On the other hand

It’s worth taking another look at the Siebel-Oracle merger from a different angle.  Too often we make a snap judgment in this kind of situation and it becomes fixed in the mind never to be seriously reexamined.  Rather than that, I did a thought experiment the other day starting with the presumption that Larry Ellison has a grand strategy and that the strategy will work.  It goes like this.

I think we can dispense with questions of whether or not Larry Ellison is pretty smart and knows what he’s doing.  In his long and rather colorful career he has gone from being a startup to dominating an industry he helped create.  Many people may not like some of the methods he used on the way up the hill, but that only puts him in company with Ford, J.P. Morgan, Carnegie, Vanderbilt and a long list of others.  People generally don’t like the disruptor very much until he’s dead, then we largely remember him for his philanthropy — ironic if you understand the Greek origin of the word.

The Goal

Oracle wants to be number one in business applications beating out SAP in the process.  How does it get there?  They can, and have, bought a lot of last generation software companies with large installed customer bases but even an optimist would not call a company of cobbled together applications dominant.  To get to the number one position, Oracle has to find a way to leapfrog whoever is in the top spot now and the way to do that is through innovation.

I have previously criticized Oracle for buying customers (through company acquisitions) rather than innovating new products and winning new customers the old fashioned way and I think it’s a valid point.  In the long run no company can survive simply by consolidating the competition and it certainly cannot become number one unless it’s the last survivor.  My point is that Oracle may have a different plan.

Although Oracle is in the applications business it has frequently been the runner up.  It has good products in ERP but SAP is at the head of the class.  Similarly it has serviceable CRM but Siebel leads that area by a comfortable margin — PeopleSoft had better CRM market share than Oracle and so does SAP.

Leapfrogging strategy

As I said at the beginning, when you think about leapfrogging the competition you need to have a plan that does more than achieve parity with the competition.  Oracle’s strategy has to be the delivery of a full suite of on demand, integrated, front and back office, solutions for the enterprise but to do that Oracle needed to bring in expertise and product from outside.  There are few companies that have been successful with the on demand model.  Obviously, Salesforce.com did it but I’m betting that the markets and the SEC would never allow Salesforce to be absorbed by Oracle.

Siebel’s on demand solution was in many ways a better fit for Oracle’s purposes.  Siebel has the in-house expertise in on demand that Oracle needs (thanks in part to Siebel’s earlier acquisition of UpShot) and Siebel also has a lot of experience dealing with very large implementations at the enterprise level.  Also, Siebel’s base of vertical applications and massive investment in things like its architecture and tools (and some cool stuff in the pipeline) make it a good fit for Oracle provided Oracle lets the Siebel people do their thing.  Finally, culturally, the two companies share memes — the social equivalent of DNA — Tom Siebel is one of several former Oracle executives who have done well starting or running companies using techniques learned at Oracle.

Oracle as consolidator doesn’t wash

Other people might continue to harp on the “Oracle has become another CA” theme, and they might be right.  I tried it and even though I don’t have all the inside information, that went into the decision, it just doesn’t feel right.  Certainly, if Oracle fails to deliver on the grand unified vision those criticisms will grow.

If I was Larry Ellison right now though, I would probably welcome the criticism I’m getting because there’s nothing better in this situation than surprising the market and your competition and no better way to do it than with a little misinformation spread by the people who “just know”.  I hope I am right. 

It would be very good for the entire tech sector and global business in general if we could forecast a time when the infrastructure of computing is recaptured by the solution provider.  Some of the largest potential markets on the planet — Russia, India, South America, and China — could benefit greatly from an IT architecture that significantly reduces infrastructure costs.

While Salesforce.com — as well as NetSuite, RightNow, and some others — has been selling this idea consistently for six years, it will probably take more than a handful of emerging companies to take the market to the next level and a company with Oracle’s stature would provide some additional leadership.  I could be very wrong in this analysis and only the passage of time will clarify the situation but the necessary drivers seem to be in place.  Most of all, Larry Ellison is a complete original and I can’t see him being just “another” CA, or another anything else for that matter.

Instant Legacy

Ok, so here we are a week later and what do we know for sure? Well,lots of things. First, Oracle now has seven assorted CRM packages from its acquisitions and those of its acquired companies if you count Siebel. The issue with counting Siebel is thatthe deal is not done yet. Dont look for the shareholders to derail this one since many have been clamoring for greater returns on their investments for quite a while. And dont look to the SEC to stop this one either. Unlike Peoplesoft, Siebel wants to be acquired, so the whole process should go much faster.
Meanwhile there are several factors which, deal or not, stand in the way of Oracle becoming the most dominant force in the enterprise software industry. Among them are the competition, Oracles increasingly decrepit business model, and time. By far, look to Oracles business model to weigh down the company.

