Friday, July 8, 2011

The IBM Acquisition Game

Recently, I was contacted by a firm called Software Advice, which has a very interesting business model: pay-for-results advice on short lists for IT buying. They just posted a blog on “IBM M&A: Who’s Next”, and were interested in my thoughts. I took a look, and found it quite impressive; and therefore, in accordance with my philosophy of comforting the afflicted and afflicting the comfortable, I decided to pick nits about their conclusions. I believe that both their and my thoughts offer some potentially useful insights to IT buyers, not just about IBM, but about how quickly vendors are likely to deliver what users need in the next 1-2 years.

The reason it’s not only fun but instructive to play the IBM acquisition game is that it implicitly asks, given user needs over the next 1-2 years, what are the holes in IBM’s lineup to meet those needs that it should fill immediately? And that also allows us to ask, if they don’t fill those needs, will it come back to bite them, because someone else is likely to beat them to the punch? And then we can ask, will folks really want to use someone else besides IBM if IBM doesn’t supply this need – or is this something for which the IT buyer will have to “roll his or her own” at greater expense?

So let the game begin!

Historical Nits
Software Advice begins with a graphic nicely capturing the extent of IBM’s acquisitions over the last decade or so. The problem lies in the headings that split the acquisitions into “applications”, “infrastructure”, and “services”. You see, IBM has been firm in disclaiming any intention of getting into “applications”, and so most if not all of the acquisitions classified as “applications” are in fact what is usually called “infrastructure software.” That also means that almost identical infrastructure software is in one case classified as an application and in another as infrastructure – for example, the Rational software development toolset is counted as infrastructure software, but the Telelogic requirements management toolset, which is almost always used as the first step in the development process as part of a “lifecycle” software development toolset, is classified as an “application”. Hence it’s very easy to assume that IBM doesn’t need any applications acquisitions.

The interesting thing about this nit is that it raises the question: should IBM, at long last, go into the “apps business”, either on the business or consumer side? Yes, they’ve never needed to before, since until recently both Oracle and SAP (the dominant players in enterprise apps) have shown themselves willing to support all hardware vendors, but now that Oracle owns Sun and has shown it can play hardball with respect to HP Itanium, should IBM rethink that posture? Does the market now need a platform that it can be sure its enterprise or other business-critical applications will support?

The answer to that, I believe, depends on SAP. In other words, whatever the merits of other app vendors like, the run-the-business applications of SAP are presently the main alternatives to Oracle Apps. If SAP remains a strong alternative, then IBM is entirely correct in continuing to keep its hands off enterprise application companies, reinforcing its image as less prone to vendor lock-in than Microsoft or Oracle.

And yet, I have to say, whether SAP will be a strong alternative remains an open question. SAP has made some major acquisitions of its own, like Business Objects and Sybase, which have taken it down the software stack with some quality infrastructure software. However, it is not yet clear that SAP can drive rapidly-changing database technology ahead fast enough to provide a long-run all-in-one enterprise-app or analytics alternative to Oracle Apps. The signs are very good: SAP appears to understand the importance of Sybase, and the potential of integrating its technologies with SAP’s present stack. Still, SAP has to execute that strategy.

I think it would make most sense for IBM to beef up its SAP application support with a smaller acquisition or two, this time of cross-database administrative tools that specialize in Sybase. Later, of course, if things get bad, IBM could always acquire SAP. In the meanwhile, the IT buyer should note that IBM and Oracle SAP support is a space to watch.

Strategic Investment Nits
Software Advice then goes on to identify general areas of future customer need where IBM may need to acquire companies. Their main focus – certainly a good one – is cloud administration. They also note – although with a much shorter analysis – IBM’s need to expand its analytics and BI offerings even further – and that makes sense too. Everyone, not just IBM, is scrambling to fill in the blanks and achieve fully automated hybrid-cloud deployment and administration.

However, I would disagree with their analysis of virtualization as a key area of acquisition. While VMWare continues to be an outstanding success, the pace of virtualization to a public cloud – the main lock-in for VMWare – remains quite slow. Private clouds in larger enterprises tend to be top-down, which means that IBM is doing quite well at driving its own virtualization software across the data center. I would argue that IBM has no need to acquire either VMWare or EMC either now or in the next two years – and a good reason to wait to see what happens as Oracle continues to compete with EMC more strongly in storage.

