Microsoft and IBM Earnings: The Battle of New vs. Legacy Businesses

IBM and Microsoft reported earnings last week and the reports clearly highlighted the current stage in the transformation of each companies. Arguably the two most important software companies of the last 40 years, Microsoft and IBM used to exhibit similar patterns in the earnings reports a few years ago. However, those days are long gone.

Microsoft and IBM are companies in the middle of aggressive transformations to adapt their business models to a world dominated by technology revolutions in areas such as mobile, cloud, data science, augmented reality etc. The earnings reports clearly illustrates the effectiveness of the transformation process in each company contrasting the grow in new strategic areas with the decline of traditional business.

Microsoft: Growth in the Right Areas

Microsoft’s earnings reports can be summarized in a single sentence: “Growth in the right areas”. The Redmond giant reported remarkable growth in areas such as cloud, devices that compensate the decline in traditional areas such as Windows and Office.

Cloud revenues were the positive highlight of Microsoft’s earnings dominated by the company posting a $2.1B loss from the Nokia acquisition.  Commercial cloud ARR grew 88% (or 96% in constant currency) to $8 billion. This continues strong sequential performance from two quarters ago ($5.5 billion) from last quarter ($6.3 billion) to this quarter. These numbers prove that the investments in the unique combination of Office365, Azure and CRM Online is producing strong results.

Devices and search were other areas of improvement. Surface revenues grew 117% which contrasts with the poor IPad sales numbers disclosed by Apple. Bing also exhibited strong growth with a market share that now reaches 22%.

In summary, Microsoft earnings shows strong performance in strategic areas such as cloud, devices with a strong presence in the enterprise. These news have to be encouraging in anticipation to the Windows 10 launch next quarter.

IBM: Too Much Legacy

IBM earnings report resulted in the 13 consecutive quarter of revenue declines. Even though the company repeated the message about its current cloud transformation process, it couldn’t avoid missing revenue estimates. Revenue was down 13% affected by the strong dollar and net income was down 15%.

Similar to Microsoft, IBM reported strong growth in strategic areas such as cloud and analytics. Growth in those two areas came in at more than 20% while software revenues overall were down 10% for the quarter at $5.8 billion and down 3% adjusted for foreign currencies, while middleware was down 7% and essentially flat when adjusted for currency.

In summary, IBM is also exhibiting strong growth in strategic initiatives but the not enough to offset the decline of traditional businesses such as hardware or professional services. From that perspective, it seems that IBM has a long road ahead in its transformation processes.

 

Enterprise Software Platforms are Entering their Third Generation

Overview

Enterprise software might be entering its golden era. The confluence of technologies movements such as cloud computing, mobile, big data as well as the raise in popularity of open source delivery models are pushing the boundaries of enterprise software solutions. As these technologies continue to rapidly gain traction in the enterprise, they are called to become foundation blocks of any enterprise software application. We call this movement: the third generation enterprise application platform.

The First Generation: Mainframes

Mainframes architectures were the first movement that powered a complete generation of applications in the enterprise. Many mission critical business applications in areas like financing, HR or resource planning were created using the mainframe as the foundation. As the times evolved, the centralized nature of the mainframe resulted insufficient to power a new generation of architectures which gave birth to the second generation of enterprise software platforms.

The Second Generation: Client-Server

The raise of client server architectures created a series of technologies that powered the second generation enterprise platforms. From web platforms, database servers, integration platforms, etc the industry produced a large number of technologies based on client server models. The client server architecture movement saw its golden days with the evolution of J2EE app servers that are still dominant in enterprise applications.

Closed Source and Outsourced

The explosion of technologies based on client-server architectures were mostly based on closed source models dominated by big enterprise vendors such as Oracle, IBM or Microsoft. Given the complexity of these technologies, organizations quickly at outsourcing everything from the development to the support of applications which cause the rapid raise of the IT outsourcing industries in regions like India and Easter Europe.

While the client-server model dominated the enterprise for over a decade, it proven to be impractical to support a new group of technologies movements that resulted in the foundation of the third generation enterprise software platforms.

The Third Generation: Mobile, Cloud, Big Data, Social, ….

The evolution of independent movements such as cloud computing, big data, machine learning, mobile computing, social etc has completely disrupted traditional enterprise software in the last few years. Independently, each one of movements has produced dozens of platforms that are being adopted in the enterprise. However, the most forward thinking organizations are shifting from adopting cloud, mobile, big data as separate initiatives and seeing as foundational blocks of the next generation enterprise solutions.

In the same way the client-server model dominated the second generation enterprise applications with technologies web sites and databases, new enterprise solutions are starting to leverage big data, mobile and cloud platforms as key building blocks.

Open Source and In-House

Contrasting with previous movements in enterprise application development, the third generation enterprise platform have been catalyzed by the renaissance of open source in the enterprise. In the last decade, open source models have matured to be considered enterprise-ready and have definitely out-innovative closed-source commercial technologies.

In this new world, software is shifting from an utility to become a key differentiator of traditional, non-software companies. In that sense, more organizations are looking to build the knowledge and expertise required to build third generation enterprise applications in-house instead of traditional outsourcing.

 

20 Years of SMS: Great Technologies Transcend the Times

Yesterday marked the 20^th anniversary of the first sent SMS message. Specifically, the target message was sent from a PC to a mobile device over Vodafone’s UK network. The text of the message was very simple “Merry Christmas” and the recipient couldn’t reply because, well, the mobile device wasn’t equipped with SMS technology.

The invention of the SMS technology is attributed to a group of engineers led by Matti Makkonen was has come to be known as the “reluctant father of SMS” given his position to never take full credit for the invention of the technology.

