BEA: sometimes you get the bear and sometimes the bear gets you

BEA is playing a high-stakes poker game right now with Oracle and it appears, at the moment, that Oracle just called BEA’s bluff. Oracle’s $17 per share offer for BEA, a premium of 21% over the pre-offer market price, has expired. Instead of considering the offer and negotiating in good faith, BEA countered with a price tag of $21 per share, an outrageous 80% premium.

What could BEA have been thinking?

BEA’s executives must have been reading the speculation that a white knight would arrive on the scene and pay upwards of $20 per share. But, despite the notion that SAP or some other company “needs” BEA to survive, no such suitor has stepped forward. As it stands, BEA has foolishly overplayed its hand, and the stockholders will pay dearly for it.

Senior management needs to recognize that the software industry is evolving and in a way that spells extinction for a dinosaur like BEA. While BEA was one of the banner carriers for enterprise Java, with its WebLogic application server once being the must-have platform during the dot-com boom, that is no longer the world that we live in. Ignoring all other technologies, the Java landscape is much different today than it was 8 years ago. The emergence of high-quality open source products has presented viable low-cost alternatives to the highly priced platforms from BEA, IBM, and others. IBM has adapted by shifting its sales model to one where the services organization drives the sale of its technology. But, BEA does not have a strong enough services organization to make that model work. (True, Accenture and the other large consulting firms will drive some sales to BEA, but they will also drive sales to other vendors as well.)

BEA has fallen into the trap of thinking that its (arguably) superior technology would win the day. This was a fatal miscalculation on the same scale as Apple vs. Microsoft, Netscape vs. Internet Explorer, and Digital Equipment Corporation vs. IBM. Apple, Netscape and Digital were, like BEA, pioneers in their fields and held strong, commanding leads in their markets. But all failed to recognize when the sands were shifting beneath them and all ultimately suffered greatly.

So, what should BEA learn from these past failures and from their own travails recently? First, things change and things change quickly. If you don’t act just as quickly to preserve yourself, you can find yourself irrelevant in no time at all. Second, 21% is a pretty darn good premium for a company with a declining market share, struggling with an outdated business model. Third, the wisdom of crowds. There is never any “secret information” that you can keep from being leaked that would give your company an 80% boost in valuation over what the market says. And, even if there were, why wasn’t management pushing full throttle to “pre-announce” an action and realize some of that gain sooner rather than later?

So now we’re left to wonder if another suitor will step forward to save this damsel in distress or if the evil dragon will escape with the prize at a discount? This is the time when the board of directors needs to do their job. Dean O. Morton needs to call up his buddies at his former employer, HP, and get them to make a $17 per share offer. The longer this ordeal lingers without some public offer, the worse it’ll get for BEA stockholders.

Yes, BEA, sometimes you get the bear and sometimes the bear gets you.

Web-IV: the name that says it all

Web-IV is here. Yes, the messages of the past 6 months combined with the announcements of this past week have signaled that the evolution has completely bypassed Web 3.0 (I always hated that moniker anyway). The Web has skipped a generation.

So, what is Web-IV? Web-IV is the ultimate convergence:

• the Internet
• the Web
• the Mobile Web
• Cellular networks
• Wi-Fi, WiMAX, and their brethren
• content
• applications
• consumers
• producers
• enterprises

Obviously, the ultimate convergence is kind of a big topic. It’s much too big for a single post. So, this blog will be exploring the theme over the course of several entries to come. But first, if you’ll indulge me, I’d like to take a moment to explain why I chose Web-IV as the name for this stage of the Web’s evolution.

I’m a firm believer in the power of symbolism and Web-IV embodies the ultimate convergence not only as the name that, as I said before, indicates that the Web has skipped a generation. But, delving deeper, let’s look at all the constituent parts of this symbol: Web-IV.

“Web” is the obvious part. It represents what we’ve come to understand as the world wide web in its first and second incarnations: dot-com and Web 2.0.

“I” stands for the Internet, which is the underlying networking infrastructure on top of which sits the web.

“-” symbolizes the expanded infrastructure that has evolved. This includes the cellular networks and the wireless technologies that untethers the web from its traditional edge: the desktop.

“V” indicates convergence, that all the various aspects outlined above are being brought together into a single, coherent whole.

