Silicon Valley Watcher - reporting on the business of technology and media

Sun Microsystems [JAVA] was expected to soon announce its cloud computing strategy. I met with one of the executives working on the launch fairly recently. He told me to expect a really great story about the Sun cloud computing services initiative designed to take on Amazon. And that it would be announced very soon.

But now with the Oracle acquisition, there seems to be a cloud over Sun's strategy. Not just in cloud computing but also in SPARC, systems innovation, open source, future data center technologies, blade servers, storage, and many other areas where Sun was trying to be innovative.

The key question is to Oracle: Does the Sun acquisition represent a departure from a merger strategy based on rolling up maintenance revenues? Oracle now has many of the business components that would enable it take on IBM, but does it have the will?

Oracle is at an interesting point in history. It can go for the brass ring or it can pass into a lucrative retirement.

Foremski's Take:

IBM's bid for Sun Microsystems [JAVA] is a strategic move aimed at preventing Cisco Systems or Hewlett-Packard from acquiring the company. IBM is already Sun's largest reseller; and IBM's support of open source software is similar to that of Sun. Why would IBM need to "buy the cow?" [Please see additional overlaps towards the end of this post.]

The move makes better sense as a strategic move to prevent Sun from falling into the hands of Cisco or HP. There are considerable synergies between Sun and Cisco:

- Sun has a large server business, Cisco is moving into servers.

- Sun has large customers in telecommunications and finance, two very large server markets.

- Sun has considerable R&D and IP in data center technologies, Cisco needs those capabilities if it is to rapidly succeed in its data center push.

- Sun has considerable expertise in building and running data centers.

- Sun has a services business that would aid Cisco in winning new business.

- Sun has very little overlap in products, technologies, or services with Cisco.

- Sun has extensive middleware.

- Companies buy systems and solutions - Sun would help Cisco move beyond just providing boxes such as its recently introduced Cisco Unified Computing System.

Sources told the Wall Street Journal that Sun has met with prospective buyers. Why didn't Cisco bite? Could it be that John Chamber's move over the past couple of years to decentralize the management of its operations and remove it's traditional command-and-control organization has disabled its ability to make large acquisitions? [Please see video of John Chambers talking abut these changes at the end of this post.]

Cisco acquired WebEx in 2007 for $2.9 billion, and Scientific-Atlanta in 2006 for $5.3 billion. It has made 127 acquisitions.

Hewlett-Packard would also benefit from a tie up with Sun.

A merged HP and Sun would make a stronger competitor against IBM. It would create a West Coast versus East Coast rivalry that could unite the two cultures against a common enemy.

- HP would get Sun’s range of SPARC systems and an impressive future technology road map for SPARC microprocessors. This is a great challenger to IBM and its proprietary 64-bit Power microprocessor architecture. Margins on proprietary hardware are four to five times better than on industry-standard systems.

- HP would gain from Sun’s large accounts in financial services and telecoms. These sectors are huge IT spenders.

- Sun needs a much stronger services arm, and HP has a strong IT services group.

- HP would gain Sun’s middleware, very important against IBM’s WebSphere middleware. Middleware software has a very high profit margin.

- Both companies could consolidate their computer labs.

- Sun’s Java technologies have consumer electronics and mobile phone applications and momentum.

- Both have strong data center technologies. They could dominate cloud computing.

There are many overlaps between Sun and IBM where there would be little benefit to IBM:

From  IBM/Sun deal won't be about the software, experts say | The Industry Standard

. . .Sun has developed StarOffice off the OpenOffice.org project while IBM has developed Symphony around the same code base.

It is unlikely that IBM would scrap the work it has done over the past few years to weave Symphony into its Note/Domino collaboration tools and its emerging collection of social networking software.

In addition, Sun is the primary sponsor of OpenOffice.org and the primary contributor of code to the project, a role IBM would have to assume.

IBM already has an established middleware (WebSphere, DB2) and tools business where Sun could add little value.

IBM and Sun also have competing directory technology and identity management tools.

