Insatiable desire?
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Microsoft has laid plans to be a $10 billion enterprise applications software vendor. What will that vaunting ambition mean for customers and the industry?
It is not every day that Microsoft co-founder Bill Gates pays a 'royal' visit to London. But on 26 January, the company jet brought the chief software architect and world's richest man to the capital for two different reasons. First was to pick up a knighthood from the Queen; the second was to add momentum to Microsoft's next big adventure, its push into applications.
Gates's presentation to Microsoft's most valuable allies steered clear of the usual territory of Office, Windows and .Net. Instead, the speech carefully articulated
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Despite a well-practised air of affability, his plans are unquestionably aggressive: His goal for Microsoft Business Solutions, the company's enterprise applications division, is to create a $10 billion operation by 2010, 20 times its current size.
If Microsoft were to come close to reaching that target, the number of casualties left by the wayside would be huge. Not only would it mean leap-frogging SAP, PeopleSoft and Oracle - the 'big three' of the enterprise applications sector - but it would involve crushing scores of once-loyal mid-market software partners, companies such as Intentia, Epicor, Exact and Agresso.
Executives at some of those companies are already talking of betrayal, accusing the software giant of "feeding on the eco-system" that it once so carefully nurtured. Some are mulling alternative arrangements, such as developing their next applications in Java rather than Microsoft's .Net to make for an easier exit from the Microsoft environment. Some are also seeking redress by advising customers to take advantage of vendor-neutral open source platforms in preference to Windows.
In any case, Microsoft's drive into the enterprise applications market raises many important issues for customers and the industry. How will the inevitable market upheaval impact customers' product commitments; can the software behemoth successfully graft on the domain expertise that will be necessary to make it a credible force in applications; and does its wholesale entry into the market herald the kind of lower prices and commoditisation that have characterised its annexing of other areas?
Tip-toeing giant
So far, Microsoft has proceeded with relative caution. The two main acquisitions that form the basis of its push - those of the US's Great Plains Software and Navision of Denmark - have been absorbed over the past three years with little market fuss. The company has treated existing customers of the multiple product lines that these vendors either created or acquired with unprecedented care, promising to continue supporting all main product lines for 10 years. It also started to earn its own stripes in business applications with the introduction of a home-grown customer relationship management package, Microsoft CRM.
The company has passed another important test, says Andrew Henderson, finance director of memory chip distributor Simms International, a user of Navision software. Since the acquisitions, there have been no big licence or support fee increases, although there have been some changes to the way that such fees are calculated, he says.
There have been other positive signs, observes Ian Doye, finance director at logistics specialist Cannon Group. The Microsoft acquisition has helped put Navision UK on a very much more professional footing, he says.
But the honeymoon period will not last forever. At some point, it makes sense for Microsoft to consolidate the functionality of the main packages it has inherited into a single offering. While that is the long-term plan, the shift will be incremental.
Not only has Microsoft vowed to support the core Great Plains and Navision products for a decade, it is happy to put that in black and white. "[It] is documented in Microsoft's life-cycle support policies," points out Lynne Stockstad, general manager of existing solutions at Microsoft Business Solutions. "Between now and 2013, roughly every 18 or 24 months,
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For many customers, that will doubtless signal the time to move. Meta Group analyst Brian Prentice warns users that they can expect rationalisation and consolidation of the Microsoft applications portfolio from around 2007 - when Microsoft's next generation package, 'Project Green', is expected to appear.
"Although Microsoft Business Solutions has stated that it will support the existing product set through to 2013, it has neither articulated a clear product-by-product migration strategy, nor a reason why four distinct product sets or brands need to remain," warns Prentice.
Big green
Project Green is certainly ambitious, although details are sketchy. What Gates says on the subject is that the idea is to provide an application that both 'supersets' the capabilities of all four current enterprise packages - Navision, Axapta, Great Plains and Solomon Software - and one that will be applicable to almost any organisation, regardless of size.
He has dropped some hints, too, that the technology underpinning Project Green will not be derived from Great Plains software, but rather from technology picked up when Microsoft acquired Navision. Specifically, suggest some analysts, it will draw on Navision's Axapta product line.
"We were pleasantly surprised by the architectural depth and forward thinking of Navision when they came together with Microsoft. They had a profound influence on the design of the future generational work... as they had some far richer modules and deeper understandings," says Gates.
Another ambitious aspect to Project Green is the design goal of formally separating the business logic from the application logic. If achieved, that should help make the application highly flexible and configurable, say executives.
"We will not only be able to deliver customisation capabilities, but also easy upgrades," says Stockstad. With the business logic encoded in a separate layer, only the application code will need to be changed when Microsoft introduces an upgrade.