The model
Oracle started life on the mini-computer. Its claim to fame was its ability to run on just about anything that had silicon and drew power from a socket. Last week in San Francisco I was joking with some analysts and reporters about what a big deal Oracle for VAX-VMS was. When the mini-computers and their makers went to the bone yard Oracle continued humming away by introducing tools and financial applications as it embraced client server computing.

In many ways client server was an easy evolutionary shift for the database giant because some organizations simply continued using their mini-computers with PC networks. Initially, manyusers simply used the PCs in emulation mode (i.e. like dumb terminals) as they gradually converted to more sophisticated applications.

So the point now is that Oracle continues to look like a client server application provider despite advances in the Web orientation of its database and the fact that even companies like Salesforce.com run their hosted services on top of Oracle databases. But by buying up so many leading client server application companies and vowing to make it all work together, Oracle has cemented itself into a paradigm that is on the way out. Moreover, the vow to make it all work is a distraction from what should be the work of leading software vendors like Oracle to usher in the age of the utility model for enterprise computing.

It was said a lot last week but it may bear repeating, in its present form Oracle looks a lot like a later day Computer Associates gobbling up healthy but troubled or sun-setting applications companies with a plan to capture the maintenance revenue. In my view, there is something almost biblically foolhardy about trying to capture market share by buying up your competition, sort of like trying to bail out New Orleans with a sieve.

Time and competition
There has been a lot of talk about 2007 and 2008 recently. Microsoft said that their converged products will hit the market some time that year, and now Oracle is forecasting great and wonderful things beginning to hit the market two years hence. The trouble is that markets dont stand still and there are a lot of existing and emerging competitors out there that can use the intervening time to tell a more coherent story and grab a lot of market share, especially from defecting Oracle customers whowant stability or who may not want to put all their delicate eggs into the Oracle basket.

SAP for one stands to be a big winner from the Oracle mashup. This company already has tens of thousands of customers and is further along in the quest for a fully integrated front to back enterprise business application suite. Then there are the on-demand vendors like Salesforce.com, NetSuite, and a long list of others that want to move into the space. Last week in San Francisco, Salesforce.com made a big splash with an announcement that pits it squarely against Oracle, SAP and all the other companies still selling a modified client-server suite.

And for different reasons, Salesforce.com has also positioned itself in direct competition with Microsoft (and later Oracle) for the databases and tools that enterprises use to fire up a simpletracking application for small groups, for example. Think of it. There hasnt been an improvement on the basic idea of using PC databases and tools to develop small applications since Intel was numbering its chip families. While databases and tools were a vast improvement on spreadsheets and index cards, they were hardly intuitive for a business user. And when the apps were done, they didnt always feed into the corporate data repository.

The on-demand model offers orders of magnitude lower costs which make it immediately attractive at the enterprise level and the latest announcements from Salesforce.comindicate that a community of secondary providers, also known as partners, is growing up around the service. The result will be an accelerated build-out of additional applications such that the on-demand service will be able to rival anything that comes to market in, say, 2007.

The road ahead
So Oracle has some work ahead of it. Oracle has created a new category of software which I have heard called instant legacy meaning that regardless of the product plans and futures of acquired applications, with Oracle at the helm its a new ball game. The ideas of fusion and long term support for the acquired applications are really separate, not partof a continuum. To do fusion in a two year time frame means that a lot of redundant code will be left out. And as a practical matter, it only makes sense. If Oracle has seven sales force automation products, they will mostly overlap so six are redundant. That means the Siebel products will most likely be the ones that dominate whether its in SFA, marketing or call center.
As for the installed customer base the real prize Oracle was shooting for when its time to look for the next generation of business applications smart buyers will still perform their due diligence and Oracle will very likely be invited to propose. But that seems a rather small return for the billions invested in the takeovers. Thats why I say that the company should have innovated its way to the next generation rather than buying up competition it might have defeated in the field anyhow.

Dreamforce05, Seismic Shift

It’s very rare that you get clean demarcations between historical eras.  Maybe the asteroid hitting the earth 65 million years ago was such an event but I wasn’t there to experience it so I can’t tell you.  Monday September 12, 2005 will go down as a deep line in the sand identifying the before and after in the enterprise software industry.  It was the day that Siebel agreed to be acquired by Oracle and coincidently the day that Salesforce.com opened up its Dreamforce user conference in San Francisco.

