Microsoft is quietly arming itself

for its most aggressive assault yet on the business intelligence (BI) software sector. According to several well-placed software analysts, the software giant is preparing to muscle in on the highly fragmented and overcrowded front-end tools market, where it reckons existing vendors have failed to tap the huge opportunity to provide query, reporting and analysis software for employees at all levels of the enterprise.

Though brandishing its commitment to ease of use and low prices, Microsoft is keeping tight-lipped about its plans. Bill Baker, product manager for SQL Server, who is hailed as Microsoft’s visionary for BI, admits that "our end goal is bringing business intelligence to the masses", but says the company is not ready to start talking about its plans for front-end tools. Yet.

But there are clear pointers to Microsoft’s broader ambitions in BI. And the seemingly unremarkable acquisition of little-known Israeli-based vendor Maximal in the summer of 2001 offered the first glimpse.

The Maximal product, renamed Data Analyzer by Microsoft, is being marketed as an intuitive desktop data analysis and visualisation tool. Giga Information Group analyst Keith Gile says that, at this stage, Data Analyzer "won’t convert aficionados" of the best selling front-end tools from companies such as Cognos, Business Objects and Information Builders. But, he adds: "By delivering a limited functionality tool with greater emphasis on broad usability, Microsoft is about to accomplish what all of the BI vendors have wanted for years – true enterprise-wide deployment."

Microsoft’s strategy for annexing the front-end tools segment is not without precedent. The company has become a serious player in the wider business intelligence market, boasting strong credentials in the OLAP (online analytical processing) and database management systems (DBMS) markets. In contrast to most of its rivals, it has been steadily gaining market share in both. Up against database giants Oracle and IBM, Microsoft has grabbed 16% of database spend in 2001 with its SQL Server product, says market research group Gartner.

The might of Microsoft

But it is outside the relational database arena – in platforms used for complex ‘multidimensional’ analysis – that Microsoft’s aggressive push into BI has been most successful. In the three years since it snapped up highly rated OLAP technology from Israel’s Panorama, the company has taken this sector by storm. Microsoft’s share of this $3.3 billion (EU3.4bn) industry almost doubled in 2001 to 21%, putting it in joint first place with the market’s pioneer, Hyperion Solutions.

Fundamental to this success was Microsoft’s early decision to bundle its OLAP tool, Analysis Services, with SQL Server, effectively making it a free add-on. But that does not understate the software’s value. "Many customers now buy SQL Server purely for Analysis Services, without necessarily using the SQL Server relational DBMS," says Nigel Pendse, an analyst with Business Intelligence and author of the sector’s ‘bible’, The OLAP Report. Even when buying the full SQL Server product, the OLAP purchase remains significantly cheaper than rival products. For example, Hyperion’s Essbase platform, says Pendse, "is no better than Microsoft [Analysis Services], yet is 20 times more expensive."

Analysts say that Microsoft’s manoeuvres in this market form a blueprint for its grander BI ambitions. With much of its BI infrastructure in place, a more aggressive push into the tools market seems the next logical step. "It has done very well on the OLAP side, but it has a blind spot in the front-end tools market," says Pendse.

Data Analyzer, as a front-end tool for OLAP analysis, is one method. But another key development comes from Microsoft Office. Pendse says Microsoft is progressively beefing up its Excel spreadsheet application with analysis and reporting functionality.

Free from fear

Those moves do not instil fear in the mainstream BI vendors. "We’d not be threatened by Microsoft moving into the [front-end tools] market with client-based tools," says Jim Irving, UK managing director of BI software company Information Builders. "We’d welcome any tools that allow users to drop down to a familiar front end."

Other BI vendors underscore the point that Excel is a personal desktop tool. "It is not a deployable tool on an enterprise scale," says Graham Walter, UK managing director of Cognos. But the fact that the product boasts 120 million users means that a significant proportion will end up putting business intelligence data into Excel.

Moving the focus of its business intelligence efforts to Microsoft’s Office group could create tensions with its Server divisions: "Which executives at Microsoft now ‘own’ BI, and can a competing product from the Office division compliment Microsoft SQL Server 2000?" asks Giga’s Keith Gile.

SQL Server product manager Bill Baker points out that his division has recently been moved physically nearer to the Microsoft Office product division at the company’s Redmond headquarters – a move designed to facilitate closer BI development. But he is unwilling to elaborate further.

Even sophisticated techniques such as data mining can be used by the masses, if Microsoft’s Data Analyzer marketing is to be believed. But Pendse argues that this technology is still "too specialist" to make much of an impact in the market. However, he says, Microsoft "has got a business model to get into the market and will be a serious player in the reporting tools market by the end of next year."

The timing looks set to coincide with strong growth in the business intelligence market. Despite the prolonged downturn in corporate IT spending, demand for BI has remained relatively strong. And, says market research group IDC, the market will more than treble to $10.1 billion (EU10.2bn) in 2006, from $3.6 billion (EU3.7bn) in 2000. Tools alone will account for more than half of this, says the analyst group, as business intelligence moves beyond the core 5% of ‘power users’ and becomes more broadly deployed in organisations.

