There’s a confusing dynamic happening in the software industry caused by the inexorable shift to the cloud. Even before you can get into the analysis you need to identify which cloud(s) you’re thinking about (infrastructure, apps, platform). Also, once you’ve done that you need to decide if you’re partial to technology or financial analysis. It should be no surprise that either approach alone gives only half the picture, so you really need to engage on both fronts.
A big topic right now centers on whether vendors are growing their revenues fast enough to claim leadership positions in the cloud. If not, what happens to those not growing fast enough to satisfy the finance guys. Oracle is a case in point and the company has been subject to a lot of financial analysis that finds the company lacking. How you evaluate revenues, especially in comparison to peers helps you figure out the price of a share of stock. But it’s very hard to get to an apples-to-apples comparison.
As one recent post on Seeking Alpha declared, “Oracle’s ability to adapt to the decline of the on-premises software business and the rise of cloud/SaaS remains in question.” To which I say maybe because the analysis is only partly revenue related. Of equal importance is the changing revenue model—taking in incremental revenue rather than a big license fee.
Moving to the cloud changes the business model, not just the product and too often I see financial analysts applying old financial models to new technology and business models and it doesn’t work well.
For most companies the easiest customer to re-sell or up sell is one you’ve sold to before but migrating your installed base to the cloud is anything but easy if you sold them legacy solutions. The effort is more akin to selling for the first time. No decision which can be frustrating in any sales situation is just as prevalent in an installed base as it is in the general market even for an incumbent vendor.
So in the horserace that some financial analysts insist on handicapping, a pure cloud vendor will usually look better than a legacy vendor moving there. But on top of all that, when your analysis is based on revenue growth you can get spurious results. Even if a legacy vendor induces an existing customer or a group of them to convert, the revenue impact is likely to be a short-term reduction because we recognize cloud revenue over time, not all at once.
We are unarguably in a transition-state so we see a mixed industry. But if you go down the road a few years to a time when the major conversion from legacy to cloud is over, the whole industry will look more uniform and comparisons will be easier.
But it will also be a more fragmented market than we have now. Software vendors will have many complex relationships between themselves and infrastructure vendors and it will be far from unusual for Brand A software to be running on Brand B infrastructure even though both brands might offer both software and infrastructure.
All of this suggests to me that the real plain of competition will have to change. It will change because the vendor communities want to avoid the zero-sum rut that markets invariably head towards in a commoditization push that leaves the survivors competing for pennies when they once competed for millions.
That’s why I see the industry morphing into a utility where a small oligopoly controls most aspects of the market, usually under some form of regulation. A utility won’t care much about infrastructure, for instance, because it will all be the same from the perspective that it adheres to standards.
The electric utility industry is a fitting example. Electric devices are agnostic over how power is generated or whether it comes from next door or a thousand miles away though some customers might prefer greener or cheaper solutions. But vendors in the supply chain take responsibility for adhering to and maintaining standards so that the product is uniform.
It’s doubtful at this stage if any of the enterprise software vendors will stub a toe getting to the cloud. Each has a unique path to travel that’s based on history and legacy constraints. At this point, rather than comparing vendors in what is a very disparate market, it might be wise to look more at year-over-year comparisons and similar measures that track a vendor’s progress against the goal. Revenues and revenue growth will, of course, always be important but the handwringing that goes into quarterly analysis and that emanates primarily from looking at a still emerging market and seeing a long established one, obscures reality and benefits no one.
Salesforce’s embrace of Rimini Street’s third-party support services is a significant departure that has transformed the support vendor from competitor to partner—at least with Salesforce. It might also offer insight into changing cloud business models. At least it helps to make sense of recent litigation involving Rimini and Oracle.
Rimini Street began life as a support vendor for enterprises running Oracle and SAP software in the traditional on-premise model. In this incarnation Rimini quickly and inevitably became a direct competitor taking support revenue from enterprise vendors. Competing for support revenue is legitimate provided the third-party vendor conducts itself lawfully, respecting patents and copyrights to intellectual property concerning the systems being supported. The third-party also has to grapple with providing patches and updates that an OEM can provide.
