Your next software buying decision: zero cost?

My piece about SugarCRM contains a line from Vinnie Mirchandani that's been ringing in my ears: "They're tiny." What's tiny about:Free edition400,000 users50,000 systemsCommercial customers100,000 users5,000 systemsI'd have thought most application software vendors would carve off their right arm with a broken hacksaw to get those sort of adoption numbers.

My piece about SugarCRM contains a line from Vinnie Mirchandani that's been ringing in my ears: "They're tiny." What's tiny about:

Free edition

400,000 users

50,000 systems

Commercial customers

100,000 users

5,000 systems

I'd have thought most application software vendors would carve off their right arm with a broken hacksaw to get those sort of adoption numbers. But then I'm not following the money. It seems to me that we're at some sort of inflection point where the value software delivers is finally coming under scrutiny. This should have happened years ago albeit Phil Wainewright asked that question nearly four years ago.

But when you have sales people addicted to six, seven and eight figure deals, when software companies can put on huge events, pour money into a compliant analyst community and still declare close to 30% net profit, there's little incentive to change. Until someone comes along and does it for you in economic conditions that demand change.

I'm convinced the days of mega margins are over but it's up to buyers to force the pace and especially to force the software industry into some semblance of SG&A discipline. Commercial open source and cloud computing offer that prospect. I'm not alone in that thinking and it makes for great knock about conversation. Over the last few days, the Irregulars have been pounding on one another around this topic.

Our resident investment guru Jason Wood correctly points out that:

The problem with OSS models is that, if the companies can't effectively monetize them over time, how do they survive? Investors aren't going to perpetually fund low profit model businesses, they rightfully demand a certain return on their capital.

My answer is simple: get better at investing governance so that you're not always dependent upon the next Google. Jason sagely adds:

Just as we saw semiconductor margins peak [and then people argued against having seen that peak for a decade before they came around to the evidence], I believe we've seen the best margins will ever be for the enterprise software/hardware computing paradigm.

Does that mean margins won't go up, sometimes dramatically? Of course not, there is too much cyclicality in the industry these days to say that. But we're now in a situation where CYCLICAL margins can rise, but in the backdrop of SECULAR decline.

No-one wants to punish innovation but the rewards we see Oracle, SAP and others currently earning seem way out of proportion to the value they claim to be delivering. You only have to consider the implications of Jason Carter's findings against net earnings to see the mismatch.

My kick off argument was against the backdrop of open source but that drew short shrift from Bob Warfield:

OSS as a business is an abject lesson that when you offer the component parts of value (e.g. separate support from the software in the traditional OSS Model), you destroy value.  The whole is greater than the sum of its parts.  That's why SaaS is so great--you're adding a service component that can't be unpicked.  At the very least, OSS is going to need to add more value somewhere else if they give away the source.

OK but then I didn't say that commercial open source is a particularly mature model or one that anyone has  cracked as sufficiently viable for a long game. Jeff Nolan weighs in with:

The larger theme is the overall trend to commodization in tech, it's the defining attribute of technology for the last 40 years. Irrespective of current economic conditions, the enterprise technology sector (hardware and software) should be getting used to an environment that rewards being lean because it's hard to imagine margins ever recovering, especially in light of the observation that many of the productivity gains that were attributed to technology are proving to be less impressive than originally projected.

OSS has a place but it's not the game changer that it was originally expected to be.

There we have it. On the one side, vendors who remain dumb, fat and happy and a lean OSS model on the other side that hasn't figured out where it wants to be. Perhaps. Which brings us back to SG&A with Jason firing back:

I always said that if SG&A costs were going to come down, it had to be because the buyers started EN MASSE changing their OWN behavior, including just blindly signing up for premium annual maintenance on software they would have trouble justifying ROI on in the first place.

Most of us agree there is a race to the bottom and that it is happening at a frightening pace. Do SAP's recent numbers portend that trend? Of one thing you can be sure, the big players will fight tooth and nail to defend their margins, regardless of what the wider customer community might wish. But it was Michael Cote who asked the right question:

I feel like open source has unmasked the "scam" of software licensing to the buyers and users: software doesn't actually have to cost a lot. But as an industry - creators and consumers - we haven't moved past that unmasking moment and asked, "so, how much should I be paying?"

If you think that open source is the answer, then the minimum is nil, zero, nada. If you're a proprietary software vendor a la Microsoft, IBM, SAP or Oracle then the answer is as much as they can wring out of you to justify SG&A plus the inevitable 17-22% maintanance tax. Neither model is right. Maybe saas/cloud/on-demand whatever you want to call it IS the answer, albeit immature in its current iteration.

Whichever way you want to slice and dice this argument I believe we're close to a significant watershed but what do readers think? Has the time come for the software business to be a more mature, lower margin industry? Is it time for a meaningful emphasis on innovation that proves Jeff Nolan wrong? Is the race to zero a reality? Or has Phil been right all along: it's not the software, it's what you do with it that matters? In other words, it's the services around software that truly transform business and that, to use Michael's thoughts - we're really looking at buying more screws and nails rather than something that offers us value at an as yet to be defined value?