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Archive for February, 2008

Google Reports iPhone Usage 50x Other Handsets; Amazon S3 Goes Down: Low Friction Has a Cost

Posted by Bob Warfield on February 15, 2008

As I write this post there are two articles that caught my eye.  For most, the iPhone and Amazon’s Web Services have little to do with one another, but I see a bit of a pattern here that’s interesting.

Slash Lane of Apple Insider reports that Google was shocked that is was seing 50 times more search requests coming from Apple iPhones than any other mobile handset — a revelation so astonishing that the company originally suspected it had made an error culling its own data.  It’s an amazing statistic, really.  But I can attest to hitting Google quite a lot myself whenever I’m out and about and killing time before the next meeting.  In fact, I am very pleased to have my bookmarks out on a web page rather than in my browser so I can easily access all of my favorite sites from whatever device is at hand.  The iPhone is quite a credible web browser.  I can’t wait for the 3G version and higher speeds.

Following closely on my read of the iPhone piece is Nick Carr’s article about an Amazon S3 outage.  Nothing all that earth-shattering or unexpected, just that S3 was out for several hours this morning, beginning at 7:30am EST.  The gist of the article is that while the outage was to be expected, Amazon did a poor job keeping users informed of what was going on and providing explanations after the fact.  Carr is right, of course, but business is always embarassed when things go wrong and the first (and wrong) human instinct is to be shy about details.

Why do these two go together?  I’ll give you a hint:  the tales of Facebook applications reaching millions of users in an incredibly short time also goes with the theme I’m thinking of.  That theme has to do with friction.  Friction is my word for all the factors that slow adoption.  The time needed for word of mouth, decisionmaking, purchase, installation, getting through the learning curve, and finally being a first class citizen of whatever community results is governed by the degree of friction.

One of the things the Internet does is reduce friction.  In its most extreme, friction actually reverses and becomes a propelling force.  We call that viral marketing.  Most of the innovations in this second Internet round (post-bubble) have been focused on reducing friction.  Social Networks, for example, dramatically reduce the friction of networking.  Twitter dramatically reduces the friction of blogging, right down to limiting the article length to 140 characters so you don’t have to labor over the wordsmithing.

While it’s harder, the web is also a powerful means of reducing friction for more physical things.  The iPhone and Amazon Web Services are two great examples.  In an extremely short time the iPhone has racked up 50x the usage of other competing handsets for the Internet.  The traffic to AWS in approximately the same short time now exceeds the combined traffic for all other Amazon properties.

While the web itself helped to spread the word, I think it is no coincidence that these two have a lot to do with the web and offer a lot of value back to the web.  It’s what some folks call a virtuous circle.  Look for more of these as time goes on.

Now that cost side.  These growth rates are not predictable.  Nobody would have guessed that either business would get so big so fast.  In fact, many guessed just the opposite.  Even if you did guess it could happen, it would only be a guess that it could, not that it would.  A prudent business would not invest in infrastructure built to the level and assumption that it would happen.  That means there will be painful outages from time to time.  Hopefully, the infrastructure owners will take those outages as signs that its time to double down and extend their projections of what might happen much further up and to the right.  Those that succeed in keeping hold of the Tiger by the Tail will survive and prosper.

Posted in amazon, data center, grid, Marketing, multicore, Web 2.0 | 5 Comments »

When Do The SaaS Acquisition Games Begin? (A Primer on Cloud Computing Market Segments)

Posted by Bob Warfield on February 12, 2008

The Yahoo/Microsoft business has turned to utter farce.  Michael Arrington’s line left me in stitches:

Wait. Yahoo and AOL? I Was Looking Forward To Something More…Fierce.

Mathew Ingram calls it “desperation squared.”  We have now moved from the factual to the sublime: a sure signal to Yahoo that they need to get on with being acquired.  When most of the world is laughing at you, and you are a huge company, it means you’ve lost it.  You’re way past the point of return.  But this is not why we’re here, for the Giants are thinking of dipping into another branch of the Cloud Computing Tree.

Tom Foremski says that Oracle recently approached to gauge their interest in a possible $75/share offer.  Duncan Riley at Techcrunch finds the rumor plausible, as do I.  I won’t spend a lot more time on this particular scenario.  It will be a question of Oracle’s resolve to buy versus Salesforce’s resolve to remain independent.  But I will say this.  Oracle typically spends 7-8x maintenance revenue to buy companies.  If the rumor is true, they’re offering 13x trailing twelve months total revenue for Salesforce.  It just goes to show the awesome financial power of a good SaaS business.  It’s likely worth that much.  After all, if Oracle is ever going to get started on the road to SaaS (yes, I know, they have a SaaS business already, yada, yada, but not really), starting from a seed as close to $1B a year as possible would help accelerate things.  That’s a real problem, BTW: there just aren’t all that many SaaS properties out there yet for acquirers to choose from.  The space isn’t very far along, and is still very young.

And yet there are machinations going on as various players try to position themselves for the coming battles.  Some of these manuevers are visible, some are just off the edge where the light is pretty dim.  It’s important to segment the Cloud Computing and SaaS market to gain a better understanding of the terrain.  We’ll leave aside the Web 2.0 world of Facebook et al, though the infrastructure at the bottom of the market segmentation model I present is the same for the Consumer/Web 2.0 world.  Markets tend to consolidate from the bottom of the technology stack up.  The reason is that the bottom layers have been around a lot longer, there are more big players, and momentum there has often slowed.  These are sure signs that a consolidation is in order.  It’s important to know where you are in the stack because it equates to where you are in the M&A food chain.  Consequently, VC’s often try to evaluate how near the bottom an idea is versus how late in the day it’s getting.  Being too low in the stack when the market is very mature is usually a bad thing.  Being high up early is oddly almost never a bad thing.  The very top of the stack is apps, and it takes apps to propel the other layers forward.