The two events were like bookends and this is as much about Oracle as it is about the rivalry between Salesforce.com and Siebel because in one day Oracle conceded any pretense of being a leading software industry innovator while Salesforce.com happily crowned itself.  In all cases, the driving factor was not so much technology as it was business model and finance.  Let me explain.

Oracle has been dominant in application development for a long time.  Since the 1980’s, first its database and later its tools and its enterprise business applications set the standards for how computing is done for big companies.  Oracle ultimately spawned numerous software companies — Siebel and Salesforce.com among them — that essentially followed the same model of building large suites of software that enterprises would spend millions to license and millions more to configure, customize, install and train end users to operate. 

But the model was getting old.  It was challenged by Salesforce.com more than five years ago and the upstart company with the brash slogan of “The end of software” got away with its challenge turning itself into one of the fastest growing software companies and a public company in only six years.  Meanwhile, Oracle, Siebel and all the others were content to play the part of lumbering dinosaurs.

Monday changed all that:  on that day Salesforce.com presented to the market its second major disruptive innovation in enterprise software when it announced Appforce and ApplicationExchange, two products that would definitively put an end to the tedious and expensive way we have come to believe enterprise software can and should be built. 

Briefly, Salesforce announced that its users and partners could now use the Salesforce.com architecture to their hearts’ content to build any applications they want.  More importantly, Salesforce.com through its ApplicationExchange lets all of these people evaluate, rate and purchase applications made by others for their own use within the hosted service.  All applications built this way have the same underlying database, operating environment, look, feel, and security.  And they can be manipulated and customized using the tools used to build them.

Globalization

For the first time in history application software development does not require a heavy investment in infrastructure, all that’s needed is a PC with an Internet connection and a browser.  With such a low barrier to entry we can reasonably expect to see a swarm of new applications hit the market developed by people on the other side of the planet in economies with very different — read lower — measures of fair value for work.  But it also means that if you have a garage or a spare room and a PC you can be in business too.

It is equally important to observe that with an online marketplace for enterprise software — which is effectively what the ApplicationExchange is — the cost of selling and marketing software will also come down significantly.  “Frictionless” sales and marketing are words that come to mind here.  Fewer people will be required to do the work so emerging software companies will not require the same amounts of money they once did and that will have a profound effect on the venture capital community. 

While we’re at it, the systems integration community is in for a shock of its own.  Salesforce.com demonstrated how applications developed independently using its platform technology could integrate — automatically — with whatever else a customer is using from the vendor.  Translation: you can take a test drive of new software with your own data at your leisure; there will be no more elaborate demos and proofs of concept.

The New Software Economy

In short, Salesforce.com introduced the world to a whole new software economy on Monday, the same day Oracle gave up on innovation and a week after Microsoft more or less did the same.  Talk about inflection points.  At Dreamforce, Salesforce.com CEO, Marc Benioff, compared Oracle to Computer Associates (CA) the company that bought up a number of mainframe software companies at the end of the mainframe era.  CA’s strategy was to simply milk the maintenance stream until customers upgraded to client-server systems.  Now, Oracle, the company that led the charge into the relational database era and client server computing, finds itself in a similar position.

You might ask why companies, like Oracle and Microsoft, which are full of smart people, would take such predictably suicidal turns.  And while the answers are numerous and complex, I think you need to look closely at business models and the financial community.  Companies are founded on certain assumptions about how they make money (business model) and how much they can make (margin).  The traditional client server model which is dying has a built in expectation of revenues and margins and so does the on-demand model.  Unfortunately, the financial community simply wants to know how well your model worked in the 90 day period just ended.  In that way the decline of a business model is like boiling a frog.

But each successive model in this industry has offered orders of magnitude lower costs to the buyer — and lower margins for the vendor.  Ultimately, I think it’s far easier for a company to burrow in and milk an installed base than it is to change its model and re-educate the public markets about the realities of doing business in a new era.

So rather than smooth transitions from one era or style of computing to another, we have seismic events like we saw on Monday.  Don’t look for everything to change literally over night; these things can take years — client-server took a decade.  There’s still work to be done building out the model, Salesforce.com is not the only player, and it may not ultimately be the one that gets all the way to the goal line.  On the other hand, a decade might be far too long.  I started writing about this new model two years ago in a white paper called “The New Garage” and I was very surprised at how quickly yesterday arrived.

