Servers' Rising Sun

Recent research indicates that overall growth of the worldwide server market has slowed. According to IDC, “Market demand for volume servers waned somewhat in 4Q05, with spending growth of 6.1 percent and midrange enterprise servers posting a revenue decline of 11.5 percent in year-over-year comparisons.” This slowdown, coupled with the, “potential negative affects from increases in server utilization through the use of virtualization technologies,” has lead IDC to “lower midterm expectations for overall server spending.” However, IDC does expect growth to continue; it projects a compound annual growth rate (CAGR) of 2.7 percent over the next five years and estimates that by 2010 customer spending will surpass today’s $55.5 billion to reach $62.8 billion. During the same period regions of rapid growth will include the emerging markets of Central and Eastern Europe, the Middle East, and Africa region, which is showing a CAGR of over 9 percent representing $4.6 billion and Asia/Pacific (excluding Japan), with a CAGR of 5.8 percent representing $9.2 billion. In the midst of the market shift, one company in the arena is shining, Sun Microsystems.

In April of this year Jonathan Schwartz replaced co-founder Scott McNealy as Chief Executive Officer and President of Sun; since then the company has been rolling out new products and continuing to grow. Though gaining it recent attention, and not without merit, some say Sun’s growth needs to be seen in perspective; as Tom Yager of InfoWorld puts it, “having majority share of a dwindling market is nothing to crow about, and that a 10-foot rise from a mile-deep hole is hardly a rocket-like ascent.” However, Yager and others still see Sun’s ascent as unique; in the same article Jean Bozman, research vice president for worldwide server research at IDC, is quoted as saying, “Sun is a standout.” The achievements of Sun are all the more notable since they represent the fact that the company is indeed making its way out of a “mile-deep hole.” According to InformationWeek, the dot.com bust hit Sun particularly hard, “Sun was among the most injured IT companies during the bust, suffering a dramatic drop in shares from about $64 in 2000 to less than $5 last week.” CEO and President Schwartz believes the company is now poised to recover from that blow, “I believe we're in what precedes a bubble, which is global build-out.” he said. Data shows that he is on the right track.

According to Reuters, Sun recently reported that its server business, “returned to growth in the company's fiscal third quarter for the first time in five years, [and] continued growth in the fiscal fourth quarter ended June 30.” Further, “Revenue growth in Sun's most recent quarter exceeded analysts' average estimates.” In its quarterly survey of the server market IDC indicates that Sun increased its share of the worldwide server market 1.7 percent in the three months ended June 30, it now holds 12.9 percent, and that its server revenue jumped 15.5 percent to $1.59 billion for the same period. Though not number one in the overall server market, Gartner reports that Sun is the number one server vendor in the global Unix space.

Putting an interesting spin on Sun’s growth in the Unix space, Schwartz says that since 70 percent of the licenses for Solaris 10, its operating system based on Unix code, are being used with IBM, Dell and HP hardware, competitor growth is actually offering Sun opportunities. These opportunities have helped Sun, however, the company did not get to this position without risk. Most notable among its risks was Sun’s move to open-source Solaris. According to Tom Yager, “The only intelligent argument in favor of taking Unix down was that it was closed source. So Sun took the bold step of open sourcing its crown jewel, Solaris, to take the ‘proprietary’ millstone from around its neck.” Opening up Solaris was a risk, but one that is paying off. Referring to a Gartner report, Forbes says that, “After former Chief executive Scott McNealy's decision to open-source its Solaris 10 platform, the company's Solaris-based servers are now found in the majority of global Unix server shipments, enjoying a 56.9 percent share.”

While Sun may be the leading Unix server vendor, it is not number one overall. However, according to IDC, Sun was the only large computer maker to gain share in the worldwide server market in the second quarter. Sun is indeed moving up; it recently took back the market’s number three spot, one that it relinquished to Dell in the third quarter of last year. In relinquishing its seat Dell moved back to the number four position, dropping to 10.3 percent of the market from 11.1 percent in the first quarter of 2006. It’s revenue slipped accordingly, down 1.3 percent to a year-over-year estimate of $1.27 billion. The number one and two vendors, IBM and Hewlett-Packard Co., also saw year-over-year declines; to 31 percent and 27.8 percent respectively.

Is Sun’s rise indicative of anything? According to Tom Yager it is. “Sun's growth is good news for the entire industry. It proves . . . that trends are useless in predicting the future. Find players with vision, drive and patience, mixed with a desire to please customers as well as shareholders, and it's easy to pick the winners. Sun's a winner.”