All things considered, if you have a killer idea for an app, that’s where you should place your bets.  That would be another reason for Oracle to pay a premium for Salesforce.  The other thing to keep in mind is that the line of safety keeps moving upward.  The snapshot I’ll portray today has that line hovering at the Value Added Hoster level.  It won’t be long before it moves up a notch to encompass the Virtualizers.

The Battle for SaaS Hosting and Platform Dominance

At the very bottom of the SaaS stack are the hosters and platform builders.  There are several armies on the battlefield jockeying already.  There are roughly three market segments:



First are the old-school hosters that basically offer raw machines and Internet connectivity: “A Cage and a Pipe.”  These guys are very long in the tooth for the current Cloud Computing era.  The trouble is they are experts on the physical plant but don’t add much value otherwise, and their expertise is now heavily commoditized.  If they don’t learn to offer more value soon, their days are numbered, hence they’re in the “red” zone.

Next up are the value added hosters.  Start with a Cage and a Pipe and add Some Service.  Perhaps that’s as simple as providing system administrators and DBA’s.  Service can become more elaborate.  This group is currently a very popular choice for SaaS startups I talk to.  Very few of these companies are considering the Red Zone.  But the Value Added Hosters need to move upstream as fast as they can, lest they start to go red too.  The services they offer are not hard for the Cage and Pipe crowd to bring on.  There is so far minimal proprietary technology adding value.  Aside from the problem that others can add services, it creates a secondary problem that the cost to deliver the service is higher.  We’ve talked before about how much more efficient SaaS players have to be than conventional users of Enteprise Software.  The Yellow Zone is borderline in that respect.

It shouldn’t be surprising, therefore, when we read things like OpSource’s acquisition of billing company LeCayla.  It gives them technology and a new service to inch them closer to the Green Zone.

This brings us to the Green Zone, which I have dubbed “The Virtualizers.”  Virtualization is their chief technology differentiator, although there is often a whole lot more.  These players want to bring on as many generic components as they can to complete a full Platform as a Service offering.  This is the most interesting and vigorous space, and I predict it represents the future.  If the Red and Yellow Zones can’t find a way to get there, they’ll find themselves increasingly commoditized and marginalized, making their segments very tough businesses indeed.  The Green Zone brings a number of essential advantages, although every player doesn’t offer every advantage. 

One of the big advantages is true On-demand computing.  With Amazon and many others you can buy servers buy the hour as needed to deal with load spikes of various kinds.  This leads to a tremendous savings for most organizations, and makes it possible for startups to pay the big bucks only if they’re successful and have the big bucks.  It’s a radical reduction in friction, and that almost always leads to radical growth.  So it is here.  Amazon recently reported more web traffic going to Amazon Web Services than the rest of Amazon’s properties combined. 

Companies like 3Tera (check out my 3Tera interview posts) and Q-Layer offer such virtulized data centers in the form of software.  Buy their software and you can create a virtual datacenter.  Or you can buy the hosting as well from these companies and their partners.  They’re very important players because they represent the means by which the Red and Yellow Zones can become Green.

Sun deserves special mention after their purchase of MySQL.  If I were being completely objective, Sun is still very much in the Yellow Zone.  I’m giving Sun and Jonathan Schwartz the benefit of the doubt in terms of where they’re going.  They do offer Sun Grid, and they certainly have the wherewithal.  Whether the organization can really pull together and get it done remains to be seen, but MySQL is a very promising new jewel in that crown.

SaaS Tools

The level above the platform consists of Tools.  First thing to note about this category is that “Tool” is a dirty word among the VC’s and other money mongering intelligentsia.  The story goes that nobody ever got rich on tools, the world now expects tools to be given away, yada, yada.  BTW, I disagree with that sentiment.  There have been lots of very successful tools companies.  I think the real issue is that it’s hard for the Money Men to evaluate tools.  Everyone promises to be able to turn a noobie programmer into a powerhouse of productivity that can single handedly reproduce SAP’s entire suite over the weekend.  Unless you are extremely technical and immersed continuously in the world of Tools, it’s very hard to separate the hype from the reality and the religion from the irrelevant.  Nevertheless, this is a real category, and there’s actually a lot going on here. 

I break this market into three segments:



At the bottom, just above the Virtualizers from the prior diagram, we have Systems Software, which I’m classifying here as Databases and App Servers.  Normally we would include operating systems, but they’re spread all around and largely play in the Virtualizer category.  In other words, what’s interesting about Operating Systems vis a vis SaaS and Cloud Computing is virtualization features.  This area is dangerously close to the Platforms where most of the Giants are.  Sun has already set a big foot down here with MySQL.  Amazon is trying to change the game entirely with SimpleDB.  There are some players, such as Elastra, that are trying to skate between Amazon and the rest of the world by offering MySQL on Amazon.  My take is that such plays need to get big really fast or diversify into other services because the window here has to be closing.  There is already so much traffic on Amazon, and so many folks using MySQL there, that it seems likely a single solution will emerge and Amazon is in a good position to dictate what that will be.  I can hear Amazon on the phone call now:

Really, you don’t want to sell to us?  Well, we’re going to deliver your product on AWS in about 6 months and it will be the preferred solution for the platform.

Or that call could be to a MySQL competitor.  There are several, and some say products like PostgresSQL are better for various reasons such as scalability.  What would it mean to Sun if Amazon acquired one and built it into their fabric?  What does it mean to others lower in the stack if all the good DB’s get bought and incorporated into the fabric of Giants?  Definite strategic manuevering possibilities here.

