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

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

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.