Archives for March 2007

Sun winner as IDC validates Jonathan Schwarz’s Bus Metaphor

admin · March 20, 2007 · Leave a Comment

As I wrote in a recent post The comeback story of Sun, Sun seems to have made some good solid bets in hardware and they seem to be paying off. Jonathan Schwarz recently wrote a post on the move towards bigger servers entitled The Glamor in Mass Transit. The latest IDC report on servers confirms his core arguments. Here are some excerpts from the IDC release:

According to IDC’s updated forecast, multicore and virtualization will cost the x86 market more than 4.5 million shipments and $2.4 billion in customer spending between 2006-2010. Overall, x86 shipments that were once projected to increase 61% by 2010 are now facing just 39% growth during that same period.

Other highlights from this study include;

Server revenue growth rates will be lower in comparison, but are reduced to a lesser extent than shipment growth rates as customers deploy more richly configured systems in terms of memory, disk, and I/O to balance the increase in processing and server utilization.

Despite the decline in the number of physical shipments, over the forecast period, growth in the number of effective processors continues to climb at a 25% annual rate due to multi-core technology advances.

The number of virtual servers rises dramatically at a CAGR of 40.6% during 2005-2010 so that by the end of the forecast period, more than 1.7 million physical servers will be shipped for virtualization activities resulting in 7.9 million logical servers. This represents 14.6% of all physical servers in 2010 compared to just 4.5% of server shipments in 2005.

The big winners of this trend would be companies like Sun and VMWare. Software vendors for database and storage servers could also benefit as the number of effective processors continues to grow at 25%. This is one reason per core pricing may be here to stay.

Did Huawei cause Cisco to buy WebEx?

admin · March 16, 2007 · 3 Comments

I just returned from the SaaS Summit organized by OpSource in Monterey, California (more on that later) and a lot of the discussion turned to Cisco’s WebEx acquisition and what it means for SaaS and the high-tech industry in general. Most of the reasons cited for Cisco’s move to acquire WebEx by experts were around the following themes:

Cisco is driven by the growth potential of selling services directly to corporate customers
Cisco is moving into IP services to compete with Microsoft’s move in IP TV etc.

But one of the key points seem to be missing in this discussion. I am of the opinion that commoditization of its core router business as evidenced by Huawei’s success in China and global aspirations, and potential for other disruptors such as open source routers running on commodity hardware may have given the added impetus for Cisco to move up the stack. After all, there are several risks to the strategy to move into applications including Cisco becoming a competitor to its large Telco and service provider customers. I am certain that Verizon and Vodafone of the world that are looking to sell value added services on top of their very expensively built networks will not find this move friendly.

Emerging Markets Demand Pay-as-you-go:
Another way of thinking about the Huawei impact is to think about the fact that consumers (individuals and corporate) are not always willing to spend millions of dollar up front to build out networks and realize the value over time. It is much easier to sell pay-as-you-go services in emerging markets where capital is often limited. In fact, if Cisco succeeds in this strategy, it may inspire other high-tech vendors to move to subscription pricing and SaaS model for emerging markets.

Services not Servers:
The WebEx acquisiton could also be seen as the begining of the move to selling “IP services” rather than do it yourself IP boxes to telcos and corporates. You can call this a Solutions strategy, an IP Services or SaaS strategy, or pehaps even hardware externalization or hardware-as-a-service . In the sense that rather than a corporate or telco buying Cisco hardware to build out a new Voip, web conferencing or video conferencing servic, it would now just buy a service. Nicholas Carr questions eloquently “Is the server industry doomed?” in this blog post where he talk about compute servers. I would extend the same argument to “IP-Services Servers” from Cisco.

What do you think about the China/Emerging Markets angle to Cisco’s move? How will Telcos like Verizon and BT respond to this?

(As with all posts, these are my personal opinions.)

Don Dodge say VCs invest $40 billion with only $18bn in exit: some addional data points

admin · March 13, 2007 · 2 Comments

Don Dodge has written an excellent piece Venture Capitalists and Angels invest $40 Billion per year but see only $18B in exits that Jeff Nolan and Jason Wood have commented on(hat tip to ). The core thesis of his post is that “exits have averaged $18B over the past 6 years while investments have averaged about $40B over the same time period. “

He further adds-

This can’t go on forever. Or, maybe it can. Gamblers lose billions of dollars every year in Las Vegas…and have been happy to do so for over 50 years. VCs and Angels are big time gamblers and they love the game. One winner erases all the losers in their mind. I completely understand that because I think the same way.

Now as much as I love Black Jack as the next guy, I think these numbers may not reveal the full truth. The total value of all IPO exits for VCs is reported as $28.4 billion. I suspect that this figure is based on valuation at the time of the IPO. Let me prove by contradiction. (Okay, proof is a strong term, let me illustrate by way of an example.)

Google: Now here are some numbers reported to SEC (accoding to Venture Beat).