More information on this topic can be found at:

Northern Light's Software Market Intelligence Center

and in the following articles:

Sun Ahead in Server Market
ComputerWorld, September 18, 2006
Inexplicably, we've gotten through much of 2006 without Linux completely kicking Unix out of the market. Analysts and Linux faithful are at a loss to explain how Sun Microsystems' server revenue climbed almost 14 percent since the second quarter last year, pushing Sun ahead of Dell in the rankings. Gartner pegs Sun's Unix server market share at 56.9 percent.

BEA Leads App Server Study
eWeek, September 18, 2006
Evans Data is expected to release soon a study on application servers that shows that developers chose BEA Systems' WebLogic server as the No. 1 application server on the market. BEA is expected to play the study result prominently at its BEAWorld conference, which runs Sept. 18-20 in San Francisco, sources said.

Sun to Target Intersection of Storage, Services, Server Markets: Schwartz
InformationWeek, September 13, 2006
Sun Microsystems Chief Executive Officer and President Jonathan Schwartz said Sun would continue to target customers who view information technology as a "weapon" rather than those who view it as a cost to be cut. Speaking at the company's annual media day, Schwartz said the company will expand in servers, software, services, and storage, while focusing on where those areas intersect.

Sun Micro Regains No. 3 Server Spot from Dell
Reuters, August 23, 2006
Sun Microsystems Inc. regained the No. 3 ranking from Dell Inc. in the market for business server computers in the second quarter as it launched new products, researcher IDC said on Tuesday. Sun also was the only large computer maker to gain share in the worldwide server market in the second quarter, according to IDC. Dell had usurped the No. 3 position from Sun in the third quarter of 2005 and held it through this year's first quarter.

AMD's Race for Server Space
BusinessWeek, August 22, 2006
For all its recent success, there's still one major goal that has eluded Advanced Micro Devices, the perennial second-place runner in the market for computer chips. Despite having made rival Intel sweat over the past year by taking up residence in servers and PCs from Dell, AMD has always labored with a long-term goal in mind: a 30% share of the combined market for PC and server chips.

Challenging Vista: Microsoft’s New OS in Europe

Like Microsoft or not, one thing must be admitted about the company: they are big. So big in fact that they are currently seen by some as a threat to the economic plans of the European Union. The perceived threat stems from word that Microsoft, in response to antitrust allegations, may delay the release of its new operating system, Windows Vista, in Europe. The delay depending on whom one listens to, is due to either Microsoft or the EU; in either case the damages could be considerable. Microsoft has already been fined almost a billion dollars, and according to new anti-trust laws in Europe, which allow larger fines to be levied on larger companies, could face even stiffer penalties in the future. As large a fine as that is, the consequences of a delayed European release of Vista for the European economy could be worse. Members of the EU have written to the European Commission warning of the dangers a delayed release could bring; not having the most recent tools, they argue, could hurt the EU’s ability to compete in the world market. This has particular significance now, with the EU in the midst of a ten-year plan designed to develop its knowledge economy and strengthen its global IT standing.

In 2004 Microsoft was fined $640 million for violation of antitrust laws; that ruling is being appealed and the European Court of First Instance is expected to offer a decision next year. In the meantime the EU added an additional $357 million in fines in July for Microsoft’s delayed meeting of obligations to provide technical documentation on several Windows protocols and failure to comply with an order to license information to rivals on how Windows communicates over a network. Currently things are in a stalemate. Microsoft says it will comply with EU regulations if the commission makes them more clear. However, the company also says, according to the UPI that unless things are clarified delivery of Vista may be delayed. From UPI: “Microsoft Corp. is warning Brussels that unless its antitrust policy becomes clearer the company may delay shipping its new operating system to Europe.” The EC has a different view of things, it is their official position that, “It is not up to the Commission to give Microsoft a definitive ‘green light’ before Vista is put on the market. It is up to Microsoft to accept and implement its responsibilities as a near monopolist to ensure full compliance with EU competition rules.”

The crux of the antitrust battle is Microsoft’s bundling of applications into Vista that rival competitor products. This is a concern because Microsoft has the OS running on 95 percent of PCs in Europe, and its ‘near monopolist’ standing, it is posited, could run competitors out of business. Gaining particular attention is Vista’s inclusion of a Windows version of Adobe’s PDF reader. Before talks broke down in June, Microsoft and Adobe had discussed this issue and how to handle it when Vista debuted. Adobe wanted the application to be a paid add-on to Vista, however, under current plans the application, though not bundled, will be offered as a free download for Vista owners. When talks finally ended Microsoft’s chief lawyer, Brad Smith, told the Wall Street Journal, “Adobe has threatened antitrust action unless Microsoft agrees to raise its prices, in particular for the software that would allow Microsoft Office users to save a document in the Adobe PDF format.” Adobe countered in a statement that, “Microsoft has demonstrated a practice of using its monopoly power to undermine cross platform technologies and constrain innovation that threatens its monopolies.” As yet no suit has been filed, but it has been suggested that if Adobe does pursue legal action it is likely to do so in Europe.