And deeper still, the “IV” is a Roman numeral for the number 4. This is relevant for a number of reasons. First, the Roman numerals are used to further emphasize convergence, playing off the saying “all roads lead to Rome.” Second, the number 4 is a homophone of the word “for” and is commonly used as a shorthand in text messages and IM chats. Thus reading the phrase with the homophone, “Web for …” speaks to the unlimited possibilities of the ultimate convergence.

Now that we’ve named the phenomenon, soon we’ll explore the phenomenon itself.

Apple has seen the light

Wow! Who woulda thunk it? A tiger can change its stripes.

Apple has announced that it is opening the iPhone and iTouch to third-party applications. Yes, believe it. This is the same company that lost the PC wars to Microsoft and Intel because it refused to allow the Mac to be cloned or to license the Mac OS. This is the same company that only allowed iTunes songs to play on the iPod and only allowed the iPod to play songs bought through iTunes (or open source MP3 files). And, this is the same company that released a software patch and turned any “unlocked” (read: hacked) iPhones into useless bricks.

Suddenly, Apple has reversed itself on over 20 years of business strategy. Steve Jobs has all but admitted that that business strategy was wrong. The poster child for tight control has seen the light of open-market economics.

Why now? Why has Steve Jobs had this epiphany at this particular time? Two reasons: Facebook and MySpace. That’s right, Apple didn’t learn from the Mac debacle in its own history. Apple is reacting to what’s happening in the Web 2.0 world right now. And, the analogy is an apt one. Apple sees that Facebook is rapidly gaining on MySpace and that the reason for it is that Facebook opened its platform to third-party application developers. MySpace got so scared by Facebook’s growth that they could only counter by opening up their platform as well.

Apple understands that to maintain its position atop the cell phone world it has to do more. Other manufacturers are introducing touch-screen cell phones. The iPhone runs the risk of being just another handset in a crowded market. So, Apple pulled out its trump card, the one thing that Apple has that no other handset manufacturer has: the upper hand in the handset manufacturer / wireless carrier relationship. Through its deal with AT&T, Apple secured the power of self-determination. And, contrary to what both parties must have believed at the time, Apple decided to share that power with the rest of the world.

But, does Apple understand the ramifications of this decision? This has done so much more than just open up a platform for developers. What Apple has done will send shock waves throughout the wireless industry. By striking the iPhone deal with AT&T, Apple put a chink in the armor of the wireless carriers. Before that agreement, the carriers maintained a stranglehold on the device manufacturers and forced them to comply with a telephone-book sized list of requirements and constraints. The chink in the armor was that Apple negotiated the power to control the device, and even forced the carrier to create service plans specifically for their device.

By opening the iPhone platform to third-party developers, Apple has not only set the device manufacturers free from the carrier’s control, but has also now ushered in the age of Wireless Net Neutrality. Since all iPhone service plans include unlimited data plans, Apple has now created a world where any person anywhere can create a mobile application and not have to negotiate with the carriers for the privilege of deploying the application.

In over 20 years of trying, Apple was never able to overcome Microsoft. But, in less than one year, Apple has thwarted Verizon, Sprint, and AT&T.

Missing the Point: wireless carrier regulation bills

Today, Senator Mark Pryor introduced a bill to regulate the wireless carriers. As the RCR Wireless News article points out, the Pryor bill is backed by the wireless industry and will compete for backing with a bill introduced a mere 10 days ago by Senators Jay Rockefeller and Amy Klobuchar.

Consumer advocates are backing the Rockefeller-Klobuchar bill. The wireless industry is backing the Pryor bill. Both bills have good and bad points. Since the Rockefeller-Klobuchar bill arrived first, let’s start there. This piece of legislation would require the carriers to make their bills more transparent. The authors claim that carriers are mislabeling as governmental and regulatory fees what should just be considered standard operating costs and paid for in the normal monthly plan pricing. If anyone has actually reviewed their cell phone bills, they would probably agree that some clarity and “truth in billing” would be helpful.

The Pryor bill would put the FCC in charge of policing the wireless industry, and would close the current loophole that allows for each state to impose its own regulations. This is important because consumers and businesses should expect the same level of service no matter what state they are calling from. Allowing the states to impose their own regulations can only lead to fragmented, unequal service throughout the country.

So, what are the problems with the bills? With the Pryor bill, too little is imposed on the industry in terms of “truth in billing” and other consumer protections. With the Rockefeller-Klubochar, the FCC will investigate cell phone “locking,” which is a pointless and unnecessary study.

