The biggest news in the tech industry the past week has been the rumored IBM acquisition of Sun Microsystems. Like everyone else who follows the tech industry I have spent more than a few hours trying to get my head around all the competitive implications. Needless to say the rumor has made for some interesting hallway conversations, not to mention some lively debates among analysts in the office.

At the same time I have been finalizing the material for the B2B Social Media workshop my colleague Laura Ramos and I will be conducting tomorrow in Foster City, and next month in Orlando. In doing so, I couldn’t help but notice I have a lot of Sun examples of social media done right. IBM holds it’s own, but in the tech industry specifically Sun and Dell are the poster children of social media marketing, and both have been struggling mightily.

A couple of years ago I was on a panel with Toby Redshaw of Motorola, who in the course of discussion confidently declared that the only way to get a Web 2.0 initiative off the ground was to fire the CEO. Since then I have seen just that over and over again: the firms looking to implement Web 2.0 tools for social media marketing — as well as employee collaboration and productivity — are those with a “motivated” CEO, typically one who is fresh on the job. The CEO fresh on the job does not typically find himself at the most successful company.

Which brings us back to Sun and IBM. Let’s take a quick look at their homepages as they stood in August of 2008 (the orange boxes are mine). Notice anything? One has community and social media all over the place while the other offers just a hint. So which one is acquiring which? And is this more than just coincidence?

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My guess is you have heard the news by now, but if not it is worth pausing to note that SuiteTwo — the Intel backed Enterprise 2.0 offering that launched in 2006 — has officially closed up shop. All things considered this is not much of a surprise. While the joint venture between NewsGator, SimpleFeed, SixApart, Socialtext, and managed by SpikeSource was a big showstopper when it launched, the offering never realized its potential and died a mostly silent death. To be honest I can’t remember the last time I spoke with a company that was even considering the product.

The main problem was not the concept – the market has aggressively moved towards suites of blogs, wikis, RSS, and social networking – but instead the execution. Though Socialtext founder Ross Mayfield always disputed the label, SuiteTwo never became more than a ‘Frankensuite,’ a group of individual applications duct-tapped together. While I’m looking out for recession casualties, SuiteTwo clearly had bigger issues.

For the few SuiteTwo customers out there now looking for another solution my advice is to examine your firm’s use of the technology and reach out to the appropriate component vendors. Unless your firm has been inordinately successful at integrating the entire suite into your processes, you are likely making most use of just one or two features, while the others are mere accessories. Reach out to the vendor of that one killer feature first; all the vendors involved are still around and most have matured their product sets to a level comparable with SuiteTwo anyway. In all likelihood you should be able to replace your existing implementation pretty seamlessly with what is now better software.

As for NewsGator, SimpleFeed, SixApart, and Socialtext: I would be shocked if they weren’t already picking over the carcass. There may not be many customers to grab, but those that are out there should be highly profitable – they know the tools are valuable, don’t need training, and will have a very short sales cycle. Happy hunting!

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Next up: RSS demand will grow substantially

Last year I wrote: “In 2007, interest in the RSS “publish and subscribe” architecture grew as firms sought to syndicate internal content such as RFP requests, blog postings, wiki changes, and CRM data. While this demand growth was enough to keep RSS vendors like KnowNow and NewsGator Technologies busy, Forrester expects 2008 to be a banner year for RSS and specifically enterprise RSS. Why the optimism? In 2007, many firms discovered the value of blogs and wikis for knowledge workers, and a healthy number of firms made initial investments. However, for these tools to truly fulfill their potential, an RSS deployment becomes a must-have, otherwise new content goes unnoticed and most blogs and wikis will fall out of daily view of their users. As an RSS technology strategist, you must pursue tight partnerships with as many blog and wiki vendors as possible. Each vendor adds value to your existing deployments by sending you qualified prospects. While 9% of enterprise firms expect to consider the use of RSS in 2008, we believe that number will be close to 20% by year-end.”

OK, this one hurt.

In my defense the logic of the argument still feel sound, however the facts blow all sorts of holes in my prediction. Of the three enterprise RSS vendors selling into this space at the start of 2008: KnowNow went out of business completely; NewsGator shifted focus and now leads with its Social Sites for SharePoint offering, while its Enterprise Server catches much less attention; and Attensa has been very quiet this year. In other words, all is not well in the enterprise RSS space. Even the RSS marketing space has not had a terribly productive year, though Pheedo recently told me they have been doing 1 billion RSS impressions a month this year, compared to 2.1 billion in all of 2007.