Typically, enterprise software vendors charge a flat percentage of the licensed software fee for support services. Regardless of the terms of the deal a business strikes with a vendor over the software purchase, the services fee is almost always calculated on the list price; so with fees around 20 percent an enterprise can end up re-buying the product every five years or so.
To be fair, there’s a significant cost built into providing service and support which includes on-going R&D, patches, updates, fixes, and bulletins, as well as live support based on a service level agreement of SLA. Customers are always trying to get a better deal and vendors need to hold the line on pricing to cover their costs and generate a profit, which is the point after all.
Third parties have a lower bar—since they don’t write the original software or upgrades their overhead is lower. But that’s the point. They don’t own the source code and so they can’t patch it, a key reason for buying support in the first place.
Rimini has announced what we can call “patches to patching” which it named holistic and virtual patching. But each of these ideas works several levels of abstraction above the source code never actually patching it. The result is that systems are still in jeopardy. So the basic low cost inducement of third-party support vendors is in some cases, specious. They charge less but they also deliver less and the difference can leave an enterprise vulnerable to hacking, and down stream effects like brand erosion and lost trust and lost revenue.
Oracle has had a long simmering law suit against Rimini, which exhausted the appeals process recently. In the verdict, Rimini was shown to have “borrowed” materials from Oracle by simply downloading them from support sites.
After Rimini lost on appeal, it issued a strange statement that was carried in the UK Register and elsewhere saying,
“The Court of Appeals, while affirming the jury’s finding of ‘innocent’ copyright infringement for processes that Rimini Street claims are no longer in use since at least July 2014, stated that Rimini Street‘ provided third – party support for Oracle’s enterprise software, in lawful competition with Oracle’s direct maintenance services,”
Which roughly translates as, we did nothing wrong and we won’t do it again.
It’s quite hard to provide in-depth support if you don’t have inside knowledge of how systems work and don’t have the source code which you need to make a patch. Oracle’s case revolved around Rimini Street’s appropriation of copyrighted support materials produced by Oracle. Specifically, the enterprise vendor accused Rimini of violating up to 93 copyrights on its support and materials and the judgements, including appeals, went against Rimini though some monetary awards were later reduced.
A new model
Since the rulings and fines, Rimini has been seeking a better way to do business and it may have found it with Salesforce. If so, it could be a new model for other cloud vendors as well.
Rimini provides 24/7/365 support for selected Salesforce applications, which now include Salesforce Sales Cloud and Service Cloud, with 15 minute response time. Salesforce and other cloud vendors offer services for their products too but generally customers have to pay more for the advanced features that Rimini provides standard. So the competition is between Rimini and, in this case, Salesforce’s advanced support services, a choice that customers are free to make. Judging by the announcement of the services, Salesforce is in favor of the arrangement and views Rimini as a partner.
Here’s why. Rimini Street CEO Seth Ravin recently told ZDNet,
“The SaaS world is different in that maintenance is included in licenses and mostly bare bones.”
Simply put, there’s more room in a cloud situation for Rimini to add value.
Let’s separate call center service from updates and patches. Only Salesforce patches its products and it does so whenever needed as well as with three annual updates. So, the thorny issue of third-party patching is off the table in the Salesforce model. No patching requirement makes it much less likely that Rimini or anyone else will need to do the things that Rimini was found guilty of in the Oracle case.
With a cloud business model a vendor builds support costs into the monthly fee and that includes further product development and enhancement as well as some amount of live support but the cloud vendor gets paid no matter what. There’s no haggling over service fees—either the customer buys what the OEM has or goes to a third-party and pays there. As a result it’s far easier for Rimini to be seen as a partner by a cloud vendor, than as a competitor.
So the difference in how support is delivered and paid for may turn out to be a significant additional inducement to legacy customers contemplating a move to the cloud. In any event, it is reasonable to conclude that the on-premise version of service and support may be going away.
At some point companies like Oracle might begin to view third-party support service providers more as partners than competitors just as Salesforce does. But the change won’t be quick or uniform. Oracle’s bevy of cloud products still have numerous configurations that enable customers to straddle cloud and on-premise positions with different support modalities. For instance, Oracle’s BYOL, Bring Your Own License, program enables customers to move an on-premise app to Oracle’s infrastructure cloud (IaaS). So, the application retains its legacy character, and presumably its support liability, even though it runs in the cloud.