Here’s why cell phones are currently locked and why contracts call for $250 early termination fees: with the carriers subsidizing consumer phone purchases, acquisition costs are $300-$400 per customer. If a new customer signs up for a $40 per month plan, that’s an 8-10 month break even period. The carriers shouldn’t be expected to subsidize handset costs and then not be allowed to lock in customers.

Now, I’m not saying that the carriers should be allowed to lock in customers. I’m saying that everyone is looking at this from the wrong point of view. The aspect that nobody is talking about here is the power that the carriers wield with the handset manufacturers. If the handset was unbundled from the service, the whole ecosystem would prosper.

Of course, each group would gain something and give up something. Consumers would gain freedom to shop around for the handset of their choice, the service plan that best meets their needs, and would be able to switch when their needs change or a competitor in the market provides a better value proposition. But, consumers would have to pay full price for the handset. This is the common model in Europe, but the American consumer is spoiled by cheap handsets. Sorry consumers, you gotta give to get.

The carriers would reduce their acquisition costs. This would allow them to focus more on the service instead of misusing their money by paying for handsets that consumers have shown they are willing to pay for themselves, if the product is right. (See iPhone) But, carriers would then have to compete with each other more fiercely on service, which means an increased investment in innovation. And, the carriers would have to give up on the idea of locking in consumers with two-year contracts. That won’t be justified.

What also wouldn’t be justified is the carriers’ stranglehold on what services are delivered on the cell networks. Consumers in the US have been deprived of innovative new services that are commonplace in Asia and Europe. It’s time that the Democratically led Congress starts addressing the real issue: Wireless Net Neutrality. Isn’t the wireless industry clamoring for less regulation? Now’s the time for the carriers to walk the walk.

eBay: another stretch

EBay is a terrific, world-changing company. Along with Amazon.com, eBay revolutionized how people purchase goods. eBay and Amazon.com together defined eCommerce. So, while Amazon.com appears to be growing beyond it’s humble beginnings as the Internet’s bookstore and thriving (come back for more on Amazon), eBay can’t seem to grow beyond being the Internet’s garage sale.

EBay has made many wise acquisitions and investments throughout its history. But, when eBay really wants to make a splash and remind everyone that it too (along with Yahoo, Google, Amazon, Netscape) is one of the great dot-com companies, sometimes Meg Whitman reaches.

First, let’s give credit where credit is due. EBay’s acquisitions of Half.com, Shopping.com, StubHub, and StumbleUpon were terrific moves. Each was reasonably priced (Half.com at $318MM, Shopping at $635MM, StubHub at $307MM, and StumbleUpon at a mere $75MM) and, more importantly, enhanced eBay’s core offering. And, of course, eBay’s acquisition of a 25% stake in Craigslist was inspired. It’s probably the single biggest reason that Craigslist is still a private company today, because Craig Newmark knows that he wouldn’t be able to ignore eBay as a major shareholder if the company were public.

However, eBay tends to overpay for targets outside of its core. Take, for example, the two most high-profile acquisitions completed by eBay: Skype and PayPal. Niklas Zennstrom just publicly said what everyone has been thinking for year, that eBay overpaid for Skype. It was folly for eBay to believe that auction participants, or buyers and sellers, would want to talk to each other before conducting that transaction for a Pac-Man lunch box. No, the real motivation for the purchase of Skype was for eBay to “make a splash.”

I spoke with Product Managers at Google (on September 27, 2005) about eBay’s acquisition of Skype. They posed the question:

A number of analysts and observers are suggesting that Google should have acquired Skype instead. Do you think Google should have purchased Skype?

My answer to them was: No, it was the right move. Skype, at that time, had annual revenues of roughly $70M. So, eBay paid 37x revenue for Skype. With ARPU consistently at or under $1.80 per year (calculated from here), that high of a revenue multiple is beyond comprehension.

Turning now to PayPal. Obviously, this acquisition was not a colossal failure. It’s actually been an overall accretive purchase. Given that PayPal had revenues of $216MM at sale and was purchased for $1.6B, with an ARPU of roughly $15 per year, the deal looks pretty solid and fair. However, digging deeper than just the numbers, eBay overpaid because eBay was the one and only legitimate suitor for PayPal at the time. PayPal was the emerging preferred payment mechanism on eBay, and competitors such as Google hadn’t started think about entering that arena yet. (Google Checkout was introduced in June 2006.)

So, in essence, eBay was bidding against itself for PayPal. You would think that that the masters of the auction would know better.

