Deal with Microsoft may hurt Siebel
By Mike Tarsala, CBS.MarketWatch.com
Last Update: 5:13 AM ET Oct. 19, 2002
SAN MATEO, Calif. (CBS.MW) -- Siebel Systems may be set to announce what some analysts are calling a deal with the devil next week, on the heels of its third-quarter loss.
An agreement expected next week would make Siebel Systems a poster child for Microsoft's .NET software. Microsoft Chairman Bill Gates is expected to announce a technology and marketing agreement between the software companies at a Siebel conference in Los Angeles that analysts say will make Siebel the first major business application available on Microsoft's .NET business platform, parts of which are still under development.
Siebel, the leading seller of customer-management software, may benefit from the Gates speech in the short-term, analysts said. An endorsement from Gates might help more customers feel comfortable about writing software checks in coming months, in light of weak overall software demand and Siebel's dismal results.
But even if a stronger Microsoft relationship can boost Siebel's sales in the months to come, analysts say it may erode sales of Siebel's flagship customer-management software to large companies over time, and put Microsoft in a better position to sell its own competing software.
"Microsoft has a history of coming from the bottom up, and squeezing out leaders," said Bill DeRosa, a fund manager who manages $1.4 billion in assets for Badgley, Phelps & Bell Inc. in Seattle. "It's possible that Microsoft will end up dominating yet another platform."
Neither a spokeswoman from Siebel (SEBL: news, chart, profile) nor a spokesman from Microsoft (MSFT: news, chart, profile) were able to return calls seeking comment on Friday afternoon.
Analysts caution that the expected agreement may give Siebel a false sense of security. In the near future, Siebel's management may think it's a partner of Microsoft, and find out in time that it's competing against Microsoft much more heavily.
Microsoft's reputation
Long-time industry observers say Microsoft has a history of fallouts with its software business partners. A deal gone bad with IBM (IBM: news, chart, profile)contributed to Microsoft's top position in the operating software market, says Rob Enderle, analyst with Giga Information Group. The companies had agreed that IBM's OS/2 software was supposed to be the basis of the next-generation of Microsoft Windows in the early '90s, before an alliance between the companies fell apart. IBM went on to dominate, while OS/2 fell into obscurity.
Just last year, VerticalNet, a one-time high-flying marketer of online exchanges, inked an agreement with Microsoft, in which it received an investment in exchange for software development help for small and midsize customers. Microsoft's sales in that market have risen since last year, as Microsoft benefited from VerticalNet's technology. Meanwhile, VerticalNet's business has fallen apart. The company reported sales of $6.2 million in the second quarter, down 37 percent from the same period a year earlier.
Similar deals between other software companies also have hurt the smaller of the two partners, said Pat Walravens, analyst with JMP Securities. German software-maker SAP (SAP: news, chart, profile) increased its stake in Commerce One (CMRC: news, chart, profile) in July 2001 to about 20 percent, at a cost of about $225 million. The companies also forged a strategic alliance, where they jointly target sales accounts. He says neither company benefited much from the relationship. SAP's sales have stayed relatively flat, while Commerce One's are about a third of what they were a year ago.
"Software partnerships are like celebrity marriages -- they never last," said Walravens. "It's hard to find one that's stood up for more than a year or two. The history of these kind of software partnerships is littered with bodies."
Siebel's software sales success over the next three to five years may depend in part on its ability to set terms with Microsoft that ensure the software giant won't favor its own customer-relationship software over Siebel's.
Microsoft is expected to announce a new version of its customer-relationship software in November. Overall, the software company boosted sales 26 percent in its September quarter, while many other software makers, including Siebel, suffered sales declines.
Over the past nine years, Siebel has built close ties to Microsoft. Siebel software that runs on desktop and handheld computers use Microsoft's operating software. Two months ago, Siebel offered a new software upgrade with performance benefits to customers who used Microsoft's Internet Explorer Web browser.
Microsoft is also one of Siebel's largest customers, with about 18,000 of its employees using the software, said John McPeake, analyst with Prudential Securities.
Software bonding
Technology engineers from both companies went through what several analysts called a "long and painful" integration process to make the Siebel software work with Microsoft's technology during the installation. But in working through the problems, analysts say they developed an installation process that can be repeated to make future installations much easier.
Now, Siebel wants to tie future software sales even closer to Microsoft's .NET, and subsequently, its server-based operating software, in exchange for a possible advantage in selling to midsize customers, where Microsoft is building its market expertise.
For its part, Microsoft wants Siebel to endorse its .NET platform software, which has yet to find a ringing endorsement from a major software maker. The deal also provides a potential way for Microsoft to sell more Windows server operating systems -- the exclusive operating system for .NET.
Analysts from CS First Boston said earlier this week that Siebel is likely to commit exclusively to .NET technology as a way to make other business applications work with its next-generation Siebel 8.0 software. The analysts said they expect financial, software development and joint sales agreements.
If CS First Boston understands the plan correctly, it could restrict where Siebel can run its applications in the future, said Mitch Kramer, analyst with the market research company Patricia Seybold Group. Many large software makers are planning to use competing Java-based technologies instead of .NET. The Java software allows customers to use a combination of Linux, Unix and other operating software -- not just Microsoft's brands.
Competing with .NET
To be sure, Siebel's software currently can run on other server operating software and database-management applications than Microsoft's. But it can be difficult to make it work with non-Windows systems, and the other applications that run on them, Kramer says.
Companies that have aggressively adopted Java standards that are supposed to make working with different types of software easier have won contracts from Siebel. Cupertino Calif.-based Chordiant (CHRD: news, chart, profile), with annual sales of about $75 million recently won a multi-million-dollar software deal from Fidelity Investments vs. Siebel.
It would be too costly for Siebel to make future versions of its software compatible with both .NET and J2EE, the next enterprise edition of Java, which is expected to be used by IBM, Sun Microsystems (SUNW: news, chart, profile) and others, Walravens says.
It's a potential problem if Siebel cuddles up too closely for .NET, as most large technology customers are showing interest in J2EE, not the competing Microsoft software. It may limit Siebel's potential sales.
"They have themselves in a box now," Walravens says. "If Tom Siebel had to restart today, he'd rebuild the whole software package in J2EE, but he can't. It's going to be much more difficult in the future to win in organizations that have chosen J2EE as their architectural direction, so they might as well take what they have with Microsoft."
_______________________________________________
Mike Tarsala is a San Francisco-based reporter for CBS.MarketWatch.com.
marketwatch.com |
