Henning Kagermann, co-CEO of business software maker SAP (NYSE: SAP ) , is about to become the next Bob Metcalfe. Bet on it.
The end of the Internets
Metcalfe, founder of one-time networking heavyweight 3Com (Nasdaq: COMS ) , famously predicted that the Internet would collapse in 1996.
I know that sounds crazy today. But this was 1996, when the Web was still the "World Wide Web" and had that fresh new-car smell. (For most of us, anyway.) Skepticism was expected.
Metcalfe supplied it. The industry paid attention because he's a technical genius who helped to create Ethernet, which acts as a sort of suitcase for on-the-go bits and bytes. He's also the architect of Metcalfe's Law, which first explained how network effects would unleash billions in value via firms like eBay (Nasdaq: EBAY ) and Facebook.
But Metcalfe's prediction of a billion user-hours lost in a single outage never happened, and he ultimately ate his words. Still, we expect columnists to take risks, and one spectacularly wrong call doesn't make Metcalfe any less of a genius.
In contrast, Kagermann's prediction appears to be self-serving and seems to ignore facts -- making it all the more troubling.
Beware the bloviator
Recently, he told a reporter at The Wall Street Journal that the most-desired features of business software are security, reliability, and regulatory compliance. The implication? Software-as-a-service -- that is, software you can access via a Web browser rather than download and install -- from upstarts like salesforce.com (NYSE: CRM ) isn't the threat to SAP and its peers that I think it is.
But Kagermann isn't alone. The Journal also gets close to jumping the shark when, in the same article, the interviewer refers to a minor outage at the Mozilla Foundation as proof of the weakness of the Web-delivery model.
Again, balderdash. Mozilla tracked more than 8 million downloads of Firefox 3, easily exceeding its public estimates.
Let's review how silly Kagermann's argument is. When it comes to the Web and software-as-a-service:
- salesforce.com says it has more than 80,000 community developers working on its platform, and that they've built 69,000 software applications.
- NetSuite (NYSE: N ) already has its SaaS suite working on the iPhone.
- Survey research from THINKstrategies and Cutter Consortium found that a third of corporate respondents were using a SaaS application, and another 37% were considering the technology. Of those already using SaaS, more than 90% were satisfied and planned to expand their use of SaaS. [Emphasis added.]
Thinking about Kagermann and Metcalfe reminds me of the two truths of tech investing that I wrote about not long ago. They are:
- My best ideas will always be under assault from something newer.
- Occasionally, these newer ideas will overtake my best ideas.
If I'm right -- and I think I am; there's enough history to support my point -- then it never makes sense to invest in firms that are swimming against the tide of innovation. Stocks like these aren't screaming "Buy me!" They're screaming "Short me!"
SAP may be one of them -- but only time will tell. Its operating margin is in freefall as billions of dollars flow toward SaaS. Salesforce.com alone is on track for $1 billion in revenue this year. Do you really want to bet against that?
I don't. I singled out a top player in Web-based computing for the June issue of Motley Fool Rule Breakers. I believe it will at least double over the next three-to-five years. I also believe it's a stock you buy to hold forever. Find out why with a 30-day free trial to the service. There's no obligation to subscribe.
Fool contributor Tim Beyers is a member of the Rule Breakers team. He didn't own shares in any of the companies mentioned in this article at the time of publication. eBay is a Stock Advisor selection. The Motley Fool's disclosure policy is screaming for ice cream.