I’ve recently looked at the changes in markets and companies as industries grow and as a disruptive innovation commoditizes. Generally, prices come down because the innovation becomes commonplace and competitors fight for every scrap causing margin erosion. Eventually markets equilibrate and a monopoly or small oligopoly sets in. Typically, as Geoffrey Moore pointed out, mature markets have three competitors, the leader that gets most of the business, a fast-following challenger, and one or more niche players.
We can see this playing out right now in various industries. Mature industries like databases have an oligopoly set up with Oracle and IBM leading. SAP with Sybase xxx is one of several niche players along with MySQL and SQLServer. Recently new approaches to data storage have come to market such as no SQL databases that offer a different approach. Amazon has developed an in-house product that has been a discussion topic for people thinking of dethroning Oracle but that’s not likely. More likely is that Oracle and IBM will be the database leaders until the planet no longer needs databases. It could happen.
On the way to oligopoly we see vendors making mistakes that could cost them their leadership positions. Mature market leaders have figured out how to put customers in the forefront and their solutions look more like a broad array of services than products. That’s because they have come to understand the role of whole product and are willing to do whatever makes sense to keep customers happily engaged.
There’s one practice, though, that flies in the face of whole product and keeping the customer satisfied. It’s the software audit. Essentially a vendor builds into its contracts the right to periodically inspect a customer’s systems to understand use patterns and to ensure that the terms of its licenses are adhered to. Typically, a contract for so many seats, or applications, or gigabytes can remain under a preset limit but should not go over. If there is an overage the customer would owe a higher license fee.
All of this seems fair in the abstract but in practice customers resent the intrusion of an audit especially when the audit does not turn up a flagrant violation but instead identifies a possibility of one. Vendors have been known to bill on the possibility and that can cause, shall we say, disharmony in the customer base.
In the future, the software audit will likely be seen as an artifact of the licensed software era. Subscription vendors and their customers don’t have the same issues because it’s clearer when the customer needs more seats and they make a purchase.
But the software audit is here today and in my mind, it represents a mistaken approach to revenue generation by mature market vendors. It also opens a legitimate seam for the competition to exploit. Recalling that markets trend toward commoditization and that features and functions tend to converge on a market ideal, the cost of attrition, even in a licensed software situation, declines over time. So, the risk of customer attrition over some aspect of the whole product, i.e. policies and procedures, increases.
You can see this scenario playing out in the document management space as Nitro, a document management company with a focus on whole product does battle with the leaders. Nitro is not a small upstart. They’re well over 10 years old and have a customer base of roughly 650,000. Nitro differentiates itself on a UI that’s very Windows-like and on price. But it doesn’t simply offer a lower cost approach to document management. Its flexible licensing policy avoids the software audit process. This seems to matter to its customers who want to deploy technology to all members of the company freely, without obsessively checking license allocation or fretting about fines each time a new hire comes on board. For them the audit can be a show stopper.
My two bits
Regardless of the size of the market or its installed base, a company needs to grow, preferably faster than its organic rate—when customers grow their business they buy more licenses. But in mature markets growth is a zero-sum game. For one company to grow it has to take customers away from competitors; usually, that means taking from the market leader(s) who have a majority of the customers.
So the software audit, as useful as it might be for generating incremental revenue, has a downside. It is not the face of whole product that a company in a mature market ought to present because it can easily prompt a rush for the exits. That’s why so many vendors avoid such contention and focus on product line extension and new product development. Those activities are harder to pull off than swooping in with auditors but they are ultimately better ways to hold onto customers and grow markets.
Finally, you might say that cloud computing with its per-seat pricing can avoid all of this but that’s not the point. A vendor that can adopt audits can also find ways to throttle use and charge dearly for increasing use. The real point is developing modern approaches to customers that generate revenue on actual products and services delivered rather than gotcha gimmicks.
I’m going to need help with this. Mulesoft, a small tech company with less than $300 million in revenues is being purchased for $6.5 billion by Salesforce.com. Salesforce offered $44.89 per share, a 36 percent premium over the market price. Others are already saying that the transaction price represents more the value than the actual price. I don’t know, I am not that smart.
What I do know is the Mulesoft is an integration platform that brings together data from other clouds and even legacy apps. That’s really important as companies all over the landscape race to build what I’m calling the information utility. For that to happen you can’t have data sitting outside of the utility because, presumably, it’s all important, and it is.
In fact we don’t have a clear idea of what the information utility will look like or do yet. Yes, we can see the broad shapes and yes, enabling apps everywhere to access and share data seems like a no brainer. That’s what a utility like this should do.
But now we have to take things a step further. In light of the blowback from the social network shenanigans associated with the 2016 election we’re beginning to see that Mark Zuckerberg and Sheryl Sandberg are doing a revival of “Home Alone”. Adults are not in the room and all heck is breaking loose in social media.
The social networks you see today are dinosaurs, kiss them good bye. It takes more effort to pull a plumbing permit to work on your new kitchen than it takes to get permission to mess with 50 million Facebook profiles. That’s wrong and unsustainable.
I can see a day in the near future when we’ll need Mulesoft to integrate social networks with encryption and storage systems that protect customer identity data. The systems that encrypt and secure identity aren’t around yet but might be coming to market in a year or two.