While awaiting a possible suit from Adobe, the EU has warned of more fines if Microsoft does not comply; Microsoft’s rebuttal is to delay Vista’s release. The economic impact of Microsoft’s action on the economy of Europe has some quite concerned. Three UK representatives and one from Poland have put their concerns in a letter to the European Commission, claiming that, “This effectively means the EC's actions are endangering the ability of European business to compete globally.” According to Peter Skinner, a UK deputy from the Labour Party, “This would put European companies at a competitive disadvantage with every other company around the world who does have access to these new technologies.” Others outside the European political arena agree with this assessment; managing director of PC World, Keith Jones: “The possibility of a further delay in the introduction of Microsoft’s new operating system Vista in Europe due to regulatory uncertainty would disrupt the computing industry.” Such an occurrence would be particularly unwelcome now as Europe is in the middle of the Lisbon Agenda, a ten year plan meant to create a knowledge-driven economy with a strong global standing in IT. Whatever the results are to the EU, it is suggested that the ‘computing industry’ alluded to might not reside exclusively in Europe, and that Microsoft’s actions could have an impact beyond economics.

Some say that Microsoft, as the dominant player in the PC arena, has an obligation to address problems in that ecosystem. However, instead of working with competitors Microsoft is going solo, an action that could have detrimental effects on the entire industry. Joe Wilcox, an analyst with JupiterResearch: “If there's a problem with bad consumer behavior -- and the major security problem is on consumer PCs -- which affects PCs and causes a threat to the Internet, [Microsoft] should step in and do something. The question is, how that's done. One way is to work with partners, to [develop] the operating system to make sure that their products work better with Windows, and to use [Microsoft's] massive distribution system to get out those products. But instead, it chose to compete with those partners.” Microsoft’s distribution system could ultimately run competitors out of the picture and with them could go innovations and improvements. In this instance Microsoft’s bundling security features into Vista is the major talking point. This bundling, as noted by EU spokesman Jonathan Todd, could be quite harmful. Todd states that the bundling of a security product within, “'its own dominant operating system ... would ultimately harm consumers through reduced choice and higher security risks.”

This current brouhaha may be the biggest that Microsoft has been entangled in since the U.S. antitrust conflagration of the recent past. However, as suggested, the results in the European theater may prove more pivotal to the industry. Microsoft has not been noted for backing down from threats or hailed as a company devoted to the common good of computer users; in fact it is the opposite that they are widely known for. Therefore, complete resolution may be a ways off.

Supply Chain Management

The challenges associated with delivering products and services at the right time and at the lowest cost are increasing as companies face tighter pressure from their competitors and work to expand their global reach. In an effort to maximize revenue amidst competition and globalization in the 1990s, companies delivering products and services began looking at supply chain management (SCM) as a new piece of the puzzle; improving internal efficiencies was no longer enough. As competition and globalization continued to increase companies realized the importance of streamlined supply chains and turned to SCM solutions for help. Forrester Research, which in the past few months has issued several reports on the topic, defines SCM as, “the business process of managing the complex interaction of products, materials, equipment, labor, and cash as they flow through the supply chain and fulfill customer demand.” This, according to a recent article in The Journal of Computer Information Systems, is something to keep an eye on: “The understanding and practice of Supply Chain Management (SCM) has become an essential prerequisite for staying competitive in the global economy and for enhancing profit.”

However, despite the current market for SCM solutions, research indicates that companies in need of solutions are often disappointed with their options and results. Forrester reports that according to a recent survey, “manufacturers and retailers stated that they face . . . persistent disappointment with returns on current technology investments. Worse yet, firms realize that widely accepted supply chain strategies are inherently ill-suited for these new challenges.” As those in need wait for improvements beyond their control, they are doing what they can to cut down on associated costs. In an increasing number of scenarios, particularly among small and medium sized businesses (SMB) where IT constraints are tighter, the need to control expenses has lead to increased adoption of a model that until recently was perceived as unworkable; hosted or Software-as-Service (SaaS) solutions.

