EDS stock has languished, and efforts to increase it value through cost cutting and revenue growth have not succeeded -- at least in terms of Wall Street. As EDS CEO Ron Rittenmeyer noted, "First and foremost, this is a great transaction for our stockholders, providing tremendous value in the form of a significant premium to our stock price."

For HP, the deal is about increasing its services business, in particular, adding more types of services and increasing its scale in order to take on the king of IT services, IBM.

Looking at what HP is buying 

In its latest filings, a February quarterly and 2007 annual report (the EDS fiscal year ends 12/31/07; read it here) and its 10-K (read it here), EDS noted that: 

• Its revenue was flat but income was up. 2007 revenue was $22.1 billion, up 4% from the $21.3 billion reported for 2006. How global is EDS? It reported that 48% of its income was from outside the US. It also said that $2.4 billion -- or about 11% of its annual revenue -- was from contracts with the US government (its biggest government deal is with the US Navy for an "end-to-end IT infrastructure on a seat management basis").
  
  As for income, the company noted that it made $716 in GAAP-adjusted profits for the year, well over the $470 million it reported in the previous year.
  
  The company noted that for the fourth quarter, it had signed $6.1 billion in contracts, down from $7.6 billion in the same quarter one year before. It did note that its "sales pipeline is up 10 percent versus the year-ago period."
  
  
• IBM is its top competitor. When discussing the competition, EDS identified IBM Global services as its top competitor in infrastructure and application services (HP was listed as 5th and 4th in those markets). Only in the business process outsourcing (BPO) market did IBM not make the No.1 spot (it was  third,; first was Accenture).
  
  
• It has lots of employees. As of 1/31/08, the company had 139,500 employees in the US and abroad.
  
  
• It offers many technical and business services. The company has three major service offering segments, with a variety of sub-groups in each. They are Infrastructure Services (server management, Web hosting, PC management, help desk, security, networking, etc.), Applications Services (development, management, modernization, integration, etc.), and Business Process Outsourcing Services (billing, HR, CRM, etc.).
  

In comparison, HP, based out of Palo Alto, CA, reported its latest annual revenue figure (from 1/31/08) of approximately $108 billion ($28.4 billion is from its printing group, or about 26% of its annual revenue). It says it has 170,00 employees across the globe. As for its major business units, the company breaks it out into seven segments. However, from a technology product and services standpoint, there are three to consider: The Personal Systems Group (PC, notebooks, etc.), the Imaging and Printing Group (printers, inks, etc.) and the Technology Services Group (TSG; hardware like servers and storage, as well as services). In reality, the TSG group is actually a combination of three business segments: Enterprise Storage and Servers, HP Services (HPS), and HP Software.

In terms of service group size, today's numbers are:

• IBM reported $98.8 billion in revenue for its last fiscal year, with 386,558 employees across the globe. Services accounts for 54% of its revenue (see this page; read the annual report PDF here). The actual total was $54.1 billion.
  
  
• HP noted that HPS generated $16.6 billion in fiscal 2007 (ending 10/31/07; 2007 10-K available here). That's about 15% of the company's revenue.
  
  
• EDS reports, as mentioned. $22.1 billion in overall revenue. 

HP's stated reasoning for scooping up EDS

Why is HP spending the cash to buy EDS? The official party line is:

Acquiring EDS advances HP's stated objective of strengthening its services business. The specific service offerings delivered by the combined companies are: IT outsourcing, including data center services, workplace services, networking services and managed security; business process outsourcing, including health claims, financial processing, CRM and HR outsourcing; applications, including development, modernization and management; consulting and integration; and technology services. The combination will provide extensive experience in offering solutions to customers in the areas of government, healthcare, manufacturing, financial services, energy, transportation, communications, and consumer industries and retail. 

What are the top benefits for HP in real world, non-PR speak terms? 

• More business strategy consulting. HP has been primarily about delivering infrastructure services, while IBM delivers those types of services as well as more strategic business and technology guidance. The EDS acquisition will enable HP to compete for more high-level engagements.
  
  
• Scale to take on IBM. Adding the huge number of EDS staff, as well as its existing contracts with private and governmental agencies, will enable HP to go after more of the services pie.
  

A typical long, bumpy road ahead 

The acquisition of EDS won't be smooth -- no acquisitions of this size are. And there is some interesting history for both companies in terms of acquisitions. For example, it's important to remember EDS was bought once before. General Motors (GM) acquired the company in 1984 and then regurgitated it in 1996. For HP, this will be its second biggest acquisition -- both were of Texas-based companies. Its largest acquisition was the 2001  purchase -- completed in 2002 -- of Houston-based, PC giant Compaq.

So what are the major challenges with regards to this deal? They are similar to most challenges faced by the merger of two multi-billion dollar companies with a somewhat overlapping product portfolio. Top issues include: 

• A huge integration effort. Merging two large companies with long histories is not easy. Issues of corporate culture, services offered, and branding will be some of the top challenges. According to the release, the EDS brand will live on: "HP intends to establish a new business group, to be branded EDS – an HP company, which will be headquartered at EDS's existing executive offices in Plano, Texas."
  
  Most likely, EDS would constitute a fourth major HP group, subsuming HPS from the existing TSG segment. In turn, that group's virtual name would most likely be re-badged as something like the Enterprise Systems and Software Group.
  
  
• Job losses. A merger of this magnitude, which also involves some overlapping capabilities, will undoubtedly result in lost jobs, relocations, and inter-company competition for those that remain in place. The most likely candidates on the chopping block: EDS human resources, marketing, and other administrative positions.
  

By: Tom Rhinelander 

With Apple's iPhone version 2.0 software also coming this summer (set to be downloadable by all iPhone users by the end of June; see this previous post; see the product page here), this should amplify the battle between Blackberry users and iPhone users, who will soon have the ability to sync their phones with Exchange servers.

Blackberry + Exchange + Windows Live versus iPhone + IMAP + Exchange

Microsoft is becoming a sort of arms dealer in the smart phone race. It has its own Windows Mobile offerings (see the product page here), and supports Blackberrys as well as other phones. By licensing its ActiveSync technology to Apple, it has now enabled the iPhone maker to take a share of the enterprise phone market from its own Windows-powered phones, as well as RIM and other vendor devices. 

While there are certainly other phone makers, such as Nokia (which still sells the most phones on a global basis), Samsung, and Motorola, and there are new software platforms emerging, such as Google's Linux-based Android (see the product page here), the public relations (PR) battle is being fought by two of the smaller device makers, RIM and Apple.

How will the PR battle lines be drawn? The debate between platforms -- Blackberry or iPhone -- that has and will continue to be waged online and at the enterprise (business, government, and other large organizaitons) watercooler comes down to:

• Primary interface. The Blackberry is all about the physical keyboard that enables typing of messages. With today's announcement of the Bold phone (read the release here), the company is also pushing its screen capability and related services -- like videos -- forward. For Apple, the iPhone is all about its touch interface. Without a physical keyboard, users type into a virtual keyboard for their messaging needs.
  
  
• Enterprise applicability. RIM and its Blackberry phones and software have been deeply embedded in the enterprise, thanks to its "push mail" and synchronization capabilities -- enabled with the licensing of the Blackberry Enterprise Server (see the product page here). The software allows Blackberrys to tie into a variety of communication platforms: Microsoft's Exchange, IBM's Lotus Domino, and even Novell's GroupWise messaging and calendaring software. In addition, since Blackberry's are available from a variety of global providers, the phones -- and therefore the solutions -- can be used across the planet.
  
  Apple's 2.0 iPhone software will add much needed Exchange support (notably, without the need to license a connectivity server), as well as features that many enterprises demand -- such as remote wiping of data on phones (e.g., if a phone is lost, IT can delete its contents remotely). Apple is also behind RIM in terms of getting the iPhone to global carriers, with limited distribution in many countries. For example, the only fully supported cellular provider in the US is AT&T (unlocked iPhones will work on other GSM networks, but Apple support and phone operation is questionable). For those in Canada, there is no official iPhone carrier even today.
  
  
• Device appeal. Apple's iPhone has garnered much more attention than the competition. Even today, with the release of the Bold Blackberry model, coverage of RIM is minimal -- or tiny, if compared to Apple's PR. In fact, Apple generates more PR on iPhone software and pricing announcements than other phone makers can generate with any new model. And with an expected new model of iPhone this summer, most likely supporting high-speed 3G networking and adding GPS capability, another avalanche of media and blogging coverage is certain.
  
  The key to the iPhone is its interface and its included applications -- the full touch screen and the integrated features, such as an extremely usable Web browser, its "visual" voice mail, an iPod for music and video, an iPhoto-lite photo application, and tailored Google mapping and YouTube software. With the release of the iPhone software development kit (SDK) and the 2.0 software, third-party software should spring up. It does have some glaring features absent, such as support for multimedia in text messaging (e.g., sending a photo taken with its camera in a text message).
  
  Blackberry models, on the other hand, have mostly been sold on one main capability -- relatively seamless connection to enterprise mail and the physical keyboard -- with some industrial design thrown in to entice new users and satiate existing ones (e.g., the Bold, the Curve, and the Pearl have all had slightly different form factors). Most of the phones have had GPS support for some time and also include a music and media player. Despite these advantages, there is very little PR generated about any Blackberry feature beyond email.
  

The Blackberry/iPhone virtual bloodbath

While most enterprise users and consumers will buy phones from companies other than RIM or Apple, a significant -- and influential -- group of users will debate the merits of the two platforms, with full scale arguments taking shape in the summer, with the release of iPhone 2.0 software and the RIM Bold and its Windows Live services.

