Huge Bets on Search: Spreadsheet Fever Rages
June 11, 2014
The news of the $70 million injected into Elasticsearch caused me to check out Crunchbase and some other sources of funding data. I looked at a handful of search and content processing vendors in the departures lounge. I am supposed to be retired, but Zurich beckons.
How large is the market for search and content processing software and services. As a former laborer in the vineyards of Halliburton Nuclear and Booz, Allen & Hamilton, the answer is, “You can charge as much as you want when the customer is in a corner.” The flipside of this adage is, “You can’t charge as much when there are many low cost options.”
In my view, search—regardless of the window dressing slapped on decades old systems and methods—is sort of yesterday. One of the goslings posted a list of Hewlett Packard’s verbal arabesques to explain IDOL search as everything EXCEPT search. The HP verbal arabesques make my point:
Search is not going to generate big money going forward.
Is search (regardless of the words used to describe it) a money pit like as the Tom Hanks’ motion picture made vivid?
For that reason, I am wondering what investors are thinking as they pump money into search and content processing companies. The largest revenue generator in the search sector is either Google or Autonomy. Google, as you may know, is in the online advertising business. Search is a Trojan horse. Search is free and the clicks trigger the GoTo/Overture mechanism that caused Google’s moment of inspiration. Before the Google IPO, Google ponied up some dough to Yahoo regarding alleged borrowing of pay to play methods.
Autonomy focused on the enterprise. Between 1996 and October 2011, Sir Michael Lynch grew the company to about $1 billion in revenues. HP’s prescient and always interesting management paid $10.3 billion for Autonomy and then wrote off $8 billion, aimed allegations at Autonomy at the company, and, in general, made it clear that HP was essentially a printer ink business with what seems to be great faith in IDOL, DRE, and assorted rich media tools.
More recently, IBM, the subject of an entertaining analysis The Decline and Fall of IBM by Robert X. Cringely suggested that Watson would grow to be a $10 billion in revenue business. Not a goal to ignore. The fact that Watson is a collection of home grown widgets and open source search technology. I think Watson’s last search contribution was creating a recipe for a tamarind flavored sauce. IBM is probably staffed with folks smarter than I. But a billion dollar bet with a goal of building a revenue stream 10 to 12 times greater than Autonomy’s in one third the time. Wowza.
Let’s do some simple addition in the elegant United lounge.
Let’s assume that IBM and HP actually generate the billions necessary to recover the cost of IDOL and hit the crazy IBM goal of $10 billion in four or five years. To make the math simple, skip interest, the cost of assuaging stakeholders, and the money needed to close deals that total $20 to $25 billion. HP pumps up Autonomy to $10 or $11 billion and IBM tallies another $10 to $12 billion.
So, HP and IBM need or want to build $10 billion or more in revenues from their respective search and content processing ventures. I estimated that the market for “search” was about $1.3 billion in 2006. I am not too sure that market has grown by a significant factor since the economic headwinds began blowing through carpetland.
Now consider the monies invested in some search and content processing companies.
Attensity (sentiment analysis), $90 million
BA Insight (Microsoft centric, search and business intelligence), $14.5 million
Content Analyst (text analysis, SAIC technology, $7.0 million
Coveo (originally all Microsoft all the time, now kitchen sink vendor), $34.7 million
Digital Reasoning (text analysis, no shipping product), $4.2 million
EasyAsk (natural language processing, several owners(, $20 million
Elasticsearch (open source search and consulting), $104 million
Hakia (semantic search), $23.5 million
MarkLogic (XML data management and kitchen sink apps), $73.6 million
Recorded Future (text analysis of Web content), $20.9 million
Recommind (similar to Autonomy method), $15 million
Sinequa (proprietary search and widgets), $5.3 million
X1 (search and new management), $12.2 million
ZyLab (search and licensed visualizations), $2.4 million
I am not sure these amounts are 100 percent accurate, but for my purpose in the airport departure lounge, these numbers are close enough for horseshoes. (Keep in mind that Dassault needs to grow Exalead to repay the $130 million paid for the company and recoup the possible losses the French vendor has racked up. Vivisimo has largely disappeared into IBM, but the $20 million paid for the company underscored the comparative bargain the metasearch and clustering technology represented. Lexmark has to convert its purchases of Brainware and ISYS Search software (code dating from the 1980s) into positive cash flow and hefty revenues. Oracle has to generate a billion or more from Endeca to recover its costs along with positive growth from InQuira and RightNow. Oracle Secure Enterprise Search is also in the game. And there are dozens of other vendors of search and content processing systems trying to win customers and grow businesses. These outfits include Microsoft with the end of life Fast Search ESP technology, Connotate with its Web scraping and search system, Google and its cheerful but challenged Google Search Appliance, and dozens of other companies. Ever hear of SRCH2, Maxxcat, Funnelback, Intrafind, etc.? My point is that the total invested in this short list of companies presented in short list with funding levels totals to a pretty interesting number:
$1.426 billion
Companies ingesting more than $50 have to find a way to hit the $130 million in revenue that Endeca achieved the year its was sold to Oracle. In the time period covered by my search and content processing files, only Autonomy, Endeca, and Google achieved revenues of more than $100 million. The other 99 percent of the search vendors in my files were money losers or stuck at revenues that forced the owners to sell.
I took a United napkin and totaled the HP $11 billion, the IBM $11 billion, and this $1.4 billion. These companies have to generate somewhere around $24 billion in the next few years to hit goals and sort of break even.
However, is this type of revenue from search and content processing possible? Well, it took Autonomy 15 years, numerous acquisitions, and some adroit management maneuvers to get close to $1 billion. HP and IBM and allocate money to search and “demonstrate” that the targets were met. I am not sure that quarter after quarter of weak revenues and brutal cost cutting are possible going forward. I may be wrong, but building a sustainable $500 million in annual revenue in search is difficult. When there are dozens of companies offering essentially similar technology wrapped in different interfaces, the task is difficult. When the source of the revenues are consulting and cloud services, the task may be more challenging. Amazon is a search vendor and it uses WalMart-type tactics to make life tough for its would be competitors.
Furthermore, there are open source options and a steady flow of tech savvy people who will apply their skills to a search and content processing project at very competitive rates.
Net net: I am struggling to understand how these companies and their stakeholders are going to get their investment back. Earning a 2X, 5X, 10X or 17X return on the investments in search and content processing mean that the total market appetite for findability technology is very, very large.
My flight has been called. I have not invested in search and content processing. I learned how lucky I was to get money out of the Point (top 5% of the Internet) in 1996. After experiencing first hand the difficulty of generating sustainable revenues from search, I vowed to watch search and its children from the sidelines.
The outfits with skin in the game have to worry about a blemish turning into skin cancer. I don’t. The question remains:
Where will customers for old technology that is available as open source come from?
I have no idea, nor do the senior managers on the hook for the wild and crazy investments. My thought is that the executives raising funds for search make money raising the job. Once the money is in hand, the search and content processing company thrashes until it fails, gets another infusion of cash, or get bought by an outfit like Dassault, HP, Lexmark, or a company of this ilk. Organizations want to reduce costs for search. With search systems constrained by the Big O hurdle, I don’t see big money flowing in sufficient quantities to make investors whole.
Stephen E Arnold, June 11, 2014
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One Response to “Huge Bets on Search: Spreadsheet Fever Rages”
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Whether or not a company makes money on the invested $billions seems a moot point. The investor can make money…why he/she invests. The manipulations of the market allow this, whether the company using the money makes any or not. Not everyone wins, but enough so as to keep the money rolling in. Probably why all the announcements, all the hip hip hooray, and arabesques.