In hosted or SaaS solutions a third-party provider is paid to host, implement, maintain, and upgrade an application. This model, which puts the burden on the provider, offers substantial benefits; it saves on implementation costs, cuts down on in-house IT man-hours, and ensures that the most up-to-date version of the application is being utilized. As Network World puts it, “Going the software-as-a-service route lets companies avoid the capital investment and complex deployment associated with conventional licensed applications.” However, due largely to the fact that this model introduces third-party handling of proprietary data into the equation, it has, until recently, been adopted only with hesitation.

A piece appearing in this month’s issue of CIO magazine has Beth Enslow, Aberdeen Group's senior vice president of enterprise research, saying, “concerns about data getting lost or stolen and system reliability prevented companies from entrusting their mission-critical supply chain activities to third parties.” Now this perception is changing; the same article quotes Bill McNee, founder and CEO of Saugatuck Technology, “Security is a baseline requirement . . . Whereas that was more of a concern two to three years ago, virtually all software-as-a-service players have overcome that.” At the same time the security of hosted solutions is improving, the SaaS model is getting attention in the SCM arena because it has proven itself outside of it. The most notable proving ground has been in the Customer Relationship Management (CRM) space where the success of companies such as NetSuite, Salesforce.com and Salesnet has proven the viability of SaaS.

In November of 2005 Forrester, “surveyed 603 technology decision-makers and enterprises in North America to find out how they plan to invest their supply chain software and services budgets in 2006.” Overall 17 percent of companies surveyed stated that they will invest in supply chain software-as-a-service deployment; the number jumps to 25 percent for smaller companies with limited IT bandwidth. In reporting the numbers, Forrester points out that companies are more likely to implement a SaaS model for ERP and CRM than for SCM, and in doing so makes the growth in this area seem somewhat less substantial. However, AMR Research sees it in a different light. AMR reports that 26 percent of companies are considering hosted solutions as an option and that in 2005, application hosting, “was the fastest growing SCM delivery model, at a 16 percent growth rate.”

In whatever light the growth of hosted SCM solutions is seen in, it remains only one option. What is clear is that there will be a continued need for SCM and that this will drive innovation in both hosted and non-hosted solutions. However, it may be a while before things take root. According to Mark Hillman, senior research analyst at AMR Research, “New business focuses and pressures are driving pockets of vendor innovation and renewed corporate spending in supply chain initiatives . . . However, spending is tempered by the fact that corporate supply chain organizational maturity is still relatively low, limiting adoption.”

Making a Move on China’s Internet

Porter Erisman, VP for Chinese trading website Alibaba (China’s version of eBay) said recently, “The Internet is at the core of community. If you look at online communities in the West... in China it's like that but on steroids.” Numbers from a recent survey conducted by the research firm China Internet Network Information Centre (CNNIC) reinforce his thought; the Internet in China is growing and growing rapidly. China is currently the number two Internet market and it shows no signs of slowing down. All this growth means a large market, and where there is a market there are those that wish to conquer it. However, China’s Internet market does not present an easy victory, particularly for foreign companies unfamiliar with Chinese culture and regulations.

According to CNNIC’s survey the number of Internet users in China has reached 123 million. This represents a 19.4 percent growth since June 2005 and an increase from the previous year-on-year growth rate of 18.4 percent. The number of users accessing the Internet via broadband connections has also increased; at the end of June the number was 77 million, an increase of 45 per cent over June 2005. Demographically the, “CNNIC survey showed 82.3 per cent of people using the Internet in China are below 35 years old and almost 40 per cent of the Internet users are aged 18 to 24.” The number one activity according to the survey was shopping which was followed closely by blogging; 26 percent shopped online ‘frequently’ and 23.6 percent say they participate in blogging. All this growth is not going unnoticed, and both shopping and blogging reveal some of the challenges of dealing with the Internet in China.

According to the Wall Street Journal, “As China's Internet booms, homegrown businesses are often reaping the biggest rewards -- a departure from many other consumer industries in China where foreigners have dominated.” The success of domestic online businesses in China, the Journal suggests, is due to two challenges facing foreign companies trying to break into business on China’s Internet. Challenge number one is the need to adapt business models to the culture; the Chinese preference to pay cash-on-delivery for goods ordered online is a good example. In China, where credit cards are not the norm, businesses supporting cash-on-delivery can thrive, those that cannot can be left behind. This model flies in the face of Western dominated models and illustrates how local businesses can take root quickly. Dangdang a Chinese company catering to cash payments has been so successful that it thwarted a takeover from its foreign rival, Amazon.com Inc. Alibaba, a Chinese version of eBay, is another example. According to Alibaba’s VP, “eBay came here first. They had a four-year head start. The problem was that they never created a local product. Our team built something totally unique for China and surpassed eBay very quickly.” A second challenge facing foreign companies moving in on China’s Internet is that, “China's Internet regulators have made it difficult for foreigners to participate in Internet businesses.” The difficulties referred to include limits set on foreign ownership, and for companies providing content, adherence to Chinese censorship laws. Challenges or not, the market has so much potential that foreigners just can’t leave it alone.