We expect a massive PR battle to be waged publicly and with surrogates -- either those astroturfing (pretending to be third-parties) or those who are simply active proponents of one solution or the other. The key issues, from an IT perspective, will be:

• Apple's enterprise features. How easy will it be to sysc an iPhone with Exchange? What about support for Domino? Will the remote wipe features work? Will enterprises take advantage of the ability to write their own applications, despite concerns about how Apple might limit their hosting and distribution?
  
  Given the slow pace of enterprise adoption, it will take a long time -- most likely until the end of the year -- to see any large organization take the full iPhone plunge. Look for medium-size business experience as a short-term fix in terms of getting information of iPhone applicability to the enterprise.
  
  
• The non-server iPhone sync solution. With no need for an expensive middleware server like the Blackberry Enterprise Server, Apple has the opportunity to entice enterprise cusotmers who don't want to invest in the license and management of another server. It will be a harder sell for those companies who already have the server software and Blackberrys rolled out -- like any change in technology, shifting users form one platform to another is never an appealing prospect, as the logistics, the support training, and the user confusion add a tremendous cost to any migration.
  

At the every least, a low-cost integration effort, combined with user demand, will drive iPhone adoption in enterprises. But expect Blackberry supporters to circle the wagons. The debates will feel a lot like the Windows/Mac battles that were and are now starting to be waged once again within the enterprise. We don't expect Blackberrys to disappear in significant numbers in the short term, but we do expect to see them sharing the enterprise spotlight with a small but growing number of iPhones.

By: Tom Rhinelander 

In a common development scenario in which teams are regionally and globally dispersed -- because of multiple offices, developers working at remote sites, and the inclusion of third-party coders -- Enterprise Edition allows developers to collaborate on modernization activities, such as code analysis; business processes discovery and understanding; code refactoring and enhancement; and the re-writing of the code in modern languages to leverage current applications, services, and databases.

A major benefit for development executives will be the ability to:

• Create and enforce policies around areas like practices and access to source code.
  
  
• Monitor and manage internal and external teams, using dashboards and reports.

Those benefits should translate directly into the real reasons companies will want to implement the product:

• To shorten development time. The development process, particularly one with several external teams, should be streamlined through knowledge as well as enforcement of policies. With a centralized tool capable of reporting on activity as well as enforcing rules, managers should be able to spot potential schedule slippages or other problems earlier.
  
  
• Improve code quality. Shorter projects don't matter if code quality is poor. To be successful, managers will have to ensure that the tool is set up and performing as expected; that the most effective coding practices, such as agile development, are also implemented; and that bug-inducing activities, such as frequent and late requirement changes, are not allowed or kept to an absolute minimum.
  
  
• To reduce modernization costs. Keeping costs down -- while delivering modern applications complete with understood and documented business logic -- is what all IT executives strive for.

A new opportunity, but several challenges

Like many other software development tools that began life in the Hot Pocket and Red Bull desktop world of the individual developer, Relativity's challenge is four-fold:

1. Make sure it works. Relativity must ensure that the system does what it says -- enables collaboration between globally distributed development teams, including those from third-party shops. Like all of its products, Enterprise Edition will improve as users implement it and uncover the inevitable bugs, annoyances, and missing features. Successive iterations of the product will give a hint as to how customers really use it, as the most important features are quickly added.
   
   
2. Sell to CIOs. For Relativity and its system integrator (SI) partners, selling Enterprise Edition means that they must now convince CIOs and VPs of development that they should invest in the new, multi-user system. The potential for the vendor is great -- much higher dollar sales and influence on the top executives of the IT department. The downside is the possibility for more involved and slower sales. But big ticket deals take time, no matter how impressive the apparent return and how compelling the customer references.
   
   
3. Have clients enforce use. Success with Relativity's latest offering is not just contingent on the internal development staff embracing or accepting the new system. To work effectively and see real return from the software, companies will have to mandate its use with their own employees as well as with external developers contracted for modernization-related projects.
   
   
4. Keep developers happy. Developers don't cut the purchase order checks for company-wide software like the Enterprise Edition of Modernization Workbench, but they can have a significant impact on whether such a solution it approved. While developers are employees, they are also used to some independence, particularly in organizations where coding is considered more of an art than a science.
   

Next steps for those contemplating Enterprise Edition

Whether you want or do deal with Relativity directly, or have been exposed to its offerings through its partners, such as IBM, EDS, Capgemini, or CSC (note: links are to modernization services of each vendor), the next steps are to:

• Understand your environment -- is it ready for Enterprise Edition? IT executives and development managers may want to invest in a global, shared modernization solution, but putting one in place involves potentially significant organization, process, and third-party relationship changes.
  
  
• Test the software to see if it can streamline your modernization efforts. Even with an organization prepared for the new solution, IT will have to test out the system to see exactly what it offers and what the expected savings will be. Relativity and its partners should be able to walk you through the process of getting the system in place and learning to not only view, but use the reports, dashboard, and other metrics to reduce the time of projects, improve the quality of software, and save money.
  

By: Tom Rhinelander, NRG Analyst

Despite the obvious appeal of the device to many, its suitability in an enterprise setting was questioned publicly. The most influential tech analyst firm, Gartner, Inc., noted in a June, 2007 research note that, "Because of possible manageability and security issues, organizations should resist general requests from users to admit Apple's iPhone into their corporate environment." Apple's March announcement was aimed at hitting this issue head-on. While there is no way to completely satisfy all observers, the company went a long way in overhauling its image as a corporate maverick.

Apple outright embraces many of the needs of the enterprise

What new features are promised with the 2.0 software -- features that will alleviate Gartner concerns, and more importantly, the concerns of information technology (IT) departments in medium and large enterprise? Top features include:

• Microsoft email support. Love or hate Microsoft Corporation, the vendor's control of the corporate email market is unquestionable. The 1.0 version of the iPhone software relied on standards-based access to mail systems (using POP or IMAP) -- standards that Microsoft Exchange Servers could be configured to support (see the product page here), but that was not the normal practice for most organizations. But with the 2.0 software, Apple said it was licensing Microsoft Exchange ActiveSync, which "enables a mobile phone to synchronize email, calendars, tasks, and contacts with Exchange Server over the air" according to Terry Myerson, Microsoft corporate VP for Exchange (see his Q&A release here).
  
  There was some concern that Exchange support would be just for email -- a legitimate concern for many Apple customers who bemoan Microsoft's limited Exchange support for its own email client, Entourage. But those fears seem unjustified. According to Apple, the "iPhone will connect out-of-the-box to Microsoft Exchange Servers 2003 and 2007 for secure over-the-air push email, contacts, calendars and global address lists."
  
  
• A real software development kit (SDK). The original iPhone announcement famously not only did not include news of an SDK, but Apple CEO Steve Jobs went so far as to imply that one was not necessary. For example, when the iPhone was officially released, he focused on Web-based development (see the release here): “Our innovative approach, using Web 2.0-based standards, lets developers create amazing new applications while keeping the iPhone secure and reliable.” But a little over six months later, the CEO displayed a major philosophical, 180-degree mind shift when he said, "We’re excited about creating a vibrant third party developer community with potentially thousands of native applications for iPhone and iPod touch."
  
  The SDK (see its page here) will enable developers to access the most interesting features of the iPhone, not just standard application programming interfaces (APIs). For example, developers will be able to hook into  touchscreen features, as well as the animation capabilities built into the operating system. But would the SDK prove popular? In a March 12 release, the company noted that there had been 100,000 SDK downloads in four days.
  
  
• Batch management, remote wiping, and secure access options. IT organizations manage  hundreds or thousands of devices, and they won't bother with a product that requires each individual device be configured on its own. With the 2.0 release, Apple is adding batch configuration capabilities. With sensitive corporate data on cell phones, IT is also hesitant to support devices that -- when lost or stolen -- can't have their memory and storage wiped clean remotely. The 2.0 version of the software will offer this feature, too. In addition, the software will include Cisco IPsec virtual private network (VPN) software that will enable the device to create an encrypted, secure connection to corporate networks, another requirement for many corporate devices.

Was the world impressed? While the typical firestorm of a debate about the merits of the 2.0 software raged across tech media and community blog sites, Gartner certainly felt different. In mid-March, a research note from the firm noted, "Gartner recommends 'appliance-level' support status once firmware 2.0 and improvements are released." Apparently, at least some in Stamford thought the changes were substantial.

Not everyone was impressed

There were plenty of commentators who thought the SDK and the developer program was not as good as portrayed in the media. Digging into the software and the accompanying restrictions, they started pointing fingers at Apple. While third-party developers debated issues like whether getting 70% of revenue from software hosted and sold by Apple is fair, corporate developers focused on:

• The App Store requirement. Many in the media and industry incorrectly reported that corporations would have to make their software available in a single, public App Store. However, Apple promises that organizations "will be able to create a secure, private page on the App Store accessible only by their employees."
  
  
• Development limitations. Debate within the development community -- and those with an opinion, but not the developer skills -- analyzed the limitations of the SDK. Both Sun Microsystems and Adobe executives said they were confident they could get their technologies -- Java and Flash -- on the iPhone with the release of the SDK, but both had to back down when it became apparent that those types of applications -- virtual machines and alternative programming environments -- would not be supported with the initial SDK.
  

Despite these concerns, the major shift in emphasis of iPhone 2.0 towards enterprise needs will ensure that IT can't ignore the iPhone.