Sun's MySQL database technology is hot in the Web 2.0 world and presents an opportunity for IBM in terms of its data center strategy, but clearly it overlaps with DB2 from an enterprise perspective.

The IBM bid for Sun makes sense if it is seen as a blocking move to prevent Sun from falling into the hands of a competitor. And it has given Sun a relatively high valuation to raise the bar for Cisco, or HP to come up with a bid of their own, and to speed the completion of the deal.

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Please see:

Cisco Crosses The Rubicon With All-In-One Data Center Box - A War Of Attrition Begins?

Cisco CEO John Chambers speaking about the move to a decentralized collaborative management structure and away from command-and-control.

IBM is considering financial support for key IT projects it is building with partners because of the financial crisis but it has ruled out equity investments in other tech companies.

IBM has a large financial services group and it has the capital to help finance IT enterprise projects.

I recently ran into Drew Clark, head of IBM's Venture Capital Group, based in Menlo Park. "We would never make an equity investment but we are looking at financial help in projects where we partner with other companies," he said.

The IBM VC group does not invest in companies but it meets with VCs and startups to tell them about the technologies and products that it finds interesting. IBM makes several billion dollars worth of acquisitions every year but no investments are made because it doesn't want to sit on boards and manage small companies.

Mr Clark said that IBM partners with many companies in large IT enterprise projects all around the world. If its partners are struggling getting financing and that might hurt a project, IBM would step in and provide financing for the "solution."

Foremski's Take: Companies in all markets are complaining that they can't get short-term credit to cover operating costs. Although IBM's financial muscle will be welcomed in bankrolling a specific IT solution, it might not be enough. IBM might be forced to offer loans to help partner companies survive and come through the global financial crisis.

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Please see: How IBM Venture Capital Group succeeds without any venture capital

Wednesday evening I'm heading over to an IBM holiday party in North Beach, it's late but I want to show up and say hello to the hard working IBM PR team.

It was good to see Jim Larkin and some of his team, plus much of the San Francisco office. I've worked with many of them on countless stories for many years and continue to do so. What I like about them is that they are always very competent and professional while maintaining a healthy realism about the nature of their work... (i.e they have a life :-)

The event triggered a few thoughts about IBM and my long association with Big Blue.

I used to cover IBM extensively when I worked for the Financial Times. I still write about IBM but not to the same degree. I always enjoyed the challenge of covering IBM because it has many massive business groups that would be giants in each of their markets if they were independent.

Reporting on IBM required an understanding of the dynamics in each market: IT services, the middleware software market, the chip market, microprocessors, servers, mainframes, financial services... And not too long ago, hard drives, PCs, and notebooks until IBM sold off those businesses.

I eventually got to interview every head of every IBM business group and then the big guy himself, Sam Palmisano. But it wasn't easy. IBM won't let you near its top executives or top strategists until you've proven you understand its many businesses. And it takes years of work to get into the CEO's office.

East Coast culture

The culture of IBM is also interesting. It is very East Coast and very not Silicon Valley. Yet IBM has roots in the Silicon Valley area that go back more than half-a-century. And it still has a large presence here with its research labs.

IBM always projects an East Coast culture. I'm always meeting with IBM execs who have flown into town for a few days, rather than being locally based. And they dress differently and talk differently from the locals.

But will its East Coast culture continue to work for IBM? Should it move more people here? Other companies are doing it, relocating to Silicon Valley. It's a trend that has accelerated tremendously over the past couple of years.

Silicon Valley benefits

The relocation surge is happening because of three things: location, location, and location. Companies find tremendous value in being here. And visiting Silicon Valley or reading about its trends, is not the same as living here.

The conversations we have in Silicon Valley, about business models, about technology, about society, are tremendously influential on a global scale. This has been proven time and again and that's why companies move here. That's why tens of thousands of the world's brightest and smartest move to Silicon Valley every year.

So does that mean that there is a substantive competitive advantage to being here and immersed in the local culture?

IBM has expanded its corporate PR team over the past few years in San Francisco/Silicon Valley but is that enough? Could IBM be missing things of great value by being an outsider?

