30 Mar 2018
Ten years ago, I was paid to write research on investing in software companies. My USP was that I was pretty much a technophobe with little or no interest in software but with something of a passion for finding how to make money by investing in companies. Back in the early 2000s the world of software was full of exclusive jargon which, deliberately or not, served to discourage scepticism. The following is selected more or less at random from the 2006 Annual Report of SAP AG. THE “NEXT BIG THING” IN INFORMATION TECHNOLOGY Today, the IT sector stands on the verge of widespread adoption of service-oriented architecture (SOA), a development that promises to change the dynamics of the software industry as much as the shift to client-server architecture did 15 years ago. In essence, SOA defines the technical standards that enable the various enterprise software applications used by companies and their business partners to exchange data effectively. Thus, SOA will help reduce the costs of creating and maintaining data exchange interfaces, a factor CIOs consistently cite as one of their top challenges. When I read stuff like this I used to think a) does this mean anything and b) even if it does, how is anyone going to persuade the board of a major company to throw money at it? That is why I hit upon a personal rule that can be usefully extended from the narrow world of software analysis to life itself – never be afraid to ask the stupid question. Experience teaches that it’s often the hardest one to answer. Fifteen years ago the normal software business model was to sell a perpetual licence that allowed the customer to use the software plus an annually payable fee that got him maintenance and upgrades. The analyst community was obsessed with the growth of software companies and consequently watched the “new licence sales” number in every quarterly earnings release. Share prices were highly volatile as a result. A “miss” from the quarterly numbers often resulted in carnage for the shares. I was actually frightened. How I could I make recommendations to buy and sell shares when my view could and probably would be...