The result: Users will have more support, and IT will learn to live with -- if not love -- the iPhone 

For IT, new iPhones and all existing models updated to the 2.0 software will generate more demand for iPhone support. For organizations as a whole, the new software and SDK will:

• Make it easier for employees to use the iPhone at work. Some workers had already been using an iPhone, but adding the enterprise features and gaining support of firms like Gartner mean that iPhone users will have less hoops to jump through. IT will still have reasons to keep iPhones out of some environments, but the list of reasons will have shrunk considerably. And if developers in the organization start to build custom iPhone software, the trickle of iPhones may become a flood.
  
  
• Expose developers to the Mac OS technology. The SDK will put Apple's iPhone development environment, APIs, and built-in features in front of many non-Apple developers. Even with a free integrated development kit (IDE) included with Apple computers, the vendor still couldn't convince developers to create software for an operating system with a relatively small market share. But the iPhone owns a much larger share of the smart phone market, and many corporate developers and their bosses will find the cost of entry into this market is not to high -- $299 for the Enterprise Program SDK license and $1000+ for an Apple laptop or tower (the SDK will only run on an Intel-based Mac running the latest version of Apple's operating system, Leopard).
  
  
• Demonstrate that smart phones don't need another server. The Blackberry has been the gold standard of corporate mobile communication devices -- not necessarily because users love the various device form factors and user interfaces, but because it connected to Exchange servers and enabled wireless email. But the trick is that those devices require a separate server component -- the BlackBerry Enterprise Server (Blackberry is actually a product of Research In Motion Limited; see the product page here). With the release of the 2.0 software, Apple intends to make it even simpler to connect an iPhone to Exchange than a Blackberry. And in the process, it will demonstrate to IT that additional servers are not necessary -- a bleak prospect for RIM.
  

By: Tom Rhinelander, NRG Analyst  

As the SOA media hype continues to diminish and reporters chase Web 3.0 stories, the real work of investing in, designing, and deploying SOA-based solutions continues to pick up pace. With a more robust product and service portfolio, an updated Web site, and an executive team ready to devote time and resources to marketing and sales, 2008 looks like a strong year for MuleSource.

Other ESB providers will have to ratchet up their own marketing to counter MuleSource's customer list, its source code strategy, and its expanded capabilities. Open source competitors, such as IONA with the integration of its LogicBlaze acquisition (press release is here), will have to compete with Mule to attract community developers to its project.
 
And with another major open source company acquisition this week (MySQL was acquired by Sun Microsystems; press release here), the continued show of strength by MuleSource will make it an increasing target for a larger vendor that either needs the ESB offering or that simply wants to take out a competitor.

Three for one: A better Enterprise ESB and new tools for managing SOA transactions and components 

On Tuesday, MuleSource -- which calls itself "the leading provider of open source service oriented architecture (SOA) infrastructure software" but is mostly know for offering an open source ESB -- officially announced its enhanced and new offerings in a string of press releases. Having set the stage in the previous weeks by prepping reporters and analysts, the company lifted the covers off:

• An update to the for-pay version of Mule ESB. Like many open source companies, MuleSource provides two versions of its flagship product. There is a Community Edition (CE) which is available for free and an Enterprise Edition (EE) that is only available as part of a subscription package. This 1.5 EE-only release includes features like patch management and provisioning support. Other enhancements, such as Apache CFX support, are designed to meet the needs of existing customers or broaden the appeal of the product. [Read the press release here]
  
  How mature is the product, given it has a relatively low version number? It makes sense to look at its release history. At Mule's commercial launch in October of 2006, the vendor pitched Mule 1.3. Mule 1.4 CE shipped officially in April of last year, with this new version shipping roughly eight months later.
  
  Will CE users be left out in the cold in terms of 1.5 enhancements? The company told us that Enterprise features should migrate down to the CE edition over a three to five month period.
  
  
• The new Saturn for-pay "lightweight business activity monitor (BAM)" product. Like the Mule 1.5 release, Saturn is for subscription costumers only. Originally built to look into transactions to resolve problems, the diagnostic tool is now its own official product as is described as providing "detailed logging and reporting on every transaction that flows through the Mule Enterprise Service Bus." Essentially, it lets users know exactly what is going on in their SOA, and it allows interested parties to dig into failed or flagged transactions to find out what went wrong (e.g., root cause analysis). It carries a 1.o designation, but also a "beta" tag, so it is still a work in progress. [Read the press release here]
  
  
• Galaxy, a registry that also serves as a governance platform. Emerging as a CE offering only -- for the time being -- Galaxy is MuleSource's answer to the commercial Systinet offering. For those interested in registries for basic Web service WSDL storage, or for those who want to toe dip into SOA governance, Galaxy is a cheaper alternative to an expensive registry. [Read the press release here]
  
  

  Note: The Mule ESB is released under the CPAL license (a change form the modified Mozilla license it formerly used). Its tooling in general is not released under the open source license.
  

  As for subscriptions, there are three levels: Silver, Golf, and Platinum. Subscribers receive a MuleSource Enterprise Software License, which includes available indemnity; Mule HQ monitoring tools; maintenance and product updates; tech support, access to a support portal (24x7 is available at the highest, Platinum subscription); and now the Saturn tool (see its subscription tier details page for more information).
  

Speedy, but without the public boasting 

Performance is always a key criteria for enterprise-class software (along with security, management, stability support, and other key attributes), and it becomes a serious issue in an SOA-world in which distributed systems are funneled through central hubs, such as ESBs. Is the update Mule fast? According to the company, it is. But while MuleSource is confident it's software is faster than alternatives, it isn't hawking benchmarks. It relies on customer referrals to help for-pay prospects understand what they might expect in terms of performance.

Since almost every benchmark, particularly those that are not considered "standard," can be gamed to deliver positive results, the idea of relying on word-of-mouth and customer references makes sense. Anyone can claim to have a fast implementation on a specially designed and managed system. Most vendors can't convince customers to tout success if it isn't there. In MuleSource's case, the company feels it has plenty of large, distributed, and perhaps most importantly, production solutions in the market.

Calling new age EAI what it is ... EAI 

One of the things we like talking to MuleSource's CEO, Dave Rosenberg, is that he doesn't try and pretend that SOA is not really about integration despite the bad rap that many expensive, proprietary enterprise application integration (EAI) solutions developed. He also isn't pretending this isn't another form of middleware -- another useful term that some in the industry have tried to kill off.

The reality is that SOA is based on critical, well-known computing architectures and technologies. It's a form of distributed computing, it's middleware, and it is an integration solution. The real shift -- and the reason why a new naming convention took hold -- is the industry-wide embrace of open standards as the critical aspect of new solutions and the subsequent reduction in cost of many licensed software components due to competition and the open source offerings. So call it what you will, but ESB solutions and associated tools, such as Saturn and Galaxy, are a new way of doing what IT has always been tasked to do: Create robust, reliable, and secure transaction systems that support business processes.

The MuleSource evolution

So, just what is MuleSource? For those who aren't open source or ESB experts, it's another unfamiliar company wearing the open source mantle and sporting a funny name. But MuleSource has been around in one form or another for awhile. It evolved from an open source project (started in 2003) to a commercial venture (founded in 2006). It offers an open source version of much of its technology, but the company, like many open source and commercial hybrids,  pays the bills by charging subscriptions.

A press release last November noted that the Mule ESB had been downloaded more than a million times -- that's up from the 700,000 it reported back in May and the 500,000 it reported in January of last year. CEO Rosenberg called this rate "alarming" -- in a positive but happily amazed tone -- in an interview on techweb's Startup City TV. Of course, this is enterprise-class middleware we are talking about, not iTunes or Firefox Web browser downloads, so the growth rate is not as extreme as the media has come to expect. But it is still impressive, nonetheless.

What about money? Will the company be around in a year? Last May, the company announced it had raised $12.5 million in a Series B funding. This adds to the $4 million in its first round that it raised back in October of the previous year.

Final thoughts

MuleSource has two major hurdles. First, it has to continue to improve and enhance its products to compete with not only similar competitors, but also the massive software houses, such as Oracle and IBM. Second, the company must squeeze profits out of the hybrid commercial-open source model. The trick with this model is that the open source products have to be appealing to users, but the company must reserve some features for the for-pay offerings. The multi-month trickle down approach, combined with enterprise-friendly support features, help create separation, but the company will have to continually both enhance for-pay products and enhance open source software with feature that were previously only for paying customers.

Those caveats aside, organizations looking for ESB solutions -- and now SOA registry and management tools -- should put MuleSource on their watch list, if not test the software in pilots or roll it out at a department-level.

By: Tom Rhinelander, NRG Analyst  

innerbridge posts will be authored by the joint team of NRG analyst Tom Rhinelander and innerbridge founder Nick Allen. While Tom has spent over fifteen years in the analyst and consulting world, Nick has spent most of his career in the marketing departments of a variety of high-tech firms. We think you will find the combined insight valuable in your day-to-day and long-term decison making and planning. 

Sample innerbridge post topics 

What can you expect to find at the innerbridge blog? Likely upcoming post topics will examine:

• Marketing program best practices
  
  
• SEO/SEM techniques
  
  
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As always, fee free to suggest technology-, vendor-, and market-related topics to NRG. In addition, now you can submit topics on marketing issues that innerbridge can write about. We hope you will not only enjoy the NRG and innerbridge content, but find it useful in refining your own strategy and improving your understanding of technology and marketing issues.