Last week I spoke with Brian Kellner, NewsGator Vice President of Products, and he said that in 2008 there was “a lot of RSS activity and need for customers, but many did not buy directly against that need.” In other words many businesses have yet to realize they have an RSS problem. They know they have a problem, but instead of investing in RSS many bought other products like wikis, blogs, and social networking tools. Its a nice story, and Charlie Davidson, CEO at Attensa, told me much the same thing. But frankly I’m concerned there is something more fundamental going wrong here. At the end of the day enterprise RSS is predicated on the notion that shoving all communications through email is too inefficient and must be augmented with other communications channels. Is it possible that people simply don’t feel that pain strongly enough to invest the time and effort to learn to use RSS?* And that every wiki feed will eventually dump right into email because that is what people really want? KnowNow tried to take a plumbing approach to RSS and failed, so my guess is if you are not providing an end-user tool you won’t survive.

So we may be stuck between a rock and hard place here — a set of end users who are not interested in a new inbox, and a set of technologists who have better ways to move bits around the enterprise. It looks like NewsGator may have struck on the best solution: sell an end-user tool people actually want and use your own RSS tool as the plumbing. So is it possible there is no long term viable market for enterprise RSS? My gut says this is not the case, but if things don’t pick up in 2009 I will have a hard time concluding otherwise. So, since I still (mostly) believe in the fundamental argument of last year’s prediction, do I go on the limb and AGAIN predict a big year for RSS? What do you think? Would you pull the trigger two years in a row?

Score: Oliver -2, Market – 1

Up next: Mashups will mature and eat into other major markets

*Sidebar: this is most of the reason I think Yammer and other microblogging for the enterprise tools are doomed. Another inbox just has not yet caught on, and I have a hard time seeing a case were microblogging is successful and RSS is not.

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Next up on the prediction recap list: IT departments will take their heads out of the sand and embrace Web 2.0 technologies

Last year I wrote: “To date, most IT departments have resisted Web 2.0 tools, often viewing them as consumer grade — of secondary concern to other major IT investments — or simply frivolous. But in 2008, Forrester expects at least half of the 42% of enterprises that say Web 2.0 is not on their priority list to add it by year’s end. Why? First, the IT shops that began experimenting with enterprise Web 2.0 tools for their own use in 2007 — for tasks like help desk ticket resolution, standards and documentation tracking, and IT project management — will begin rolling out these tools more broadly to lines of business as they pass IT muster. Second, CIOs will concede that they cannot quell passionate employees’ use of consumer-oriented or SaaS Web 2.0 tools and will mitigate risk by deploying enterprise-class tools in their stead. Finally, for IT departments aspiring to be more relevant to the business, enterprise Web 2.0 tools will be a high-impact, low-cost method to show leadership and innovation. Tech strategists should focus feature development on IT in 2008 and keep a sharp eye on integration and deployment. For many vendors, this means offering the previously unthinkable: on-premise software.”

The result? Again, so far so good. When I looked back at this prediction in July I concluded that if anything I was too timid. We saw a LOT of inquiries and other activity from IT departments that were trying to take an active role in Web 2.0. Granted, some were more reactive than proactive, but on balance the interest was strong and genuine.

In addition to looking in general at the activity of IT departments I conducted a small survey of 262 IT professionals to get more detail. In that survey we found that IT staffers are very knowledgeable about Web 2.0, though there are still major gaps in knowledge, most notably with regards to mashups and prediction markets.

Other notable findings: IT departments strongly believe that Web 2.0 will have a major impact on their businesses; the availability of IT resources for deployment and customization is a major factor determining if Web 2.0 tools get off the ground; in one of three businesses IT developers have an active role in technology selection; and in many cases IT departments are still hoarding Web 2.0 technology, serving their own needs ahead of the rest of the business.

For 2009 I would expect this trend to continue, though not as quickly as it would have if we had not hit an economic downturn. Many of the projects IT departments would have spearheaded are in the realm of collaboration and productivity, and my belief is that those projects will be hard hit in 2009.

Score: Oliver -2, Market – 0

Up next: RSS demand will grow substantially.

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I find it hard these days not to glaze over when I see article after article about the death of the newspaper industry. It’s an industry in what looks like a death spiral, and has been for quite some time. Surprisingly though the news seems to get worse nearly every day.

So it was with much sadness that I read today (in the Wall Street Journal online edition delivered via RSS) that the Detroit News and Detroit Free Press, the two remaining daily newspapers in Detroit, are expecting to stop delivering physical newspapers all but three days a week. My normal response would have been to note this as yet another sign of the death of the industry — as I imagine most everyone else has — but this one struck close to home; literally.

