Novell was recently rumored to be shopping itself around for a buyer. The new rumors? That it's doing some shopping of its own. In this, Novell isn't alone, with Dell also looking to pick up companies that can expand its product lines, as both look to grow despite CIOs' decreasing willingness to spend. Open source may factor into both companies' M&A strategies.
As reported in Daily News & Analysis, Novell CFO Dana Russell has said the company is "interested in making acquisition in the high-growth businesses like identity security and compliance management software, data centre tools and open source software." With over $1 billion in the bank, Novell is in a prime position to buy companies on the cheap.
However, Novell should avoid its SiteScape error, viz., buying into a trendy but not yet profitable market. Identity security and compliance management are probably safe, because they're precisely the sort of "boring" markets that CIOs will pay money for in a recession.
Open source is much the same, but it depends on which open-source products it picks up. A Zenoss, Reductive Labs (Puppet), or some other company in IT management/configuration might be a smart bet.
Novell isn't alone in its interest in acquisitions to spur growth. Dell has been widely reported to have a $10 billion war chest set aside for acquisitions and, according to The 451 Group, Dell may be looking to make some significant acquisitions in the storage market:
With existing partners such as Cisco and Oracle...now priming themselves to become players in the server hardware market, Dell clearly needs to build up its portfolio to do battle with these new entrants along with its traditional rivals Hewlett-Packard and IBM. One clear way to do this would be to expand its storage software and hardware lineups since these offerings are complementary to its core server and PC business.
One way to get into the market would be to buy EMC, a current partner, but as The 451 Group notes, Dell has rarely ventured into big acquisitions--its $1.4 billion acquisition of iSCSI storage systems vendor EqualLogic in November 2007 the exception to the rule. I'd expect Dell to buy midrange players along the lines of 3PAR, Exanet, and so on rather than NetApp or EMC. Buying big would be distracting to Dell and take too long to digest and commoditize, Dell-style.
It's possible that Dell might even delve into the open-source storage market. An Infoworld reports identifies the best of the bunch, with vendors/projects like Zmanda, FreeNAS, and StorageIM in the mix.
It's doubtful, however, that any of the vendors in the open-source storage space are big enough to move the revenue needle for Dell. So, while it's SMB strategy may involve a healthy dose of open source, I wouldn't expect its storage strategy to do so...at least, not yet.
Open source could be a boon for both Novell and Dell, but each would need to be pragmatic about what to expect from open source. Currently, the most revenue either can expect from an open-source buy would be in the $50 million range, with most open-source vendors offering much less than that.
However, the one thing that open source can offer both right now is a ready supply of leads, plus branding and relevance in markets where Novell and Dell may not yet have much of either.
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Eating dinner with Larry Augustin in London this weekend, we fell to talking about open source's relevance to the SMB (small- and medium-sized business) market. Augustin is currently CEO of SugarCRM, a company with over 5,000 customers, many of them SMBs.
But SugarCRM is the exception to the rule. Open source has long been billed as a savior for the SMB market, but the reality is that open-source adoption has largely been an enterprise IT phenomenon, despite other exceptions like KnowledgeTree, which recently updated its product suite to further appeal to this market.
Why aren't more SMBs adopting open source? Following recent Forrester data, Savio Rodrigues of IBM points out that many SMBs still cling to the perception that open source is not secure and is overly complex.
In many cases, it's not perception. While it's tough to generalize about open source at this point in its history, it's absolutely the case that some open source is complex, some open source is not secure, etc. Much open-source software mimics the enterprise software world it strives to leave behind.
Dell is trying to overcome these concerns by selling prepackaged open-source applications, and I would assume we'll see more companies following Dell's lead.
While some big vendors like Cisco already have significant SMB focus, others, like Oracle, SAP, etc., could use an open-source runway to the SMB market. Unfortunately, as noted, open-source vendors haven't necessarily penetrated the SMB market any better than the proprietary vendors have.
This suggests a strategy for open-source vendors, one that could lead to a big exit: figure out how to pitch to the SMB market, then sell to those big, proprietary vendors that need an entree to SMBs. The new hybrid model for open-source vendors might well be to make the "enterprise" version the one that is easiest to administer and use.
First, however, open-source vendors need to start making software easier to use, and not emulate all the wrong behaviors of the proprietary past. Fortunately, the way to make software easier for SMBs and to monetize it might actually be cloud-based computing.
How fortunate.
Disclosure: I am an advisor to SugarCRM.
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According to BusinessWeek, Dell has amassed a $10 billion war chest with which it intends to buy BMC Software, Symantec, or another big technology company to expand into new markets--and particularly software markets--in a bid to boost profitability.
Yet even as Dell ponders where to spend its cash, it is reportedly rolling out a program to provide free, open-source applications to small and midsize businesses. The reason is simple, according to Amit Midha, president of Dell's Asia-Pacific and Japan region for the SMB business:
The more advanced the customers, the more likely they will adopt open source, because they are likely to ask why they should spend money on something they can get free.
Why indeed?