The HP advantage?

Could the boost in the fortunes of IBM rival Hewlett-Packard be partly attributed to the fact that HP lives in the heart of the most innovative region on the planet? It'll be interesting to see if HP will demonstrate the Silicon Valley effect in its future business performance.

Despite IBM's long Silicon Valley history it sometimes seems as if IBM doesn't "get" Silicon Valley, and that it is amused rather than inspired by Silicon Valley ideas and antics.

Dotbom jokes

For example, I remember seeing Sam Palmisano a couple of years ago at the San Francisco Museum of Modern Art. He kicked off his speech with a couple of jokes, which turned out to be of the dotcom dotbomb variety. He said there was more technology in a cash register than in a typical dotcom company.

There was little laughter from the audience of journalists, analysts, and local executives. Even though the the jokes were funny because they were very true, they felt very much out of place.

Silicon Valley has been suffering through its deepest and most difficult business cycle ever, with massive job losses and company failures. Yet this East Coast big shot thinks it is funny. That's the way Mr Palmisano's presentation came across--even if it wasn't meant that way.

But I'm certain that the jokes provided a glimpse into IBM's private thoughts about Silicon Valley, and momentarily revealed a superior and dismissive attitude towards Silicon Valley. That could come back to bite IBM, imho. Things like that generally do.

I just got back from a meeting with Irving Wladawsky-Berger, IBM's chief strategist on open source and one of the key agents of change within IBM over the past ten years.

He is also a key figure in helping to establish the open source movement as a whole. He had to evangelize for open source within, and outside of IBM. Without IBM's support for open source software in the late 1990s, corporations wouldn't have taken it seriously.

And without IBM's lawyers and patent portfolio defending Linux against SCO's patent claims (and those of its allies), we wouldn't have an open source movement that's alive and thriving.

Irving Wladawsky-Berger should be credited with a key part in the success of the open source movement because he had to evangelize open source software within, and outside of IBM. Without his efforts within IBM, the world's largest computer company would not have become the world's largest evangelist for Linux and open source. Open source software seems such an obvious thing to support these days but it wasn't that way just a few years ago...

It is always a treat to catch up with Irving when he is in town, and an hour and a half chat always seems like we barely scratch the surface of things. I was very surprised when Irving told me he was retiring at the end of May.

Which means I have one of the last interviews with Irving--about to be published as a text and video interview later this week through podtech.net.

...

Irving's retirement means this is an opportunity for some Irving stories... I've got a few I will share later this week, send me some too if you have them: tom at foremski.com.

(Intel is an SVW sponsor.)

IBM says it has matched Intel's chip breakthrough with the discovery of materials that can make chips smaller and faster.

"Until now, the chip industry was facing a major roadblock in terms of how far we could push current technology," said Dr. T.C. Chen, vice president of Science and Technology, IBM Research. "After more than ten years of effort, we now have a way forward.

IBM's East Fishkill fab in New York will start producing 45nm chips in 2008.

. . .

Foremski's Take: IBM is one of the only chipmakers that can take on Intel in bragging rights around leading edge chip technologies.

IBM has pioneered a lot of important chip technologies. For example, It figured out a way of using copper in chips so that the metal wouldn't contaminate the entire wafer. It also pioneered silicon-on-insulator (SOI)--a technology that boosts the speed of chips. (Intel won't touch SOI, it says there are better ways to achieve a similar performance boost.)

The difference between the two chipmakers is that IBM is in the foundry business, it makes chips for whoever pays the invoice. Intel is not, it works only for itself.

Using IBM to make your chips gives you access to leading edge  technologies but it doesn't come cheap. And that is the challenge that the AMD/IBM alliance faces: to be able to match Intel's 45nm process at a comparable cost of production.

Here is IBM's announcement:

IBM, the world's largest computer and IT services company, could become an acquisition target for private equity firms said Steve Bengston, managing director at PricewaterhouseCoopers.

Mr Bengston was speaking at a recent lunch panel on trends and predictions for 2007 organized by FountainBlue. Also on the panel was Fred Greguras, a top lawyer at Fenwick and West, and Rick Ellinger, a venture capitalist with WCA Technology, and myself.