Amazon, fresh on the heels of unveiling its own digital rights management (DRM)-free music store , announced a new hardware product, the Kindle eBook (product page is here). Meanwhile, Kinset's 3D store technology hopes to entice retailers to create a virtual online store that mimics the real world, complete with stocked digital shelves (the solution page is here). Is the book broken and in need of a high-tech replacement? Do consumers long for digital re-imaginations of already successful online stores? Maybe sometime in the future, but in today's market, both most likely both ideas will fall flat.

Digital books -- even round 2.5 -- still don't make sense 

A few years ago, eBook readers were hot -- at least in terms of vendor investment and media acknowledgment. In 1998, NuvoMedia's Rocket eBook and Softbook's Reader were launched (both companies were acquired by interactive program guide provider Gemstar International Group in 2000; the company debuted follow-on RCA/Thomson built devices in late 2000; by 2003, the renamed Gemstar-TV Guide International stopped production of its readers and shuttered its content site). Microsoft released its Microsoft Reader software designed to make it easier to peruse titles on portable screens. The then-popular PalmPilot was not to be left behind -- it, too, could be loaded with digital books. Early Windows CE devices also battled for the non-existent but supposedly emerging market, adding eBook presentation to their PC-like list of features. Even Franklin of organizing fame was in the game. It offered its own reader, the eBookman, which is now marketed by ECTACO and lives in consumer electronics (CE) obscurity. 

The first generation of readers and software did not fare well. But unknown to most consumers and even the tech media and pundits, a second-generation effort, the Sony Reader, has been on the market for over a year. But like its forefathers, it has also failed to gain traction (product page is here). While Sony's recent mixed record with portable CE devices (a successful portable game platform, the PSP, and repeated unsuccessful portable music players) leaves open the possibility that perhaps the Reader's failure is related to Sony design, implementation, and marketing, the more likely and obvious answer is that consumers don't find these devices compelling.

Enter the Kindle 

So what about the Kindle eBook from Amazon? Like the current Sony offering, its hardware is light years ahead of those first-generation products. But the real issue is not screen resolution or battery life. It isn't even an easy, iTunes Store-like buying, managing, and syncing experience. As has always been the case, the challenge is that the Kindle's and its ecosystem -- the reader device, the software, the associated stores, and the content -- are not of significant consumer value enough to overcome the reigning reader champion -- the time-tested hard- and softcover book.

Here are the top problem with eBooks:

• Paper books aren't broken ... and digital books don't add enough. There just isn't much of a compelling reason to invest in digital books. Unlike music, consumers don't need access to hundreds of digital books or access digital book playlists. And unlike portable or in-vehicle GPS devices, a digital copy offers no real advantage over the analog version. Newspapers and magazines are, and they are being replaced by more current and searchable online properties. For example, if you are interested in celebrity gossip, tmz.com has up-to-the-minute coverage of the latest Britney Spears custody news, while the paper version of Us only appears each week. Similarly, your local paper's sports page is, at best, hours out of date -- sports fans will have already read the stories at the online newspaper site or a magazine site, such as si.com (Sports Illustrated).
  
  
• Book readers like the look & feel and navigation system of the old analog models. Digital books encased in eBook readers don't elicit some of the core emotional responses of reading. For example, you can't see the book mark -- a real one or just a handy receipt -- to see exactly where in the book you are. You can't display your digital books around your house. Unlike with LCD photo frames, a digital display of the virtual spine of your books makes no sense.
  
  
• eBook devices compete with more important devices that do much of the same thing. A comparison of eBook readers isn't all that useful, but comparing the Kindle to Apple's iPod touch makes more sense. The iPhone-like iPod touch has a full-featured Web browser and Wi-Fi networking, enabling commuters, travelers, and anyone else to visit their favorite content sites when near a networking hotspot. And don't forget computers. For business travelers, a notebook computer is often a necessary evil (in terms of weight and size). And with the ability to surf the Web, watch movies, manage music collections, and read digital books, the notebook can deliver more. Sure, it's a bigger device -- and its clamshell form factor does not promote book reading -- but it makes more sense to carry one device than two.

Perhaps the most promising new effort in terms of portable content devices is bendable plastic screen technology, but even there, consumers will be only willing to carry so many devices. With multi-function phones/multimedia players with moderate screens, the eBook reader will find few converts.

Digital stores don't need 3D representations

Kinset describes itself as "the leader in the development of 3D immersive online stores" and says that its solutions are aimed at "the needs of high fidelity retail shopping." The company made a little bit of a slash by securing a New York Times article and Boston Globe story on its soon-to-be-released technology. But while Kinset -- or more likely, its public relations firm -- gets a gold star for attracting high-profile mainstream press coverage, the PR coup won't translate into a financial windfall.

It's important to never say never in terms of technology adoption, but it is unlikely this type of solution will become common in the next five years. Why? Because:

• Non-3D online stores are booming. Despite "low tech" features, stores that feature static images and text like Amazon.com are doing well. Navigation -- using product categories and search boxes -- may not be as cutting edge as 3D navigation, but it works and consumers are comfortable with it. Even a non-Web solution like Apple's iTunes Store does not rely on 3D navigation, and business is booming.
  
  
• Retailers have yet to embrace even Web 2.0/RIA solutions. NRG has spent years talking to and following the advances of rich Internet application (RIA) and AJAX vendors like Laszlo, Nexaweb, and Adobe, but despite impressive technology demonstrations, the most recognizable stores have not embraced the technology. In fact, with Amazon's public Web services, almost every vendor in the Web 2.0 space has created an interactive front end to the store, but none has been able to secure a deal to overhaul the store's primary interface.
  
  
• Consumers see stores as utilities, and fancy interfaces can slow down shopping. In the retail world, companies spend millions of dollars on physical store layout. For example, compare the interior of a Wal-Mart to a Target or Best Buy outlet. The layouts of the latter are arguably more advanced, yet Wal-Mart remains the largest retailer in the US by a large factor. Adding 3D interfaces will force consumers to relearn online shopping, and the navigation techniques will only appeal -- or be familiar -- to the small sub-segment used to 3D games, such as first person shooters (e.g., Halo and Call of Duty), role playing fantasy games (e.g., Blizzard Entertainment, Inc.'s World or Warcraft 3D game; see the product page here), and virtual worlds (e.g., see Linden Research, Inc."3-D virtual world" Second Life; product page is here).
  

Final thoughts

In the technology world, its unwise to say a technology will never take off. Undoubtedly, digital books and 3D online shopping will be much more mainstream in 2020, but for the near term, expect the Kindle and the Kinset-powered store to disappear in short order.

Current technology -- whether paper books or current online stores -- function fine, and the leaps of faith needed to embrace these new approaches will take a long time to become mainstream. 

By: Tom Rhinelander, NRG Analyst 

Evolution No. 3

Laszlo has undergone several significant strategic transformations over the years. When we first talked to the vendor more than five years ago, they were easily identified as a core, if not well-known member of the RIA development tools market (overshadowed by the large software vendors, such as Adobe with its Flash technology and Sun Microsystems with its various Java- and Web-based presentation solutions). Now, it's harder to postion them given their current marketing emphasis.

How has the company's strategy changed over the years? Significant eras in Laszlo's history include:

• LPS and cool-looking widgets: Promoting an RIA development tool (2002). With a focus on both Flash -- as in Adobe's presentation technology -- and flash -- as in smooth, Apple-like desiged widgets and solutions -- the company pitched both its development platform -- called Laszlo Presentation Server, or LPS -- and its professional services. Today, the company notes that this launch was the "first rich Internet application (RIA) platform available at that time." While other vendors will debate that claim, there is no doubt that Laszlo has been in the RIA game for many years.
  
  
• OpenLaszlo: Doing the open source thing (Fall, 2004). In October of 2004, the company announced a new strategy: " ... the entire Laszlo platform is now available as open source under the Common Public License .... " (read the release here; the CPL license is explained here). As part of this announcement, the LPS was renamed OpenLaszlo.
  
  
• Laszlo Webtop: Licensing a modular application framework (Fall, 2007). As mentioned previously, this fall, the vendor announced an enhanced version of the Laszlo Webtop, calling the product "its flagship commercial offering" (press release is here). In the original Webtop introduction release from last March, the company described it as "... a commercially licensed software product built on OpenLaszlo that uniquely combines the functionality and ease-of-use of a conventional desktop user interface with the ubiquity of browser deployment" (press release is here). This was just a few days after the vendor formally released an Ajax-ready version of OpenLaszlo (the Flash runtime is still available). Two years before, the company had first hinted at this strategy when it discussed "a new Digital Life suite of licensed applications." A year before that, it had publicly previewed its mail application.
  

Why all the major strategic shifts? Laszlo's meanderings reflect the overall RIA market, and more specifically the inability of RIA vendors to prosper solely by licensing RIA development tools.


Different RIA year, still limited RIA market traction

RIA has never been a major success -- as a development paradigm, an accepted and understood term, or a hot technology. The vision is still compelling: interactive Web-based applications with minimal client-side software installation and minimal bandwidth requirments. Those promises were valid when they were proposed with the first RIA offerings and remain so today, although the issue of bandwidth is less critical in today's broadband world. But even with maturing and brand new RIA solutions, the market remains in the doldrums. Veteran and fresh RIA vendors valiantly promote an optimistic future, but users don't have the same interactive client vision as vendors.