Next up are the Languages.  Since the dawn of computing, there have been Language Wars.  A lot of this is about separating the religion from the irrelevant, BTW.  Nevertheless, we have the new school of scripting languages circling the castle of traditional curly braced languages like Java and C++ (not that the new guys are bereft of curly braces!).  Their battering rams are pummeling the iron doors of performance ceaselessly with the promise of productivity.  Cheap among these are PHP, Python, and Ruby on Rails.  There are successes and failures to point to for all of them.  PHP is largely what powers Yahoo and many older web properties.  Python, while Open Source, seems to be the one championed by Google.  After all, they got Guido.  Ruby on Rails is one that I find interesting, because it doesn’t yet have a big power partner.  It’s Open Source, but without the partner, it remains something of a Free Spirit.  Perhaps that makes it an ideal nucleus for an upstart wanting to take on the Cloud Computing Giants.  Heroku would be one such possibility.  I’ve seen a demo, and it surely did seem pretty cool.  The Ruby brand is still strong, and could propel the right offering far.  Zend is working hard to have a go at PHP as well.  BTW, I would put Force squarely in the language category.  Yes, it is all of the layers below too, but there is a rich set of functionality that adds language and framework, not to mention you must use their proprietary langauge.

I can’t move on from Languages without mentioning Salesforce’s Force either.   They view it as a Platform-as-a-Service, but it offers so much more than something like Amazon (so far at least) that it deserves a spot higher in the stack.  Force includes a language that is Java-like, but proprietary to Salesforce.  Most developers these days have a problem with proprietary.  They prefer Open Source.  But that’s not even the real Achilles Heel.  Force is currently way overpriced to make it practical for ISV’s.  As I’ve discussed many times, your Cost of Service needs to be as far below 50% as you can get.  With Force starting out at $50 a seat month, customers must charge $100-200 a seat month to achieve reasonable margins.  That’s largely not possible for ISV’s, so Force is mostly an IT pheonomenon.  That makes it less strategic, but perhaps a better cash cow for Salesforce.

What’s this Enterprise Tools category?

Enterprise IT is used to having a rich ecosystem that fills in the gaps.  When you think about it, purchasing the software application is just a small piece of the overall organism that is created when that app goes into production.  There are many products bolstering and augmenting the application’s functionality.  Don’t like the reporting provided out of the box?  Plug in a Business Intelligence Tool.  Need to integrate the application with other applications without writing too much custom code?  There’s everything from ETL tools ala Informatica to shift data between tables to complex messaging systems from companies like Tibco.  Need help managing logon information and implementing single sign on (SSO)?  There’s LDAP, Active Directory, and a ton of other products out there. 

Almost all of that is gone with Cloud Computing.  As someone quipped, “It isn’t that the data is in THE cloud, it just isn’t in MY data center anymore.”  And in fact, THE cloud is really many clouds: one for each data center of each provider you’re doing business with.  Even more interesting, a lot of the Old School providers of this stuff have technology that isn’t real relevant to the Cloud Computing Era, and many of them have been bought so they can be milked.  Witness all the BI vendors that have been absorbed.  Their time of innovation is done.

That’s actually great news.  The SaaS Enterprise Tools category is the lowest true Green Field opportunity in this model.  Nobody owns it.  The Giants are mostly absent.  And there are even surprisingly few startups about.  Perhaps it just doesn’t seem sexy enough, but there are real problems here that need solving.  I had lunch the other day with Mike Hoskins of Pervasive.  Among many other areas, they do a good business out of software that pumps data out of Salesforce and into your local data center so you can apply your BI tools to it.  I’ve interviewed Ken Rudin of LucidEra for this blog.  They provide BI solutions in the Saas model, largely based on data from Salesforce again.  Another great example is EMC’s recent acquisition of SaaS backup vendor Mozy.

These are good opportunities in this segment.  There are customers with real pain and minimal competition so far.  The Giants are ill-positioned to jump in because of the disruptive business model that is SaaS.  I would expect to see a lot more action here before it’s over, but there is a very interesting move that just took place that seems to have largely been ignored.  Workday, Duffield’s Peoplesoft Version Two, has just acquired SOA integration tool vendor Cape Clear.  I think this is really an interesting move.  Yes, I’m sure they needed to be able to easily integrate a lot of systems outside Workday to sell their application, but I wonder if there is more going on here?  For example, at some point, I expect to see fine grain network effects emerge from the topology of the clouds.  These will be a function of the need to shift data between applications to integrate them.  There’s a real speeds and feeds issue there that has to be addressed.  It will be advantageous to run your software in the same cloud as what it integrates with.   This will favor really big clouds like Amazon’s.  I could also see it triggering partnerships bolstered by high speed dedicated links between data centers.  One example is Joyent’s dedicated link to the Facebook data center, which gives them a real advantage hosting Facebook applets.

Is Workday trying to lock in a part of that future integration pie?  Not clear, but there sure isn’t much else beyond Cape Clear in the space right now and Workday’s application is the kind that wants to be the system of record nexus for everything else.  Dana Gardner discusses how increasingly, it is the Service and not the Software that drives acquisitions like this.  After the merger, you won’t be able to buy Cape Clear except as a Service (now dubbed “Integration as a Service”).  Given that it was a very high quality offering, Cape Clear gives Workday an interesting and valuable differentiator, if nothing else.  One of the big puzzles of SaaS is how to get the more complex domains installed much more cheaply than conventional Enterprise Software.  Integrating with a bunch of Legacy systems can make that really hard unless you have a toolset like Cape Clear to simplify the job.  To the extent the tool is bought to integrate other SaaS vendors, it can serve as valuable lead generation to go sell the primary Workday Suite into Enterprises that clearly have SaaS underway.  All in all, I would rate this as a canny and highly strategic move that Workday has made.

SaaS Enterprise and Desktop Applications

This brings us finally to the topmost slices of the layer cake, applications.  I include here both desktop and Enterprise applications, so it’s everything from spreadsheets and word processors in the cloud to  That’s a lot of ground to cover, and it has barely been penetrated.  There are numerous application categories for which there are not yet any SaaS offerings, and many of the offerings that are available are still in their early days yet.  Most of the application companies I talk to are seeing unbridled demand.  It seems likely that for early markets there are enough customers out there in the SaaS early adopter crowd that you can go pretty far just because your offering is SaaS, assuming it works, of course.