The signs are everywhere that chief information officers are increasingly looking to open source to cut costs and boost productivity. And they're not just looking: Forrester Research survey data suggests that 87 percent of enterprises that try open source actually realize cost savings from its adoption.
This sounds like a perfect message for Dell, the low-cost hardware company, to be selling.
So why is Dell talking about buying up bloated, proprietary software companies out of one side of its mouth, even as it acknowledges that open source does the job for less money out of the other side of its mouth?
Dell could very well be envisioning offering open source to seed new customer accounts and then upselling proprietary software, similar to IBM's model. But I suspect that the company's software strategy is nowhere near as nuanced as IBM's. I think that this is simply an example of a top-down strategy (buy big software companies!) conflicting with bottom-up demand (our customers want open source!).
Maybe Dell should straighten out its story by buying Red Hat?
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While Funambol CEO Fabrizio Capobianco thinks Dell's move into smartphones is a good idea or, at least, the way it's going about it. I can't agree. Has he forgotten Dell's MP3 player?
The rest of the world certainly has.
In the smartphone market, as Capobianco notes, Dell is planning to do an open-source Google Android-based phone and a Windows Mobile-based phone, which he thinks makes sense:
I think it is a smart move. They do not take risk, they do not expose themselves too much, they will pick the winner later. The only risk of not making a move is not making a move. If the market moves too fast (it always does) they risk to be defocused and have to jump on one bandwagon quickly, dropping the other one. Motorola has done exactly that. But they are desperate. Dell is not.
It's true that Dell's open/closed approach is a less risky way than to pick one platform and go to market with only one, but the alternative is for Dell to realize that its track record in markets outside industrial enterprise markets is terrible and to stay out completely. Dell's MP3 player was worse than uncool. It was Soviet.
Now it wants to compete with the iPhone and Blackberry? Not a chance. Dell lacks the DNA. The company has always been a low-cost aggregator of others' technologies. It ha never demonstrated a penchant for design or technology innovation, both of which are key attributes of both Research in Motion and Apple. In this club, Dell can't compete.
Like Microsoft, Dell needs to look in the mirror and learn how to work with what's there, rather than veering off into foreign markets in which it has no savvy and no experience. Few are going to relish hearing, "Dude, you're getting a Dell smartphone!"
Dell's biggest problem is that its one-time differentiation--low-cost hardware assembly and distribution--is now common industry practice. Indeed, it now routinely gets beaten at its own game, as called out in a recent article by Ashlee Vance in The New York Times.
Dell's growth, to revenue of $56 billion in 2006 from $5.3 billion in 1996, has come from within. But company executives now concede that they need to make a large acquisition, or a series of them, to tap the repeating, higher-margin revenue streams that come from the software and services businesses....
"It's not a question of size (of acquisition)," said Brian T. Gladden, chief financial officer at Dell. "I think the question is more around diversifying our revenue base and becoming bigger in some things that are attractive for the long term...(Servers, storage systems, software, or services) is where we have to do an acquisition to become relevant. There is no question."
Assuming that this is correct, and that Dell needs to look beyond hardware for growth, it could hardly do better than to buy Red Hat, or possibly Sun or Novell, for two reasons. The first is that buying Red Hat might be the least painful option for Dell getting into software in earnest, as it would offer Dell a close analog to what it has done to hardware: a commoditized software business that depends heavily on low-cost assembly and distribution. Dell and Red Hat were made for each other, in many ways.
The second reason is that buying Red Hat would also position Dell to do what no other software company has done, but which offers tremendous financial promise: consolidate the open-source ecosystem to provide huge value to chief information officers. I argued earlier that Red Hat should do this and become the ASCAP of the software industry, allowing CIOs to subscribe to its ever broadening portfolio of open-source solutions. Dell could expedite this, bringing cash and heft to the relationship.
Of course, Dell doesn't have much of a history of acquisitions, and might struggle to incorporate Red Hat, or any other software vendor for that matter. Red Hat, for its part, has a checkered history with acquisitions, though it is now making its JBoss acquisition pay healthy dividends.
Red Hat is brilliant at consolidating and delivering open-source software. Dell is brilliant at consolidating and delivering commodity hardware. Dell needs software to grow, and Red Hat could use some financial cushion as it seeks to expand its business beyond application servers and operating systems. Imagine if Dell/Red Hat could start offering open-source customer relationship management, enterprise resource planning, IT management, and more.
If you were a sales guy calling on CIOs, wouldn't you want to be selling the Dell/Red Hat suite of hardware, software, and services? The two companies routinely top CIO Insight's annual CIO surveys--combining them would give CIOs an amazing alternative to Microsoft and other solutions.
Update: The VAR Guy smacks me around a bit for thinking Dell would imbibe Red Hat. His thinking is strong, but I still think it depends far too much on Red Hat boxing itself into a corner as "the Linux company." If Red Hat gets ambitious with open source, all bets are off.
It has been years since I've had to use a Windows PC, having spent several years on the Mac (with minor bouts of Linux along the way). Today, however, I'm suddenly envious of my friends who haul around those monstrously ugly HP and Dell machines.