Private equity firms are raising ever larger funds and making ever larger acquisitions, some as large as $35bn, said Mr Bengston. At that rate, it is only a matter of time before even some of the largest tech companies become targets.

IBM has a current market capitalization of about $145.5bn. To take the company private would require a premium to be paid. But several private equity firms could potentially finance such a deal.

"IBM is a perfect candidate for private equity firms, there is a lot of restructuring that could be done," said Mr Bengston. 

If such a deal were to happen, the new owners would be free to breakup the company into several large business groups. This is a strategy that IBM considered before Lou Gerstner took over as CEO in 1993. He spent nearly ten years restructuring IBM but keeping its major business groups intact.

Mr Gerstner retired from IBM in December 2002 and is now a member of the Carlyle Group, one of the world's largest private equity groups. It would be ironic if Mr Gerstner were to be brought in to help take IBM private and then possibly break it up.

Fred Greguras from the top Silicon Valley legal firm Fenwick and West, said that private equity firms are fast becoming large players in Silicon Valley, and are acquiring lots of startups.

Private equity firms also target large public companies private then apply financial engineering to restructure the companies. They are then sold to other private equity firms or they go public again. The profits on such deals can be huge and there are also massive fees that the private equity firms collect from the companies they acquire.

However, there are concerns that private equity firms are loading up companies with high debt loads which will make them more vulnerable during economic downturns. And the huge amount of money flowing into private equity funds is likely to result in new regulations.

Here is the market capitalization of some of Silicon Valley's largest companies: Intel at nearly $120bn, Cisco Systems at $161bn, Hewlett-Packard at $114bn, and Oracle at $88bn.

Google has a market cap of $147bn and it is controlled by its founders and early investors which protects it from a hostile acquisition. Microsoft has a $301bn market cap. 

By Tom Foremski

Late last year I met with Drew Clark, co-founder of IBM Venture Capital Group which operates out of the heart of Silicon Valley, in Menlo Park.

There are just half-a-dozen specialists and their support staff, yet the group has been very successful, and doing it with OPM (other people's money).

Drew Clark, explains: "In the late 1990s we saw the many billions of dollars invested by the venture capital community and we thought about the best way we could participate and leverage those investments. That's when we set up the VC group. Since then we've helped IBM acquire key startups and also partner with hundreds of others in business ventures."

IBM's Venture Capital Group does not manage a fund as do other VC organizations. The company doesn't even have a strategic VC fund such as Intel, which makes billions of dollars in investments. Instead, it tells the VC community, and the startups, what types of technologies it is interested in, and the direction of its business strategies.

Then it waits for the magic innovation engine of Silicon Valley to spit out companies with technologies that it can leverage across its global business platform.

For example, Steve Mills, head of IBM's Software Group, can acquire a small Silicon Valley software company and immediately monetise its products across IBM's global distribution channels. It would take years for a software company to acquire that kind of capability.

It is a sweet deal for IBM since it doesn't have to identify, and invest in startups, and help grow them into larger businesses--the Silicon Valley VC community does it all for them and with their own money.

And the VC community is happy to do it and have an exit--selling a portfolio company to an IBM, SAP or Oracle,  is very welcome.

The IBM VC group has had a hand in 15 acquisitions, and Mr Clark says that the annual rate of acquisitions will accelerate. It will  accelerate because IBM is pushing harder into emerging markets, in India and in China.

"In China we helped a small startup in the financial services area where we needed a secure online payment system. We have good contacts with the banks and we were able to put together an IT and business solution that has been very successful," Mr Clark says.

It is such IT services projects that IBM can help startups find customers, and help refine their technologies. Big Blue is creating "innovation" centers around the world where its engineers and researchers help startups develop their technologies, and bring them into contact with IBM's client companies. It partners with about 1200 startups.

IBM benefits from the IT/business services contracts that build the complex IT and business infrastructures. Services is more than half of IBM's revenues and increasing--so it is a smart strategy. It makes more money from services than it would as a vendor of hardware and software.