20 years is a very long time in the technology ecosystem. In 20 years, we have witnessed multiple revolutions in the mobile and telecommunications world and yet SMS is still standing as one of the fundamental pieces of any Telco technology stack. As far as user experiences go, SMS is as simple as it gets; infrastructure wise, SMS requires an incredible robust network pipeline to ensure the correct delivery of messages. The ability of surface a complex infrastructure using simple and intuitive user experiences and open programming interfaces that can be blended into different technology stack are part of the core DNA of world-changing technologies.

At its core, SMS is an infrastructure technology. I am of the firm opinion that the best infrastructure technologies have the ability of “disappearing” behind simple user experiences. Every day, we used technologies like Twitter, GPS or simple phone calls without thinking about the infrastructure powering our user experience. Simplicity and openness gives great infrastructure technologies the ability of transcending the times and changing the world.

Regardless of its many technical merits, 20 years is still a long time for a technology. Congrats to Matti Makkonen on the 20^th anniversary of SMS. 8 trillion messages after, we still need to thank him for giving us a technology that has transcended the times. 

 

Upcoming Speaking Engagements

This summer, I took a brief break from speaking engagements to focus on shipping our new software in Tellago Studios and not stress my already hectic travel schedule. However, I’ve accepted a few invites to speak at different conferences during the fall and winter. Here is a brief list of the ones that are already confirmed:

Software Architect Conference (London) http://www.software-architect.co.uk

• NodeJS for the .Net Developer
• I am a .NET developer but I have an iPhone and an Android

Oredev (Malmö, Sweden): http://oredev.org/

• Kinect for Windows Deep Dive

Cloud Computing Expo (Santa Clara, CA) http://cloudcomputingexpo.com/

• Introducing the Enterprise Mobile Platform as a Service

Cloud & Virtualization Live (Orlando, FL): http://virtlive360.com/Events/2012/Home.aspx

• Using Windows Azure to Build the Next Generation of Mobile Applications
• Windows Azure in the Real World: From Idea to Production in a Few Months

I plan to add a few more events to the list in the next few weeks. If you are attending any of these conferences feel free to contact me via this blog so that we can sync up.

 

Microsoft-Yammer Deal is the Florence of Enterprise Software

Florence and Siena are the two Italian cities that had the most impact in the Italian renaissance. Even though the movement itself was originated in Tuscany, Florence is often associated with the expansion of the  renaissance movement throughout that Italian peninsula. Is we can, for a minute, trace a parallel between the rebirth of  enterprise software and the Italian renaissance then Microsoft’s Yammer acquisition can become the Florence of enterprise software.

During the last few days we’ve heard strong rumors that Microsoft will be acquiring enterprise social media pioneer Yammer for a price between $1B-1.6B. As a matter of fact, if the rumor holds true, the deal is likely to be announced in the next few hours. Yammer provide enterprise social networks capabilities to thousands of organizations across the globe and has a very strong presence within Fortune 500 companies. After a few financing rounds, Yammer’s valuation is reported around $500M but the value is far from directly correlating to revenue numbers which is reported to be around $20M.

Regardless of your opinion related to the terms of the transaction, there is no doubt that, to the day, Yammer’s acquisition represents the most important moment in the history of this new generation of enterprise software. While this new movement has already experienced outstanding successes such as Jive’s IPO or the acquisitions of Rightnow, Success Factors and Taleo for multi-billion dollar valuations, Yammer’s acquisition is set to have a more profound impact in the enterprise software industry.

Why is that?

Yammer’s influence in the new enterprise software movement goes way beyond its technology contributions and expands onto the commercialization, economics and adoption models of enterprise software technology. If you think about it,  Jive’s IPO had very little influence in the new enterprise software models and SAP’s and Oracle’s acquisitions of Taleo, Rightnow and Success Factors were strongly validated by revenue models and traditional customer acquisition processes.

Yammer, on the other hand, has established a strong enterprise customer base by challenging a large number of the traditional enterprise software concepts. Microsoft’s Yammer acquisition strongly validates that the economics and dynamics of enterprise software are changing. With this deal, Microsoft is telling the world that the old school of enterprise software might benefit from a few lessons from the new boys:

• Market share matters as much as revenue: As in the consumer market, enterprise software valuations can be correlated to market share rather than actual revenue. While Yammer’s revenue numbers might not be impressive, their number of customers and the dependency those customers have on Yammer’s technology is a great asset for Microsoft.
• Fremium works: Yammer was one of the pioneers of the fermium pricing model for enterprise software. Microsoft’s acquisition validates that these new type of pricing models can be very effective within enterprise customers.
• Sexy and simple interfaces win: Yammer is not a super feature rich product and its main value proposition is a very simple one: improving the communication within the enterprise. However, Yammer accomplishes this goal by providing a super sexy, incredibly intuitive and astonishing simple interface. Compared to most enterprise software products, Yammer’s interface might look ridiculous but, as always, we should remember that in this industry simple and open tends to win.
• Partnership matters: If you have been following the market, Microsoft acquisition of Yammer should not come exactly as a surprise. Since last year, Yammer and Microsoft have partnered to expand SharePoint’s social networking capabilities with Yammer. This acquisition is a testimony that long term partnerships can evolve into successful outcomes for both parties.
• Mobile-First Matters: Mobile devices are one of the main channels by which people use Yammer. By acquiring Yammer, Microsoft is acknowledging that mobile-first consumers are also relevant in the enterprise.

You can probably tell I am super excited about Microsoft’s Yammer acquisition. I believe Microsoft will get an all-star team head by David Sacks and a rock solid product and Yammer directly benefits from Microsoft’s dominant presence in the enterprise software world.

What do you think? Is Microsoft-Yammer deal as important as I think it is? Is $1.2B too much? 😉