In all the hoopla around Web 2.0/Enterprise 2.0 applications and services I'm left with an uncomfortable question. Where's the money for the application creator?
- mySQL has only just broken even after years of pioneering open source with only 1:1,000 downloads leading to any revenue for mySQL.
- Zoho Office on Facebook is getting a lot of attention yet to date, there have only been some 2,120 taking up the service.
- Robert Scoble hyped the Google Reader Shared Items yet it has plateaued at 5,921 users.
Is it any wonder then that Larry Ellison, Oracle's CEO, doesn't seem fazed by open source? In discussing a recent Gartner research report into SaaS Phil Wainewright:
The Gartner release doesn’t mention this specifically, but I was intrigued to see that its research found enterprise content management and search were the application categories where SaaS adoption is lowest, at less than 2% of spending...There are a lot more Web 2.0 tools that are currently either free of charge or else being tested out in low-budget pilots. If enterprises decide to move ahead with adoption, that could increase penetration of SaaS in this application area. On the other hand, concerns about losing control and oversight over what’s happening to the content and who’s seeing it may remain a brake on adoption.
If there is a brake on adoption then it is hard to see how application developers will turn a coin. Regardless of the egalitarian notion of 'free' everyone needs to put food on the table and ad-supported apps won't cut it in the enterprise. As Ellison said at Haaretz:
I think that if we put advertising on our general ledger pages, so before you make a journal entry, somebody suggests that you go out and buy I don't know, a Mars bar or a Coke, I think our customers wouldn't be thrilled. They want to make a journal entry. B, we are not a consumer company.
Part of the problem is price perception. In the enterprise, 'free' is seen as 'no value' whereas big ticket commands attention. A few moments consideration shows that doesn't make sense. Fellow Enterprise Irregular Vinnie Mirchandani went off on one of his periodical rants at SAP and Oracle, implying that recent examples of Web 2.0 services are little more than sops:
You really think Oracle is ready to become transparent with its customers? You really think SAP and partners can implement anything for its customers in 24 days, let alone 24 hours? Can they come close to the web 2.0 rich experience for users? Will they ever get anywhere near price points we are seeing from pure play web 2.0 vendors?
Till I see massive transformations at both, all this cool stuff is a thin coat of innovation paint on old, overpriced products and business models.
Vinnie spends a lot of time beating up vendors in price negotiations. He sees at first hand the merry dance that goes on between customers and vendors. It is clear that price does matter. In comments to another Irregular and fellow ZDNet blogger Mike Krigsman's rebuttal, Vinnie adds:
You and I have watched SAP and Oracle for years and I, for one do not see the 180 degree turn, or even a 30 degree turn. I continue to see the old SAP and Oracle and their partners in clients negotiations every week. The core of the companies is not changing.
Me too Vinnie. Watching SAP execs squirm as they try and divert talk about A1S as a business model disrupter is telling. It's easy to understand why. Earlier in the year, SAP let slip that A1S pricing is in the $160/month ballpark. Henning Kagermann said the sweet spot for A1S is the 50-user business paying $50-100K per annum. Do the math. SAP is pinning growth from 40K to 100K customers by 2101 upon A1S. If we assume it all comes from this segment and taking a mid-level figure of $75K per customer we end up up with $4.5 billion revenue. Compare that with SAPs latest results: $4.6 billion in revenue in 6 months. It doesn't take a brain surgeon to realize that SAP is readying to eviscerate its own pricing structures.
If SAP sets the pricing stage, then there's a simple solution to the money problem and one that I'm surprised hasn't been previously discussed. Instead of blog whispers about 90% application license discounting, why not simply re-write the price books? It would take a lot of the fun out of price negotiation and may even put a dent in Vinnie's business but it would have a positive effect on the Web 2.0 world. But even here there are problems.
In a recent price negotiation, we shaved 40% off the price very quickly and are looking at an effective cost of $3.80 per user per annum for an enterprise class blog info system to be delivered to some 130,000 users. Even then we're not sure if money is being left on the table or whether the service provider is being adequately compensated. The system won't pay the bills so comparisons with ERP for example are silly. Even so, if a service like this can get to this sort of price level then why not mature, traditional apps?
Validation for Web 2.0 services makes a big difference to CXOs. Biting the bullet now means that at a stroke Oracle/SAP could do just that while serving up a response to Vinnie's and my continual gripes over value delivery and pricing. Of course it will take more than that but as vendors well used to dealing with scale, they're the ones who should be taking the lead. Whether their Wall Street masters will let them without significant penalty is another matter.