What’s Strategic and Who’s Being Left Out?

First, there is an overall megatrend at work here, and that is the move from proprietary to open.  Companies will over time be less and less inclined to run datacenters.  Giant Cloud Centers like Amazon Web Services will be the new black and the New Open for that world.  That Openness will drive throughout the stack in an expanding wavefront, because Open wants to connect to Open.  That makes All Things Open strategic in this Cloud Computing Era.

Second, let’s talk briefly about acquisition strategy.  If your goal is to acquire SaaS market share and scale, there isn’t much available.  Salesforce is the largest pure SaaS vendor and they’re still under a billion in annual revenues, although they’re closing in on it.  That means acquisitions at this stage in the market should be more focused on capturing Strategic Choke Points than cubic dollars.

Let’s review potential choke points:

– Hosting and Platforms:  Look at the 3Tera and Q-Layer offerings as a means of supercharging data centers into the Cloud Era.  There are probably other players I’ve missed, but these guys give a flavor.  Be aware that virtualization is all the rage.  I personally have met 2 different Entrepreneurs in Residence at major Silicon Valley VC’s in just the last month who are focused on virtualization.  There’s a lot of attention here, and we can’t forget VMWare, nor the fact that the OS makers all want to build it into the OS.  The nice thing about something like a 3Tera is that its a lot more than just virtualization.  The real answer is to recast virtualization as a solution, and thereby move up the stack.  Simply Continuous, for example, offers a Disaster Recovery solution based on virtualization.  Those EIRs I mention are also interested in solutions more than generic virtualization.

– Systems Software:  Sun’s purchase of MySQL signalled that consolidation has begun here.  We’re going to see the clash of the Relational DB’s versus the new era SimpleDB-style systems.  I have to expect that all the action over at Amazon will flush others out of the woodwork some time this year, especially Microsoft and Google.  The former may be overly preoccupied with Yahoo and therefore delayed.  As for App Servers, look for Dark Horses specific to the new languages.  Someone who does something really great for Cloud Computing may have a leg up, but I’m not sure how long it will last.  If you want to hang out in this layer, be focused outside the limelight.  LucidEra took over an open source column store DB and focused it around SaaS BI needs.  That’s safely out of the line of fire between MySQL and the SimpleDB’s of the world.  In fact, there are likely more opportunities in the BI-specific space.  Certainly this was very late in maturation for conventional On-premises.  I wonder if someone will build a Teradata equivalent in the Cloud, for example?

– Languages:  This is as low in the stack as I’d want to be innovating unless I had a serious niche picked out.  The world seems to be clamoring for new languages at the moment, so maybe there’s a good shot here.  And so far, nobody is very far along at packaging any of the new languages so they’re easy to use for Cloud Computing.  Stay away from the crowded niche of proprietary “non-programmer” languages.  These are the Bugees, Cogheads, and the like.  They’re really more like dBase or Access in the Cloud than they are Languages in the Cloud.  If one of these players can really hijack a major language and get a big enough lead, it will be interesting.  It’s very hard though, with Open Source.  It levels the playing field unless you’re very careful about how you add value.

– Enterprise Tools:  Huge opportunity here.  There is no compelling generic BI offering for SaaS.  Workday just bought arguably the best SOA offering in Cape Clear.  Yet many application domains require these tools and a whole lot more.  If you are a startup looking to be acquired, think about what services your company could add to the Amazon umbrella.  What are the things that would spread like wildfire among the couple hundred thousand developers who have accounts on Amazon?  Build your solution so it scales well and takes advantage of Amazon’s pricing for communication within their cloud and you could go far.  One thing I think is glaringly apparent and needed, for example, is an OpenID service for Amazon.  There are many many others.  Deconstruct the current On-premises IT ecosystem and see what makes sense for SaaS.

–  Applications:  If you want a strategic choke point, you want to own a system of record.  They’re the blue chip properties in the Enterprise Suites.  That’s because everything else gets its data from some system of record or another.  Let’s not be totally focused on the past though.  The Cloud is ideal for collaboration.  How can you combine a system of record domain with serious collaboration to build a new killer category?  Worth thinking about.

I think I’ve provided a decent framework for thinking about the SaaS world in terms of where the action is, what makes sense for M&A, and where the opportunities may be.  If there’s one thing I’m certain of, it’s that we’re early days on Cloud Computing and there is a lot more opportunity out there than I’ve portrayed in this brief article.  There will also be a lot more change, and market segmentation could be viewed along many more dimensions than the one I’ve portrayed here. 

Food for thought.

Related Articles

Just noticed Cote refers to the folks at the bottom of my stack as the “Morlocks”.  Remember the nasty troglodytes from H.G. Wells the Time Machine?  I don’t think the Morlocks are all that likely to eat the “Blond People” who are apparently the SaaS applications, but stranger things have happened!

I just watched the Google App Engine announcement.  It places them at the language level, which is a big leap up the stack I’ve drawn in this post.  It really raises the stakes for those playing at the lower levels!  See my post for more.

Posted in amazon, data center, grid, saas, strategy, Web 2.0 | 13 Comments »

Software Testing in the Multicore Cloud Computing Era With Replay Solutions

Posted by Bob Warfield on February 11, 2008

I had the opportunity to visit Jonathan Lindo, CEO and co-founder of Replay Solutions last week and I came away impressed.  This Hummer Winblad and Partech backed startup has some fascinating new technology to help with software testing and debugging.  I like to think of their software as a time machine for complex software.  With it, you can go back and recreate the circumstances that led to a bug, and thereby figure out what has happened.  Their software works by turning your J2EE application into a black box, and monitoring everything that comes and goes into or out of the box.  Using their proprietary algorithms, the data required to do this is actually kept very small.  So small, that the company got its start helping game companies to monitor their software using the same technology.  They’re still doing a business in that market, and you can imagine the software has to be pretty unintrusive if its not going to interfere with a game.  And so it is. 

