Hardware, software, consumers and Apple

I’ll admit that I’m part of an ever increasing group of Apple users. I could stretch the truth by pointing out that I wrote my resume for my first job at Intraware on a Mac but the truth is I really switched to Apple around two years ago. The switch was primarily to take advantage of the built in video capabilities.

As a historically enterprise software focused technology company you wouldn’t expect too much that Apple does would impact our world. However, two things recently caught my attention as very pertinent.

The first was - the MacBook “Air” did away with a DVD drive. It’s all about digital downloads now. Ironically, to set up your “Air” you need to install a DVD in your older Mac if you wish to move data over, but we’ll cut them some slack on that.

Secondly, at a recent breakfast in a restaurant the waiter asked me if I liked my iPhone. He proceeded to tell me he had one too. This guy was clearly younger and hipper than me. I’ll always mentally compare my iPhone’s pros and cons against my Blackberry. However, this chap was clearly thinking more in relation to other consumer mobile devices. His comment was “I love my iPhone because they update the OS/features so regularly via iTunes”

I thought to myself that’s really true. I remembered that part of the excitement of getting a new phone every two years (yes and getting locked in) was that the new phone usually was light years ahead of your old one when it came to the UI, web browsing, checking email etc.

What do all these things have in common with Intraware? Well, by successfully integrating a complete digital experience within their products Apple is creating a competitive advantage. The “Air” is partially only viable due to its reliance on data moving digitally and the iPhone is an attractive device because it can be a little different/new/better every month you own one. All technology companies, and hardware companies I know are really interested in creating a much truer end to end offering, can learn from these lessons. Not everyone can be Apple - but perhaps we can help you get closer

Justin

Changing Landscape

We at Intraware tend to sell our SubscribeNet service to corporations larger than ourselves; sometimes much larger, as in the case of IBM, EMC or McKesson. A question from them over the years has been whether Intraware would be around to support them in the long run. Today, given our customer base, cash position, and recent quarterly news, our existing and potential customers are no longer asking that question from a financial perspective, but from a concern regarding the current climate of consolidations. It is a legitimate concern and a question for which there really is no answer – we’ve all watched large companies like PeopleSoft, BEA, Macromedia or Business Objects get gobbled up. So, no one is safe.

Our particular market place has gone through some interesting change in the last few months. Macrovision, a company with which we’re deeply entwined for a variety of reasons, decided to sell it’s software division. So that which was much bigger is now much smaller – although still a large participant in our field. Whether their new management will choose to focus on the competitive elements of our respective offering or the complementary components is yet to be seen – certainly the previous groups’ response was focused on the former at the expense of the latter.

We also saw OCS, a competitor in the licensing space, come full circle and return to their roots. OCS was originally a spin out from Modus Media and is now part of CMGI or ModusLink. Going into this fiscal year our sales team believes there is increased interest from hardware and device companies in software and license delivery. We view the OCS acquisition partly in this light – validation that others perhaps are seeing an increase in interest from similar quarters and their existing customer base.

Lastly, we saw LTG – part of ASAP software – acquired by Dell. Although more of a peripheral competitor, it was part of an interesting year of regular change in the competitive environment. Speaking of peripheral impacts, it was a highly turbulent year in the CDN market with the “arrival” of Limelight. While we’ve seen some settling down in that arena of late it certainly added to an overall feeling of significant change over the last twelve months.

That leaves us heading into a new fiscal year where our core business is still firmly founded in a belief that a combination of our hosted model, financial stability, customer base, entrenched partnerships and experience give us the confidence to continue to compete in an ever changing market place. This could be a very trying year from a macro perspective and one that reinforces the benefits of having recurring revenue streams and large customers.

Intraware Roadshow

We just completed our Roadshow on both the West Coast and East Coast this week. I want to thank all of the customers, prospects and partners that attended. I had a lot of fun at our Boston (Bedford) event. James Brentano led the way for us on the West Coast.

There’s an old expression when it comes to sales meetings: “If you’re telling you’re not selling” It means if you’re doing the majority of talking, and very little listening, you probably shouldn’t have it in your forecast at much greater than 10%. So it was definitely great to hear our customers and prospects take over the discussion. The only major criticism I received was that it was “too short”! Better that than the other way around of course.