According to Google’s filings with the SEC, Sequoia Capital owns 23,893,800 shares in Google, now worth $4.42 billion on paper, and Kleiner Perkins has 21,043,711 shares, worth $3.89 billion on paper.

Now this was more than a year ago. Since then the value of the Google shares has gone up further, and the combined stake for the two VC firms in Google today would be $20,221,879,950 (at $450 a share, current prices). That is over $20 billion.

Yes, this argument is using the best case example. But I would surmise (and bet) that the same is true for other big exits. Salesforce.com investors for example ‘exited’ the company by way of an IPO at $11 i.e., less than $1 billion (market cap). Today the stake is worth 5 times the amount.

In that sense, an IPO exit is much more preferable than M&A because it allows further appreciation even after the exit.

At the same time, I do agree that the market value represented by the IPO price is an accurate measure. The fact that some shares appreicate in value after the IPO is supposedly reflected in the share prices.

What do you think? Are these calculations wrong? Or am I missing something very basic here?

Peek inside the Kitchen: Why SaaS customers should care about SOA?

admin · March 13, 2007 · 1 Comment

If you are a customer that is using on-demand CRM, HR, Reporting, you may think that you probably need not bother about SOA. After all, SaaS is akin to ordering a meal at a restaurant rather than cooking one yourself.

But actually you should care about how the meal is prepared, metaphorically speaking, for several reasons esepecially when evaluating a new restaurant (SaaS vendor):

Reliability: Will their service be as good tomorrow as it is today? Any time you make a long-term commitment to a service, you need to be able to predict that the vendor will be around a year (or decade) from now and the quality will not deteriorate. In real life, we do this by relying on brands and reputation, and so is true in software. However, when dealing with a new restaurant, you may need to peek inside the kitchen.
Quality of Service: Will my food be free from E-Coli? Will my data be secure? How do I ensure compliane with HIPAA, Sarbanes-Oxley etc? You need to know that the burger meat was cooked to a certain temperature. In SaaS, you need to know that the software is hosted at a world-class data center, that the service provider is using a technology stack that provides security at all tiers (data, process and user interaction).
Manageability: Will my waiter understand what I need and help me pick the wine I want or should want! As you adopt SaaS, you will want a solution that not only provides the functionality be it CRM, HR or whatever but you also want to make sure that the users and IT will be able to manage their accounts, integrate with existing systems and processes, monitor usage, etc.

So, even though you as a customer are not responsible for development and on-going maintenance of the software, it is imperative that you have a good idea of the architecture and operations of your SaaS vendor. After all, as we all know thanks to Verizon when you buy a cell phone, what you are really buying is the network.

You don’t want your SaaS vendor to drop your calls when it is time to close your quarter.

In another blog post, I will discuss why SaaS ISVs should and do care about SOA. This blog post was originally posted on http:blogs.oracle.com/zen

Prosper could get bigger than Google

admin · March 12, 2007 · 1 Comment

Prosper is a P2P lender founded by former E-LOAN founder and CEO Chris Larsen and follows in the footsteps of Zopa, a UK based startup. Prosper has helped originate loans over $35 million over the last 18+ months. The unsecured consumer lending market is huge- if you think Google’s potential playing field or EBay’s universe of opportunity is large, consider this- in one quarter (fourth quarter, 2006) banks gave out $382 billion dollars in credit card and consumer loans. Or over a trillion dollars. Compare this with total internet advertising revenue of $4 billion dollars in the same quarter. (The global advertising market is $406 billion dollars annually)

I have followed Prosper for close to a year (see my earlier posts here and here,) and used it as a lender playing with $1000 to get a feel. So far, here are the statistics on my experience:

Loans:
Active loans: 14
Principal loaned: $657.79
Avg. interest rate: 18.52%
Late/Bad loans: 0

My APY, after fees is 18.04% – way more than what I have earned in other investments. Now, clearly this is not a typical experience and my appeptite for risk is higher. However, with this positive experience I am likely to lend more, and even consider borrowing when needed.

What is Prosper doing right? And wrong.

Listen: Prosper has reached out to its user community. I have been contacted for a user study and they have incorporated feedbacks from that session.
Growth at the right rate: Prosper is building a community and that requires time. The fact that they are dealing with real money requires trust to be built between Prosper and the users, and between borrowers and lenders. Over time, these borrowers and lenders will become the evangelists.
Ease of use, not AJAX: Yes, I love sexy UI’s as much as the next valley guy but if you want a community site that welcomes everyone including 75 year old rich retiree as a lender, you want to keep the site easy and accessible.

And what is it they are doing wrong. I am still not satisfied with how much time it takes me to search and find good borrowers. The platform is too complex for new users and not powerful enough for savvy users. They ought to consider building a power tool (site) for heavy users and further simplify the user interface for others.

What do you think about prospects of Prosper? Do you prefer Zopa? What advantages do they enjoy over banks?