We’ll need those systems as governments in the EU and US ponder ways to enhance GDPR and lock down personal data in an effort to prevent future cyber war.
Here are some links to articles that flesh out my meaning:
So, grudgingly, because $6.5 is a lot of money, I say the Mulesoft acquisition makes sense in a roundabout way. It speaks to a vision of the future at Salesforce that I can only speculate about as an outside analyst covering them. That said, I’ve been right about stuff like this before.
Oracle is in a legitimate exponential growth phase and not for the first time in its long career. Like a startup it is growing much faster than the organic growth rate of the economy or its primary market because it has some new products that are highly desirable including cloud offerings and a unique fully autonomous database. It is also growing quarter by quarter and year over year—this is not a one-time thing. But unlike a typical startup that must claw and fight for every new customer, Oracle has the opportunity to sell its new products into an existing customer base that is hungry for improvements in their price-performance ratios.
Yesterday co-CEO’s Safra Catz and Mark Hurd plus Chairman and CTO Larry Ellison broke down the numbers for the just completed quarter and they were impressive with most of the growth coming from cloud computing including infrastructure, applications and platform services.
Total cloud and conventional software revenues were $8 billion, and Catz gave a blizzard of other positive numbers including,
Cloud staff revenue for the quarter was $1.2 billion, up 21% on a GAAP basis from last year in constant currency with — on non GAAP basis with Fusion Cloud revenues up 52% in constant currency. Cloud PaaS and IaaS revenues for the quarter were $416 million, up 24% from last year in constant currency. Cloud PaaS and IaaS revenue, excluding legacy posting services, saw growth of 49% in constant currency and 56% in U.S dollars. As legacy hosting services become smaller part of total PaaS and IaaS, the underlying growth of PaaS and next generation IaaS will be more visible.
Here are my observations.
First, only about 15 percent of the customer base has even begun moving to the cloud products meaning that more good news will likely be coming in future quarters and for some time. Much of the momentum comes from net new sales.
Second, the revenue gains are likely to accelerate as the company builds out its infrastructure support. Oracle announced earlier this year a drive to deploy xxx new data centers to support its Infrastructure as a Service (IaaS) initiative. Without those data centers being deployed and ubiquitous it can’t sell much infrastructure though even there it generated $416 million last quarter gaining 24 percent year over year.
But more is to come, and, now, infrastructure is a potential throttle. For instance, as the company will soon be able to service more customers with the same hardware or as Hurd put it,
As we fully deploy database multi-tenancy in our staff, let’s say. We double our capacity without spending one penny on hardware. We can help twice as many customers, twice as many transactions, twice as many users without spending one dollar.
Third, the new edition of the core database product, which is fully autonomous, is now generally available offering a level of efficiency and security unparalleled in the industry. On the call Ellison said there’s more to come.
Over the next few months, we expect to deliver autonomous analytics, autonomous mobility, autonomous application development and autonomous integration services.
If anything, Ellison may be underselling the benefits of the autonomous database when he talks about the labor-saving aspects as money savers as when he said,
Our highly automated suite of autonomous PaaS services reduces cost by reducing human labor and improves reliability and security by reducing human error.
For enterprise users, labor is cheap and although reducing human error is important the speed with which the autonomous database acts to self-correct may be the more significant benefit. Ellison revealed at OpenWorld that his customers can take upwards of 13 months to install database patches leaving their systems unnecessarily exposed for that time. The autonomous database self-patches meaning that users can install fixes much faster. Almost any cost associated with upgrading to the new database when compared to reputational hits and law suits over compromised data are insignificant in comparison.
Fourth Oracle is buying back shares and has a war chest of $70 billion. In the last quarter Catz said the company bought back $4 billion in shares, a process that is ongoing. The implication is that revenue and earnings numbers that are measured on a per share basis will likely improve simply because there are fewer shares outstanding.
Also, with so much cash on hand Oracle can pay for important things like further IaaS deployment and marketing to further push its products into the marketplace.
The notable difference between Oracle and a startup is that the company can afford to be its own venture capitalist. Another difference is that in addition to being able to attract net new customers, it has a huge installed base to bring current. They’ve previously said the process could take 10 years or more so it is still early days.
Unlike many other players in the market, Oracle has seen the need for greater security measures to combat the threats in the world today. Oracle is the logical player to deal with security since so many of the world’s applications are based on its technology infrastructure.
It will take some time before the technology diffuses through the industry and IT becomes a more secure environment. But it won’t take ten years. Plenty of companies will need to upgrade their applications independently of what Oracle does now that new tools are available. As it makes this turn to cloud computing Oracle is laying the foundations for a global information utility that can address today’s challenges.
But Oracle can’t do the job alone. Current news demonstrates that the Internet and social networks are no better at security than a screen door against a winter gale. The information utility will need more encryption and professionalization of its user class. In addition to having proficiency with the technology, users need to be easily identified, perhaps through license numbers, and certified in the ethical use of the technology.
You might not realize it but a plumber has to get a permit before working on your natural gas feed. It’s not an onerous process if the individual can demonstrate (via his or her license) the basic competence to do the job. We’re getting to that point in IT right now.