One investor with sites on China is MySpace founder, Brad Greenspan. Greenspan announced this week that he has founded an investment group called BroadWebAsia which has taken stakes in 20 Chinese Internet companies that focus on entertainment and social networking. In an effort to navigate the difficult regulatory waters in China BroadWebAsia has focused on investing in already-established Chinese companies. Alluding to the challenges imposed by government regulations Greenspan said, “We're working with Chinese entities who have already thought out those issues.” But established foreign Internet companies want China’s business too, and they often find themselves challenged as much domestically as by China.

A recent report from New York-based Human Rights Watch accuses Google, Microsoft, Skype, and Yahoo!, of complicity with China’s censorship rules as the companies try to conquer China. Though this 141-page report which, “illustrates how various companies, including Yahoo!, Microsoft, Google and Skype, block terms they believe the Chinese government will want them to censor” was longer presented a more extensive and thorough litany of criticisms than most, it was far from the first attack on these and other companies making similar moves. CNNMoney says, “The report was the latest in a wave of criticism against Western Internet companies operating in China which are accused of compromising their principles by censoring searches and blog titles and blocking politically sensitive terms in order do to business in the world's number-two Internet market.”

As stated, the Internet market in China is not going away, nor foreign interest in it. Despite cultural differences, challenging regulations, and domestic criticisms the West is going to keep at it. For those with complaints Porter Erisman, Alibaba VP, has this to say, “People have blogs in China they can chat and say just about anything they want. The international critics are focused on the one per cent of things you can't do. But when you look at the 99 per cent of things you can do it's not even an ethical dilemma. You can pursue profit and do the right thing at the same time. They're not mutually exclusive.”

MySpace

When News Corp. bought MySpace last year for $580 million, the social networking site had 17 million unique monthly visitors; this June that number more than tripled to 54 million. MySpace now boasts 100 million members worldwide and is adding new members at the rate of 250,000 a day; Facebook, the number two site for social networking averages 14 million users and number three, MSN Spaces, 8.7 million. MySpace, however, is not just dominating among social networking sites, the traffic its users generate places the site at the number two spot on the Web, just behind Yahoo!. As such a presence, MySpace finds itself in an elite group with the likes of Microsoft and shows little sign of slowing down. With money from a recent deal with Google the company plans to expand, on both its core offerings and its international reach. Analysts wondered a year ago if News Corp. would be able to make MySpace viable, it would seem things are heading in that direction.

A recent article in BusinessWeek refers to what it calls the MySpace ecosystem, an independent network of third party companies which develop features and applications for MySpace. Similar ecosystems exist around few companies, “Only the largest and most vibrant of tech communities are capable of creating that sort of network effect.” Analyst Richard Greenfield of Pali Research says, “The MySpace ecosystem could help the site grow even faster than it otherwise would, increasing the usefulness and awareness of the site at no cost to News Corp.” Another thing that could help MySpace grow faster is the recent deal it struck with Google.

On August 8 it was revealed that Google paid $900 million to take over as the search engine of MySpace; the deal has Google providing both the search function and the placement of text ads alongside the search results generated by MySpace users. After the announcement Peter Chernin, News Corp’s president and chief operating office said in a press conference, “In one fell swoop, we have paid for two-thirds of our Internet acquisitions . . . We have gotten a 70 per cent premium on our MySpace investment and are now playing with house money.” Pali sees the significance of the move, “Fox Interactive Media's agreement with Google illustrates how MySpace (and social networking more generally) has become a 'real' business.” According to Fox Interactive Media president Ross Levinsohn, “It was the most important decision we were going to make strategically and financially. It gives us the clarity to move forward with the expansion of our business.” This expansion will include, “developing content and tools for consumers and expanding our network.” Leaving the search and advertising networking up to Google will allow the company to grow and do just that.

On the content end of things, MySpace will focus on video; increasing staff for its MySpace video and adding more video content from News Corp. and other providers. Though MySpace video lags behind its competitor, YouTube, Levinsohn said MySpace video has done well. “YouTube gets all the buzz . . . But MySpace video is 60% to 70% of the size of YouTube. Nobody recognizes that.” Europe and Asia, which accounted for 8.8 and 3.6 million unique visitors last month respectively, will be the focus of MySpace’s network expansion. A MySpace site for France is expected at the end of the month and in September, one more in Europe and one in Asia.

