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Infoconomist's monthly review of the top technology sector stories, together with informed comment on the wider implications of the news.
Microsoft blocks out Sun
Incompatible. An email from Microsoft founder Bill Gates revealed that he approved Microsoft's involvement in the Web Services Interoperability (WS-I) standards body on the condition that the role of Sun Microsystems was kept to a minimum. The email was presented in court during the antitrust trial against the software giant. "I can live with this if we have the positioning clearly in our favour," Gates wrote. "In particular, Sun not being one of the movers/ announcers/founding members." More than 100 members have joined the WS-I but Sun has refused to sign up unless it gets a board seat.
The four-month old industry consortium, co-founded by Microsoft and IBM, aims to promote web services by ensuring that software from various vendors is compatible.
Comment: The unparalleled cross-industry collaboration that was trumpeted with the emergence of web services has rapidly disintegrated. IBM has tried to head off the spat between Microsoft and Sun by proposing the addition of two extra board seats for the WS-I. But the danger is that political in-fighting could prevent essential standards being completed. Expect a compromise.
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Number crunch. The post-Enron accounting scandal in the technology industry deepened in May 2002. The Securities and Exchange Commission, the US financial regulator, extended its inquiry into financial practices at Computer Associates (CA), the systems management software giant. The SEC issued subpoenas to CA's former auditors, Ernst & Young, as it sought to determine whether CA's accounts were inflated by $500 million (€545m) in 1998 and 1999. Strong results earned CA's three senior executives – Charles Wang, Sanjay Kumar and Russell Artzt – combined bonuses in 1998 of $1 billion (€1.1bn). Elsewhere, Network Associates, the security and anti-virus software group, restated its results for 1998-2000 amid claims of 'channel stuffing', the practice of booking sales when products are shipped to distributors rather than bought by end-users. Peregrine Systems, the asset management software vendor, faced similar allegations, saying that up to $100 million (€109m) of revenues booked in the last two years had been "called into question" by new auditor KPMG.
Comment: Allegations of creative book-keeping during the high-tech bull market are coming back to haunt the recession-hit sector. The technology industry, with its fast growth and complexity, has proved peculiarly vulnerable to temptation. It will benefit more than most from a radical overhaul in regulation.
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New leader. According to market research group Gartner, IBM overtook Oracle as the largest database software vendor at the end of 2001, with a market share of 34.6% compared to 32%. Microsoft was ranked third with a share of 16.3%. Gartner said that, in financial terms, IBM earned revenues of $3.1 billion (€3.4bn) and Oracle $2.8 billion (€3.1bn). It attributed IBM's success to the 2000 acquisition of Informix, which accounted for about 3% of the market. But Oracle CFO Jeff Henley, challenged the findings, suggesting that figures provided by IBM and Microsoft were "suspect". Gartner analyst Betsy Burton defended the survey and claimed Oracle was feeling the pressure of intensified competition in the database market.
Comment: Oracle has been hit hard by the downturn in IT spending. But it remains the overwhelming leader in the important Unix-based database sector, with a 63.3% share against IBM's 24.7%. Coming second to IBM in a Gartner report, however, will probably spur CEO Larry Ellison into action. Expect him to use negative advertising to launch a fight back.
Juniper buys Siemens' Unisphere unit
Rivals merge. Networking hardware vendor Juniper Networks bought Unisphere Networks from its German owner Siemens for approximately $740 million (€804m) in cash and stock. Under the terms of the deal, which is subject to regulatory approval, Siemens has agreed to resell some of Juniper's products. Unisphere, which was set up in 1999 to make routers and broadband access systems, had revenues of about $200 million (€217.3m) in 2001. But the company has been hard hit by the drop in demand from struggling telecoms network operators and has yet to reach profitability.
Comment: Juniper is Cisco's main rival in the router market. This deal, while undeniably expensive, strengthens Juniper's position in edge routers – which generated more than 95% of Unisphere's sales. And its timing could not be better: Analyst Yankee says the IP edge, where Unisphere has taken market share from Cisco, is one of the few network segments that will grow in terms of carrier capital expenditure this year.
For an analysis of Cisco and the networking market, see Cisco's softer side.
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Presidential seal of approval. George W Bush briefly set aside foreign policy matters and made his first visit to Silicon Valley since the onset of the technology industry recession. Bush, speaking during a two-day fundraising tour of California, said that a blend of tax cuts, expanded trade and deregulation would help rally the technology industry as well as the wider US economy. "I understand people are hurting here in Silicon Valley," he said. "Our economy grows when entrepreneurs are rewarded for their success, not hounded by regulation and needless litigation." Bush's words were watched closely in Europe, where various governments are considering whether to help technology companies with tax breaks.
