Fed Chairman Ben Bernanke's dovish remarks this week sparked a satisfying rally. But investing in technology for the next few months will be more like riding a roller coaster than an up escalator as economic news ebbs and flows. "We should be careful about extrapolating from a bit of good news," says Alan Gayle, senior investment strategist for Trustco, which has $70 billion under management. "I think his comments were not negative, but the market should not construe them as a signal." Gayle says investors should focus hard on economic news over the next few months and realize that the markets will react to it with a good deal of volatility. "We are going to be very data driven," he says. Late next week, for example, we should get a preliminary look at GDP data, with details on consumer spending coming the following Monday. If the GDP numbers look very strong, as exemplified by higher housing starts, cyclical stocks, including tech issues, are likely to take a hit because the market will interpret the strength as evidence that the Fed's policy of cooling the economy isn't working. On the other hand, if the numbers are too weak, as evidenced by a drop in durable goods orders, techs will also take a hit because investors fear that it would signal a slowdown in consumer spending. And consumers, of course, have done much to keep tech's top lines growing for the last few years. Although this sounds like the classic lose-lose situation, it isn't -- at least not quite, says Gayle. "There's a narrow band in which tech stocks win. If growth continues, but slows, and the Fed is allowed to pause, cyclically sensitive stocks should find footing." Meanwhile, Dell's ( DELL) apparently collapsing margins raise the question of what the PC maker should do now that price cuts aren't working. A variation of that problem faces Intel ( INTC) and Advanced Micro Devices ( AMD), which appear to be in the midst of a nasty price war. None of these companies is going to disappear, but the margin pressure is unpleasantly reminiscent of the fratricidal price wars that devastated the hard-drive industry.
And it also highlights the danger to Microsoft ( MSFT) of earning the lion's share of its profits from PC-centric businesses, such as Windows and Office.
What's in a Name?We at TheStreet.com usually assume that our readers could not care less about tech PR campaigns (we certainly don't), but Oracle's ( ORCL) attempt to raise the profile of its middleware business sheds some interesting light on the dynamics of the software industry. For years, analysts harped on the theme that Oracle needs to move beyond its lucrative, but maturing, core database business. And for years, Larry Ellison and friends got grief because making a go of it in the software-applications business turned out to be pretty tough. That changed, of course, when Oracle ponied up about $18 billion to buy PeopleSoft, Retek, Siebel Systems and lots more. Meanwhile, the company waged a less spectacular campaign to move into middleware, the critical software layer that allows diverse applications and software to work together. That segment has long been dominated by IBM ( IBM) and BEA Systems ( BEAS). How well has Oracle performed? It's been tough to tell, because middleware sales are folded into the database-technology line of the earnings statement. According to numbers released by Oracle, its middleware business passed the $1 billion mark in fiscal 2006, or roughly 7% of the company's total revenue. Nothing wrong with that; even in Oracle land, $1 billion is real money. But Oracle, which is entitled to crow about how much the incremental business Fusion Middleware (that's the new brand name) is pulling in, also wants bragging rights as the middleware leader. Oracle marketing types have been buzzing around Silicon Valley -- PowerPoint presentations in hand -- attempting to make that point. But there's a problem, as there often is when companies play the market-share game: It all depends on who is doing the counting and how they count.
By the most conventional metric -- sales of application servers -- Oracle's market share is teensy, about 2.5%, according to market researcher Gartner. By that measure, BEA leads with a 34% share, and IBM is second at 33%. But Oracle has widened the category to include numerous other types of software, including some that almost no one else counts as middleware. "It's everything but the kitchen sink," says Dennis Byron, principal analyst with IT Investment Research. "I don't question their numbers, but it simply isn't an apples-to-apples comparison with other companies," he says. To be fair, there is a category in Gartner's schema that incorporates most -- but not all -- of Oracle's middleware, and it's called Application Platform Suite, of which Oracle has a better than 48% share. Also a bit puzzling is the relatively high proportion of maintenance fees to license fees in Oracle's middleware business. Byron estimates that license revenue, an indicator of new business, accounted for about 300 million middleware dollars for Oracle; the rest came from maintenance, which is generated by existing customers. Typically, says Byron, a new business exhibits a higher percentage of license revenue. "Oracle says they are taking share, but if the majority of revenue comes from maintenance, there seems to be a disconnect." The argument is somewhat reminiscent of the dispute between Siebel and SAP ( SAP) over which company really had the biggest market share of customer relations-management software. Ultimately, most people figured Siebel was the winner. The outcome: Siebel faltered and fell into Oracle's maw. So much for the power of market share.
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