Of course with all the growth there is risk and BusinessWeek sums it up well, “There's still plenty of risk ahead for MySpace and FIM. A powerful rival could come out of nowhere, just as MySpace did two years ago. The process of turning MySpace into a big business could alienate users. But so far, Murdoch's big bet on the Internet appears to be paying off.”

Securing the Internet

The Business Roundtable, an association of chief executives from160 of the largest U.S. companies, is clearly concerned with the strategic security of the Internet. The group’s Security Taskforce recently published a report entitled Essential Steps to Strengthen America’s Cyber Terrorism Preparedness, in which it is stated, “The Internet and its communications infrastructure serve as the critical backbone of information exchange that is vital to our nation’s security and our economy. Yet the United States is not sufficiently prepared for a major attack, software incident or natural disaster that would lead to disruption of large parts of the Internet.” Though members of the task force may disagree as to the likelihood of a wide-scale “cyber disaster” they do agree that, “risks and potential outcomes are serious enough to mandate careful preparation and planning.” The report’s purpose, according to its introduction, is not to propose a solution, but to, “identify gaps in our nation’s ability to effectively manage a reconstitution effort following a catastrophe and offer strategic recommendations for filling those gaps.” In an effort to achieve this goal the group highlights what it considers to be the three most serious gaps in the current strategy and points out the need for government and private sector cooperation, both within these groups and between them.

First among the gaps named is the lack of a formal “Trip Wires” system, or an advanced notification mechanism, to alert relevant agencies of a large-scale Internet issue. Some government agencies, such as the National Weather Service, which predicts and alerts necessary agencies to potentially hazardous weather conditions, have such a system in place. None is existent for the Internet. Such a mechanism is crucial, without it, “the government, businesses and citizens lack the ability to anticipate when coordinated mitigation strategies are needed or understand if or how government might intervene.” Implementing such a systems is by no means an easy task; given the “velocity of Internet attacks,” the system would need to respond almost instantaneously; it would not have the relative luxury of the 24-72 hours needed for weather issues.

The second gap is a lack of accountability and clarity in regards to which agencies provide support for Internet reconstruction. The report uses the Center for Disease Control (CDC) to illustrate a properly working model. In the instance of a pandemic, public and private entities in all 50 states know that the CDC is the agency in charge, that it will undertake full responsibility. However, this is not the case with the Internet. “The Roundtable’s analysis found that there are too many institutions, both public and private, with unclear or overlapping responsibilities chartered to manage aspects of Internet reconstitution. This proliferation of security institutions has, ironically, undermined our nation’s ability to restore Internet services.” Not only does lack of consolidation present substantial gray area, but these areas are further muddied by the fact that similar solutions are offered by both the government and private sector and that many of the organizations serving the critical infrastructure, “are steeped in voluntary activities, relying on ‘trust models’ . . . without clearly defined accountability.”

The final gap is simply lack of resources. The National Resource Plan identifies the U.S. Computer Emergency Readiness Team (US-CERT) as the key point of contact for cyber reconstruction, yet “Congress funds US-CERT at approximately $70 million annually, which is less than 0.2 percent of DHS funding.” Similar scenarios exist for private sector entities such as telecom carriers and Internet service providers which lack appropriate funding for handling large-scale Internet disruption.

The report does concede that in the past ten years much progress has been made. The introduction of the National Resource Plan (NRP) and creation of a new organization, the National Cyber Response Coordination Group (NCRCG), represent steps in the right direction taken by the federal government. However, “few outside a small group of government officials know much about NCRCG and its authority over coordinating efforts in government and across the business community.” As for the private sector, “individual companies may have adequate plans for their own business interests, but the private sector as a whole is unprepared to work together on a wide scale.” The idea of cooperation is paramount; not just within the government and the private sector, but between the two, and not just to avert or recover from disaster, but because, “A long-term Internet disruption would undermine the public’s trust and confidence in both the government and industry.”

Failure to respond properly to a large-scale Internet disruption will obviously have a detrimental effect on anything requiring the Internet to be up and running, and this list grows constantly. The Internet is a part of virtually every sector in the U.S.; citizens are increasingly relying on it for critical information, in the private sector institutions such as banks are becoming more dependent on it; and emergency workers, whose work could be of vital importance if an Internet disruption were the result of natural disaster, are increasingly dependent on the Internet for communication. The Business Roundtable’s Security Taskforce sees a need for serious change if the U.S. is to be prepared. “Without these changes, our nation will continue to use ad hoc and incomplete tools for managing a critical, national risk to the Internet.”