Why? Twenty-four hour battery life on the HP EliteBook 6930p, as ZDNet reports. Twenty-four hours!!! One battery. Dell was no slouch either with a 19-hour battery.
My MacBook Pro? Maybe three hours if I baby it. When I travel internationally I carry a BatteryGeek extended-life battery that gets me another eight to ten hours, but it's really heavy, making it a bit of a chore to lug around.
To get 24 hours out of the HP laptop requires a host of fortuitous events (special "Ultra Capacity Battery," updated Intel graphics driver, SSD drive, special LED display, etc.), but I'd happily pay extra and jump through hoops to get this kind of battery life from my MacBook Pro. Happily.
Heck, I already paid something like $500 to $800 for my lug-along extended-life battery for my Mac. Paying extra for something that would break my bank but not my back...? Done.
According to a recent IDC report highlighted by ZDNet, Linux is booming. At just 9.4 percent of the overall server market in terms of revenue in 2007, Linux has now climbed to 13.4 percent of the overall server market, with Unix at 7.7 percent and Windows at 36.5 percent. If Linux server vendors want to continue to grow, at some point they're going to have to come to grips with Windows, rather than eating into the low-hanging Unix fruit.
The big winner in the quarter was IBM, with 33.2 percent of the market. Hewlett-Packard is not far behind, but is moving the wrong way on market share:
(Credit:
IDC)
Despite the healthy 6.4 percent growth in the overall server market, however, IDC suggests a softening in the server market, as The Wall Street Journal points out:
...(T)he growth came, in part, because manufacturers cut prices on popular product lines. That worries IDC because cutting prices is how companies typically react when faced with softening demand. With economic conditions showing few signs of improvement, price cuts "are a concern, as they may foreshadow a slowdown in market demand," said Matt Eastwood, an IDC group vice president.
Perhaps this softening is one reason that while Linux server growth topped 10 percent, Unix only grew 7.7 percent and Windows struggled to achieve 1.7 percent growth. I actually would have expected a stronger showing from Windows but then, HP, IBM, and Dell all have a vested interest in getting out of Redmond's shadow. Linux points the way to greater independence.
It will be instructive to see if Linux server growth will continue to outpace the rest of the market and, in particular, Windows server growth. In a down economy, Linux may find its direction is up, up, and away. Red Hat and Novell will be the beneficiaries, and perhaps a bit more Ubuntu?.
If you needed any further testament to the colossal failure that is Microsoft Windows Vista, just read this Wall Street Journal article detailing PC manufacturers attempts to design around Vista's shortcomings, shortcomings that no amount of marketing are going to fix.
...[S]ome PC makers are trying to improve that [Vista] experience by adding their own proprietary software to their machines. In some cases, they're creating new user interfaces intended to make Vista faster and easier to use. In other cases they're replacing applications from other software companies with their own....
Today, Microsoft encourages PC makers to build software "on top of Windows Vista that enhances the customer experience," according to an email from Lauren Moynihan, a senior product manager at Microsoft.
This is the problem: they can't. At least, not as much as they'd like. PC manufacturers are trying to stand out, but given that they've ceded so much power and control over the computing experience to Microsoft, the best they can provide is "Windows dressing."
For Sony, HP, or other PC manufacturers hoping to create an Apple-esque experience, forget it. Your best chance of doing so is with Linux. When you pre-install Windows, you pre-install Microsoft's view of the world, with all the bad (and good) that comes with that view. Dell can replace Skype with its own VoIP software, but it can't replace the look, feel, and experience of an increasingly all-consuming Windows experience.
Perhaps Dell, Sony, etc. should band together with Adobe, Google, and others to create Linux-based computing experiences for consumers and/or enterprises. Each of these companies arguably has the brand awareness to take the Linux out of the Linux desktop, and re-brand it as their own. Windows will never give them this opportunity, no matter how hard they try.
Dell, following IBM and others that have seen their most pronounced growth in emerging markets, is reporting booming sales in Asia-Pacific:
"Dell experienced 41% unit growth in Asia Pacific and Japan region" in the fourth quarter, said Mr. Dell, who is also founder and chairman of the world's second-largest personal computer maker. Mr. Dell said that in the fourth quarter the company's laptop business in the Asia Pacific grew more than 70%. Industry research firm IDC estimates that the laptop business is growing about 21% year-over-year in the region, he said.
This is great for Dell, and eventually should be great for open source. Asia Pacific hasn't been a booming market for commercial open-source vendors, but increased penetration of computers should provide fertile ground for the software to match them.
Dell has entered a partnership to take to Fonality's affordable VoIP phone systems to small and midsize businesses.
This is big news for the VoIP world--and for the open-source Asterisk project underlying Fonality.
Dell will be selling the Fonality VoIP Phone System through its global SMB sales organization, as well as its channel.
Needless to say, the opportunity is huge. According to a Dell'Oro Group group analyst quoted in The Wall Street Journal (PDF), 35 million small businesses worldwide are expected to adopt VoIP calling over the next three years.
Fonality brings to the table a product designed to be easy to use and directly installable. Dell brings its market reach and brand. It's a good deal for Dell. It could be the making of Fonality.
Look at the math.
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