What might make sense, on the other hand, is for IBM to consider acquiring Red Hat. The two have been working together pretty effectively, and IBM needs to build up its open-source brand as a new market of tech-savvy open-source-oriented firms opens up. As long as it leaves the open-source culture of Red Hat in place, IBM can use Red Hat as an “early warning system” for changes in the new market – because that market cares less about VMWare vs. KVM and more about open-source-based services for cloud deployment.

My second nit regards mobile technology. It appears likely that the movement of mobile business workers towards having a laptop for some situations and a small-form-factor smartphone or tablet for others has reached flood stage, and needs to be addressed better. Sybase would have been a great entry point, but it’s not available now. Buying Apple would be fun to imagine, but seems impossible to achieve. Perhaps IBM might consider RIM. The value-add of Blackberry cell phones has always been in their business software, and while they are under threat in the consumer market, business users still find them appropriate. Here is an area of great user need where all vendors – not just IBM – fall short; so if IBM doesn’t do a good acquisition soon, IT buyers should anticipate a lot of “roll your own”.

My third nit concerns the whole area of BI/analytics. There seems to be a pervasive confusion of BI, analytics, and Big Data, as if they are the same thing. My short take on the differences is: BI is basic repeated reporting and querying plus ad-hoc or goal-oriented querying, both for corporate; analytics is ad-hoc or goal-oriented querying, not only for corporate but also embedded in other software across the organization (e.g., security and administrative analytics); Big Data is a wide range of new large-footprint data types, more usually on the Web, that provides insights into such new marketing topics as social media, and therefore typically complements BI with extra-organizational data. The result is that any good push to meet user needs is going to need to tackle all three areas.

As I noted in a previous blog post, what’s users need in all three areas is some combination of scaling and user friendliness, especially for the burgeoning SMB BI market. It’s hard to buy or create user friendliness – the BI market still has a ways to go in this area. However, there are ways that IBM could improve its scalability. For one thing, Netezza and the new IBM z appliance have columnar database technology that’s too tied to a particular appliance. It’s not clear just how fast IBM will move into this area, but Amazon’s investment in ParAccel reminds us that there are still interesting columnar database suppliers out there.

On the Big Data side, users must also consider integrating BI with file-system-stored Web data such as that accessed via Hadoop. There are quite a few NoSQL open-source efforts that may be worth productizing and integrating with DB2 or a columnar database. Again, this is an area where all vendors – not just IBM – need to do more to make the path to combined BI/analytics/Big Data clear. In the meanwhile, IT buyers should think carefully about buying from only one database vendor, because until one of them shows they have the full Big Data story there is no guarantee that any of them will not fall short of what users need – and past experience suggests that database lock-in is about as locked in as you can get.

Having played Software Advice’s IBM Acquisition Game, I draw three conclusions from it. First, IBM is in a surprisingly strong position going forward. There is no obvious hole in its solution lineup that immediately threatens the company, and that it cannot fix by careful re-tuning of the same strategies it has had up to now. And that’s good news for IT buyers.

Which leads me to conclusion two: there’s still enough choice in the market. We have seen a lot of acquisitions, not just from IBM but from other major vendors, in the last decade; but the fact that there are still smaller companies out there to plug holes for IBM and others means that IT buyers can still find a way to stitch together a solution where one’s favored vendor doesn’t quite cover all needs.

And that leads to conclusion three: despite the hype, users are still a long way from taking full advantage of mobile, cloud, or analytics/Big Data. This may well be a transition as slow and incomplete as the one in the early 2000s to service-oriented architectures – and don’t get me started about Business Process Integration. In fact, it might be a good idea to play the Acquisition Game with other vendors on your short lists – and then see what those vendors do in the real world to cover the holes you find, before committing irrevocably and totally to one of them. That’s not to say you shouldn’t press ahead with all deliberate speed, as your competitors will be doing -- but cover your bets.

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