Trefis'  Instablog

With a market cap of about $266 billion, Microsoft is the most valuable software company in the world but the most valuable software business is IBM Middleware.

Software Business Segment	Trefis Value Estimate
IBM Middleware	$103 billion
Microsoft Windows Operating System	$101 billion
Microsoft Office	$83 billion
Oracle Database Software	$67 billion
Oracle Middleware Software	$41 billion
EMC Storage Software	$21 billion

Source: Trefis.com


Middleware is a type of software "plumbing" used to connect different software applications that need to share information.  Middleware is commonly used by businesses that have a variety of separate software systems to make information integration easier.  By making it easier to integrate and share information, businesses can work more efficiently and better serve customers.
 
Examples of Middleware in Use

• A hospital that has multiple software applications for tracking patient information across medical segments can use a middleware database program to more easily share important patient information between applications.  This means that physicians and nurses will be able to access the latest patient information more easily.

• A customer who views his savings balance online through his bank's website while also checking on the status of a recent mortgage application is benefiting from middleware software which is integrating information from different parts of the bank's operations (savings and mortgages) and delivering it to the website.

 
IBM's has a variety of middleware products, with brands like Websphere, Lotus, Tivoli and Rational, that are used to connect diferent types of software systems.  You see more about IBM's Middleware business here.

Disclosure: No positions

Based on our Discounted Cash Flow (DCF) analysis of the notebook PC businesses of Apple, HP and Dell, we've estimated that Apple's notebook business is more valuable than that of HP and Dell combined.  Apple's higher valuation is driven by three factors: (1) higher average notebook pricing compared to HP and Dell (2) growing market share (3) higher margins (making Apple notebooks more profitable). 

Notebook PC Valuation

Apple:  $22 billion
HP:      $12 billion
Dell:       $6 billion

For all three companies, the notebook PC business is more valuable than the desktop business given the on-going shift in demand from desktops to notebooks so figures above also give you a sense of the comparison for their overall PC businesses.


Key Valuation Metrics

Source: Trefis estimates
* EBITDA margin estimate
** Gross margin estimate


Additional Detail on Trefis Forecasts

Pricing:  We expect pricing to continue to decline for all three notebook makers.

• Apple: $1,200 in 2009 to $699 by the end of the forecast period
• HP: $715 to $526
• Dell: $814 to $413

Market Share:  We expect Apple to have the largest market share gain while HP has a small gain and Dell has a small decline

• Apple: 5% in 2009 to 10% by the end of forecast period
• HP: 22% to 23%
• Dell: 13% to 12%

Margins:  We expect Apple margins to decline but still remain relatively high overall and that HP will continue to have higher margins than Dell

• Apple (Gross Profit): Decreasing from 33% to 30%
• HP (EBITDA margin): Increasing from 7.5% to 8.5%
• Dell (EBITDA margin): remaining around 5%

Disclosure: No positions

Cisco announced the acquisition of Chinese digital TV box maker DVN Holdings for about $45 million.  Digital TV boxes, also known as set-top boxes, allow cable and satellite providers to deliver interactive TV services like video-on-demand as well as higher picture quality.  Although the acquisition of DVN is a small transaction by Cisco's standards, it provides Cisco access to a fast growing market.


Key Takeaways:

• We forecast that global digital TV box market is expected to increase from about 100 million units shipped in 2009 to nearly 200 million by the end of the Trefis forecast period

• China has 160 million cable subscribers making it the largest cable market in the world.  Cisco expects the market to grow to 200 million subscribers over the next 3-5 years

• The Chinese government has mandated full digitization of cable by 2015

• DVN shipped slightly less than 1 million digital boxes in first six months of 2009

• Cisco currently has about 15% market share in the global digital TV box market

Key Questions:

1.  How much does the digital TV box business matter for Cisco (as a percentage of the stock)? 

(a) 1%

(b) 5%

(c) 10%

(d) 20%

2.  Which major tech stock is most impacted by digital TV boxes? 



Answers: About 5%, Motorola


Disclosure: No positions

eBay recently announced plans to launch PayPal X a platform that allows software developers to create payment applications that utilize PayPal.  With PayPal incorporated directly into applications, users will not have to navigate to a separate payment site to complete a transaction potentially driving more transactions for developers and PayPal. 

If PayPal X is adopted widely it could have a positive impact on eBay's stock price by driving more transactions for each PayPal account.  Payments per account on PayPal has fallen in recent years from 1.7 payments per account on average in 2005 to less than 1.2 today. 

We estimate that PayPal constitutes about 24% of eBay's value and the stock could gain about $4 per share if payments per account on PayPal were to rise to 2005 levels as a result of PayPal X.

Disclosure: No positions

Viacom's Paramount Films business makes money through box office ticket sales, DVD sales, and TV licensing of its films.  In recent years, the DVD business has been the most profitable part of the film industry with many films becoming profitable only after the film is released on DVD.  Viacom's recent Q3 earnings indicated that DVD revenues declined 21% year-on-year for the quarter. 

Historically, Viacom's US DVD Pricing increased from $21 in 2005 to $22 in 2008.  We currently estimate that pricing will continue to increase to $26 by the end of our forecast period due to on-going adoption of Blu-ray HD DVDs which are currently priced above regular DVDs.

However, adoption of Blu-ray DVD players has been slow to date with only 7% of US consumers owning a Blu-ray DVD player according to a recent poll conducted by Harris Interactive. Furthermore, DVD alternatives such as internet video (YouTube, Hulu) and video on-demand, continue to gain consumer attention.  For example, Comcast's video on-demand views (both paid and free) have increased from 1.4 billion in 2005 to 3.3 billion in 2008 and we expect this figure to reach 9 billion by the end of the Trefis forecast period.  Netflix, the DVD rental company, has been investing heavily in on-demand delivery, both online and through digital boxes, in anticipation of the long-term shift away from DVDs.

Overall, upgrades to Blu-ray DVDs have not had the impact that the Viacom and other media conglomerates had hoped.  With DVD sales stagnating or declining, a significant profit driver for big media is at risk.

Disclosure: No positions

We estimate that HP's Printers & Ink Cartridges business constitutes 24% of the company's stock price.  HP's printer business makes money primarily through the sale of ink and toner supplies for its printers.

HP's market share in printers has gone from 35% in 2005 to 40% in 2008.  We expect HP's share gains to continue over the Trefis forecast period due to HP's strong relationships with large business buyers and its traction with consumers through its PC business which has also gained share in recent years.

However, HP's printing business is continuously at risk of commoditization.  The company has been able to maintain share and some pricing power in this market through printing technology designed to limit the use of low cost (non-HP) ink and toner supplies, with HP printers.  As low cost printers and printing supplies become increasingly capable, HP's printing market share along with its printing profit margins will be at risk.

If HP's printing market share were to decline to 2005 levels of 35%, the company could lose $6 billion of its value or about $2 per share.

Discloure: No positions