Microsoft’s Swiss Army Knife

Microsoft shot itself in the foot yesterday when it announced a plan that will converge some of its business applications in an attempt to court medium sized companies. In a series of announcements by Bill Gates and Steve Ballmer, the company set its sights on integrating its flagship Microsoft Office products, back office accounting and front office CRM and other products. The company also announced an initiative to compete in the on demand CRM domain with Salesforce.com while continuing in its core business of providing traditional software licenses.

Where to begin? I can see at least three reasons for concern: in no particular order, they are: convergence, divergence, and pre-announcement. Lets take them one at a time.

Convergence
Absent any real new, new thing on the technology horizon, vendors are turning to convergence the bringing together of separate technologies into a single uber product as a means of bringing new products to the consumer. Ironically, an opinion piece in the September 1, issue of The Economist took aim at digital convergence in the home but many of its observations fit equally well in the software business.

Enumerating converged devices of the past, The Economist went to the venerable Sears catalogue of the early 20^th century, to find converged devices: among others, …A vacuum cleaner that also dried hair, heated rooms and spray-painted walls… and summarized its objections as, A converged device is invariably complex, and people like simplicity. A converged device represents a single point of failure, and people like to know that they can still look at baby photos even if the TV breaks down.

Theres also the eminent marketing guru, Al Reis, who discusses convergence in terms of the Swiss Army knife. Lots of people have them, but who uses them? Each element in this converged device is a compromise the fork is not as convenient as a real fork though better than nothing. OK, but how do you cut a steak if the knife and fork are on the same handle?

No doubt, Microsoft will defend its decision and product direction as a way to bring greater customer value by simplifying the buying and implementation decision for companies of up to 1,000 people. That part of the market really doesn’t have time or resources to do it themselves. And theres the rub. Convergence at the application level is appealing because no one has yet brought to market a good, cheap and easy way to make disparate applications work together,but that is changing.

Major business software providers like SAP AG, Oracle, Siebel, Salesforce.com and others have each made strides at enabling convergence of diverse applications. The need to buy it all from one vendor is waning, as it must because no vendor can support the increasingly complex matrix of applications. It is impossible to know which attempt will become a standard and at this stage all could, but the betting has to be that the tide is turning against converged business software of the type Microsoft envisions.

Divergence
This might be less of a problem for Microsoft but mostly because the company has not diverged very far. The divergence in question is the idea of supporting both a traditional Microsoft CRM product and an on demand product which Microsoft president Steve Ballmer said would give Salesforce.com a very effective run for its money. The easy problem with this divergence is keeping the products synchronized and different sales channels motivated and out of each others way you’d expect they would go after the same customers after all. Those problems are easy both relatively and because Microsoft has so many resources.

The harder problem for Microsoft is its business model. The company has grown big and profitable selling licenses to personal software products, networking and database products according to a story in the Seattle Post Intelligencer, the company’s business unit Microsoft Business Solutions lost more than $200 million last year.

The point is that the market is taking dead aim at the on demand software delivery model which has very different financial underpinnings can Microsoft go against this tide? Alternatively, can Microsoft skillfully re-architect itself to become an on demand software provider? If so, can it re-educate Wall Street about earnings expectations? At some point in the not-too-far-off future, it needs to make these decisions.

Pre-announcement
Lastly, the announcement I read said that aside from some re-branding to a new Microsoft Dynamic badge much, if not most, of the deliverables are scheduled for 2007. That’s fifteen months into the nebulous future and practically a whole software generation away. Customers are expected to buy the new Microsoft Dynamic products and wait for the cavalry to come and link it all together. The problem, as I see it, is that no one else is standing still. For example, in the intervening fifteen months SAP will, no doubt, have an improved NetWeaver and Salesforce will have gone through 4 or 5 new generations of its products. Meanwhile, no one expects Oracle, Siebel and all the others to take a semi-permanent vacation.

All together, it looks like the people in Redmond are trying to play catch up in a big way. It would be a mistake to discount Microsoft’s ability to catch up. After all they have a lot of cash and a lot of talent to take on the job. Still you have to wonder about a lot of things.

When Apple Computer saw itself marginalized from mainstream personal computing the company went on an innovation binge. The personal digital assistant — remember the Newton? — was the first new product to come out of that spree and desktop movie editing for personal use was innovated at Apple as well. And the latest big hit for Apple has been the iPod and iTunes. Faced with maturing markets and no new software niche on the horizon Microsoft has stepped away from innovation and settled on a safe strategy of convergence. But given the meager success of converged products from the multi-function vacuum to the home media-center PC it will be surprising if they succeed.