Comment: The troubled US technology sector believes that governments in the US and Europe should stimulate its recovery. And that does not just mean investing in e-government systems. The industry wants help in asset write-offs, tax breaks, stock options rules and support for R&D projects. The Republicans, however, gave some breaks back in January, and Bush isn't promising more. European governments aren't giving much, either.
Microsoft buys Navision
Microsoft goes mid-market. Software giant Microsoft snapped up Danish mid- market business applications vendor Navision for $1.3 billion (€1.4bn). Navision is Microsoft's second largest acquisition after the 2000 deal to buy design software company Visio. The fresh deal gives Microsoft a broad product portfolio – a result of the 2001 merger between Navision and Damgaard – and a foothold into the European market for small- and medium-sized businesses (SMBs). Microsoft now has a number of accounting, manufacturing, distribution and customer relationship management products to sell to SMBs. In 2000, it purchased Great Plains, another mid-market vendor. Although focused on a similar market to Navision, it sells mainly into the US.
Comment: For more on the Microsoft-Navision union and the challenges facing large vendors selling into SMBs, see Stoop to conquer.
HP/Compaq saga 'helped sales'
Two's company. Merged computer giants Hewlett-Packard (HP) and Compaq Computer launched their new organisation in May 2002, outlining product plans and insisting that customers kept buying despite months of uncertainty over the $18.7 billion (€20.5bn) deal. HP said it booked more than $5 billion (€5.5bn) in orders to major corporations in the last three months. "We think customers understand this merger very well," said HP's embattled CEO, Carly Fiorina. The new company is dropping the Compaq name, except as a PC brand. Compaq's iPaq handheld will replace the HP Journada as the HP iPaq. HP's Intel-based servers will disappear in favour of Compaq's. Elements of Compaq's Unix operating systems will also be folded into HP's HP-UX. The Compaq/Tandem NonStop becomes the HP NonStop.
Comment: HP executives are touring the world trying to convince investors, customers and employees that it can make this work. Many staff are still sceptical – after all, in mid-May, the first of 15,000 redundancy notices went out. In spite of the preparation, the critical factors are likely to be cultural and logistical. With demand for IT products still depressed, HP's executives will struggle to make themselves look good.
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Brain drain. A number of senior executives at US technology companies departed during May 2002. The fresh round of exits began with Ed Zander, chief operating officer (COO) of Sun. Struggling e-marketplace supplier Commerce One underwent a boardroom reshuffle. Dennis Jones, the company's president and COO, is leaving at the end of June, while Peter Pervere, the CFO, has quit his post but is staying on in a consulting role. CEO and chairman Mark Hoffman has taken over the title and responsibilities of president, and corporate controller Chuck Boynton has become the CFO. Asset management software company Peregrine Systems replaced CEO and chairman Steve Gardner and CFO Matt Gless after KPMG questioned historic revenue-recognition methods. Executive vice president Rick Nelson was promoted to acting CEO.
Comment: The time for excuses is over. In 2001, executives who missed their numbers could blame the recession. But they had a year to sort things out. Those that haven't done so have had to go. Others are leaving because they don't much like the new environment. Their replacements probably won't be visionaries, but proven performers under pressure.
Wall Street revolution?
Merrill in peril. Investment bank Merrill Lynch agreed to pay a $100 million (€108.9m) fine as part of a settlement reached with New York attorney general Eliot Spitzer over allegations that it misled high-tech investors. An internal reorganisation at the bank and a "statement of contrition" are part of the deal. Spitzer's investigation concluded that Merrill analysts misled investors with upbeat equity research notes in a bid to boost stocks and win investment banking business. Key measures of the deal include separating compensation for analysts and corporate financiers, disclosing in research notes any fees from the company covered over the last 12 months and requiring Merrill to justify itself when it stops covering a company. Merrill must also appoint a monitor, to be approved by the Attorney General, to ensure these commitments are kept.
Comment: Spitzer has taken on Wall Street and won. Merrill must revamp its operations to restore the 'Chinese walls' meant to separate analysts from investment bankers. Spitzer says the crusade is not confined to Merrill and several big investment banks under investigation have since announced similar plans. If Spitzer gets his way – and he has so far – the inquiry will truly "change the way Wall Street operates".
