Ellison: Where's the big money in SaaS?

Ellison: Where's the big money in SaaS?

Summary: Oracle CEO Larry Ellison says software as a service and the small business markets are interesting, but not terribly profitable. In other words, Ellison largely dismissed SAP's Business ByDesign.

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Oracle CEO Larry Ellison says software as a service and the small business markets are interesting, but not terribly profitable. In other words, Ellison largely dismissed SAP's Business ByDesign.

But the dismissal isn't exactly what it seems. Ellison was speaking for Oracle and for the company a move downmarket with an on-demand offering would be less profitable than its current business model. But for Ellison to say that there's no money in SaaS and smaller enterprises is a tad disingenuous. Why?

Ellison owns NetSuite, a SaaS ERP provider that is prepping an IPO. If Ellison really thought there would be no money in SaaS ERP he wouldn't own NetSuite. But Ellison's comments, which were delivered (transcript) after the company's solid earnings report, do reveal Oracle's strategy. Oracle isn't going to try and replicate what SAP has done. Here's Ellison's strategy: Let SAP figure SaaS out and crow if the rival fails. If SAP is successful--it probably will be over time--Ellison buys NetSuite from himself.

Simply put, Oracle will simply buy NetSuite when the time is right. Sure, there are corporate governance hackles to be raised since Ellison is basically buying his own venture, but that'll be worked out with some independent committee and a healthy premium. So when folks figure out this SaaS thing, Ellison will answer with another acquisition.

Here's what Ellison had to say about the growth strategies of Oracle and SAP and the SaaS market:

What I'd like to highlight here is the radically different strategies of the two companies for growth. Our strategy for growth is to find a way to add more value to the same customers we already serve, which are the large end of the mid-market and large companies. What we're doing here is moving beyond ERP to industry specific software. So in the telecommunications industry that would be billing systems and network provisioning systems and network inventory systems; core applications to run their business, to run telco. Core applications to run a bank. Core applications to run a retail chain of stores. Core applications to run a utility. That's our focus, and that allows us to leverage the existing relationships that we have because we already sell databases to these companies, we sell middleware to these companies. We sell ERP and CRM to these companies, and now we want to sell this industry-specific software.

It's very different than SAP's strategy which is to go after small companies; small companies with their new Business ByDesign, formerly known as A1S product. Now, we see the problem in that because we've looked at going down market. We've looked very closely at it, and we think it's very hard to make money because there is no synergy. To go down market you need a new product and new product development teams. You spend a lot of money developing a whole new product for the low end. But you also need an all new sales force because we don't call on those customers. We don't call on small businesses, and it's very expensive to call on small businesses. It's very expensive to do ERP implementations in small businesses. The cost of sales is high. The cost of implementation is high. There are virtually no synergies in sales, marketing, and product development and support.

So while we think it's an interesting market -- the small market -- because it's large, we just haven't figured out a way to make a substantial profit in that market. We think it's hard to make money. Our strategy: add more value, go upstream, sell industry-specific software to our existing customers, and we'll watch and see how SAP does going after small companies. Especially with in Software as a Service which we think is very interesting, but so far no one has figured out how to make any money at it.

What Ellison could have said no one has found a way to make gobs of money in SaaS. Salesforce.com is profitable but you could find the $481,000 the company made in its latest fiscal year in Ellison's couch. Indeed, without maintenance fees SaaS may be less profitable in the long run. Later in the call, Ellison also noted that it's not clear how wide open the small business space really is because there are a lot of vendors--notably Intuit--to worry about. And since Oracle doesn't cater to smaller companies it would have to hire a new sales force, develop a new product development team and launch new products.

However, Ellison can make these comments precisely because Oracle has its SaaS plan ready--it's called NetSuite.

Other odds and ends:

IBM is Oracle's middleware obsession. Oracle clearly wants to catch IBM in middleware. IBM got a few more mentions than usual this time around.

Ellison:

Microsoft, with their middleware, a lot of which is embedded in Windows, Microsoft being the number 1 player, IBM being the number 2 player, and Oracle being the number 3 player in middleware. We passed all the other niche players. We really separated ourselves from the niche players. BEA, we're almost twice as large as BEA right now, BEA is shrinking in terms of new license sales. So, it's come down to the same big three, but we're growing dramatically faster than our competitors and our target really is to beat IBM because it's very difficult to measure the size of Microsoft's middleware business because so much of it is embedded in Windows.

Oracle touted some key customer wins. Oracle president Charles Phillips said:

Intuit made a commitment to our entire suite of offerings, as did Thomas Cook. Both of those were wins against IBM, University of Virginia. Enterprise performance management wins, Ford Motor Company, Cisco, Baker Hughes. Business intelligence against the usual competitors, Anheuser-Busch, U.S. Steel we won and several others. Content management, which I mentioned was very hot, Symbion, a very large airliner, the U.S. Department of Agriculture, and those were wins over Documentum and a replacement of IBM Filenet. Management enterprise-wide rollout at Royal Bank of Scotland and Scandia. We beat Sun, IBM and C8 in those deals.

There may be some worries about the economy, but Oracle isn't showing its cards. Safra Katz, president and CFO, said Oracle's sales pipeline is strong and the company is benefiting from the weak dollar. But she was asked whether Oracle's outlook was conservative due to economic concerns. Katz said Oracle is well diversified. Analysts seemed to believe that Oracle was giving itself a cushion with its outlook.

On the financial vertical, Phillips, like other software executives, said he hasn't seen a slowdown in demand. Phillips said:

I was just there last week, meeting with a lot of financial customers and it hasn't translated yet to any definite change in spending from what we can tell, although there will be layoffs, of course. That's coming, so we'll have to wait and see. We're watching it, but none of my guys have seen anything. I haven't seen anything yet.

Topics: SAP, Cloud, Emerging Tech, Enterprise Software, IBM, Oracle, Software

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3 comments
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  • Great Idea, But You're Thinking Too Small

    Great idea for Oracle to buy NetSuite if/when they want to get into SaaS, but you're thinking too small. When you are the likes of Larry and have a mouth like Oracle to feed, only prime acquisition beef will do. Larry would buy Salesforce. NetSuite might get swept up too, but it's more of an appetizer.

    This is actually a good strategy for really big ISV's to transition in a SaaS product. More on my blog:

    http://smoothspan.wordpress.com/2007/09/21/oracle-could-buy-netsuite-but-salesforce-is-more-to-the-point-aka-saas-strategy-for-big-isvs/
    BobWarfield
  • Where's the big money for Ellison?

    In an IPO.

    Quoting the article:

    "Ellison owns NetSuite, a SaaS ERP provider that is prepping an IPO. If Ellison really thought there would be no money in SaaS ERP he wouldn???t own NetSuite."

    There may not be any money in SaaS, but stock buyers respond less to financial results than to the conventional wisdom, a widely-believed narrative.

    So, just as Microsoft stock price is restrained despite the financial results the company consistently delivers, so positive opinion of SaaS can inflate the price even though profits are elusive.

    If SaaS is ever worth doing, Oracle will purchase whatever assets will save on expenses.
    Anton Philidor
  • Oh yeah?

    [Enterprise performance management wins, Ford Motor Company,...]

    Hmm, I guess the lawsuit over the billion dollar Everest portal debacle didn't enter into Ellison's thoughts on Company 'F'. I wonder if his lawyers are telling him to not mention that company . . . .
    Roger Ramjet