Though I live in San Francisco now I was born and raised in the Detroit suburb of Grosse Pointe — where my grandmother, parents, brother, and extended family mostly still live — and grew up reading the Free Press. My parents have subscribed to the paper for as long as I can remember and it was my first introduction to newspapers, current events, and becoming an informed citizen. My mother worked for both the Free Press and the News as an art director, and many of my parent’s closest friends still work in the industry. It would be fair to say the the paper was a constant presence in my life, though in many cases it went unnoticed, only remarkable when there was a protracted labor dispute in the 90’s, a frame worthy front page when the Red Wings or Tigers won a title, and when Mitch Albom stopped writing a daily sports column.

But like most newspapers those in Detroit have been hit hard by the systemic changes in the industry, namely the Internet, and more accurately Craigslist. It has been hard not to notice the impact. A couple of years ago I had the pleasure of coming downstairs one morning around Christmas to see my father — who is 6′4″ — sitting in his usual chair straining to read a paper the size of a comic book. And now the companies are planning to stop delivery of those comic books all together, save Thursday, Friday, and Sunday, the most lucrative of days. Though I believe strongly in the power of the Internet, business efficiency, and progress, its hard not to feel disappointed.

From a strategy standpoint the newspaper industry is serving as a stark reminder of how nasty the innovators dilemma truly is — though calling the News and Free Press “great companies” may be a tad hyperbolic. Its clearly difficult to walk away from profitable businesses in favor of the inevitable future. But what I find more interesting here is not the destruction of long standing institutions but the lack of a viable economic alternative to take its place. While Craigslist is wildly popular it does not come close to matching the revenues of the newspapers it is leaving in its wake. Yes, Craigslist doesn’t even try, but I have a hard time believing it could if it wanted to.

If we were to be perfectly honest though newspapers have always been a strange beast: a forced bundle of journalism people were willing to pay a bit of money for and classified ads which pulled in the real cash. All with advertisements tossed in on top for good measure. The Internet has blown that bundle to pieces — as it has done with the musical anomaly called the “album” — and they have all been sold off at the lowest possible prices; reporting is free (with ads of course) and classified are mostly free (save a few select ads and a few select markets that subsidize the rest of us; thank you San Francisco job postings and erotic services).

I’m all for killing off inefficient industries, but in this case we don’t seem to be taking inefficient resources and capital and moving them to more efficient uses. Maybe its because I think citizen journalism is a sham, but real journalism practiced by newspapers is a critical part of how our society stays on track and nothing seems to be coming up to take its place. This despite the fact that it is an incredibly valuable service. Just this week we’ve seen a corrupt governor go down in no small part because of intrepid reporting from the Chicago Tribune. Ironically The Tribune Company filed for chapter 11 at exactly the same moment they filed the story; its hard to believe the governor would be on his ass today if the Tribune was already gone.

The simple problem is that We The People have been conditioned to think of journalism as a free good. This is not a new development; over the last hundred years the price we pay for journalism has been slowly coming down as it was subsidized by classifieds and advertising. Mostly what people pay for in a newspaper subscription is the convenience of delivery and the pleasure of holding a physical object. Now the News and Free Press are left with just the reporting as a viable offering but have priced themselves out of a business model. Further, nothing short of ‘free’ will work for anyone else trying to provide journalism. We’re not even willing to pay to remove the ads!

Frankly, I don’t see an easy way out. We’re in a situation which, in economics, we call path dependent. The newspaper industry started down this road years ago making rational choices, but now is unlikely to survive as more than a shell of its former self because of those very choices. And the rest of us appear to be screwed, as we have been trained to expect free journalism so no viable replacement business model is apparent. There are a lot of very smart folks looking at how to save journalism and it appears the numbers just don’t crunch.

So, consider this a warning to other industries: bundling is a thing of the past. You must assume hyper efficiency in the future and prepare for it today. Its the only way to stop yourselves from becoming path dependent.

As for this post, consider it a love letter to my hometown newspapers, or at least what is left of them. And a recommendation that they buy a few more servers; at least make it a fair fight.

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In late 2007 I took a long look into my crystal ball and wrote out nine specific predictions for the enterprise Web 2.0 market for the coming year. Well, its that time of year again — I will be writing up another series of predictions in a Forrester report over the next 2 weeks — and it felt like a good chance to look back at my 2008 predictions and see how I did.