The one common theme to both the Skype and PayPal acquisitions was that eBay bought a “hot” company, and they paid top dollar for it.

Now, eBay is on the verge of another mistake. According to Fortune, eBay is making a foray into social networking with eBay Neighborhoods. The powerseller, Evan Prytherch, quoted near the bottom of the article is right: what possible tie-in does social networking have with boosting sales on eBay. This smells an awful lot like the Web 2.0 version of eBay’s rationale for buying Skype: getting buyers and sellers talking to each other. At least this time eBay didn’t plunk down $2.6B.

Instead of creating yet another social networking site, wouldn’t it have been smarter to dedicate those resources to developing widgets for Facebook or the recently unveiled MySpace platform?

BEA: going, going…

After years of conjecture and rumor, it appears that BEA’s days as an independent company are numbered.

As reported by Bloomberg, Oracle has started the bidding for BEA at $6.7B. This shouldn’t come as too much of a surprise to anyone paying attention to Silicon Valley. For a couple years, rumors have been swirling that BEA wouldn’t be able to stay independent long-term. Even with the acquisitions of Fuego and Plumtree, BEA has been unable to regain it’s position as the leading J2EE vendor. In fact, BEA’s WebLogic has been steadily losing market share not only to IBM’s WebSphere, but also to JBoss.

This is undoubtedly a legitimate acquisition attempt, but it leads me to wonder if this is the best strategy for Oracle, and if there are any suitors who would benefit more by acquiring BEA. Let’s take these one at a time.

Is this the best strategy for Oracle?
Now that Oracle has made this public announcement, it’s doubtful that Larry Ellison would be able to walk away from this auction without the prize. But, Oracle would probably benefit more by considering other targets and diversifying. Oracle’s database customers and BEA’s application server customers overlap to a large degree. Therefore, this acquisition would provide a relatively small number of new opportunities for cross-selling. Which means that Oracle would only really be gaining the existing revenue stream that BEA’s licensing provides. Given that Oracle’s market capitalization today is $115B and BEA’s market capitalization is $7B, it is apparent that these additional licensing fees would not contribute significantly to Oracle’s bottom line. And, once Oracle writes off it’s existing application server business, the benefits would be further diminished.

I would think that a more attractive target for Oracle would be Red Hat. With a market capitalization of $4B, the acquisition price would ultimately be lower than that for BEA. Furthermore, an acquisition of Red Hat would give Oracle an extension in product offering and market segment penetration. Red Hat’s JBoss application server has greater market share that BEA’s WebLogic. True, JBoss does not generate any licensing fees. But, it provides an entry to new customers, who will eventually outgrow the open source databases that they are likely using, such as MySQL, and will need the industrial strength solution that Oracle provides. Through JBoss, Oracle would have an opportunity to capture these new database customers, using the existing relationship to prevent their selection of Microsoft’s SQL Server.

Furthermore, Oracle would be gaining the whole Red Hat Linux customer base. If Oracle ever wants to challenge Microsoft, eventually they will need to have an operating system product to complete the software stack offering.

Would other suitors benefit more by acquiring BEA themselves?
Yes! As the Bloomberg article explains, SAP may feel compelled to join the bidding for BEA if for no other reason than to keep up with the Ellisons. SAP is already reeling and is steadily losing ground to Oracle in the ERP market, as SAP’s products age and organizations reconsider their options.

HP would also make an interesting acquirer. HP is quietly growing their software business, through the OpenView product line. BEA’s suite of products would be a logical extension of HP’s stack. Not to mention, the publicity of such an acquisition would help HP break the public perception that they just make printers and, through Compaq, laptop computers. This would be a statement that HP should be mentioned in the same breadth as IBM in terms of hardware, software, and services.

But, the best suitor has thus far been overlooked: SUN. True, with a market capitalization of just $22B, SUN wouldn’t be able to acquire BEA. Instead it would need to be a SUN:BEA (3:1) merger. Of course, this move is probably no longer possible. But, had it taken place when Jonathan Schwartz assumed control, SUN could have finally reaped the benefits in the corporate world that it’s technology, Java, created. And, like HP, SUN would benefit greatly from the publicity, and would be able to reemerge as the company that puts the dot in Web 2.0.

I, for one, will miss an independent BEA. But, consolidation in the technology world is inevitable and BEA is ripe for the picking.

This “Internet” thing… I predict it’s gonna be big!

By the very nature of this blog…

QED