It works this magic by tapping into and instrumenting the Java code.  This sounds a lot like what my old alma mater Pure Software did with their memory leak detection.  What’s nice about it is that no access to source code is required.  In the demo, Jonathan fired up an app server (they support Tomcat and JBoss, and soon WebLogic), lit up their instrumentation module, and from that point on just used the software being tested normally.  Of course in the demo, using the software “normally” eventually led to a crash.  It was the classic ugly Java stack dump that tells you very little about what actually happened–just the thing to annoy both the user and the developers.

Replay Solutions to the rescue.  Jonathan likes to think of it as “Tivo for Software.”  Looking at the screen one sees a screenshot of every HTML rendering to the screen.  This makes it easy to tell where in the recorded dump you are and what the user was doing at the time.  The developer can set breakpoints in their code and then use ReplayDIRECTOR (that’s what the software is called) to bring the program up to the point of failure.  This can be done over and over until the programmer has figured out what went wrong.

Sounds cool, but why is this software an essential tool for the Multicore Cloud Computing Era?  Think about it.  In the old days, reproducing bugs was hard enough.  It could take days to find the exact set of steps needed to make a bug reproducible.  And until the bug is reproducible, it’s nearly impossible to fix.  Now fast forward to the Multicore Cloud Computing Era.  You’ve got hundreds or even thousands of simultaneous users running against a hundred or more CPU’s.  There are many many processes running.  Developers recognize this as a nightmare situation, because it becomes impossible to reproduce bugs in such a world.  How would you ever get all of those users to do exactly the same thing twice?  Add to that all the other crazy timing-related issues and it’s darned near impossible to track down many kinds of bugs on such software.

I talked over with Jonathan what I thought was a really cool scenario.  Would it be possible to set up ReplayDIRECTOR to continuously monitor a big SaaS or Web 2.0 system?  The answer, surprisingly, is that it is completely possible.  Suddenly, we can make these kinds of bugs reproducible.  But it gets even better.  ReplayDIRECTOR will reproduce the problem on far less hardware than the original system.  That’s another big issue to be faced with such systems–the cost of providing a duplicate environment for testing.  With Replay, the “black box” can be just the J2EE server.  All of the other pieces are simulated.

If I were currently involved with a J2EE-architecture piece of Enterprise Software, I would definitely be trying to get into Replay’s Beta Testing program.

Posted in multicore, saas, Web 2.0 | Leave a Comment »

Where is Amazon on OpenID?

Posted by Bob Warfield on February 7, 2008

Every boy and his dog has embraced OpenID, at least among the larger web properties.  Even Microsoft is going to play ball, so the standard is going to be a big part of the day-to-day nuts and bolts of Cloud Computing.  Meanwhile, there are 300,000 accounts on Amazon Web Services and more Internet traffic to the Web Services than to Amazon’s retail side.  It’s about high time Amazon was announcing an OpenID service as part of their offering.  How about it, Amazon?

This is one of those litmus tests for where Amazon is really going.  Their mainstream business doesn’t need or probably want OpenID.  It’s an E-Commerce business that has a well-developed identity service already.  Yet a lot of the rest of the world is embracing OpenID.  A good identity service is a major component that would add a lot of value to the Amazon Ecosystem and be one less undifferentiated thing for developers to worry about building.  Can Amazon develop and bring to market a component of Amazon Web Services that has no use to their mainstream business?  I would love to see them do that to prove the point that AWS is not just a remaindering service or fifth wheel.

What about it, Amazon?

Posted in Web 2.0 | 4 Comments »

Microsoft + Yahoo the Only Counter-Google Combination that Makes Sense? (The Force is Strong in Another One)

Posted by Bob Warfield on February 4, 2008

Microsoft’s unsolicited bid for Yahoo sure has the blogosphere working overtime.  There are lists of what products will stay or go.  The answer is that those products that are aligned with Microsoft’s strategic intentions and are not redundant will stay, but they will have to be rewritten to fit those strategic intentions in Microsoft’s de riguer .NET tool set.  Some of the key questions and thoughts boil down to:

Email is really big for Yahoo.  But how does their cloud computing offering square with Microsoft Outlook and the Exchange business?  I’d hate to deal with just the meetings that will be required to decide who will be in charge of the overall Microsoft E-mail efforts and what trade offs will be made.  You can count on some eggs being broken while that omelette is made.

–  The Email question is just the biggest piece of an overall question:  Will Microsoft use Yahoo to accelerate a move into the cloud, possibly weakening some of their existing desktop software, or will they stick to their guns?  ZDNet says ask Ray Ozzie, who has been making the right cloud noises, but Microsoft is extremely adept at talking the talk while walking a completely different walk.  Jeff Jarvis puts it well, “I’ll bet that Microsoft is just as likely to destroy as to exploit what it gets from Yahoo. That is often the history of these takeovers, when a company tries to buy the strategy it doesn’t have: AOL and Netscape, Time Warner and AOL, Yahoo and, and on and on.”  I’ve seen several of these from both sides, and what is about to happen is a collosal tussle of personalities and ideas.  It gets very emotional, very aligned with interpersonal issues, and often will not make much sense after it’s done.  Anything can and will be rationalized in the heat of battle.

–  I think OpenID will be a great test question for how the new behemoth will operate.  If they unconditionally adopt it across all Microsoft + Yahoo properties, that’s a good sign.  If they weasle at all, that’s a bad sign.

–  Microsoft has likely made their business case on the idea that advertising and search synergy pay enough to make the deal worthwhile.  The rest is just icing on the cake.  Don’t look for them to exercise too much care preserving every last bit of the icing.  Some products will die.  It will be done quietly, but it will be done.  Customers will wake up one day to discover it’s over for their product, and I’ll bet very little warning will be given.  It’ll take at least a year even to sort through it all and decide.