Some startups have disappeared (Droplets), some continue to look for the right technology (Sun Microsystems), some are lingering in the RIA market netherworld (Curl), some are still struggling to gain developer traction (Adobe), some toil on trying to hit the big time (Nexaweb), and others are just getting into the game (Microsoft). All the while, hand-coding and still rough open source toolkits for adding Web page interactivity, such as the Dojo Toolkit (visit the Dojo Foundation here), are making strides and threatening to undermine the RIA tool market.

Almost once a year, we write about the RIA market, wondering if this is the year the compelling nature of the promise will attract individual developer -- and perhaps more importantly, CIO and IT executive -- interest. For example, in 2005 we published a post titled, "Next-generation Web app frameworks deliver results" (read it here). A year later, despite the continued popularity of Ajax solutions in consumer mapping services and a handful of other Web apps, not much had changed when we wrote another post, "With AJAX and SOA, RIA is even more compelling and less risky" (read it here). With this post, once again we discuss market promise but focus on vendor struggles. Will we write about RIA challenges once again in 2008, or is it time to shift the discussion?


RIA versus page augmentation: The difference does matter

Some would argue that the RIA market is, in fact, picking up steam with the industry adoption of Ajax technology. Ajax leverages industry standards, such as JavaScript, CSS (cascading style sheets), and XML (extensible markup language). Google Maps was the initial solution that put Ajax on the radar for technology enthusiasts and CIOs alike. Flash-based Web page augmentation has also been popular, with YouTube the poster child for Flash's acceptance. But Ajax and Flash success stories have so far been about partial Web page augmentation -- essentially, adding interactive elements to a static Web page -- so it is hard to argue that Ajax adoption and RIA adoption are one and the same.

While discussing Web page augmentation and RIAs may seem like splitting hairs, there is a reason to view the two as different animals. A "true" RIA is an end-to-end application, with an interactive, Web-browser application frontend tied to a server that integrates with other systems and data sources -- all of which is created in a single development environment. The development environment enables code management, easy widget creation and reuse, and has hooks into server-side applications and databases. Simply crafting a client app to backend data sources using a solution like Dojo may get the job done, but it won't satisfy IT shops that need to model, document, enhance, and maintain the solution over years.

So while the gap between page augmentation and RIAs is somewhat fuzzy, the folks who understand and will invest in an RIA platform will know exactly why they choose that path. For the rest of the industry and its observers, most will ignore the nuances and be happy to simply scroll through their maps or drag and drop their Web-based email.

By: Tom Rhinelander, NRG Analyst 

The digital music store will complement Amazon's existing sales of physical CDs. Its primary competitor will be Apple's very successful iTunes Store (iTS). The most important aspects of Amazon's new offering are:

• Files are not wrapped with digital rights management (DRM) technology. DRM is technology that controls how, when, and where a media file, such as a song, can be played. Files without DRM can be copied and played on any device, can be emailed to friends, and can be burned to a CD unlimited times. Only the service's terms of use and accepted copyright laws -- and the users willingness to obey them -- will keep these files from being illegally traded.
  
  
• Songs are in the MP3 format. MP3 is a music file format that can be played on any PC or Mac and, more importantly, any portable music player. Previously, almost any major non-Apple iTunes store relied on Microsoft for DRM technology. The result was that the music could not be played on an iPod. With MP3 files without DRM, any device can store, access, and play or stream the Amazon files, including an Apple iPod, a Microsoft Zune, and a Sony PlayStation.
  
  
• The store is a Web page. Unlike Apple's iTS, Amazon MP3 does not require that users have or download and install a PC or Mac application. For existing Amazon customers, shopping for digital music will feel the same as shopping for other products. The only difference will be a platform-specific download helper application -- the Amazon MP3 Downloader -- designed to make it easy to mange the process of downloading a file and importing it into a music management application.
  
  
• It has some major label support. The Amazon store launches with music from two of the big four music labels: EMI and Universal Music. Apple only has EMI support for DRM-free downloads (all other major labels sell through iTS, but with Apple's DRM, called FairPlay, attached to the files). Given that Apple CEO Steve Jobs has refused to allow the labels to have hardly any variable pricing -- think of popular songs costing more, older songs selling for less -- expect more labels to sign up with Amazon.
  

No security on any available song 

As mentioned previously, the most interesting aspect about Amazon's offering is that all of the digital tunes are available without DRM. DRM is the technology and music industry's term for a software control wrapper around media files, including audio files, that limits the use of that file. The software on a computer or digital music player will check with the DRM in the file and compare that to the rights of the user. Those rights, usually stored on the local device, such as a PC or portable MP3 player, but tied to the servers of the DRM-managers (usually a store or a technology provider, such as Apple or Microsoft), determine allowable activities, such as who can play the song, how often, on what devices, and whether it can be copied to a CD.

In the service's FAQ (read it here), Amazon makes it clear the advantages of foregoing DRM:

DRM-free means that the MP3 files you purchase from Amazon.com do not contain any software that will restrict your use of the file.

Prior to digital downloads, consumers almost never encountered DRM-encumbered media. However, the popular iTunes Store from Apple introduced the concept to many users -- often in a surprising manner -- when they tried to do something not allowed by the DRM system, for example, emailing a song to a friend or attempting to play it on an unauthorized device. In both cases, the music wouldn't play.

Amazon's new digital download store offers only DRM-free content, a first for one of the major music retailers.* As the retailer noted: "Every song and album on Amazon MP3 is available exclusively in the MP3 format without digital rights management (DRM) software." That's a positive step for law-abiding consumers, but it also will limit availability of music at Amazon's store. Not every label, major or independent, has seen the light of selling DRM-free tunes. Of the four big labels, Warner Music and Sony BMG still have not decided to abandon DRM.

[* Note that eMusic (site is here) already offers independent, DRM-free music -- for a monthly subscription. The company has said that it offers "2 million tracks from more than 13,000 independent labels spanning every genre of music" and "sells music in the universally compatible MP3 format." While eMusic and its fans will no doubt complain, it is still not a major retail player in terms of market share or consumer awareness.]

Labels hope to limit iTS power with competitors like Amazon 

The success of Apple's iTS took the music industry by surprise. Every other company that had tried to sell digital music made little headway with mainstream consumers, but Apple's popular iPod line, its free iTunes music management software for Mac- and Windows-based PCs, its heavy promotion of gift cards, its relatively light DRM restrictions, and its simple pricing helped make the store popular with consumers. As iPod popularity grew, consumers began to buy more from the iTS. As a result of both time and success, the iTS catalog grew, and international versions of the store were launched. To the labels, it seemed like overnight that Apple had suddenly become a major threat with the apparent power to dictate how they could distribute their content.

From the major record label perspective, the Amazon store represents a real opportunity to slow down the growth -- and power -- of Apple. As such, Universal Music joined EMI -- the only company licensing DRM-free music to Apple (DRM-fee tracks at the iTS debuted in May; read the release here) -- in allowing its content to be sold on the Amazon store without any controlling software. Amazon trumpeted the fact that it had more major label support. According to the release, the Amazon store has the largest DRM-free catalog:

 ...  new digital music download store with Earth's biggest selection of a la carte DRM-free MP3 music downloads. Amazon MP3 has over 2 million songs from more than 180,000 artists represented by over 20,000 major and independent labels.

While the major labels and Apple won't talk about specifics, the implication is clear: The labels are unhappy with Apple's dominance and its refusal to embrace variable pricing. Helping a competitor like Amazon is about trying to level the digital music store playing field.

A good thing for consumers

For consumers, the launch of Amazon MP3 is to be welcomed. Choice is always a good thing, but with digital downloads, choice has never really been available -- only choice of who's DRM ecosystem to be part of (Apple's or Microsoft's). Why is the store so good from a consumer perspective?  Because it offers consumers many benefits, including:

• No technology restrictions on music use. DRM-free MP3s mean that consumers don't have to worry about authorizing PCs or counting the number of CDs that are burned. They can even email files to friends. Of course, sharing music will break copyright laws and the Amazon terms of service, but at least the DRM-free stores like Amazon will put the responsibility on consumers, rather than assume all buyers are potential criminals.
  
  
• Some lower prices than iTS offerings. The Amazon press release noted, "Most songs are priced from 89 cents to 99 cents, with more than 1 million of the 2 million songs priced at 89 cents. The top 100 best-selling songs are 89 cents, unless marked otherwise. Most albums are priced from $5.99 to $9.99. The top 100 best-selling albums are $8.99 or less, unless marked otherwise." Price competition is always in the benefit of the consumer.
  
  
• Browser and operating system independence. Shoppers can use whatever browser they prefer. The only use restriction is that the download tool -- the Amazon MP3 Downloader -- will look for the computer's default browser, so using a non-default browser may impact the experience. Mac users will need the latest version of the operating system (10.4.x), while Windows XP or Vista users can run the Microsoft-specific software. The retailer notes that Linux users can still buy single songs, but that a Linux version of the download tool is "under development."
  
  
• Digital and physical albums in the same place. When an album or an artist's offerings are not available in the DRM-free, digital download form, Amazon offers to sell users a physical CD. While not optimal for the customer who wants to go all digital, the opportunity to buy a CD will do two things: 1) Enable consumers to get any music they want, though they will have to wait for the CD and then rip it to their PC; 2) Help demonstrate to label holdouts that consumers want digital downloads and are willing to pay for them (Amazon will obviously track purchases of physical CDs made off the MP3 store).

By: Tom Rhinelander, NRG Analyst

Round No. 1: An uncommon sneak peek and dribbles of information get the PR avalanche started

In a rare pre-launch look at an Apple product, the normally secretive CEO Steve Jobs discussed the product in January -- a full six months before it would be available for purchase (see this post). The company noted that two models would be available. The models were to be based on their flash memory capacity. A 4 GB model would retail for $499, while an 8 GB model would sell for $599.