So, in that vein, lets start with the easy ones: Trial deployments in 2007 will deepen in 2008

Last year I wrote “Forrester has seen the adoption of enterprise Web 2.0 tools consistently follow a tried-and-true pattern: technology investigation, experimentation, roll-out to small groups or teams, and finally widespread adoption. The vast majority of deployments followed this pattern in 2007, but as of yet very few have hit the point of pan-enterprise adoption. While we don’t expect every deployment to balloon to its full potential in 2008, we expect that enough will grow to provide solid revenue growth within existing installed bases.”

So how did I do? Well this was an easy one: Yes, deployments in 2007 deepened in 2008. Unfortunately our Business Data Services data on the topic is not yet out of field — be on the lookout for that data in a few weeks here and in a full blown report — but the anecdotal evidence makes this one a foregone conclusion. Even despite the soft economy for most of the second half of 2008 I consistently dealt with firms that were expanding their deployments, either to more employees, more customers, or more products and features.

In other words, Web 2.0 is here to stay. In late 2007 I actually had discussions with CIOs, CMOs, and others where this was not yet a foregone conclusion — hence the prediction. In 2008 I can’t remember the last time I had that discussion.

Score: Oliver – 1, Market – 0

Up next, IT departments will take their heads out of the sand and embrace Web 2.0 technologies. 

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Update: Traction President, Greg Lloyd weighed in via email. See below for his comments.

Traction Software, one of the blog and wiki vendors selling exclusively into the Enterprise 2.0 space, announced last week that “2008 marks the sixth year of consecutive revenue and customer growth at Traction Software.” This is the same drill as for MindTouch; with the wind at its back in (most of) 2008 Traction better be setting new revenue records. Congratulations to the Traction team; Jordan hasn’t been in my ear every other week as of late so it looks like things are busy over there.

The other news Traction announced is that “To thank existing customers for their support, and welcome new customers, we’re offering a 20% discount on commercial or non-profit price of all software licenses or upgrade purchases made between November 17th and the end of 2008. The promotion applies to perpetual licenses as well as the annual subscription options announced in June.”

My first thought after reading that announcement: “Uh-oh.” I applaud Traction for taking decisive action and slashing its already affordable pricing and grabbing customers now, but clearly there are larger forces at work here than a simple thank you to existing customers. My guess is they have 20% slack built into the pricing anyway, but to cut it right off the top is aggressive. Either the company is struggling to meet growth targets — despite the positive returns in 2008; the economy is taking a toll faster than I thought it might; or the competition in the market is really starting to hurt. I would guess it’s a bit of all three, though I’m not terribly bullish on Traction’s long term prospects; it feels like the market has started to leave the company behind.

I’ll be on the lookout for more discounts — advertised or otherwise. If we see more than a handful of vendors slashing prices I may need to revise my market projection downward with prices falling faster than I originally modeled.

Jordan, I’m looking forward to an earful, though I’m traveling the rest of the week, so you may not hear from me right away!

Update: Greg Lloyd, Traction software President sent me a quick note on the post and has agreed to let me share his comments.

“Hi Oliver — I enjoyed finding your Strategic Heading blog – via Google  alerts – and encouraged Jordan to speak for himself on  your ‘Traction Offers A “20% Year End Discount”‘ From me: it’s not a price cut, it’s a 45 day promotion. As Freud said,  sometimes a cigar is just a cigar.

“We have a limited downside closing deals one or two quarters earlier than we otherwise might, and a good opportunity make our case as the smart alternative for penny-pinching visionaries who have a business purpose firmly in mind.”

As I wrote originally, wrapping up customers today, before budgets flip to 2009, makes a ton of sense and Traction is smart in doing so. That said I’m not quite ready to believe that a cigar is just a cigar in this case; in all something just leaves me uncomfortable. But as usual I am more than happy to be proven wrong.

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MindTouch has reportedly grown its revenue very aggressively in its past fiscal year. According to VentureBeat, “in the year ended October, the company says its revenue grew 612 percent while the number of customers grew 368 percent.” The company blogged about the news earlier this week.

This is a big number but not unexpected. MindTouch was growing from a small base — MindTouch is an open source company — and the wind was most certainly at the company’s back in 2007-2008. As someone who predicted a 47% CAGR for the enterprise Web 2.0 market its nice to see these kinds of numbers, though clearly they are not going to be typical for the industry as a whole.

No word yet if the company is profitable — my gut says no — but in either case congratulations to Aaron and the team.

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Now that the dust has started to clear — or so we hope — from the financial meltdown over the past few months, I’ve been asked how badly the enterprise Web 2.0 market will be hit. I’ll be putting together a detailed report for Forrester next week, but it is worth looking a bit more closely at the role finance and insurance firms play in the US technology market.