There are discussions about how Google and others can and are trying to block or slow down the shotgun wedding:

Scott Schnaars recalls how Microsoft spent tens of millions of dollars hiring the key talent away from Borland.  This was a little while after I left Borland, but I remember the exodus of talent, and it was truly debilitating when people like Anders Hejslberg left the Delphi group to go to Microsoft and build things like C#.  It’s a lot cheaper to drain talent this way than to beat Microsoft’s $44B offer, but I wonder if it would be as effective with Yahoo?  I’m not saying they don’t have talent, but it isn’t clear there are key people aligned with a few key offerings that matter enough to do harm if the people are snagged.  So I don’t think it’s worth making truly ridiculous offers, but it is probably very worthwhile to make generous offers if companies see valuable talent that is already unhappy about going to work for Microsoft.

– The anti-trust argument is fascinating.  On the one hand, Google couldn’t buy Yahoo without falling prey to monopolist complaints.  On the other, Microsoft claims this is good for competition, but there is potential fallout.  Cote worries about the impact on Firefox versus IE, for example.  Make no mistake, Firefox is out and IE is in at MicroHoo.  Nicholas Carr puts it well when he says that when Google adopted “don’t be evil” as the cornerstone of its corporate code of conduct, what it really meant was “don’t be Microsoft.”  That’s really the fear many have, and they are right to be afraid.  Soon Yahoo, a very decent company on the “don’t be evil” scale will be a tool of Microsoft.  OTOH, Read/Write Web’s poll indicates most people see this as fear mongering and not a real monopoly threat.  In their view, Google can’t claim to be David to Goliath.  While Google is no David, you have to laugh at Microsoft’s claims that it is the saviour of openness

– There are strategies Yahoo could pursue.  It could tie up its search business inextricably by making a deal with Google that can’t be broken.  Remember Peoplesoft’s deal to allow customers to get all their money back if support and new releases for products were dropped?  Similar thinking.  Didn’t stop Oracle or even slow it down much.  Find another suitor?  News Corp, Apple, Private Equity, eBay are all mentioned.  The problem is that Yahoo is more valuable to Microsoft than any of these, and MSFT is well-equipped to pay more.

Of course there is also a large contingent that say this acquisition isn’t the next big thing, which is where I’m at.  One of the funniest is Fake Steve Jobs’ “Monkey Boy’s Three Legged Race.”  Those that think this acqusition is no threat to Google at all wonder why Google bothers to fight it at all.  In fact, if, as many have said, it is good news for Google, why not encourage it?  In this respect, Scoble has it exactly right in terms of what Google is doing.  The reason the deal is good for Google is because these mergers are so messy.  Nothing gets done for a long time.  Key people leave.  Those that stay spend way too much time thinking and talking about it no matter what Jerry Yang tells them.  If Google can prolong and deepen the uncertainty, it compounds this effect, even if the deal goes through.  Google has little to lose playing this time honored game, and potentially a lot to win as each day devalues the transaction.  Henry Blodget maps out what a disaster this deal can be for both companies, from the pre-deal purgatory Google wants to extend to the idea that Microsoft is ill-prepared to start fighting yet another way.

While I do think the deal is not the best news for Microsoft, and is good news for Google, others are very much afraid the deal is terrible for Silicon Valley in general.  There is concern that a Microsoft+Yahoo marriage eliminates a prolific acquirer and could thereby put a damper on the Internet startup game.  Bill Burnham’s post on why the merger is bad for Silicon Valley is probably the seminal essay on the topic, but Fred Wilson takes up the refrain as well.  The last time the bubble burst, VC returns never did come back and there has been a dearth of seed funding from VC’s ever since.  While VC’s often seem to have an almost pathological need to find something to worry about, this one is interesting. 

On the one hand, it’s hard to imagine that so many Internet startups have been counting on just one company like Yahoo to make it all worthwhile.  Can the loss of one player really close down the party?  On the other hand, as was pointed out in the articles I mentioned, part of it was the competition between the big giants that drove up valuations.  The other thing the analysis overlooks is just how prolific an acquirer Yahoo can afford to be if it continues independently.  These guys are at the point of sharpening all available pencils.  Yahoo Music Unlimited, for example, is being shut down and traffic redirected to Rhapsody.  More of that sort of thing will follow regardless of whether Yahoo is acquired.  Fred Wilson points out that people were already starting to leave Yahoo’s services like Flickr and Delicious and MyBlogLog.  The Microsoft thing is just the wake up call telling folks its time to smell the coffee.

Dare Obasanjo asks if you ran Microsoft and didn’t like the Yahoo deal, “What would you do instead?”  I’d buy Amazon if I could.  I think it is a much more interesting play.  Yahoo isn’t strategic, it’s market share.  Traffic, in other words.  There is not a single jewel in Yahoo’s crown that is really strategic.  Yes, they can help grow Microsoft’s search business and portal businesses, but it’s very tactical.  The most likely strategic move would be to place a big bet on Yahoo’s cloud email over Outlook+Exchange, but I have a darned hard time seeing that.

But where did this Amazon thing come from?  I think Amazon is the next up and comer on the web in terms of big scale.  Huh?  That’s right.  Here’s why if Microsoft wants to own a big web property and a strategic one at that, they should buy Amazon:

They own a hugely valuable search franchise: shopping

You want search?  How about shopping search?  Now imagine feeding additional traffic from Microsoft’s other venues through that.  Now add to that even more traffic because Microsoft could afford to buy Amazon as well as Yahoo.  One of the reasons search is so important to advertising is because people often search just before they buy.  An ad picked up during that important period is much more likely to influence behaviour than an ad that runs while a user isn’t even thinking of buying, for example when they’re watching a funny YouTube video.  But Amazon is a search engine for many many e-tailers.  If you are on Amazon you know folks are ready to buy.  Yes, it’s more cosumery and less technie than we think of Microsoft, but it would be a very valuable addition to their empire.  And, according to, Amazon gets nearly as many visitors as each month.  The difference is these people are all shopping and presumably ready to spend money.  No wonder Amazon’s market cap is higher than Yahoo’s was before Microsoft floated an offer.

