Wither Oracle, SAP, et al? (Pt 1)

Er, Phil, shouldn't there be an 'h' in whither, as in 'where are they going'? Or did you really mean 'wither', as in 'shrivel away and die'?

The answer is both, really. I've been mulling over the contents of several quite interesting articles,In my view, Ellison is making the right call blog entries and interviews that have appeared over the past week or so. The established enterprise application vendors really do have to make some tough decisions about where they're headed, and if they make the wrong choices it'll hurt them badly. But what are the right choices? That's not at all clear. Here's where I think the key pressure points are.

Licenses or maintenance/services? SAP's pre-eminent blogger Jeff Nolan took a riff through SAP's latest quarterly financials yesterday, showing off how favorably the company's license sales compare to those of its largest rival. SAP outperforms Oracle in each of the three major global regions and is winning accounts from Oracle while losing none, he says. Meanwhile Oracle's total license revenue has declined a third compared to the combined total for Oralce, PeopleSoft, Retek and Siebel two years ago. Nolan concludes with this killer punch:

"With Q3 2006 world-wide application license revenue of $269 million, Oracle sold roughly as much software as SAP sold in the Americas alone in our Q1 2006."

But I'm sure that he, like I, read this week's FT interview with Oracle chief Larry Ellison (now unfortunately subscription only), in which Ellison talked of a deliberate strategy to move towards recurring subscription, maintenance and services revenues rather than traditional license fees. In my view, Ellison is making the right call. Software — especially 'platform' software — is moving towards zero-cost licensing, either via the open-source model or the on-demand services model. So by allowing Oracle's license revenues to decline, Ellison is reducing the company's dependence on a shrinking revenue source.

SAP, on the other hand, remains enthusiastically wedded to license revenues, as Nolan's post reminds us. Company CEO Henning Kagermann was adamant in this CNET interview published Monday:

"I have spoken to many clients and they want to own (the software). They are happy with this model. So, therefore, there will be some additional new profit models, that is true, but the core will still want to license. You can ask me again in one or two years from now."

I think there's a fundamental strategic error being made here, based on the misapprehension that customers want to 'own' software. What they really want is to be in control of their business processes, which they automate using software. It's not important to them in that context whether the software is licensed from SAP or open-source. It can even be on-demand, so long as the provider gives them enough visibility and control. For a long while, the enterprise software model only gave them one 'ownership' option: perpetual licensing (which isn't ownership anyway, it's just a long-term lease on closed-source software that belongs to somebody else). But as confidence grows in the alternatives of open source and on-demand, more and more will switch over. That's why I believe Oracle is making the smart bets on this particular point while SAP is still heading up a blind alley.

This has turned into quite a long posting and I have to go do something else now. So I'm going to leave this here and move onto the next point in a separate posting later on.