A couple of years ago my colleague Andy Bartels was nice enough to publish the US IT spend broken down by industry (the graphic design was mine; nice right?). The exact spend numbers are no longer 100% accurate — the IT industry has been growing between 5% to 7% the last two years — but the relative proportions are likely still quite close. What we find is that overall the finance and insurance industries account for 18% of US IT spend and the finance industry specifically accounts for 15%. As you can see from the graphic above, finance and insurance firms with 500-999 employees spend like crazy, accounting for nearly 25% of all money spent on IT in the US SMB market. In other words, its a big, important sector.

So what does this mean for the enterprise Web 2.0 market? First, a fair number of finance firms have gone under or been acquired. I would estimate 3% to 5% of spend just dropped out of the market. Second, those firms that are left will be a bit distracted over the next six months to a year dealing with major IT integration projects focusing on exchange, CRM, and major legacy systems. If you didn’t go out of business you likely got bought or rolled up other firms. Even the smaller firms are going to be busy, so the IT cycles thrown at Web 2.0 projects is likely to be low*.

While I don’t expect the external, customer-facing side of the enterprise Web 2.0 market to get hit any worse than the IT market as a whole, the internal, employee-facing Enterprise 2.0 market is going to get hit hard. If you examine the client roster of most Enterprise 2.0 firms you find an inordinate number of finance and insurance firms. It makes sense that they would have been the best customers, since Enterprise 2.0 holds the most value for knowledge workers and finance is fundamentally about knowledge. The problem is that the industry is getting inordinately hammered. I unfortunately don’t have a proper estimate on the percentage or revenue coming from the sector, but I would guess 30% to 40% of the Enterprise 2.0 spend comes from finance and insurance firms. Again, a good portion of that is going to drop out completely and the rest is likely to stagnate.

In other words: its going to get ugly. I would expect to see more than a handful of enterprise Web 2.0 firms to go out of business in 2009. I’ve got some predictions as to whom, but we’ll leave that for later.

If you are a vendor in this space I’d love to hear from you. What proportion of your revenue comes from finance and insurance firms, and how bad do you think it will get? Leave a comment below, or shoot me an email.

*Yes, I know there is a strong argument to be made that this would be the perfect time to invest in Web 2.0 tools. I do believe that these tools have big value for worker efficency and reducing redundancy, but I just don’t belive that the market is thinking this way yet. Right now Web 2.0 is a nice to have, not a need to have.

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I had a great briefing this week with Ross Mayfield, the founder, Chairman, and a few other things over at Socialtext. In the course of the briefing we discussed my recent report predicting falling feature prices in the Enterprise 2.0 market — ReadWriteWeb has an excellent summary of the research and a lively discussion.

Ross’ concern — which seems like a reasonable one to me — is that customers may look at my report and ask “so, where is my price reduction?” This logic makes sense if the product set is not changing; if Socialtext was offering a wiki feature last year, and is only offering a wiki feature next year the revenue they can expect from that product is going to come down. There is just too much competition, too much bundling, too much commoditization.

With Socialtext, however, this is not the case. The company recently announced the launch of Socialtext People, a social networking module in Socialtext 3.0. Now, instead of simply facing falling prices for the its wiki feature Socialtext has added social networking to the mix, which will increase the average deal size for its customers. In essence it is moving up to a higher price plateau. That plateau is still going to lose value over time, but if Socialtext, and any other Enterprise 2.0 vendor, can continue to innovate and combine features the revenue the company sees will continue to rise — even as the price per feature falls.

It is still possible to improve the quality of the features offered, and if that improvement is compelling price erosion can be held off, however this treadmill is much more difficult to stay on, and Socialtext’s strategy of adding other features (while improving existing features) is the right strategy — it actually happens to be the exact strategy I advocated back in April in the recommendations of my market sizing report.

In the long run falling prices are going to make this a very difficult market in which to survive, but a nimble company that can continue to innovate should do well for the short run. And, as Keynes famously said, in the long run we are all dead (or at least happily retired).

*Upcoming research note: I’m trying to convince my colleague Gil Yehuda to take the analysis used for my report and write the “Users: Here Is How To Take Advantage Of Your Vendors” report. It won’t help Ross, but at least he has a compelling case to make to his customers.

*Briefing note: To brief me on your product please fill out this form with Forrester’s Briefing Central group. They manage all the scheduling (thank god) and the service is free. Hands down it’s the best way to get a hold of me.

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