanent basis. So those cloud platforms - Microsoft Azure is an example, Salesforce.com's Force.com is an example, Amazon's ec3, their elastic cloud, is another example. There are many more trying to jump into this game. I think even the telecom providers are trying to get into that game. They all need to buy these shipping container loads of servers with software pre-integrated. So they are prime customers for Oracle.
The big shock in all of this is that it used to be SAP's turf; it used to be to a degree Microsoft's turf; it was definitely HP and IBM, and even Cisco to a degree. Oracle now is in a position where it can literally cut a lot of people out of that transaction, with big potential market share gains for Oracle and big competitive lawsuits for all the other players, which means they are not going to sit back and let this go uncontested.
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