MicroZon is geographically proximate and easier to digest in every way

Hey, both companies are in Seattle.  Amazon does not consist of a million little unrelated divisions that were once separate companies that got poorly glued together.  Amazon does not have a disaffected staff that was already in the process of walking out the door.  They are not being run by a founder that was off on vacation while a technophobe ran the company for years.  They are a healthy entity that could be brought in relatively undisturbed as a division at Microsoft.  Yahoo will require a massive amount of surgery, some tissue will die, and other tissue will have to be removed.

Google can’t just absorb the value by attrition

Nothing about combined Microsoft + Yahoo will stop the attrition that’s been going on for years.  In fact, many think a merger will accelerate that attrition.  Google’s got nothing going on that competes with Amazon.  They’d have to scramble to think of something.  Meanwhile, the franchise can be brought over intact and likely made to grow even faster.

I saved the best for last:  Amazon Web Services

There is no better way for Microsoft to own a huge piece of the future of Cloud Computing than Amazon Web Services.  It does not require all the hard business cannibalization questions that things like E-mail or other office apps in the cloud bring.  It is a fabulous SaaS model.  It is strategic because it is an operating system in the clouds.  Google has not yet been able to unveil a competitor so Microsoft steals a huge lead.  In one fell swoop Microsoft can gain a fantastic start on the operating system position its used to having on the desktop, only this time it happens in the Cloud, which is the Future.  What’s that?  You wonder how big Amazon Web Services really is?  Guess what, they just announced the traffic to web services is bigger than the rest of Amazon’s offerings.  Let me quote Read/Write Web because this is huge:

web services bandwidth now accounts for more bandwidth than all of Amazon’s global web sites combined. To put this in perspective, comScore ranked Amazon the 7th most visited site in the US in December. The retail giant was 6th in the UK, 9th in Canada, 11th in Germany, 11th in Japan, and 20th in France. In other words — Amazon is big, which means AWS-powered sites must be really big (collectively, at least).

Adoption of Amazon Elastic Compute Cloud (EC2) and Amazon Simple Storage Service (S3) continues to grow. As an indicator of adoption, bandwidth utilized by these services in fourth quarter 2007 was even greater than bandwidth utilized in the same period by all of’s global websites combined.

As TechCrunch’s Erick Schonfeld points out, “That means startups and other companies using Amazon’s Web-scale computing infrastructure now bigger collectively than, at least as measured by bandwidth usage.”

On top of the interesting scale, momentum in a strategic direction, and other tasty reasons to look at Amazon, we have that it is readily monetizable.  These guys sell servers!  There is real money there, folks.  More all the time.  AWS is the big fat iceberg that holds up the tip we think of as Amazon the book and music e-tailer. 

Amazon would have been a better bet for Microsoft than Yahoo,

and it may turn out to be a better bet for Silicon Valley too.  At some point, Amazon will start acquiring like crazy too.  They’re doing some acquisiton, but imagine how easy it is for them to acquire companies that built on Web Services.  This could be the business model the Harvard B-School kids are reading about for years to come.

But the really scary scenario is:  GoogleZon

That combo would pretty much own Cloud Computing.  The amazing thing is it even looks to me like it should pass anti-trust, whereas GoogleHoo wouldn’t.

Posted in strategy, venture, Web 2.0 | 3 Comments »

Microsoft Acquiring Yahoo: Is This A Good Thing?

Posted by Bob Warfield on February 1, 2008

You must have heard by now that Microsoft has launched a bid to acquire Yahoo.  I haven’t counted just how many blog posts on it used the word, “Wow!” (sometimes that’s all the analysis they imparted) , but are we really surprised?  Jeremy Zawodny says it’ll be our least productive day at work since 9/11 because of all the news.  Come on, it’s been talked about forever.  Then there was talk of big layoffs, a sure sign they had no good short term answers.  And $44B is a lot of money to most folks, but not to Microsoft or even Yahoo really.  Where’s the wow?  I don’t see it.

Frankly, someone needed to do something to wake them up over at Yahoo.  They had run aground and were seriously floundering without making much progress towards getting out of shallow waters.  Former Yahoo execs are all over the Valley and paint a grim picture of the internal goings on.  So, compared to just gradually fading away to greater and greater degrees of irrelevance, I suppose it is a good thing that someone has stepped up, but this is not a “Wow!”, this is a, “Ho, hum, business as usual, that’s what happens when you the horse can’t run, it goes to the glue factory,” kind of announcement. 

Patrick Logan is much closer than the “Wow” crowd when he says, “This could turn out to be the best thing to happen to Google in five years.”  Fred Wilson says very matter of factly, “You had to see this coming.”  I love Zoli’s shot of Darth Vadar telling Like he is his father.  The analogy is apt with Steve Ballmer playing the role of Vadar. 

It’s not a done deal yet, either.  Microsoft is offering a fat premium over Yahoo’s very cheap stock, and $44B is a lot of money, but it’s could be just an opening salvo with rounds of negotiation back and forth.  Put that aside, and let’s suppose the deal goes through.  What does it mean?

The combined MicroHoo entity (don’t kid yourself, it’s all Microsoft folks!) will now have 30% search share versus Google’s 60%.  They’re not going to knock down the Google castle walls very soon, but it’s a huge step up for Microsoft and it could make them a meaningful competitor, which neither Microsoft nor Yahoo have been until now.  Given that people are starting to become pretty afraid of Google, that should be counted as another good thing beyond ensuring the survival of the brand.  Although, would you really want Microsoft to win given the way they’ve used their monopoly in the past?  More likely people want Microsoft to just slow down Google a bit without winning.  Otherwise, we’ll be reading about this epic acquisition years later much the way we read about Gary Kildall giving away the OS business to Microsoft.  The analysts of the future will shake their heads that Google didn’t try to acquire or shore up Yahoo in some way.