The media, tech community site, and blogger coverage -- articles, posts, and thousands of comments -- on all aspects of the forthcoming device kept the product in the tech and mainstream news and on potential customers' minds. The PR buzz was kept alive by continual speculation as well as occasional information on the product from Apple and the iPhone's sole wireless carrier, AT&T (which now included former Cingular customers). Even negative aspects of the phone, such as the lack of a true software development kit (SDK), kept tech enthusiasts discussing its eventual arrival.

Round No. 2: The iPhone launch and early results keep the free PR flowing

In mid-June, Apple provided a firm availability date for the iPhone: US customers could purchase their own on June 29. In an event that received another wave of attention by the mainstream, tech media, community sites, and blogger -- perhaps more so then the initial preview because of the subsequent hype -- customers lined up for their iPhones that Friday. Initial reports of AT&T being unable to activate many of the phones fed a new round of discussion: Was AT&T unprepared for the launch, or were there simply too many iPhone customers? Again, the initial event and the follow up created more Apple and iPhone coverage. The mainstream media, such as the Washington Post, provided triple-coverage as it noted both the launch, the initial activation problems, and the eventual improvements to the device's activation process.

More iPhone coverage resulted as a result of the first official word of the product's success from Apple. In late July, Apple announced its third quarter financial results. The release quoted CEO jobs saying, "iPhone is off to a great start—we hope to sell our one-millionth iPhone by the end of its first full quarter of sales ... ” Then, in late August, AT&T announced its quarterly earnings, delivering some eagerly-awaited iPhone sales data in the process:

Sales of the Apple iPhone have been robust. The June 29 launch allowed for less than two days of sales and activations before the end of the quarter. In that time, AT&T activated 146,000 iPhone subscribers, more than 40 percent of them new subscribers. Sales of the iPhone continue to be strong in July with store traffic above historical levels. 

This news sparked yet another flurry of iPhone coverage. Again, many pundits and enthusiast speculated as to whether the new AT&T data was proof of weak iPhone sales or the result of AT&T's inability to activate new subscribers -- particularly those switching form other wireless providers. 

Round No. 3: A massive fall price cut generates two more PR tsunamis

On Wednesday, initially lost in the noise of the revamped iPod family, Apple announced that the iPhone would receive a significant price drop. The 4 GB model would be sold only until supplies ran out (the closeout price was not mentioned, but turned out to be $299) and the sole remaining model -- for the time being -- would be the 8 GB offering, now retailing for $399. This represented a massive 33% price reduction for a product that had only been on the market for about two months.

Once the price drop was noticed, the media, community sites, and bloggers wanted to know why the company had dropped the price so much so soon. The company release only noted that the change would make the iPhone "affordable for even more customers this holiday season." but for the early adopters who had paid $200 for the product just days to two months ago, there was no mention of a rebate. Online discussions, articles, and posts were rampant with angry comments from early adopters and those advocating for early adopters. In another bout of speculation, commentators wondered if the price reduction demonstrated that the product was not selling up to expectations. Some wondered, did Apple knowingly ring profits from eager early adopters, only to anger them months later?

Apple weathered the growing negative PR storm for just a few days. On Friday, Apple responded. The company posted a letter from its CEO on its site. In the open letter -- similar to other well publicized letters that Jobs has posted recently -- the CEO said:

• He had heard from many existing customers and was ready to apologize. He wrote, "I have received hundreds of emails from iPhone customers who are upset about Apple dropping the price of iPhone by $200 two months after it went on sale." Later, he noted that, "We apologize for disappointing some of you, and we are doing our best to live up to your high expectations of Apple."
  
  
• Despite making the right decision, Apple needed to reward early adopters. He made three observations. First, he said the company stood by the reasoning behind the price cut: "... we are making the correct decision to lower the price ... " Second, he noted how these types of actions are part of life in the tech industry: " ...  the technology road is bumpy ...  there is always someone who bought a product before a particular cutoff date and misses the new price ..." Finally, he said that despite observations 1 and 2, early adopters should be treated better by the company: "... we need to do a better job taking care of our early iPhone customers ..."
  
  
• Apple would offer customers credit worth half the price cut. Jobs outlined how the company would "do the right thing for our valued iPhone customers." The reward for early adopters would be a $100 store credit at the Apple online or physical stores.
  

Competing mobile phone software providers, handset manufacturers and other wireless carriers could only watch in frustration as more waves of iPhone publicity filled the Web, TV, and print media. The discussion of the apology and coupon fueled yet another round of iPhone frenzy as online commentators debated whether Apple's move was based on misunderstanding early adopter reaction or a carefully pre-planned PR stunt.

Planned or not, Apple's 9-month iPhone marketing adventure has succeeded beyond any realistic goals. Awareness of the iPhone, the Apple brand, and the company's other products, such as the iPod music and video players and Mac line of computers, has received a massive boost. 

Rewarding early adopters is not new: The Aperture 1.0 to 1.1 incident

While some online commentators held that the iPhone price reduction and subsequent coupon were all part of a Apple master plan to generate PR, giving back money -- or more accurately, rebates and coupons -- to early adopters is not something new for Apple. Just last year, the company faced a similar customer backlash and responded with a similar offer.

In October of 2005, the company announced version 1.0 of Aperture, its post production professional photography application. The program, to be available the following month, had a list price of $499. Six months later Apple announced the immediate availability of Aperture 1.1. The release noted that this version, free to those who had bought the initial product, offered "dramatically improved RAW image rendering" and "impressive speed gains." These improvements directly addressed some of the applications harshest critics, such as the well publicized critical review at Ars Technica in which the review had said, "At this stage Aperture is a big, expensive misfire and considering the hefty price tag, I can't think of a reason to recommend it." But the big shock was not the improvements, which were expected. The surprise was that Apple was dropping the price of the product by 40% -- to $299. An as a "thank you for their support," the company offered all Aperture customers a $200 coupon for use at the Apple Online Store.

The positive reaction in the Aperture-concerned niche of the tech industry set the precedent for the iPhone coupon that would follow next year. Whether planned or not, Apple could look back at the Aperture rebate program and gauge the reaction of the iPhone coupon strategy.

Lesson for tech vendors: Can'ts, coulds, and shoulds 

In reality, it doesn't really matter whether the most recent iPhone PR was the result of a blunder or the product of brilliant -- if manipulative -- marketing. Tech vendors can learn from iPhone's marketing campaign, although many of the particulars that led to the PR coverage are not reproducible by other companies. Most marketing executives:

• Can't ... have their own Steve Jobs. There are certainly some personalities in the industry -- now and in the past -- from Microsoft's Bill Gates to Sun Microsystems' Scott McNealy to IBM's Lou Gerstner. But no one has captured the media and tech enthusiasts interest the way Steve Jobs has. He creates publicity -- positive and negative -- through his very presence, whether its wearing black turtlenecks or announcing "one last thing" at company conferences. His recent foray into open letters espousing doing away with digital rights management (DRM) and his battle with NBC over the price of TV shows only add to his persona.
  
  
• Can't ... tap into a huge pool of those who love the company and its products. Consumer products generate the most enthusiasm, and about the only other companies and products that can generate such rabid media and blogger response are the handheld game/game console suppliers. But while those entertainment products may be inspirational, the company executives enlisted to promote their products fail to create a Jobs-like reaction. For example, gamers rabidly devoured any news of the next-generation consoles before they launched, but only a hardcore few new of the Microsoft, Sony, and Nintendo executives in charge of those products.
  
  
• Could ... try and focus on every little detail. From its product unboxing experience to its minimalist ad campaigns to its product fit and finish, Apple seems to spend time and resource on the little details. In fact, many tech-oriented sites rush to be the first to publish pictures of the unboxing experience for new Apple products. This has led to similar coverage of other products being unboxed, but Apple seems to gain the majority of free PR in this niche area.
  
  So why can't other companies offer similar fit and finish? The problem for most companies is that they don't connect detail with profits. In fact, most connect minor details to avoidable costs. A marketing executive hoping to follow the Apple model will have to convince the CEO that fine details lead to dollars.
  
  
• Could ... try to create interest through limited exposure. One of Apple's marketing strengths is its ability to surprise the market. Despite nearly every tech site -- whether Apple-centric or not -- reporting on future Apple products and speculating about upcoming events, the company manages to surprise the market and professional and armchair analysts. For example, few expected the entire iPod line to be revamped, let alone the iPhone to see such a dramatic price drop. Yes, sometimes rumor and other tech sites do uncover future products and news, but their track record is such that even those reports are not fully believed by readers.
  
  For marketing executives, the biggest obstacles to secrecy is the industry's need to test its offering with beta releases as well as the belief that early news seeding will increase market interest. However, secrecy can be applied in a limited fashion. Apple engages in both secret and pre-release activities. For example, few industry watchers expected Garageband when it was first unveiled, while the next-generation, dual-platform Safari Web browser has been in beta since June.
  
  
• Should ... reward your early adopters. In one area, companies can mimic Apple's recent trend to reward early adopters (planned or not). Providing special treats for those who jump on board at first launch -- whether small, such as company trinkets, or more substantial, such as free software -- can go along way to creating happy customers and positive PR. The practice of rewarding the public for its help has taken root in the software bug and security vulnerability world. In many cases, vendors will now credit the individual or organization that brought to light a specific coding defect. Similar public recognition could be applied to those willing to be beta testers, such as having their names coded into credits or even buried in application Easter eggs.

