As I committed last week, here’s my response to Phil Wainewright’s post on SAP’s earnings and our path “down a blind alley”.
Your recent post suggests that Ellison is positioning Oracle for the switch to a subscription revenue model as affirmation of your belief that the entire industry must move to a zero-cost licensing model. While I agree that the industry is adopting subscription licensing, I think you are missing a rather significant – huge – point that the flavor of license a product or service is available under is secondary to whether or not the product actually fits the needs of the customer. As I myself wrote back in February, it makes sense for Ellison to do this if only to get a valuation bump for calling “maintenance” revenue “subscription”, and because Oracle just can’t compete effectively against SAP as the market currently exists. If I did for Oracle what I do for SAP, this would absolutely be at the top of my list.
If the only variable that a company had to tweak was their license options, enterprise software would have a lot more competitors rather than a lot fewer. The fact remains, and you should know this as well as anyone, is that it’s not easy or inexpensive to build the kind of software that SAP and our major competitors have, and in our markets we have achieved a level of success that goes beyond any one factor. Yes, we have a world class sales and marketing organization, and extremely stable executive leadership, and a development organization that understands these products and markets better than anyone, and customer satisfaction that is the envy of our competitive peers, and a technology future built on a real set of technologies and not just cool looking Powerpoint slides, and a set of strategic partners that any company would die for, and a customer reference list a mile long (ever wonder why it’s so hard to get Oracle to talk about customers, and why Ellison gets so pissed at the fact that SAP customers are so willing to speak on behalf of the company?), and much more. All these things are true and not once did I mention the kind of license that we sell our products under.
Markets are never monolithic, any given vertical has hundreds of slices that may be limited to a single company, a dozen or a few hundred. Each of these slices behaves according to different determiners, some are price sensitive, some are features, some company reputation, some implementation risk, and no doubt we will see some slices respond according to license options. Salesforce has done a fantastic job of identifying the slices that respond well to their product offering, distribution options, and license, but they have not done well transitioning into our core markets. The SAP CRM on demand offering will not overlay directly onto SFdC’s core market either, we’re targeting a different set of slices.
Your posting also has some errors that I want to correct:
“I think there’s a fundamental strategic error being made here, based on the misapprehension that customers want to ‘own’ software. What they really want is to be in control of their business processes, which they automate using software.”
How are customers not in control of their business processes using on premise software that is perpetually licensed? If anything this is a hell of of lot more control than using a hosted service offering, as SFdC customers discovered when the lights went out and it took up to a day to restore service. When a customer can take the software they have and make it work with their processes, can use it indefinitely regardless of whether or not they pay a monthly fee, can add users at will, and most importantly have control over the infrastructure that they run their business on, then they have real control over their business processes – as you rightly point out is a primary motivator for them.
I would also add that the actual license fee for the software is a small part of the larger equation, and whatever you want to license under still have a maintenance and support component attached to it. I’m not going to defend the complexity of enterprise software as necessary, but the fact remains that much of what we, or Oracle, or Peoplesoft does is complex when applied to the traditional markets we have sold into. As we move down into the lower midmarket we’ll have to rethink how and what we build, but let’s not make any mistake about it, SAP and Oracle are not in any position to sell to the corner florist or the machine shop with 10 employees and a few million in annual revenue.
“It’s not important to them in that context whether the software is licensed from SAP or open-source. It can even be on-demand, so long as the provider gives them enough visibility and control.”
Wait a minute, you started out talking about license vs. subscription and Oracle vs. SAP, but now you are throwing in open source? Nowhere did I read that Ellison was talking about open sourcing Fusion or Fusion Apps, so this doesn’t belong here. We can debate the merits of open source vs. proprietary software in another post, but let’s not throw it all together as one giant trend. On demand and hosted software are also separate concepts, and license variations of course can be applied to all. I could have a hosted software service that I pay a flat license fee for, or pay a subscription for hosted storage and CPU capacity while paying a flat fee for application licenses.
“For a long while, the enterprise software model only gave them one ‘ownership’ option: perpetual licensing (which isn’t ownership anyway, it’s just a long-term lease on closed-source software that belongs to somebody else).”
What is it about “perpetual” that you don’t understand? Also, customers don’t “own” open source or on-demand (which I am assuming you are using to describe hosted subscription services), as one of the interesting twists of copyright law is that someone has to own something in order to license it, so even open source products are owned by someone other than the entity licensing it. In other words, a customer doesn’t “own” open source products any more than perpetually licensed proprietary products. And insofar as hosted services are concerned, there’s huge risk associated with that vendor going out of business and taking all of your data with them, or changing the terms of the service (which they can do) and turning you off, or introducing an upgrade that changes a feature or process you depend on, and you don’t have any option but to go with it. In case you are thinking I’m simply defending the notion or perpetual proprietary licenses you are dead wrong, I am simply pointing out that these are no silver bullets and they in fact introduce new complexities where none existed before.
I also want to take a moment to clarify what I do for SAP, I am in our marketing organization and my team does Oracle competitive strategy. I don’t just post about Oracle because I have nothing else to think about, this is what I do for SAP – Oracle competitive strategy. The fact that Oracle is flailing about as they try to make their acquisition strategy work, and irrespective of any business model they settle on they still have to make everything work together, is good news for me. I’ve never made any secret of what my biases are, so it shouldn’t surprise anyone that I’m going to blow the horn about our good performance relative to Oracle – it’s my job. I have also noted in posts past that I think Ellison is doing the right thing by going with a subscription model (assuming they actually do it) and by embracing open source, so give me a little credit for having some objectivity about this business.
You should also note that not once did I suggest that just because everything is working well that we should just stay the course. Throwing out your business model for whatever is in fashion today is a decision that every CEO should take deliberately and with great caution because let’s not forget that there is over $11 billion a year in revenue and $68 billion of shareholder value riding on the business model we have, and we are performing at the top of our peer group so we’re doing something right. It doesn’t surprise me, nor should it surprise you, that our executives are cautious in their public statements, because unlike Oracle we haven’t spent $20 billion of our shareholder’s money and have little to show for it. Phil, I appreciate your comments and point of view, but would encourage you to be more objective about the practical realities of our business before you make comments like we are “going down a blind alley”.
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