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Crystal buy brings BI biz to boiling point

ANALYSIS - Business Objects' pending $800 million acquisition of Crystal Decisions, due to close in Q4 of this year, signals that the consolidation of the business intelligence (BI) industry is now reaching a boiling point.

The players turning up the heat in the BI market are Microsoft on the low end -- which continues to bundle BI functionality in its SQL Server database and Office software -- and SAP, PeopleSoft and Oracle on the high end -- whose BI adjuncts to their package-operational software are becoming more functional and widely adopted within their large customer bases.

To avoid getting squeezed out of the action, pure-play BI vendors, such as Business Objects and Cognos, are scrambling to increase their market heft by fleshing out the functionality of their BI suites and expanding their presence in large customer accounts.

The stakes are high since BI has proven to be one of the more profitable parts of the software market during the recent economic downturn, and one with the most potential for future growth. Experts claim that BI vendors have only penetrated about 15% of the total BI market.

At the same time, the scale of BI deployments is growing exponentially as organizations seek to replace a hodge-podge of departmental BI initiatives with a single BI platform that serves all employees, suppliers and customers. These standard, enterprise BI platforms reduce the costs of maintaining overlapping BI environments and create the Holy Grail of business information -- a "single version of truth" -- upon which the entire organization runs.

The best defense is a good offense

Given this backdrop, Business Objects' acquisition of Crystal enables it to leapfrog the current market leader, Cognos, and become the largest pure-play BI vendor in the space, with more than $700 million in revenue, 3,800 employees and 1,000 developers in the combined company. In contrast, Cognos last year reported $520 million in BI revenue, and has 2,900 employees and 750 developers.

The acquisition is a bold move by a relatively conservative company. Strategically, it bolsters Business Objects' chances of surviving long-term in an increasingly competitive environment. Tactically, it eliminates Crystal Decisions -- the fastest growing, sizable BI vendor -- as a competitive threat. With a revamped direct sales force and a new set of Web-based analytical products, Crystal has been competing increasingly with Business Objects for new business -- and winning a fair portion of the time.

On the product side, the acquisition gives Business Objects best-of-breed production reporting, design and server software (e.g., Crystal Reports and Crystal Enterprise) -- a key gap that currently exists in Business Objects' suite of BI tools. Business Objects currently provides best-of-breed interactive query, reporting and analysis tools for power users, but comes up short in production reporting.

Production reporting tools enable IT or professional report developers to create pixel-perfect reports and to distribute them to hundreds or thousands of users via multiple channels (e.g., paper, Web, e-mail or Excel). Examples of production reports are bank statements, invoices, regulatory reports or standard internal reports where formatting and printing are key requirements.

During the past year, production reporting has become a key battlefront among BI vendors. While OLAP and self-service BI have garnered the lion's share of attention in the past, vendors have discovered the simple truth that a majority of enterprise users simply want to consume pre-defined production-oriented reports (paper or online) rather than create their own reports.

This is one reason why Crystal Decisions has been the fastest growing BI vendor during the past several years with a 30% annual growth rate. It's also why Cognos, MicroStrategy and Microsoft are preparing to ship production-reporting tools, and why privately held Information Builders, a long-time reporting vendor, is gaining positive marks from industry analysts.

Surprisingly, it seems that the growing popularity of production reporting caught Business Objects offguard. Company officials admitted during the acquisition announcement that they had not initiated plans to develop a true, production-reporting product. (The officials noted that customers use WebIntelligence to build reports, although not the pixel-perfect variety supported by Crystal Reports). Since Business Objects was about to wage a war without ammunition, the availability and willingness of Crystal Decisions to be acquired is an amazing stroke of good luck for Business Objects.

Besides production reporting, Crystal also brings many other goodies to the table -- almost 350 OEM partners, all-important partnerships with SAP and Microsoft, a sizable presence in the Americas and Asia-Pacific, and a sizable sales force that includes both direct, inside and OEM sales groups. Each of these areas is highly complementary to Business Objects' existing business. All that Business Objects needs to do now is to quickly integrate the two company's people and products in a seamless fashion that brings value, not confusion, to customers.

Fear, greed and blasphemy

I must admit that I am sad to see an up-and-coming BI player get ripped out of the market so abruptly. Crystal Decisions had a lot of momentum and was about to make a serious push to become a tier-one BI player and a fierce rival to Business Objects. It would have been fun to watch!

Unfortunately, Crystal Decisions' was almost wholly owned by a venture group, which did a quick financial calculation that determined that the $300 million in cash offered by Business Objects was greater than the $150 million or so they would have pocketed from going public. (Crystal had filed to go public in June 2003, a month before it agreed to be acquired by Business Objects.)

On the other, it would have been a long haul for Crystal to upgrade its product line and marketing team to compete successfully with Business Objects, Cognos, SAS Institute, Oracle and other large vendors in the BI space. The acquisition enables Crystal executives to more quickly achieve their stated objectives of becoming a $1 billion BI vendor that offers a comprehensive BI suite -- yet they had to relinquish control of the firm to do so in an accelerated fashion.

I suspect that Business Objects will keep the Crystal Reports product and brand intact and discard most of the rest of Crystal Decisions' products. It will pick over Crystal's server-based technologies to find those that can enhance the performance and scalability of WebIntelligence, an important requirement for Business Objects' largest enterprise customers. It will then leverage Crystal's sales forces and channel to aggressively push Business Objects' WebIntelligence product into every nook and cranny in the market. If all goes well, the combined company will cause grief to Cognos, and create severe stress for smaller BI players, especially Brio and Actuate.

So, from a product perspective, the acquisition makes sense. The strengths and weaknesses of the two companies' product lines are complementary. Instead of duplicating resources to develop, sell and support the same types of products, the companies will be able to streamline operations (saving $25 million in the process, according to officials) while delivering the same product capabilities.

The only problem for Business Objects is that the acquisition violates one of its core principles -- to provide multiple BI capabilities within a single tool. Many customers have purchased WebIntelligence because it offers integrated end-user reporting, querying and OLAP using a single graphical interface and object model. By acquiring Crystal, Business Objects now has two distinct product lines. Eventually, Business Objects will merge the products, but history has shown that this will take many years. In the meantime, Business Objects will somehow have to spin its product transgressions in a positive light.

The key is execution

It's unclear how quickly and effectively Business Objects will be able to digest Crystal Decisions. Although the cultures of the two companies are fairly similar, we suspect many Crystal Decisions employees are disappointed by the move. Many were excited by the prospect of going public and gaining the funds needed to compete head on with Business Objects and Cognos. Now, many are likely to lose their jobs and the rest will see the products that they've lovingly nurtured for the past several years eliminated or pillaged for their embedded technology.

The deal is Business Objects' largest acquisition ever and the biggest in the BI space, an inevitable outcome of a highly competitive and rapidly consolidating market. Although I'm sad to lose Crystal Decisions as an independent vendor, I do hope that Business Objects does a good job of merging the two companies and providing enhanced value to customers. That's the result upon which all deals must be judged.

About the Author

Wayne W. Eckerson is director of education and research for The Data Warehousing Institute, where he oversees TDWI's educational curriculum, member publications, and various research and consulting services. He has published and spoken extensively on data warehousing and business intelligence subjects since 1994.

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