From the rankings, the research firm noted a number of findings, such as the fact that technology sector brands experienced the 5th highest growth of all industries in terms of its collective brands.

And the winner is ... The Google! 

So how did technology brands fare? According to the results Google was the top global -- not just technology -- brand. Other interesting findings from the rankings include:

• Google was No. 1, driven by a 77% increase in its brand value. Online portal and service competitor Yahoo! saw its brand value drop 6%, which resulted in a No. 42 showing.
  
  
• While Microsoft may be losing the recent PR war to Apple, it soundly beats its smaller rival in the rankings. Microsoft came in at No. 3 as the technology company with the second highest brand value, while Apple only manged to secure 16th place. For Apple fans, the good news is that Microsoft's brand value was down 11%, while Apple's was up 55%. In fact, Google and Apple were the only two tech companies listed in the top 10 brands with the highest momentum list.
  
  
• Nokia checked in at 12, ahead of Apple but not growing as fast in value (19%). It will be interesting to see the impact of Apple's forthcoming iPhone (see this previous note) on next year's rankings of these two soon-to-be mobile phone competitors.
  
  
• IBM made it to No. 9, finishing ahead of No. 15 HP and far ahead of No. 37 Dell. Of those three, though, only HP was gaining in brand value (27% for HP, -7% for IBM, and -24% for Dell).
  
  
• Despite its PS3 pricing and delay issues and disastrous CD DRM missteps, Sony's brand was up 22%. However, the bad news is that the brand only ranked at No. 55, one step behind Canon and more than ten from No. 44 Samsung.
  

Comparisons to Interbrand/BusinessWeek 2006 results

The 2007 BRANDZ rankings are notably different than the more well-known global brand rankings by the team of brand consultant Interbrnad and BusinessWeek. Those two organizations' rankings emerged last year in late July (click here for the report), so it will be interesting to compare this year's results -- available this summer -- with the BRANDZ rankings noted above.

In the Interbrand/BusinessWeek "Best Global Brands" 2006 report -- the 6th year of the effort -- the rankings were determined based upon a different methodology than used by Millward Brown Optimor. Acccording to last year's release, here's how the Interbrand/BusinessWeek rankings are determined:

Brand value is calculated as the net present value of the earnings the brand is expected to generate and secure in the future for the time frame from July 1, 2005 to June 30, 2006. To be considered the brands must have a minimum brand value of US$2.7 billion, achieve about one third of their earnings outside of their home country, have publicly available marketing and financial data, and have a wider public profile beyond their direct customer base.

According to this methodology, in 2006 Coca-Cola was No. 1 in terms of brand value, while Google was at the 24th position. Microsoft came in at No. 2, while iPod developer Apple only made it to the No. 39 spot. IBM also fared better at No. 3, while Intel followed at 5.

Rankings = Entertainment and perhaps some new business ... for the ranking companies 

What do these results mean? Is Google really No. 1 or No. 24? For companies with high rankings -- particularly rankings higher than competitors -- the results will increase marketing staff morale, but they most likely won't lead to increased sales.

Much as vendors cherry pick the results from press articles and analyst firm reports, tech vendors will selectively promote the brand rankings results that favor them. For the rankings' providers, the resulting heated debate will undoubtedly increase their name recognition and perhaps lead to more business. For the rest of the tech industry and observers, the rankings are simply a fun read and an excellent source of debating material.

By: Tom Rhinelander, NRG Analyst

Apple TV and the PC-TV divide 

The Apple TV set-top will help bridge the traditional divide between the PC and the TV -- in this case, the divide between computer-centric Apple iTunes video content and the consumer electronics world of TVs and surround sound audio systems. Previously, iTunes users could cobble together solutions using Apple (Airport Express, Mac mini, etc.) or third party products, but it was not a simple, seamless out-of-the-box experience. But with the imminent arrival of the $299 set-top, Apple is finally offering its Mac and Windows customers an easy way to bridge the PC and CE divide.

Not usually the first, but usually compelling 

It's important to remember that it just does not matter that Apple TV is not the first product to help play PC-based video and audio content on TVs and surround sound systems. The iPod was not the first portable audio player the and Mac operating system interface was not the first graphical desktop, but both redefined the digital audio player and PC markets, respectively. This new set-top box will succeed because it allows Apple to excel at what it does best -- solving difficult technology usage problems in a way that reduces or hides the complexity of the task. Naysayers and those who dislike Apple can argue all they want about the fact that the Apple TV is not new or not innovative or is too expensive for their tastes, but those same arguments could be made for many other successful Apple products, such as the iMac, the iPod, and ITS audio and video content. All that matters in the end is consumer adoption -- not the approval of posters at technology community sites.

Besides interest, customers will need the right software, networks, and TVs

What will define the potential market size for the Apple TV? Consumers first and foremost must have the desire to view or hear ITS content on CE devices. They must also be willing to spend $299 on an additional set-top (they most likely have a cable or satellite box, and maybe a personal video recorder). And last but not least, they will need all of the following:

• A Mac or Windows PC with iTunes. iTunes software (version 7 or later) is a free download and available on both Mac OS X and Microsoft Windows XP computers (a future update will support Windows Vista).
  
  
• A high-speed wireless or wired home network. Most discussions of the set-top revolve around its wireless networking capability (using 802.11b/g/n), but the product will also work with a wired network (10/100 Base-T Ethernet). See this Apple page for more technical details.
  
  
• A modern TV. Apple product literature says that consumers using the set-top will need a "widescreen (16:9) enhanced definition or high definition television with an HDMI, DVI, or component video input."
  
  Enhanced definition TV, sometimes called EDTV, can be as "low" as 480p (it is not 480i, the standard definition for analog TV in the US). The sweet spot of the high definition (HD) TV market these days in terms of quality and price is a 720p-capable set (that can down convert 1080i signals if necessary), with high-end products supporting 1080i and 1080p. Apple TV product literature notes that the set-top supports current ITS video with a resolution of 640x480, as well as video with a resolution of 1280x720 (720p).
  
  
• iTunes video and audio content. Apple-centric consumers have been able to hook their computers up to their surround sound system with the Airport Express since June of 2004 (see this release), but previously there has been no Apple-branded solution for simplifying the computer to TV connection. With Apple TV, ITS video and audio will be both synced (cached on an internal 40 GB hard drive) and streamed to the set-top from the various PCs in the home.
  

The Apple TV launch is a perfect time to move to HD ITS video

Currently, Apple does not sell high definition video on the ITS (it does offer some movie trailers in HD, in either 480p, 720p, or 1080p formats). But many potential Apple TV customers are receiving HD content on their TV today from a variety of competitors. Microsoft sells or rents high definition video at the Xbox Live Marketplace (not all content is 720p HD video; some is standard definition 480p content). Cable and satellite TV providers offer numerous HD channels and on demand movies, usually in the 720p or the 1080i format. In addition, next-generation DVD players (HD DVD and Blu-ray), including the optical drive in the Sony Playstation 3, support video content that is generally in the 1080p format.

The official release of the Apple TV will allow the vendor to do the inevitable today -- improve its video quality. In October 2005, Apple first announced it would offer video in the iTunes Music Store, and the content it sold -- mainly music videos and some TV shows -- was formatted at the very low resolution of 320x240, which looked fine on the new video-capable iPods but provided a poor viewing experience on progressive screen PC monitors (PC monitors and HD TVs are almost identical) and even standard analog TVs. Last September, Apple announced it would sell full-length movies and that all video sold on the renamed iTunes Store would be delivered at a resolution of 640x 480 -- what it called "near-DVD quality." However, audio was still stereo only, not 5.1 surround sound compatible as on most standard definition DVDs.

It's 720p with surround sound this month ... or sometime soon 

With the release of Apple TV, the company should upgrade its video resolution to high definition quality. Why? Because Apple TV and the current resolution of ITS video will look substandard on HD TVs. The vendor needs to bump up the resolution to 1280x720 (that is, to the 720p format), a high definition standard that will make the video content look appreciably better on the intended TVs. Apple should also deliver support for surround sound in place of its current stereo support. These two enhancements would blunt the impact of competitive HD video offerings and further justify the investment in the set-top.

Could Apple hold off on this migration? Yes, it could avoid a February upgrade. But moving to HD is inevitable, as the Apple TV will create the expectation of high quality video and HD video competitors like Microsoft and the cable companies will market their resolution advantage if Apple does not enhance its own offerings. Besides, for a company that prides itself on innovation and leading technology, delivering Apple TV without HD content would seem -- in the words of typical blogging commentators -- lame.

The downside of going HD 

On the surface, the move to HD video seems like a major benefit to consumers and even to Apple. But of course, there are some negatives for enhancing content resolution. These include:

• Bandwidth and storage issues for customers and Apple. Enhanced resolution content means video files will be much larger (see the above graphic). Not only will consumers have to wait longer to complete downloads (and to start watching a video during the download), but they will also need more storage capacity for the files. For consumers who have broadband providers with monthly download caps, multiple movie downloads could fill up their quota relatively quickly.
  
  For Apple, the larger file sizes will require more storage capacity, and they will require increased bandwidth to support individual purchases and peak download periods (for example, when a popular new movie is available).
  
  
• Complaints from previous ITS video customers. Customers who purchased Cars or School of Rock at 640x480 and in stereo will not be happy when new buyers get the same title for the same price, but this time in HD and with surround sound. Apple has weathered this storm before with its previous resolution upgrade, but it can't avoid the wrath of annoyed users who will saturate the blog posts and comment pages of sites like Engadget and slashdot.
  