But not all are convinced that Project Green will live up to those kinds of promises. Eduardo Loigarro, founder and managing director of Exchequer Software, a developer of financial applications for SMBs, believes that if Project Green is based on Axapta, as is widely assumed, the result will prove to be of questionable suitability for many SMBs. Axapta, he says, is an expensive product because of the level of customisation required and the sheer number of Microsoft server products required to make it work. It is not an investment that many small businesses can easily afford.
"Unless they have completely re-engineered it, there's no way [it can be run by small businesses]. It needs every Microsoft server going: BizTalk Server, Exchange Server, SQL Server. These are not trifling products," says Loigarro.
This is untypical of Microsoft, says Phill Robinson, European vice president of marketing at online applications supplier Salesforce.com. While the core product may be reasonably priced, the software giant architects it in such a way that users have to buy an entire bundle of associated Microsoft products, he says. "It's basically trying to lock users into the whole stack of Microsoft software," says Robinson.
This is already the case, he adds, with Microsoft CRM, which is targeted at the SMB sector. It requires the SQL Server database, Exchange Server email and collaboration product and Microsoft Office running on all client PCs.
That SMB market will be the initial focus for the new package. Indeed, Stockstad refutes suggestions by executives at Oracle that Project Green will take Microsoft into the high-end, a claim that Oracle has used to support its acquisition bid for PeopleSoft.
"We have no plans to drive into the Fortune 2000 enterprise space," says Stockstad. "We see a wide open opportunity in the small and mid-sized business space and so our strategy is all centred on that."
Such statements should be read with caution, believes AMR Research analyst Nigel Montgomery, because it is in Microsoft's interests to keep rivals guessing about the scope of Project Green and therefore how they should respond to it.
They may be left guessing for some time. Project Green's release is inextricably tied to the arrival of 'Longhorn' - the code name for the next generation of Microsoft's Windows operating system. Longhorn was originally due in 2004, but it is widely believed to be running two or three years behind schedule. "Longhorn and Project Green are years away," admits Stockstad.
Hatching cuckoo
For Microsoft's rivals in the enterprise applications market, that three-year hiatus will provide valuable time in which to prepare a response. Many of those software companies that have thrived from offering SMB applications on the Microsoft stack now feel threatened by the software giant's move into their market.
"It's caused consternation. There's an awful lot of concern," says Loigarro. "The rug's been pulled out from under all of us... I think they are being greedy."
It is not just the entry of an 800-pound gorilla into their market that has got many suppliers feeling uncomfortable, but the fact that Microsoft also controls most of the technology on which they depend: the operating system platform, the development tools and the various servers.
Already, the tight integration between the components of the Microsoft stack are being viewed with some suspicion. Many vendors fear that developing in .Net, particularly on the Longhorn operating system, will bind them too tightly to Microsoft.
For example, the graphical presentation of .Net-developed applications is completely controlled by the .Net engine, not the operating system as it is in most development environments. That would make moving .Net developed applications to an alternative platform that much harder.
Some vendors are already unwilling to accept that situation. Mid-market manufacturing software supplier Epicor, for example, has chosen to combine a .Net user interface with Progress Software's OpenEdge platform. Epicor executives say this creates the "best of both worlds"; observers say Epicor has avoided becoming locked in to Microsoft from end to end.
Bud Robertson, the CFO of Progress, agrees with that sentiment. He says that Epicor's choice will prevent it from being tied in to the Microsoft 'monoculture' and enable it to more easily migrate to alternative platforms, if necessary.
Moreover, Robertson believes Microsoft will alienate swathes of developers with its move into enterprise applications. "People writing new applications will be reluctant to do so in Microsoft," he says. "[It] will finish up with no partners. What application vendor will want to wind up competing against Microsoft?" he asks.
Epicor is not the only mid-market vendor backing away from a wholesale commitment to Microsoft. Others are looking to develop their products using Java technologies to ensure their applications will be able to run on Windows, Linux or any other platform that offers a Java run-time environment.
Therefore, Microsoft's success is not necessarily assured, says Meta's Prentice, regardless of how much resources it brings to bear. Since 2000, the company has spent $2.5 billion on acquisitions in creating a business with revenues of $567 million.
That already makes it larger than all but four applications competitors - SAP, PeopleSoft, Oracle and Sage - and Gates clearly thinks some, or all, of these can be overtaken in the next decade. That is a far cry from 1995 when his colleague Steve Ballmer, now Microsoft's CEO, told analysts that the software giant had no interest in the enterprise applications market. "We're only interested in markets with massive volumes," he said. Clearly, when it comes to enterprise software, volume has been redefined.