Today, a handful of companies stand out in the market: Business Objects, Cognos, SAS Institute, Information Builders and Oracle (all with BI revenues of between EU300 million and EU1 billion). Those are chased by a number of still significant players with revenues of over e100 million, notably Brio, MicroStrategy, Crystal Decisions and Actuate. Faced with the commoditisation of their wares, these rivals have shifted their strategic direction as they seek to increase their penetration within organisations. Analytic applications, rather than complex tools, some argue, are the way to deliver business intelligence to more users.

This push toward analytical applications (where the analytic function is geared towards a specific job or set of tasks), is something of a red herring, says Gile from Giga. "Business intelligence vendors have made a big mistake chasing that market. The applications still require customisation and consultants, yet vendors are charging lots of money for them." Analytic applications, he concludes, "are not living up to their billing as a panacea for all analytic ills." Ease of use, he says, rather than breadth of functionality, is key to bringing a wider audience to business intelligence. And this is where Microsoft has traditionally excelled.

Ian Hubbard, director of BI systems integrator Acuma, disagrees, saying that these distinct trends – toward applications and ease of use – reflect different ways to counter the commoditisation set to sweep the market. "To differentiate themselves, many vendors are moving up the value chain," says Hubbard. "Say an application framework costs around £150,000 (EU232,000), that’s a lot of BI tools licences," he says. Other vendors will need to drive sales volumes to counter the fall in unit prices

that commoditisation will bring. To survive the shakeout, he says, "vendors need to be either into value, like SAS, or into volume, like Business Objects."

Many of the dozens of other vendors touting a bewildering array of disparate tools will simply not be able to achieve either value or volume. A shakeout, say pundits, is inevitable as the market matures. The entry of Microsoft into BI can only accelerate this – but so will the relatively recent entry of the main business application software vendors. Business applications vendors, in particular, are heeding customer calls to embed analytics in their products. Customer relationship management giant Siebel Systems, for example, snapped up analytics specialist nQuire in November 2001 to head off growing criticism of the lack of analytics in its CRM applications suite.

"Almost every software vendor can tell an analytics story," says Kevin Scott from AMR Research, "either through a partnership, original equipment manufacturer relationship, acquisition or custom development." Oracle has been a major BI player since the mid-1990s and has progressively tied its BI technology in with its applications. And other ERP vendors, notably Germany’s SAP, are rapidly moving into the market.

But, says Allan Russell, senior vice president of strategy at SAS, these vendors face a mindset problem. "Some don’t have the imagination required for business intelligence." Importantly, he adds, "ERP folks are going to find themselves with a mix of data sources, which they aren’t used to dealing with." Yet no-one can ignore the huge installed bases of companies fostered by companies such as SAP.

There is another force at work, says Scott, which will trigger rapid consolidation. "Database vendors like IBM, Microsoft, Oracle and Teradata are getting in on the action by embedding analytic tools in with their data warehouses."

Consolidation looms

The upshot is that small vendors will be unable to survive the combined competition from larger pure play rivals, business applications vendors and the database giants. In 2002, warns Gartner, a full half of all small and specialised BI vendors will either be acquired or go out of business.

Market watchers agree that Cognos, Business Objects, Information Builders and SAS Institute, as the largest and most financially stable vendors, will ride out short-term turbulence. Not only are customers considering which vendors will be around in a couple of years’ time before buying any products, they are also cutting the number of vendors they deal with, a trend that should favour those large vendors with broad offerings. The best of breed case for buying [multiple] query tools is no longer so convincing, says Russell.

Many competitors have been ravaged by over-eager acquisition strategies, poor financial management or flimsy business models. "Some are teetering on the edge," he says.

Microsoft has the resources and distribution prowess to usurp all but the strongest pure play vendors, and the time and money to wait for the weaker vendors to die. More important, perhaps, is its approach to pricing. The expense of analytical applications is "driving an overwhelming resistance" to buying them, says AMR’s Scott. In contrast, Microsoft has already cultivated a reputation for bringing down BI prices, notably in the OLAP market.

Given Microsoft’s success in commoditising OLAP, front-end tools vendors seem surprisingly sanguine about the imminent arrival of Microsoft. "I’m seeing the same complacency among tool vendors as there was among OLAP vendors [in the late 1990s]," says Pendse. In that market, he adds, Microsoft’s arrival slashed the number of vendors from more than 30 to "just six".

In fact, many tools vendors refuse to regard Microsoft as a potential rival. "We don’t see them in the context of the front-end tools market at all," says Graham Walter, managing director for Cognos UK. "In fact," he continues, "their impact has been a positive one with their OLAP server capabilities."

And despite Microsoft’s obvious strengths, there are several question marks over its ability to deliver on any front-end tools vision. Its BI products are designed to work exclusively on its Windows platform, while other vendors offer products that support both Windows and Unix servers. Furthermore, says Pendse, rivals offer better "connectivity" with third party applications: "Cognos, Business Objects and Crystal Decisions all know how to get data out of SAP systems, for example."

Nonetheless, "no BI vendor can reach the enterprise like Microsoft," argues Giga analyst Gile. And although Microsoft has a lot of catching up to do, the strength of its existing BI technology will stand it in good stead as it tries to sell new tools and technologies into corporations. Pure play vendors have much to fear.