By: Tom Rhinelander, NRG Analyst

The red ink still flows in EDD

For the pervious quarter, Microsoft reported sales of $12.5 billion and earnings of $2.6 billion. When broken down by segment, the company reported that its three core businesses -- Client, Server and Tools, and Microsoft Business Division -- were responsible for all of its operating income. The Entertainment and Devices Division (EDD), which produces the Xbox 360 and the Zune, had a $289 million dollar operating loss (a year ago, before the Zune launch, the quarterly loss was $286 million on $1.3 billion less revenue). See the chart below to see the contributions in terms of segments.

The challenge of making EDD profitable 

Where is the money in EDD? According to its most recent 10-Q (Word doc here), Microsoft reports that in the EDD:

• The Xbox is driving revenue growth. "Xbox and PC game revenue increased by approximately $1.0 billion or 76% during the three months ... We sold approximately 4.4 million Xbox 360 consoles during the second quarter and approximately 5.4 million Xbox 360 consoles during the first half of fiscal year 2007. Since the Xbox 360 console was launched in November 2005, we have sold approximately 10.4 million units."
  
  
• Zune, new to the product mix, offered little. The Zune was launched on November 14th of last year -- halfway through the quarter. "Revenue from Zune, consumer hardware and software, and TV platforms increased $260 million or 104% during the three months and $323 or 71% during the six months ended December 31, 2006, primarily reflecting the recent release of Zune, new consumer hardware products, and deployments of MSTV products."
  

But a 10-Q doesn't tell the whole story. There's more to learn, and some insight can be gained from recent  interviews of key Microsoft executives.

Robbie Bach's take: EDD will be profitable by 2008

According to a November of 2006 Mercury News interview with Robbie Bach, President of EDD, the division is on track to be profitable by next year. The interview touched on a variety of topics, including:

• Reducing Xbox costs. "If you looked at the investment in the Xbox over the last four or five years, a significant percentage of that was purely in hardware subsidization." Later he notes: "The engineering team is always thinking about the future. Right now we are thinking about how to cost reduce the Xbox 360. That seems to be the first order of business."
  
  
• EDD profits. "To be clear, we have said that in fiscal 08, Entertainment and Devices makes money. That’s not exactly Xbox. We don’t break profit down by business. And there are parts of Entertainment and Devices that make money. Xbox doesn’t. Xbox has to make significant progress to enable E&D to get there. We feel we are on track."
  
  
• Zune making money. "But, yes, [the investment horizon is] multi-years, just to get back to your original question. It's definitely multi-year."
  
  
• Counting Xbox's sold. "In our case, it’s reasonably close to sold through. To make sure we’re clear, Sony does shipped from factory. We don’t. Our shipped means it has left a distribution warehouse in Memphis to a retailer. There is a big lag of six week to eight-week lag between what we called shipped and what Sony calls shipped. That’s the way we do the accounting."
  

On January 8, Bach spoke at Microsoft's Investor Relations Financial Analyst Briefing at the Consumer Electronics Show (CES) in Las Vegas (get the Word doc transcript here). Highlights of relevant EDD issues include:

• Zune shipments. "In fact, we're on track to hit a million units of Zune by the end of the fiscal year ..." Note that Zune was launched on November 14 of 2006; Microsoft's fiscal year ends in June of 2007.
  
  
• Xbox numbers. "10.4 million consoles sold into retail ... Attach rates really are off the charts.  We're 5.3 games per console right now." As for other Xbox services, he noted that, "Xbox Live, 5 million members and continuing to grow. Our movie download service is doing very well."
  
  
• EDD profitability. "We absolutely expect E&D to be profitable next fiscal year. We're still on track to do that. Nothing has changed that. So that part still completely square, and most of that is driven by the shift in what we're doing on Xbox 360. Financially it's such a big part of the model that we can't get to that number without 360 improving dramatically, that profit profile."
  
  
• Profitable devices. According to Bach, each of Microsoft's key consumer devices requires a different strategy to make money.
  
  
• Xbox: "So the things that make the needle move in Xbox are cost reduction, Xbox Live, games, and peripheral sales. That's the way the business model works. You reduce the cost on the hardware, so you keep that roughly neutral on your P&L, and you drive attach around the rest of the things, that's how you make money."
  
  
• Zune: "In Zune, in a funny way it's almost exactly the opposite, you make the money on the hardware. On the content, the content providers make most of the money, we make a little bit, but most of that money ends up going to the music ecosystem. And peripherals is a positive, but probably not as big as it is on the Xbox side."
  
  
• Mobile phones: "And then in the mobile phone space, you have the royalty rate that we get for the operating system, which is, you know, a much lower number than it would be on Windows, but we have the opportunity for services on top, which is the discussion that was had earlier here about services that we can build on top of that."
  
  
• Media Center PCs: "Relative to Media Center, its predominant role from an economics perspective is it drives people to higher priced versions of Windows. That's great for the ecosystem. It's great of the ecosystem, it's good for us, and we make a little bit more money on that."
  

CEO Ballmer backs up Bach

In a New York Times article on Microsoft CEO Steve Ballmer, the reporter noted the problem Microsoft has in terms of making money on the Xbox:

Still, despite investing billions, Microsoft has yet to show any profit from its video game venture. “Look, the jury is still out,” Mr. Ballmer acknowledges. “But I feel very confident that we’ve built a good market position with Xbox. I feel very confident that we’re on track to make money.”

The company has said the Xbox business, including hardware and software, should move into the black this year, but when, and if, the business will pay back its multibillion-dollar investment is unclear. 

The elephant in the room: The lack of Zune device profits

Losing money on consoles in the first couple of years is now fairly typically, so the challenge of squeezing out a profit on the Xbox 360 hardware is similar to the problem Sony faces with the PS3. However, Microsoft was never profitable with its first-generation Xbox hardware (discontinued after the launch of the 360), while Sony continues to sell tens of thousands of its now profitable PS2 hardware every month (see this International Herald Tribune article). But while its acceptable to lose money in the console space, the issue of Zune red ink is another matter.

Apple generates enormous profits from its iPod players. While it does not breakdown revenue or profits by product, in its recent quarterly earnings report the company said it had a profit of $1 billion on $7.1 billion in revenue and shipped 21,066,000 iPods (versus 1,606,000 Macintosh computers). Previously, the company has said that the iTunes Music store had broken even, but was not a major profit center. Its purpose is largely to drive interest in the iPod, and to some extent, Macs.

In contrast, Microsoft is apparently not only selling its Zune device at a loss, but is also paying Universal Music Group $1 for every device it sells (see this New York Times article). For the vendor, the embarrassment of losing money on each Zune device while its rival Apple makes a good profit on each iPod shows just how far Microsoft has to go to succeed in the challenging CE space. Microsoft certainly has the cash to invest in the business, and with Xbox 360 and Xbox Live, it has shown it can create a compelling offering. But at some point, losing money to gain share won't be tolerated by investors, particularly if Microsoft's key products, such as Windows and Office, show slowing sales and lower profits.

If the EDD can't make money in 2008, Ballmer will have to once again revise his outlook or begin to abandon some of his prominent CE efforts.

By: Tom Rhinelander, NRG Analyst

• To improve their competitive advantage. Knowledge management champions believe that capturing and disseminating critical knowledge will enable employees to make the right decisions quicker, shorten sales cycles, speed up product launches, and create a consistent and high level customer experience.
  
  
• To manage the reality of the job market. Employees and employers have little loyalty these days. With employees often eager to switch organizations, employers ready to downsize at the sign of a bad quarter, and an aging population planning to retire soon, the prospect of organizational brain drain is continuous and real. While KM efforts cannot stop these trends, a KM initiative can hopefully mitigate the impact of these job market realities.
  

Focus on the KM4

The most effective KM systems make useful knowledge readily accessible to employees. The process and technology behind a KM project will differ by organization, but the same basic four principles will apply.

1. Develop measurable project goals. No project should get the green light unless the KM team can highlight business goals that are expected to be achieved. A project may eventually deliver more than promised, but it must, at the very least, create a core justification for its existence. This justification will not only drive initial budgets, but it will form the backbone for creating incentives for knowledge nugget (kn) contribution and create the metrics required for project auditing.
   
   
2. Create effective capture processes. The KM capture process must be user-friendly and mandatory. If the process is onerous, cumbersome, or unintuitive, users will avoid adding nuggets, add the bare minimum required, or simply fill up the KM database with substandard or unreliable kn data. While a voluntary or incentive-laden system sounds appealing, the reality is that participation must be mandatory; otherwise, employees will find valid and not so valid reasons for avoiding inputing nuggets.
   
   
3. Enable intuitive and integrated knowledge access. The KM database will store the nuggets, but the KM team should ensure that users are not limited to simply querying a database. While a central KM database (or knowledge base) will serve as the knowledge repository, the nuggets should be farmed out to a variety of systems and documents using automated technologies to ensure that the latest and most useful information is made available to users. Employees should gains access to kns that are integrated into CRM systems, queried through a KM database tool, and presented in various portals, FAQs, and email newsletters.
   
   
4. Audit the KM project. Did the project meet the goal? Has it delivered more benefits than initially planned? Auditing of a KM project can use hard, soft, or a combination of both types of metrics. Surveying users is also critical. KM auditors should remember that the silent majority -- those that don't tend to fill out forms or send in surveys -- are most l