Does a 'fiscal cliff' await software vendors switching to cloud?

Does a 'fiscal cliff' await software vendors switching to cloud?

Summary: No one in the industry is talking about any fears they may be having about the cloud -- at least not out loud.

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The move to cloud is seen as the ultimate form of product cannibalization for software vendors, since customers will be switching from high-end purchases to relatively low monthly payments.

Clouds over Lake Galena Dam Bucks County PA by Joe McKendrick
Photo credit: Joe McKendrick

In a new report, Diginomica's Kenny MacIver says this is part of a potential "fiscal cliff" that awaits many vendors as they shift their user bases from licensed, on-premises software to cloud-based services.  He points to an interview with Oracle president Mark Hurd, who says the mega-vendor is ready to meet the cloud model head-on, and doesn't appear to be fearful about any precipitous drops in on-premises revenues.

For its part, Oracle is seeing impressive growth in cloud subscriptions ($231 million for the most recent quarter and up 130% from year to year), though cloud sales still only represent 10% of the software giant's revenues, MacIver points out.

MacIver's article focuses on Oracle's confidence, and this is the same tone of confidence I hear from many smaller vendors as well. Of course, no one in the industry is talking about any fears they may be having about cloud-- at least not out loud.

The question is: will the fiscal cliff occur with software companies being washed away, or will there just be a dull 'thud' as the transition gains steam? 

Here are two scenarios:

Cloud will actually be a good thing for many vendors: Customers will appreciate the sudden ease in which applications can be accessed, versus long nights spent by their IT departments installing it on multiple machines. And there's the added advantage for the vendor of only having to write and install software only once -- versus sending out disks or downloads and taking hundreds of calls to help customers with their software upgrades. There's also a case that could be made that in the long run, companies may even end up paying more in monthly cloud subscription fees versus money spent on an up-front purchase, since they no longer truly "own" the software.

Cloud is only the latest force to wash away some IT vendors, enriching others: There's really nothing new here. Anyone who's been in the software business for some time knows that some kind of "fiscal cliff" always looms around the corner. I've seen vendors have to scramble after one of the industry giants (think IBM, Microsoft or Oracle) added a competing offering, built right into their OS or framework, at little or no charge to customers. Or an entirely new paradigm emerges that renders their technology obsolete (think Web versus client/server, or open source).  Now, there is an abundance of cloud and APIs providers that fulfill a range of enterprise tasks, from accounting to CRM. Even these vendors will someday see a day of reckoning as the industry moves on.

Every vendor that comes along gets a shot at killing the old paradigm. Dell certainly did it with made-to-order PCs and servers. But now they're having problems with the cloud paradigm.

The key takeaway is there is a lot of churn in the software industry, and even if the cloud didn't exist, vendors would be rising and falling in mass numbers anyway. As a CEO once told me, in this industry, if you aren't increasing sales by at least 10% from year to year, you are falling behind.

Topics: Cloud, Oracle, Tech Industry

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11 comments
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  • Adobe's Customers Don't Seem Happy

    And Microsoft's ones are worried it will go the same way too.

    It's quite clear they're all concerned this is a ploy to squeeze more revenue out of them, pure and simple.
    ldo17
  • While the incumbents are scaling the heights ...

    ... I hope their markets are taken over by entrepreneurs who see the immense, unnecessary burden of business product pricing.
    I also hope all people who construct such legalise like 'fiscal cliff' fall off the same :-(

    What is wrong with ...

    - MSFT, ADOBE, APPL, AMZN, et. al. are trying to set up ecosystems and subscription models to guarantee revenues in the face of declining value, just like the music industry

    - unless you are an idiot and want to be locked in to declining value for money, boycott their offerings and tell them to take a hike
    jacksonjohn
  • The real damage is to...