Deploying a modern, cloud version of the app might remove the annual support bill but at the cost of an incremental SaaS fee by the month or contract year.
Few enterprises will decide about moving to the cloud over the cost of application support alone. The move involves a complex matrix of costs for hardware and software—including everything in the stack. There are also considerations for labor. Given Oracle’s new push into automated products in database, security, integration and other areas we can expect cost savings for some premise-based systems but that remains to be seen.
Oracle is making its customers’ move to the cloud as cost effective as it knows how and it’s likely that early movers will get the best deals. Something else to consider for the vast majority of Oracle’s customer base with its feet planted firmly on the ground.
For some time now, it’s been my impression of the CRM market that all, or at least most, of the good ideas have been taken. It’s been a long time since we saw a new systemic solution that approaches front office business. It’s even been a long time since we saw a major innovation at the department level.
CRM itself was a systemic innovation in the last decade of the last century. Cloud-based CRM was the innovation of the new millennium and since then, marketing automation would count as a departmental innovation. You can also look at analytics as a systemic innovation because although it straddles departments, it has become a department itself.
This is not a bad thing, just the opposite. As CRM has been built-out it has opened new market niches which has maximized the number of solutions and, more importantly, it has made all of them affordable to just about any business. As I’ve said before, cloud computing is the commoditization of IT. It has made information processing both simple for a lay person to use and so affordable that all those who want it can have it.
CRM is far from done as an approach to business and as an economic driver, but we must acknowledge we’re at a turning point. Behind the scenes the major vendors, among whom are Salesforce, Oracle, and Microsoft, have gone a long way toward consolidating the industry by platform and from here that will be the dividing line.
So far this spring I’ve attended two conferences that illustrate my point, SuiteWorld and Financial Force’s analyst day. Each company has financials and ERP solutions that address the needs of small and medium and in some cases larger businesses. Each is deployed on a specific platform: NetSuite on its own which it announced is moving aggressively toward the Oracle Cloud Infrastructure, and Salesforce whose solution encompasses development platform and infrastructure.
While it’s quite possible that many customers will continue using hybrid solutions such as NetSuite for back office operations and Salesforce in the front office, it’s already easy to see that situation morphing. Oracle has for many years used the logic of running a suite of related software over an integrated solution made up of best of breed apps. It is continuing this logical progression with NetSuite both on its own and as a member of the Oracle family.
Salesforce is using a derivative of this logic too. While Salesforce is and will likely always be a front office company, its powerful platform and AppExchange gives partners the ability to build completely compatible applications that help customers achieve suite status. After all, that’s the logic of having a platform to start with. A platform supplies a consistent set of programming tools, interfaces, objects, data structures and more—standards—so that apps built on it can interoperate. It’s the same logic as building a hardware bus so that manufacturers can build to common standards. It’s popular because it works.
So, the play as I see it for any software companies not named Oracle, Salesforce or a small group of others, is to pick a platform, become intimately involved with it, and pursue the surrounding ecosystem as your market.
Some vendors have begun working with two or more platforms and that’s fine if they have the resources, but I see that as a short-term gambit designed to see which platform vendor is the best partner.
All of this is vitally important. As I mentioned last time, the meme making the rounds is that it’s easier to start than grow a company, especially in tech. I can see this and deciding on a platform and an ecosystem to work in is one of those things that can help reduce overhead and enable a business to better focus on the things that really matter for growth, like markets and customers.
My two bits
CRM has been a wild ride for two decades and the ride continues. At this stage it’s important not to get sucked in to the latest discussions of digital disruption, IoT, analytics or anything else that looks bright and shiny. They’re all important as secondary considerations but I think the most important thing, and in some ways the least glamorous, to concentrate on is what vendor and which platform you want to work with over the next decade and beyond.
Markets converge. Fifteen years ago, few vendors had complete CRM suites and now they all do. Today we’re looking at far more complex and sophisticated front office applications as vendors take on vertical market apps. These apps combine back office data, front office processes, intelligence and machine learning and highly specialized subsystems for everything from manufacturing to healthcare. In this new environment who has time for platform incompatibilities?
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.