Oracle's latest results came as a nasty shock to the financial analyst community. The result was even more surprising when you know that Oracle has carefully crafted plans that are laser focused on keeping Wall Street happy. What went wrong? Safra Catz blamed deal management:
First, in the last few weeks, really in the last few days of our November quarter, we saw an increase in last minute additional approvals required for previously scheduled and expected deals. As a result, we’re putting in place better deal management so that we have the time and the approvals necessary to take this into account.
Hmmm. I'm not buying that. It has been a constant source of amazement to me that Oracle appears to defy gravity in returning great numbers. It has never made sense to me given the company is selling legacy software plus re-engineered hardware.
Here is what I think may be happening.
Field reports consistently show that relationships between Oracle and its customers are among the worst in the industry. Colleague Vinnie Mirchandani counters saying:
While they do not call Oracle a “bed of roses”, I get much more negative customer feedback on value from SAP or IBM investments. SAP provides much easier executive access but when you measure progress against problems they acknowledge in previous meetings, the results are often disheartening. After a while you learn to discount that channel.
Value is only one dimension of a relationship. Oracle has concentrated on fiscal account control to the detriment of keeping customers feeling warm and fuzzy. Check this video I shot with a start up which had SAP, NetSuite and Oracle in the frame. Put in more prosaic terms, I'll likely spend a silly amount on a dinner with my wife than I would with colleagues?
Oracle customers frequently complain that they feel as though they're being taken to the cleaners on cost. Oracle has perfected the art of auditing customers to ensure that nothing slips through the cracks. My guess is that exercise is running out of steam. It's only ever a one hit wonder and does nothing to ensure organic growth.
Deep down I think there is something else in play. When I look at predictions and forecasts for the cloud apps vendors, I see nothing but sharp upward growth. What's happening? Is the market of sufficient size that one poor quarter from Oracle would be seen as a measure of general buying activity?
Oracle is starting to make headway with Fusion but I don't see a real commitment to cloud in the way some analysts are suggesting. When it acquired RightNow it was really buying old SaaS at a bargain basement price. I don't see or detect a DNA mindshift towards the cloud that is needed to make that business hum along.
On the maintenance front, Rimini Street seems to be doing just fine implying there are cracks in the maintenance model. But over arching all of this I think there is a general shift in the way pricing works. Here's a chart of how software pricing used to work:
Over time, more users meant a steady but not huge decline in prices with considerable stability even at discounted prices. I believe that is changing rapidly. SAP has pretty much run out of large HANA deals for the moment and is now rationalizing HANA based products to get into volume. That means a collapsing of price but much larger volume deals. The net-net should mean accelerated growth given that SAP is able to pick off clusters of users across a very large customer base. The same will hold true for Sybase Unwired Platform and the mobile apps and cloud LOB apps. In turn, I reckon that what we are starting to see is an apps pricing profile that goes something like this:
The important point is the time it takes for prices to collapse. Workday believes that on a five year rolling basis, it can beat out pricing against the SAP/Oracle competition by around 50%. Thinking about HANA, it is astonishing to consider that less than a year ago SAP was muttering about deals in the $10 million range but is now talking HANA for COPA at $200K. SIs are starting to understand that a x5-6 multiplier for implementation is fading away - upgrades to existing apps aside. Move the timeline to 2013-14 and you see an entirely different SI/vendor landscape emerging where the name of the game is velocity and volume.
If you agree with my rough assessment then it is not hard to see why Oracle stumbled. They may have great account control but that doesn't stop buyers from looking elsewhere. In my conversation with Phil Fersht, he touched upon the pent up demand for outsourcing in the cloud - another price data point. Combine that with a customer group that doesn't feel as loved as it might and you can see where the drift occurs.
We have yet to see whether SAP's results mirror what happened at Oracle. From what I know, the company is quietly confident of hitting all its stated targets. The last few days of December will be telling along with the date upon which they pre-announce. However, and contrary to what Vinnie might think, SAP has a much more broad based, flexible and scalable business model where it is starting to understand the volume game much better than it did six months ago.
How that ends up cannibalizing the core has yet to be seen and we do not yet know the overall impact a changing business model will have on current predictions. But SAP is not stupid and having understood what volume can do to build a business in the shape of SuccessFactors, I believe they are ready to take the next steps to improving customer value.
Analysts will need to consider these factors when pawing over the bones of the next announcement from SAP while keeping a firm eye on how the SaaS/cloud vendors continue to ramp. In retrospect, they may have to watch Oracle much more closely because, among other things, I don't believe they have the same degree of flexibility. That is a significant weakness when you're trying to introduce a new LOB aka Fusion while continuing at champagne pricing with a legacy portfolio.