Microsoft's Digital Media Player: Zune

Microsoft has decided to counter stalling PC sales and stiff competition from Internet-based services such as Google and iTunes by making a move into the digital media player market. The company recently announced that by this holiday season it intends to release a digital entertainment device to rival Apple’s iPod; the device is the first in “a family of hardware and software products,” currently named Zune. If successful, Zune could kill two birds with one stone; sales of the player and associated media, which will be sold through its own online store, could boost Microsoft’s bottom line while taking a bite out of Apple which relied on iPod sales for roughly 40 percent of its revenues in 2005. In addition, Zune could give Microsoft much needed position in what may be the industry’s pivotal market; some say that the true reason behind Zune is to stop Apple from further dominance as the computer and digital media move into the living room. In an effort to ensure victory, Microsoft is betting big on this endeavor; accompanying its launch with an advertising campaign of a reported $500 million. This is not the first time Microsoft has taken on entrenched rivals; it pitted its Xbox game console against Sony’s PlayStation and came out on top. Morningstar analyst Toan Tran noted this, “The iPod is going to be a tough nut to crack, but you probably could have said the same thing with Sony and the PlayStation and it [Microsoft] has done a good job positioning the Xbox.” However, as Tran notes, it may not be an easy victory. Apple already has over 70 percent market share in both digital music sales and digital music players; this alone will be a challenging hurdle for Microsoft.

Microsoft’s move to end the reign of Apple and its iTunes store is not new; however, what Zune introduces is a new business model. In the past Microsoft has sought to conquer Apple through partnerships with services such as Yahoo!, Napster, and Real networks; and with hardware manufacturing companies such as Samsung, Sony, and Toshiba, each of which has its own version of the iPod. However, to date none of the partnerships have proven successful; not one of its partners has even a 10 percent market share. In the partnership business model Microsoft was content to supply the software for its partners’ services and devices; Zune has Microsoft taking matters into its own hands and as such represents a marked departure for the company.

Though Virgin Records executive VP Jeff Kempler, noted that, “We're going to have to think about evolving licensing schemes that have some flexibility in them,” music industry executives who were briefed by Microsoft are generally pleased. George White, senior VP of strategy and product development at Warner Music Group, said, “We're incredibly excited by it. . . It's something that we hoped peer-to-peer services would bring to the digital retail space.” In general, these executives see the competition from a company with the clout of Microsoft as a good thing, in that it may help to break the hold that Apple has on the market. According to Reuters, “While publicly praising Apple's success in building the digital music space, music industry executives have expressed frustration at the company's my-way-or-the-highway tactics. Competition means more opportunities to sell digital music in ways Apple won't allow. For instance, Microsoft is more open to variable pricing, whereas Apple is not.” Flexible models represent only a part of how Microsoft is seeking to set itself apart with Zune.

Zune also stands apart from the iPod and other players by the fact that it is to be wireless; other digital media players rely on a computer for the downloading and transfer of files, Microsoft’s offering will be untethered. Many see this as a key to the device’s success, and as such it will be leveraged in other capabilities, though how remains unclear. According to Reuters, Microsoft's new GM of marketing for MSN Entertainment Business, Chris Stephenson says that, “the company is examining ‘seven or eight’ different wireless scenarios.” These scenarios include allowing users to sample music stored on other Zune devices in the same hot spot and the ability to access content stored in an online digital locker. Zune users will also be able to interact with one another through shared playlists and music recommendations. The Zune line is to be more than just an iPod from Microsoft, to succeed it will try to be that and more; in large part by filling in some of the holes in the Apple product line. There are those that think it just might make it.

Analyst Toan Tran says, “Microsoft definitely has its work cut out for it, but the company has massive financial resources and it's very persistent.” However, success, even for Microsoft, is not a guarantee. There is the huge market share that Apple has already to overcome; Zune will need to be very compelling to get iPod users to switch tracks. There is also the fact that the product is not yet fully operational, which could affect Microsoft’s quest for content partners. In a Bloomberg piece Anne Sweeney, co-chairwoman of Disney Media Networks and president of Disney-ABC Television Group, remarked that when Apple Chief Executive Officer Steve Jobs went to Disney to gain programming for the video iPod his case was compelling, “Jobs came in to Disney. We held it. We could see it . . .We haven't had that experience with Microsoft.” (By the way, Jobs is on Disney's board and is the largest individual shareholder.) Also, there is the fact that the iPod is simply not a Microsoft product, and that alone may count for something.

