The new economics of the BI market

Consolidation within the Business Intelligence (BI) market continues, affecting the entire BI software stack:

• After more than a dozen acquisitions made by Business Objects, Cognos, and Hyperion over the past few years, these BI tools/analytics industry leaders were themselves snapped up in a matter of months by SAP, IBM, and Oracle respectively.
  
  
• In the 2005-2006 time frame, the BI/data integration market consolidated as the major DBMS and BI players acquired a host of ETL and data quality solution providers, including Ascential, Sunopsis, FirstLogic, and Acta.
  
  
• Earlier in this decade, we witnessed a similar consolidation within the underlying BI/DBMS segment that became dominated by Oracle, IBM, and Microsoft.

But economies of scale enabled by consolidation is just one of the two primary drivers of the new economics of BI. The other driver is economies of innovation that is a result of the continuing stream of new entrants.


Continuous market consolidation drives economies of scale

With their broad range of products, the consolidators -- IBM, Oracle, and SAP -- can now offer their customers the simplicity of one-stop shopping, single contracts, quantity discounts, and a single point of support. Their focus on removing redundant administrative costs, gaining efficiencies in all aspects of distribution, and leveraging commonality in a broad range of products should allow these mega-vendors to provide quality products at lower costs while still improving their own profitability -- a situation that is good for both customer and vendor. The fact that none owns a dominant market share also helps ensure competitive pricing. These economies of scale should benefit the overall BI marketplace.


A constant stream of VC-funded entrants drive economies of innovation

While convenient, one-stop shopping often does not deliver best of breed, innovative solutions. The greatest strengths of the mega-vendors are their extensive product lines -- product lines built on millions of lines of code, sold to huge numbers of customers, and targeted at the core of a very large market. These great assets, however, make it difficult for the mega-vendors to focus on new products for new market needs. As a result, the venture capital world continues to fund a series of new entrants who can provide focus on and agility around ever evolving market needs. These newcomers provide both technology and business model innovations.


Business model innovation examples: Open source and SaaS

A clear example of business model innovation is the open source movement (e.g., MySQL, Postgres, Jaspersoft, Pentaho, Talend, and others). This movement delivers various components of the BI stack to a much broader part of the market -- a market that previously was forced to make due with file systems and spreadsheets. Because of these open source offerings, millions of customers now enjoy economics which allow them to use much more sophisticated tools at very affordable prices. Another promising -- but fledgling -- area of business model innovation is software as a service (SaaS). The SaaS model when applied to BI can change the economic equation in terms of cost and speed of deployment as well as reduction in complexity of operation. Larger vendors are experimenting with this model while nimble startups, such as LogiXML, LucidEra, Oco, Dimensional Insight, SeaTab, and OnDemandIQ, are moving ahead without the constraint of existing business models not designed for a SaaS product line.


Technology innovation examples: Netezza and Vertica

By limiting the design focus of a product and building on a new foundation, it is possible to make breakthroughs in price and performance. In the underlying BI/DBMS area, several companies have made dramatic improvements in scalability, performance, price, manageability, and ease of use. Netezza has demonstrated how a special-purpose product can rapidly gain acceptance if it delivers clear value in a focused segment of the market. Vertica has shown how a ground-up software redesign on top of commodity components can provide very impressive performance at dramatically lower prices (Note: Vertica is the patron of this blog and I'm also the chairman of its board. That said, I believe that Vertica is one of the more important examples of breakthrough economics and the company has plenty of examples to substantiate this claim).

Relative to the databases from the large players, these new entrants make it possible to analyze orders of magnitude more data in new ways in less time and at much lower cost -- often on an ad-hoc basis and in real time. Examples include:

• Using these new technologies, telecom companies keep a year's worth or more of call detail records on line for analysis. Previously, it was only practical to store just 30 days worth of data.
  
  
• Online marketers can now analyze the effectiveness of campaigns in real-time and make adjustments mid-stream rather than post-mortem. Problems that were intractable because the cost of doing an analysis was more than the value returned are now affordable.
  

In summary: A buyer's BI market

The dramatic consolidation we've seen in the BI market recently is great for customers. It provides many with one-stop shopping, lower license costs, and better product integration from the mega-vendors. It also paves the way for market entrants who create new possibilities for generating business value with solutions that are optimized to meet today's business requirements, such as analyzing large volumes of data, ad-hoc querying, or implementing real-time operational analytics. The result of these innovative companies' arrival is not the displacement of the mega-vendors at the heart of the BI market but rather the extension of the market. Organizations should take advantage of the new economics and consider a portfolio of new and established technologies to maximize return on their BI investments.