Ours is a relatively small market so the challenges faced by hardware or software companies resonate with Intraware and non Intraware customers alike. License management, channel and partners, “virtual machines”, 3 to 4 GB files, resources required to implement and then maintain a service etc. Even the “grizzly old veterans”, whom I rely upon to help drive these user group type events, always come away with a new trick or two.

So thank you to those of you who attended, we missed those of you who didn’t and I hope to see you all at our next one. I shall leave you with a comment we received via email:

“Good timing, good location, good guest list, good food and drinks, good facilitated conversation”

If it looks like a duck, and walks like a duck, it must be a duck.

In 1998, I raised some money from the notable venture capital firm, Kleiner Perkins Caufield & Byers (Kleiner Perkins). I learned a lot about investor perception in the weeks prior to that agreement. Kleiner Perkins had done some extensive work reviewing our business model and seemed intrigued enough to begin negotiations on valuation. Meanwhile, the buzz of an imminent deal began to trickle through various other top Silicon Valley venture capital (VC) firms. About 18 different firms reached out to me, interested in participating in the upcoming round of financing.

Putting a valuation on the company did not appear to be an issue, but determining how much we could have was challenging. Due diligence by these investors varied but for the most part as long as Kleiner Perkins was leading the charge, it seemed that beyond the simple, “what do you do?” the decision to go forward was based on the terms and conditions of the investment.

I felt pretty good about things. I was talking to the top guys at the top funds in the nation and I could feel the momentum building for Intraware. We were quickly coding SubscribeNet,an on-demand service designed to help companies convert from a physical supply chain process to a digital one. We picked up a major contract from Netscape and revenues were growing faster than plan. 

Kleiner Perkins set up a meeting in November 1997 to have me present to all of their partners. The partner on our account let me know that this part of the process was necessary but really was nothing more than a “rubber stamp.” The other VC’s were aware of the presentation and began to commit up to $8 million dollars and the size of the round started to look like $15 million vs. the $2.5 million we were initially looking for. 

I knew that one weakness in our business plan existed: Most of our potential customers were in no hurry to convert to digital supply chains. They enjoyed a quarter or two of padding by shipping products to their two-tier distribution. Once they filled the channel with physical goods they could recognize revenue. Our process would bring actual use of product to real-time.

I presented on a Monday morning and was told that they would figure out the financial figures later that night.   By midday on the following day, I had received plenty of calls from the other VC’s committing millions of dollars, even without knowing what Kleiner Perkins was committing.

Kleiner Perkins called back at 2 p.m. Tuesday afternoon saying that their partners had a few issues and couldn’t get comfortable with funding the round. After a dozen calls to the other VC firms, I realized that the word was suddenly out and all of the other VC’s quickly declined as well.

I didn’t sleep well that night but was delighted by a call I received from Kleiner Perkins the next morning indicating that they had gotten past their internal differences and were ready to fund.  I declined additional funds from the other VC’s and closed the round solely with Kleiner Perkins in December and opened a new round at two times the price three months later. A year later we were public with a $500 million valuation and two years later our valuation was $2 billion. 

Then the bubble popped, and we popped with it. SubscribeNet hadn’t grown and we tried to play in multiple other markets only to build overhead to a point where a $0 valuation seemed imminent.

That was six years ago.  Today I can sleep at night knowing we are a much stronger company, with a leading technology and expanding market opportunities.  We went from sizable debt and a couple dimes in the bank, to growing cash with no debt. With strong working capital, positive cash flows, and over $35 million in federal and state NOL’s, the company’s financial position is secure.  We have seen tremendous traction in the end users leveraging our trusted platform.  And, while Netscape represented 95% of our business in 1999, the company does not have one 10% customer today.  Intraware is successfully converting technology providers of all sizes including some of the larger software providers in the world to its SubscribeNet service. 

Intraware’s solutions provide a single on-demand platform for managing all critical digital assets. Our entitlement management engine that powers our on-demand services meets emerging market demands in many digital media markets.  We have moved past just delivering enterprise software to managing multiple forms of digital media including consumer software applications, games, maps, consumer entitlements, and hardware entitlements and licenses on behalf of our customers. Our on-demand offering continues to have expanding applications in the market as the world moves digital. In addition, our SubscribeNet offering provides a very credible and defendable ROI that has historically met customer demands in times of economic stress.