As big as a win would be for Microsoft in this arena there are suggestions that it is really a larger battle that the company is looking at. According to Forbes, “It's unlikely that Microsoft intends to take back Apple's control of the portable music player market. Instead, its strategy seems aimed at getting in front of Apple's plans to leverage its iPod success into other markets--most significantly consumer's living rooms. Apple has already begun positioning its Macintosh computer line as a home entertainment device, and the company has been in negotiations with movie studios to transmit full-length films over the Internet.” Jupiter analyst Michael Gartenberg agrees, “This is about far more than the iPod. This is a battle about the digital home . . . Apple already controls one end of the system. That's a huge threat to Microsoft.”

Microsoft clearly has intentions behind this launch, some stated, others not, and the “iPod Killer” is already making a lot of noise, however, Gartenberg sums things up well, “When a player the size of Microsoft jumps into the pool, it definitely makes a splash . . . The question is will it have a lasting impact?”

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AOL Free for All

AOL announced yesterday that it would begin to offer its online services free to all Internet users. In this shift AOL anticipates that it will lose half of its 17.7 million subscribers over the next three years. However, it believes that by cutting $1 billion from its expenses and increasing advertising sales it will still come out ahead in the long run. The company intends to cut costs by eliminating employees in marketing and customer service (it has not stated how many, but the New York Times estimates it will be in the thousands) and make up for losses by offering ads on what the New York Times refers to as an “expanded line of free Web-based services.” The move has analysts on both sides of the fence, some believe that it may be too little too late and others that it might be just what the company needs. In either case the move is based on two facts, AOL is losing its subscriber base and it is seeing a larger than anticipated increase in advertising revenues.

In ever increasing numbers dial-up customers, AOL’s one time bread and butter, are jumping ship to broadband options from big cable and phone companies as well as to cheaper dial-up services from rivals such as NetZero and Earthlink. AOL lost a million subscribers in the first quarter of 2006 alone and 3 million last year. Looking ahead the company foresees losing more than 6 million more over the next year. With average monthly fees of $19.45 the total income lost to this exodus is at least $1.4 billion. In addition more will be lost as AOL introduces a low-rate unlimited dial up account for $9.95 a month.

On the other hand, AOL’s advertising wing, which currently comprises just over 20 percent of the company’s sales, grew 40 percent over last year to $449 million; during this time subscriptions dropped 11 percent. Some say this hefty increase, which beat expectations by as much as 14 percent, is due to the fact that last year under company chairman and CEO, Jonathan Miller, AOL began offering some of its once proprietary Web content for free. If this is the case it may suggest that offering more at the same price could have the same effect on a larger scale. Given this scenario, moving to an ad based model may make sense.

However, moving to an ad-based model is not without risk. According to the Financial Times, “AOL’s income from its 18 million U.S. dial-up subscribers, although declining, accounts for 80 per cent of its income, which was $2 billion in the last quarter alone.” The move is also not without critics. Gordon Hodge, an analyst with Thomas Weisel Partners said that to cut $1 billion and still increase profitability would be, “an amazing achievement.” Some also see that this may be too little too late, that the move to a free ad-based model should have happened earlier. According to the New York Times Morris Mark of Mark Asset Management, which owned nearly 612,000 Time Warner shares at the end of March, said, “It’s something they should have done two or three years ago . . . They’re going to lose these people anyway.”

AOL, however, acknowledges the fact that they will be losing subscribers, and cites this as a large reason for the shift. Arguing that subscribers are leaving anyway Time Warner president and chief operating officer Jeff Bewkes says that by offering the services free users may drop their subscription, but stay on as AOL members. “Our members don't want to leave; they want to keep using AOL . . .They tell us that the No. 1 reason that they leave AOL when they switch to broadband is price. So, now we're fixing that problem. We're going to stop sending our members to our competitors.” Retention of members that would otherwise leave to competitors is critical; AOL members represent 36 percent of unique visitors to the AOL network, but 80 percent of the page views. Not fixing the problem, forcing these members to cancel, would be dangerous to advertising revenues. Bewkes said, "If we didn't change this practice [of charging all members for e-mail and other services] ... we would be giving up 30 billion to 40 billion page views this year. Just to give all of you a sense of the magnitude of that, it's the equivalent of 10% of Yahoo. It's a third of a Google” Charging for the services was the problem, not the services themselves. Therefore, offering services free for all will, AOL hopes, keep current members, bring in new ones, and all the while increase page views and advertising dollars.

Dan Poole, who helps manage about $34 billion at Cleveland-based National City Corp., including Time Warner shares told Bloomberg, “They needed to do something with this business, it was in constant decline . . . The old model just didn't work.” Whether or not the new one will be debated until the verdict is returned.