When will the Hunters become the Hunted?...BI vendors on Safari?

At the start of the year, I predicted that Business Intelligence [BI] will engender a slowdown after a torrid 24 months:

The business intelligence vendors have enjoyed prodigious growth the last two years, as the need for data analysis, query and reporting tools extended beyond the analysts and power users within the enterprise. However, several headwinds are upon the sector which could curtail the investment momentum, at least for the early part of 2006:

• Product overlap is now significant -- The product sets of Business Objects, Cognos, Hyperion Solutions and Microstrategy [among others] have evolved into startlingly similar offerings. Each vendor has acquired missing functionality over the years [i.e., BOBJ+Crystal, Cognos+Adaytum, Hyperion+Brio] and now offer very little differentiation among core punch lists in competitive bake offs. This market will become more about sales and marketing execution [i.e., who has the best reps and message?] and product cycles.
• Product cycles are maturing -- Aside from Cognos 8 [which has been disappointing out of the gate], most of the major BI platforms don't have a major product cycle to ride in 2006 as they did the last two years
• Sarbanes Oxley comps are anniversaried -- Sarbanes Oxley compliance has been a driving force behind the uptick in demand for BI solutions. While Sarbox compliance costs aren't going away anytime soon, the BI vendors will now face 2005 comps which already included Sarbox-related growth

So how is my prediction shaping up? Although there are many BI vendors peddling their wares, there are four public comps that represent a decent slug of the BI tools market share: Business Objects (BOBJ), Cognos (COGN), Hyperion Solutions (HYSL) and Microstrategy (MSTR). Combined, these four vendors sold more than $330mm in license revenues in the last calendar quarter.

• Business Objects -- $125.9mm
• Cognos -- $117.9mm
• Hyperion -- $64.4mm
• Microstrategy -- $23.1mm
• Total -- $331.2mm

On a combined basis, the four BI platform vendors showed 1.3% license decline YOY this past quarter. While the first negative YOY growth quarter in ages, it's a continuation of a disturbing trend.

YOY License Growth Rates (Big 4 BI Vendors: BOBJ, COGN, HYSL, MSTR)
Note: refers to calendar quarter, not fiscal quarter

• Q3-04 -- 48.0%
• Q4-04 -- 31.1%
• Q1-05 -- 15.6%
• Q2-05 -- 9.2%
• Q3-05 -- 6.7%
• Q4-05 -- 1.9%
• Q1-06 -- (1.3%)

On a trailing twelve month basis (rolling four quarters), the data is no less comforting.

Rolling Trailing Twelve Months License Growth Rates (Big 4 BI Vendors: BOBJ, COGN, HYSL, MSTR)
Note: refers to calendar quarter, not fiscal quarter

• Q2-05 -- 23.6%
• Q3-05 -- 15.4%
• Q4-05 -- 8.2%
• Q1-06 -- 3.8%

A disturbing trend to say the least, all the more concerning when you consider these license revenues INCLUDE acquisitions. The BI vendors have grown via acquisition for years, but now their suites are overlapping in so many functional areas it's becoming harder to differentiate themselves (i.e., commoditization).

So with license revenue growth slowing, products overlapping and M&A white space diminishing, could we start to see the HUNTERS BECOME THE HUNTED? Business intelligence remains a buzzworthy item in IT spending surveys, and there is tremendous utility in embedding BI functionality into a suite. I know from talking to bag carriers at the ERP vendor level that they're wholly indifferent to which BI suite they include (read: resell) to a customer. We investors like to make a big deal out of the reseller aspect (remember all the debate the BOBJ/Crystal Decisions merger created), but to a great many influencers in the channel, the functionality is commoditized.

So who would be the obvious acquirers?

• ERP Vendors -- Certainly the ERP vendors are a viable option, but not my first choice. SAP has steadily increased its internal embedded analytics capability and I would think they're more in the market for tuck in acquisitions than buying market share. Oracle, on the other hand, loves buying market share. With Oracle's M&A binge now pushing 20 companies in the last 24 months, I wouldn't rule them out; but I would say they've got a decent analytics core set via the Siebel purchase (albeit not a great ROLAP/MOLAP engine). I haven't had a good look at Microsoft's BI capabilities in a while, but given their dual approach (Dynamics on the apps side and the obvious infrastructure play); it's an area they could justify spending some money on (of course, the problem with Microsoft right now is spending too much money on R&D).

• Systems Vendors -- Business intelligence suites are tools; easily deployed across platform. For that reason, it's an area I can see appealing to the systems vendors (CA, HP, IBM, BMC potentially). Andy Hayler has a concise and plausible analysis of why IBM should consider buying Cognos; and I've certainly been on record that Hewlett-Packard is positioned to make some software acquisitions in the near future.

• Systems integrators and the global services companies -- It seems that every time I get into a discussion on the trends in IT of late, India's growing influence is an inescapable topic. According to a great many people I respect (and have made trips to India to vet their notions), India is innovating at a far more blistering pace than anywhere else in terms of software structure and deployment. The days of existing vendors simply farming out their code writing to India to save money are nearing an end. With that in mind, I've also heard rumbling that some of the established juggernauts over there (i.e., Wipro, Tata, Infosys, Cognizant) are interested in acquiring differentiated software tools as they expand their reach and try to differentiate on a different axis than price.
  

Regardless of who is in the market for BI, it's a significant space that is, by and large, vertically agnostic. Companies are swimming in mountains of structured and unstructured data and without tools to help business users cull that DATA for INFORMATION, much of the data is useless. The tools are well established, fully baked and much of the acquisition fodder of the last few years have brought functional parity to the larger pure play BI vendors. I've seen no indication that any of the public BI guys are out there for sale, but it makes logical sense to think that, at least for one or two of them, the hunters will soon become the hunted.

Note: At the time of this writing, I and/or funds I maintain discretionary control over, maintained long equity positions in MSFT, ORCL and SAP but did not maintain a position (long or short) in any of the BI vendors, IBM, HPQ or the Indian outsourcers.

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