For years, yes, Intraware looked like a duck, walked like a duck, so it was a duck. The partners at Kleiner Perkins must have smelled “duck.” But, they somehow got past it, as they did see something long term. Eventually warehouses of DVD’s would be replaced with a more economical process for distribution. Old boxes of retired versions of software would no longer crowd our landfill.  To date, 99% of the Fortune 500 companies have received software from Intraware in over 160 countries.  Our model’s rapid time to value and platform independence has been winning over skeptical purchasing organization as web-based applications have emerged.  We continue to leverage our experience in hosting on-demand applications and we are positioned to benefit from the video and social networking markets that depend on a provider that is here to stay and able to provide leading innovations.

Intraware isn’t a duck anymore. The numbers are beginning to reflect it and the great plan of eleven years ago is finally here.  We are focused on continuing to build long-term value for stakeholders, and are confident that our value will continue to reveal itself even through tough market conditions.       

It won’t be long until this duck is really seen as an Eagle.

 Peter

Hardware companies embracing software updates

An interesting article on the increasing role of automated software updates for ever more elaborate hardware devices:http://www.wired.com/gadgets/miscellaneous/news/2008/01/macworld_hardware

Facebook: The Next AOL?

The growth of Facebook is fairly astounding no matter which metric you use. Profiles, valuation, visits….it’s impressive to staggering.

For many, Facebook is becoming “The Web” or a large part of it. You have an inbox for communicating with friends, you can play interactive games (instead of watching TV game shows at night you can actually participate in an interactive online game show with your friends!), reconnect with lost friends and, via the choices you make, project a “virtual” image of yourself to the outside world. I have heard that users outside the U.S. view Facebook as more of an utilitarian and effective tool. “Less chicken throwing, more networking” might be another way to illustrate my point.

Entire businesses are springing up on Facebook. If you’re a Facebook user, check out “Mesmo TV”. It’s a small but growing company (started by an ex-Intrawarian) that is now run pretty much exclusively within Facebook. Yes, you know Facebook is a bona fide hit when you can say “I know someone who has started a company running on Facebook” at cocktail parties.

The risk of course for Facebook is the AOL dilemma. AOL took advantage of a new way of communicating - the Internet. Whereas the World Wide Web at that time was very hit and miss in terms of quality and content, AOL made it easy for the masses to use with graphics and rich content.

Yet over time the “closed” nature of AOL was its downfall. Both end users and content providers wanted freedom. In addition, AOL became very “uncool” and was considered a tool for parents: “The Internet with training wheels.” Lastly, advertising ran unchecked for the most part and, along with spam, greatly impacted the end user experience.

Similar arguments are being made today with respect to Facebook. These arguments focus on the fact that Facebook has a proprietary development language. Just as companies had to develop “an AOL version” and a “Web version” in the late 90’s, today companies are required to develop a version of their application to run on Facebook’s proprietary markup language. This was at the core of the recent “Open Social development platform” announcements prior to Christmas.

Yet one key difference between AOL and Facebook remains. Facebook allows developers who build applications to reap 100% of the revenue they derive from those applications. Perhaps an analogy to the physical world is that you have 20 acres of land and you want to set up a market. One model, the traditional one, is that you charge every vendor 30% of their earnings by way of payment. Your alternative is that you could divide the lot in half and let the vendors keep all their earnings and charge $5 per hour for parking. Then over time you select the most popular vendors and once you have a reputation established you raise your parking to $10 per hour…

AOL clearly followed the first path - demanding big fees to be present within AOL. Facebook is focusing on the second. However, one of the key differences between the physical and virtual world is that Facebook isn’t constrained by only having 10 acres. You would think that is a good thing. However, in this case it might actually become a problem. There’s no quality control and many Facebook pages I visit now appear to be “drowning” in data. I think that’s been LinkedIn’s point all along.

These are pertinent questions as we continue with the ongoing development of zAthlete. It’s a new frontier. How do we take advantage of the most exciting elements of social networking while avoiding the potential pitfalls. It’s an interesting challenge and the stakes are high. There are so many pundits on Facebook that weighing in hardly seems valuable. Maybe the best question is “What was the biggest reason for AOL’s downfall?” It will be interesting though to see if Facebook is another Google or AOL.