As for Microsoft, they can certainly afford to pay the $44B.  Their market cap as I write this is $285B and the stock is only down 6%, which is much less than the dilution.  I read that as the Street thinking this is a good deal that Microsoft will come out ahead on.  There is little doubt this is a strategic acquisition as Microsoft is offering 12x EBITDA, which is rich.  This may be Microsoft’s last chance to catch Google before it is just too late.  Nevertheless, financially and from a bean counting perspective, the deal makes total sense.  Shareholders at both Microsoft and Yahoo will likely be happy over this one.  Most of the financial analysts are viewing this as a sensible deal.

So how does this deal hurt anyone?

The blogosphere is quick and insightful in its analysis.  As Dare Obasanjo quotes, Microsoft has openly said they plan on, “eliminating redundant infrastructure and duplicative operating costs will improve the financial performance of the combined entity.”  That, my friends, is the sound of a whole bunch of Open Source being shut down and replaced by .NET courtesy of Microsoft.  I want to talk more about the Open Source ramifications, but they’re just one aspect.  There is huge overlap in these entities.  You have to wonder what happens to Zimbra, for example?  Is Microsoft going to allow web versions of its office apps or not?  Will it do so for just some applications like email?  None at all? 

I love the line from Read/Write Web, “Microsoft is serious about innovation, they just haven’t been doing much of it in house for awhile.”  Sorry, but I haven’t seen it.  Marshall Kirkpatrick, who wrote that line, sees this deal as not about search and advertising (what Microsoft has said the deal is about), but about bringing Yahoo’s innovation into Microsoft.  Is Yahoo really an innovator?  Doesn’t seem like it.  One would think they would be doing better if they were.

My sense is that Yahoo is mostly about a lot of web traffic.  That traffic is scattered across an incredible hodegpodge of properties.  If Microsoft can rationalize the properties without losing too much traffic, they will consider that successful.  Don’t look for Microsoft to be rooting around all the great innovations and elevating them to pedestals.  Look more at the Oracle acquisition model.  Some things will be sacrificed.  Some things will not be worth rewriting to .NET either because Microsoft already has something close enough (goodbye Pipes, hello PopFly) or because whatever it is just isn’t successful enough to be worth the effort.  Microsoft will attempt to push some of that enormous web traffic through its existing properties.  Few companies are as good at pushing linkages between every product as Microsoft.  This, BTW, is a weakness at Google that they need to address now more than ever.

Can Google counterbid and take Yahoo themselves?  Interesting thought from Larry Dignan.  I don’t agree it makes more sense for Google though.  Google doesn’t need traffic like Microsoft does.   Google also has minimal track record digesting a big acquisition.  Microsoft isn’t a lot better on that score, but their organization is more robust and they have a great track record running multiple divisions.  There is a tremendous opportunity to screw up the acquisition as with any large acquisition.  In Microsoft’s case, it would be embarassing and harm the Yahoo division.  In Google’s case, it could drag everything else down too because it would be a merger of equals: Yahoo has about the same number of employees.  Mergers of equals are always risky.

The aftermath of this deal will be an interesting Rorschach test for Microsoft.  We’ll get another look at just how nice a group of people they are to do business with.  Are they reformed, or are they completely voracious predators who will seek an unfair advantage and use it ruthlessly.  In the end, I expect Microsoft to go the voracious predator route.  I’ve written in the past that they needlessly have created a rift with the web, and I think this deal will intensify that rift.  They will be under enormous scrutiny, but they just won’t be able to overcome their own DNA.

If Microsoft does follow its historical traditions, then Stowe Boyd has it exactly right when he says:

Personally, I think the Microsoft and Yahoo matchup is like two tired swimmers who bump into each other and then wind up drowning each other in their scramble to survive. But Yahoo will be the first to go under in this embrace.

That’s definitely not a Wow! scenario.  It will be kind of sad to watch.  I hope it turns out differently.

Related Articles

Microsoft is no longer the enemy.   The WSJ riffs on one of those “The Enemy of My Enemy is My Friend” things.  In this case, hoping one poorly behaved monopolist can save us from another behemoth is wishful thinking.

A Narrowing Field of Tech Suppliers:  Classic repeat of a theme one hears every time a big merger is discussed in any industry.  Of course there will be fewer suppliers, that’s what consolidation is all about.  But it clears the way for new innovations too.

Mathew Ingram wonders whether two sick dogs roped together can beat one healthy dog.  They won’t beat Google.  If they’re smart, they’ll focus on using all that traffic for something besides a frontal assault on search. 

Jeff Jarvis puts it brilliantly:

Yahoo, I’ve long argued, is the last old media company, for it operates on the old-media model: It owns or controls content, markets to bring audience in, then bombards us with ads until we leave. Contrast that with Google, which comes to us with its ads and content and tools, all of which I can distribute on my blog. Yahoo, like media before it, is centralized. Google is distributed.

It’s appropriate, then, that Yahoo is being bought by what one could say is the last old technology company, Microsoft. For Microsoft still operates on a model of control: closed in an open era. They will get along well together.

Will this be big enough to beat Google? No, because big won’t win in the end. Open will.

Remonista has a great post about Yahoo sowed the seeds for this by using Google to do search at a pivotal time.

Phil Wainewright sees the Yahoo acquisition as a great way to catapult MSFT into offering cloud applications.  It is, but it remains to be seen whether MSFT will think of things that way.  Check back in 6-12 months and we’ll see what happened to Zimbra, for example.

Posted in strategy, Web 2.0 | 3 Comments »

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