Mr Clark is particular impressed with China and the startups that are emerging over there. He sees a lot of innovative thinking in China, and emerging technologies that IBM could leverage.

We spoke for a while abut innovation and Silicon Valley and the unique culture of this place. Mr Clark fully appreciates the value that Silicon Valley continues to produce, despite innovation occurring in many other places around the world.

I see Silicon Valley as unique because it tolerates massive amounts of failure. Here, people are allowed to fail, and fail often--something that other cultures punish.

Mr Clark and his teams regularly  meet with VCs to tell them what they are looking for. One current area of interest is in Service Oriented Architecture.

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Additional Info :

IBM: The Venture Capital Group Report

• Hot topics at IBM Venture Capital Group
  
  The Long Tail of SaaS
  Virtualization creep
  Irving on Innovation
  Open source & storage: it's about time
  Open hardware is here to stay
  Mainframe trends: a virtual and practical leap to SOA
  Information-based medicine

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IBM Strategy & Venture Big News - Drew Clark | PodTech.net ...

Drew Clark of IBM's Director of Strategy and CoFounder of IBM's Venture Capital Group talks about the formation of a new Venture Capital Advisory Council ...
www.podtech.net/home/technology/105/ibm-venture-news-drew-clark - 30k -

David Boloker CTO of Emerging Technologies at IBM came into town to speak at Ajax World. I caught up with him Wednesday morning and we talked about Ajax and Web 2.0, and a new early alpha initiative IBM calls QEDwiki that can provide the framework for integrating information and applications within enterprises:

David Boloker is very interested in Ajax and very interested in making sure that there aren't dozens of nuances of Ajax. He and Scott Dietzen, CTO at Zimbra, one of the earliest Ajax apps companies, founded the Open Ajax Alliance.

"Every Ajax toolset was following its own nuance of Ajax and the problem was that each toolset wanted to 'own' the whole page. This created many conflicts and made it difficult to pull together different components," said Mr Boloker. "We did not want to create a standards body but to create agreement on some basic things such as naming JavaScript objects."

Is an Ajax application the same as a Web 2.0 application? "No, a Web 2.0 application has to include the social dimension, how it implements tagging, for example, and sharing, and all the other community oriented aspects that are important," said Mr Boloker.

For IBM, Ajax and Web 2.0 represent new generations of  applications that use the web as a platform. And they have characteristics that enable users to create their own "my web" experience by mashing/pulling  together Ajax components from many different sources.

A key to that approach is to be able to provide the framework that enables that type of integration. And that is the OpenAjax Hub an open source project.

But with everyone having access to this framework, where is the value-add? Mr Boloker says it will be in two places. One is in the value of the data or content. The databases of content will have value to organizations and users, such as Reuters feeds, or databases of chemical data for example.

The second place will be in the Services Oriented Architecture (SOA) layer which is all about services. And IBM is a services oriented company.

"The focus for us is on the business professional, not the IT department. All you need to do is operate a mouse and know how to drag and drop."

That's the basis for IBM's alpha project called QEDwiki (Quickly and Easily Done wiki), which is being tested by 20 large corporations. This is IBM's version of what Jotspot, SocialText, and others are offering, a way to enable business people to mashup sources, feeds and applications, by what I call drag and drop share or not (DADSON), depending on user access rights.

But mashing up feeds and data means trust in the source. I pointed out that Google News recently was carrying a news headline that had been hacked, it carried an anti-US anti-Israel message. In that case, Google had not verified the content, it was corrupted, and that corrupted trust in Google.

In the brave new world of web applications and mashups, verifying that content comes from where it says it does will be absolutely critical. But how will that be done?

Mr Boloker said that feeds could be signed with security certificates but he also acknowledged that even Microsoft has had problems with security certificates.

Trust will come from long standing relations, contracts, and also using security technologies, said Mr Boloker. "It will come from your relationships with your vendors and an established history of trust. You will assign different levels of trust to a feed. And trust will be offered as yet another service."

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