Let me know what you think.

Justin

Dust Off Those Digital Camcorders!

Not too long ago, digital camcorders were all the rage. After the digital camera boom, it naturally followed that electronics manufacturers would evolve their new cameras into ones that could shoot videos, leading to consumers wanting to replace their oh-so-last-century tape-based camcorders. You probably received or gave one of those slick (and expensive) new digital camcorders not too many holiday seasons ago. But they aren’t so hot anymore. I looked on Amazon’s top sellers list in Electronics, and there was only one digital camcorder in the top 50 (and that was a very inexpensive model). People aren’t replacing them like they do digital cameras. The reason is not that they aren’t prone to breaking or obsolescence, it’s because people aren’t using their old ones anywhere near their original expectations; they feel like the original investment in one was bad, and they don’t want to make that mistake again. You didn’t buy a new one this holiday season, did you? Everybody loves to watch videos and shooting a movie is as easy as can be. So what went wrong?

If you have a digital camcorder, you know what the main problems are: 1. storage, and 2. delivery to friends. Videos are large files and they chew through your memory cards very quickly. Even though camera memory is cheaper than it used to be, it is still costs $25-$50 per hour of video camcorder storage. So you naturally want to offload the storage to your computer. But then you find that you start to run out of space on your hard drive. You see the effects of digital TV, movies, and videos all over the place: on your DVR, on your video iPod, and on all of your computers. That digital camcorder is so fun and easy to use, but the results quickly zap all of your storage. The second main problem may be an even bigger one. You’ve got all this great video content (assuming you had a place to put it), but now you can’t seem to share it with your friends and family since the video files are too big for email. They are too big to upload to YouTube and, in fact, as you get them off your camcorder, they are too big for most people to play over the Internet, even if you could make them available. Most existing video websites require that you first compress your video into lower quality of shorter duration. And then, those websites make your videos available for the world to see. Even if you jumped through the hoops to get your videos YouTube-ready, do you really want your daughter’s ballet recital to be shown to the entire world of unknown viewers?

At Intraware, we are attempting to solve these problems. We provide solutions for storing, organizing, and securely delivering your digital files. On zAthlete.com, you can upload your original video, no matter what the size, and our servers will store your original file for you and make a transformed copy that is suitable for playing over the Internet. Further, zAthlete allows you to organize the videos, along with photos, links, and other types of documents into albums, and then entitle which friends and family may to access to those albums.

So dust off that digital camcorder and try uploading a video from it to zAthlete.com. You might already have something cool trapped on the memory card just waiting to be shared. If you find that it is easy enough to securely offload your videos and share them with others, that camcorder might just end up being the shiny cool toy that you originally thought it would be.

Paul Martinelli, Co-founder and Chief Technology Officer at Intraware

zAthlete and Facebook

Hello Everyone and Happy New Year,We continue to work to enhance and expand our zAthlete offering. As many of you saw, we mentioned our new team functionality via a press release a couple of weeks back.In addition, over the break we pushed live a “mini” version/game of zAthlete on the Facebook platform. We hope this application will help increase end user exposure to our core zAthlete offering. If you’re a member of Facebook you can easily add the application to your profile. Go ahead, challenge me!Regards,Justin

Macrovision’s News

I am certainly feeling overdue to write a post for our blog. This is traditionally our busiest time of year and this year has been no exception, so my apologises for letting my duties here slip.

Like many, I was caught by surprise by the news of Macrovision’s acquisition/merger from last week. I confess that I still don’t understand the dynamics behind the deal and the only quotes I’ve seen around the value of the combined company haven’t helped at all. Needless to say, the executives behind this are experienced industry veterans and must have their reasons, so I assume in time all will become clearer.As our largest competitor, as well as an integral part of many shared customers, our relationship with Macrovision has always been complex. Now it appears that much of that has changed.

