Microsoft's Next Target: Business Intel


Microsoft announced on Oct. 24 that it would throw a slice of its $15 billion marketing and R&D heft at yet another segment of the business-software market: business intelligence. As the name suggests, this software lets customers gather intelligence on the health of their businesses.

Little wonder it's an attractive target for Microsoft (MSFT), the world's largest software maker. In contrast to other pockets of software, sales of business-intelligence (BI), or analytics software, are rising at a relatively rapid clip -- as much as 20 percent annually. A beachhead in business intelligence will let Microsoft develop tools and programs that let corporate customers plumb the depths of multiple databases and applications to get answers swiftly.

Here's Microsoft's game plan at a glance: On Nov. 1, the company will launch Microsoft Office Business Scorecard Manager 2005. The software will cost $5,000 for the server-software license, and each client-access license will be sold for another $175, a fraction of the price charged by competitors, analysts confirm. Microsoft is also going to add BI features to the next version of Office, code-named Office 12, due for release in the second half of 2006.

MORE COMING. The next version of Excel, the spreadsheet application inside Office, will let users tie into data warehouses and enterprise applications, and cut and slice that data using Excel, says Lewis Levin, Microsoft vice-president of Office Business Applications. Jeff Raikes, president of Microsoft's Business Division, says the company has spent "tens of millions, if not hundreds of millions, of dollars" developing the new BI software.

More is on the way. Levin says Microsoft is working on a raft of other products that will help it compete more broadly against the existing BI leaders -- Cognos (COGN), Hyperion Solutions (HYSL), Business Objects (BOBJ), and others -- in the next five years. "We have been investing, and this stuff has started to pay off," Levin notes.

The move harkened back to other big announcements by the Redmond, (Wash.)-based giant. In the past year, Microsoft has vowed to take on Symantec (SYMC) in security, Intuit (INTU) in small-business accounting, Adobe Systems (ADBE) in graphic design and document tools and, of course, Google (GOOG) in all things search.

"CUSTOMERS TAKE NOTICE." In some cases, the prospect of a turf battle with Microsoft has left investors and analysts jittery. Symantec's stock dropped some 30% as it raced to close a controversial merger with Veritas in early 2005. Some analysts cut ratings on Intuit and Adobe on the heels of Microsoft's threats.

But in the wake of saber rattling by Microsoft on Oct. 24, share prices of two of the largest business-intelligence players, Business Objects and Hyperion, were up, while shares of Cognos fell less than 1%. With sales expected to top $1 billion this year, Business Objects ranks No. 1 in business intelligence these days. Business Objects Chief Executive John Schwarz says Microsoft's move validates the importance of the sector. "It's good in overall terms for the BI landscape," he says. "Any time Microsoft comes out like this it makes customers take notice."

Would-be acquirers may be taking notice, too. Microsoft is hardly alone in eyeing this sector. Before agreeing to be acquired by Oracle (ORCL), Siebel was betting a large chunk of its future growth on BI. Oracle used its recent Oracle Open World conference to outline analytics as a key focus going forward.

AN INEVITABILITY? The comments fueled speculation that a recent buying spree by Oracle CEO Larry Ellison isn't yet over. "You have three $1 billion or so companies battling it out and $20 billion-$80 billion companies eyeing them," Dennis Gaughan, research director at AMR Research, says of Cognos and the other two public BI companies and their potential suitors. "I think one might survive but who that's going to be, I have no idea," he says.

Hyperion may be a candidate for being first to go. It's the cheapest, and it missed analysts' revenue estimates by $1 million when it reported fiscal first-quarter results on Oct. 21. A Sept. 29 AMR Research report named Oracle as a likely suitor, while Germany's SAP (SAP) could answer back by picking off Business Objects, and IBM (IBM) may take a look at Cognos.

Each potential target counters that it has a strong case for staying independent, while acknowledging that consolidation is currently a way of life in software. "All we can do is run great businesses, and if they want to pay a price necessary to appeal to our shareholders, that's their business," says Neal Hill, senior vice-president of corporate development at Cognos. "You look at someone like Oracle, and you have to assume sooner or later they'll look at this space."

A TOP PRIORITY. Of course, all three potential deals have barriers. Oracle, for one, has signaled that it will only do small- to medium-sized deals for now, and SAP doesn't tend to make big acquisitions, building technology in-house instead. As for IBM, Cognos may be not be a good fit for Big Blue's emphasis on services and consulting more than apps. With a market capitalization of about $2 billion, Hyperion is the smallest of the three.

Business intelligence and analytics are not new categories of software, having been around for more than a decade. The industry rings up some $22 billion in annual revenue, if you count all the different types of tools and applications, services, and maintenance revenues. And unlike many areas of software that large, it's still growing -- to the tune of 10%-20%, depending on whom you talk to.

Business analytics is one of the top three spending priorities for businesses' IT departments currently, AMR's Gaughan says. "Customers aren't buying it for the first time, but they're going back and buying more, and trying to standardize on a few key strategic vendors," he explains.

That plays into the hands of Microsoft, Oracle, SAP, and other huge companies eagerly eyeing the growth rates of business-intelligence software. Key to this growth is getting more people within businesses to use the software. However, Microsoft's Raikes maintains existing BI software is too expensive, too inconvenient, and too difficult to use.

TIGHT FIELD. "You've got to find the high priest of business intelligence in your organization" if you want to take advantage of the technology, Raikes says. "At Microsoft, we view that as an opportunity to deliver value," he adds. The company's aim is to build low-cost, high-value BI software -- and crucial to this objective, if it succeeds, is that it gives companies additional reasons to upgrade to Office 12.

While competing companies won't be crushed by Microsoft any time soon, analysts agree there's not room for three big stand-alone business-intelligence software companies. Even if the long-rumored consolidation isn't imminent, these companies need to do something. For all the talk of analytics being a high-growth market, Hyperion is only expected to grow 6% this year. And while Business Objects and Cognos reported second-quarter sales growth of 18% and 14%, respectively, some of that was the result of acquisitions.

For years, the three have been busy buying up smaller players in attempts to outdo each other and offer customers a total package of intelligence and analytics products. Expect one of the three to make an even bigger move, if the Oracle and the SAPs of the world don't. If there's one sure thing in the software business these days -- aside from watching out for Microsoft -- it's this: Start buying, lest you be bought.

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