    The real damage is to the small independent developers. They can't build or support a "cloud" server effectively and that takes them out of the market.
    NoAxToGrind
    • That Depends

      That depends on the type of small, independent developer in question. In the startup for which I work, our flagship product is 100% cloud-based (Azure), and it's been a great deal for us as we have far fewer servers to manage, our users don't have to install anything, and all users are on the same version. As with any major advancement, some will be left out to pasture, sure, but the overall tech sector (and its customers) will benefit from the economies of scale, assuming of course that reliability and security are more than adequate (those are the Big 2, IMHO).
      IndifferentDisdain
      • Agreed...

        Agility, lower TCO, and more rapidly changing SMB's will find opportunity rich in the cloud. Your business strategy must incorporate it, not add it to your existing strategy. AMS has done nicely, because they are a completely separate entity.
        QAonCall
  • Reasons to avoid the cloud

    I've been shopping for software for my firm recently and encountering more and more cloud stuff where the vendor is doing the hosting. When I start asking questions like:

    1. What are your procedures to ensure my data is secure?
    2. What do you have in place to guarantee uptime of your servers?
    3. How do I extract the data from your service to use locally (such as when the net is out)?
    4. What formats do you use so if I exract my data I can move it to another service?
    5. What are your price guarantees, so I don't get hit with a big bill tommorrow?

    No firm is willing to answer these questions. Admittedly, we are a tiny company, but if you can't get good answers why would you want to move to the cloud. Right now I am looking at spending close to 10 years of current cloud service rates so I can get software I can run on my server, since I can answer these questions which the cloud companies seem to want to ignore!!
    oldsysprog
    • Finally, a man with a brain...oldsysprog

      Your questions are spot-on oldsysprog. I'm so glad to finally hear from someone who has NOT drunk the "cloud Kool-Aid." I work at a College. We rely on multiple vendors who are in the cloud. I also live in New Jersey where Sandy came barreling through. Half of our vendors were down and our systems were dependent upon each other which meant essentially that they all were down. All those systems we had running in our Data Center were fine...running off of a diesel generator while others were either down for an unknown reason or cutoff from the 'net because THEIR fiber took a hit. So, in addition to oldsysprog's comments, think of my situation. If we still had everything running in our Data Center then it would have been functioning perfectly fine instead of being down for more than a week. In my opinion the cloud is all wet!
      Rickochet
    • Add one more reason

      What happens when your network connection fails, not if, but when. Does your business come to a standstill and your employees stand around twiddling their thumbs?
      arminw
    • Agreed

      Here are some issues that I have come across in my research:

      1. SLAs. Because the industry is so new, there are no standards in place. If there is an outage (as some above me have pointed out), who is responsible and hence going to pay for the downtime? If the internet connection on my side is good, the problem happened at either the hosting company or their ISP. Some SLAs are so vague that if their ISP caused the outage, the hosting company doesn't have to pay anything because "they" didn't cause the outage.

      2. If you're hosting with the big, big boys, this problem probably won't happen. But there will be a bunch of companies popping up promising the same services. If they go out of business, what's going to happen with my data?

      3. Security. Enough said by everyone else.

      "The Cloud" is coming. Resistance is futile (ok, I couldn't resist it :-) ) Just like the Web and e-commerce started slow but is now in full swing, so too with The Cloud. It's gonna happen. I just think being an early adopter is risky right now.
      tallbruva
  • Ahaha

    "There's also a case that could be made that in the long run, companies may even end up paying more...since they no longer truly "own" the software." And many of the companies (and consumers) are doing the math and making that case for themselves. This is hardly a point in favor of moving to a cloud model; it's the opposite.
    Ginevra
  • The real winner...

    The real winner is the enterprise customer if vendors can ever get beyond offering them a hodge-podge of solutions rather than a single purpose-built platform. In the new cloud economy, IT can’t simply continue adopting technology built on top of even older pieces of technology, cobbled together to create a Franken-monster that increases complexity and IT frailty. Rather, IT needs to start with a platform specifically created to help decrease complexity and deliver the promise of cloud computing. For one example: http://www.forrester.com/pimages/rws/reprints/document/83521/oid/1-L5XLC6
    - Shawn Douglass, CTO, ServiceMesh
    Shawn Douglass