I’m left with three general thoughts or observations as a result of this news. Firstly, it’s obviously great short term news that we’ll see Macrovision recede as a competitor even more than we had recently. We had seen and heard rumblings about these types of changes directly and indirectly in the marketplace for the last 90 days or so. It also means there are several very smart decision makers out there who have decided over the last few years that it made more sense to bet on Intraware vs. a much larger alternative company in Macrovision. Secondly, it creates a vacuum for a legitimate new DRM provider in the software/technology vertical. This is a fascinating concept and it’ll be interesting to watch what plays out in the next 90 days.

Lastly though, it’s a problematic statement about the state of the software marketplace and reinforces many of the changes we’ve made within Intraware to expand our focus and portfolio of offerings. On a much smaller scale, customers and investors sometimes scratch their head when we discuss zAthlete in particular and our new market endeavors in general. I think Macrovision’s news, should this really prove to be an exit from the technology marketplace (and read any of the news coverage and see if you can find the word “software” and “Macrovision” close together - I can’t) reinforces the “maturing” state of the technology market overall. That maturation has resulted in a vertical that is growing less rapidly in general and thus is less attractive to many companies to sell to than has been the case in the past.

I believe Macrovision made some significant strategic missteps from a technology and cultural perspective that accelerated their exit from the technology vertical. However, there’s a lesson in this for all companies focused on selling to technology companies.Macrovision will remain a strong presence in our marketplace - if only due to their overall market penetration and depth of their legacy products. So, let’s all stay tuned as this one interesting announcement is more of the start than the end of this story I suspect.

Dear Al Gore

Dear Al Gore, 

Congratulations on your new job at Kleiner Perkins. I think your continued investment in “clean technology” will be successful in so many ways. Kleiner Perkins is the perfect partner; after all, they helped me create my own clean technology company back in 1998. 

Almost ten years ago, I built a company that allows software companies to digitally deliver software and licenses rather than shipping pallets of CDs, boxes of manuals, and truckloads of packaging. Now, I must admit that I wasn’t just thinking “green” when I did this (maybe some green in my wallet), but I did consider that concept as well as other things like efficiency and amazing returns on investment. We quickly recognized that we could build a company that could eliminate many layers of distribution, production costs, returns, warehousing, and personnel. Thank you Mr. John Doerr for sharing that vision. 

Nine years later, our customers can release version 2.0 of their software and their customers don’t have to throw away version 1.0. Our customers can “ship” a bug fix that doesn’t result in the creation of five million CDs. That’s sustainable development; fuel that isn’t burned, landfills that aren’t packed, and waste that never gets created. 

We have come far, but we’ve got along way to go. This morning I went into my daughter’s room and discovered that she had bought the new operating system from Apple. I was more upset about the packaging than learning that she had charged it to my credit card. It came in a cardboard box with protective stuffing. The software box was pretty slick with a shiny X on it. Inside the box were a manual, jewel case, and CD. 

Yesterday, we received 99 boxes like this at our office of software that we had already downloaded to keep our systems in top form. We called and asked why they had sent them “Oh sorry,” was the reply. “It’s just our systems. You can ignore them and throw them in the trash.” How much waste did this create beyond our company? How long will it take to make up for that damage to the environment? Is this happening everywhere?  I’m guessing the landfill numbers, gas consumption, and production waste behind physical software is reaching epic proportions.

Old habits die hard. The behavior behind not going digital is tainted by a few poorly thought out strategies. There is a belief that “the box” is a branding opportunity. “The box” represents a better way to get to retailers and a better way to get product accounted for even if it is not yet sold. I hear other reasons why technology companies can’t shake the physical shipment habit: “Our customers are not requesting that,” or “we don’t have a budget to make the transition.” 

I realize that there is an argument for physical distribution. I can understand the political dilemma faced by music and movie producers. Because Apple has created a pricing structure that gives them more power than either the producers or creators, many producers are waiting to go digital until there is parity in that supply chain. Companies like Wal-Mart still receive a large percentage of their revenue from physical shipments and do not have a way to convert to digital delivery, yet. 

Over the past decade, I have not wavered my commitment to create a digital world.  Fortunately, I had a lot of help.  I tip my cap to many who were quick to change and helped push our company to profitability.  Their drive to become green companies would make you proud. 

But we’re only in the first inning here. More change is needed. And frankly, Mr. Gore, we could use your help. 

Sincerely, 

Peter Jackson

Intraware, Inc.