The end of enterprise software companies

by Bob Evans, InformationWeek USA, July 19, 2010

Oracle and SAP already are software service companies. The numbers don’t lie

Oracle and SAP are no longer software companies that also sell services; rather, they have gradually become services companies that also sell software. How can CIOs ensure that those changes benefit you at least as much as they benefit Oracle and SAP?

In its last four quarters, Oracle has reported total revenue of USD 24.18 billion. Yet less than one-third of that revenue—USD 7.143 billion, or 29.5 percent—comes from the sale of new software, or what Oracle calls “new software licenses.” The remaining USD 17 billion in revenue came from two categories: “software license updates and product support” brought in USD 12.71 billion, or 52.6 percent of total revenue; and services/consulting brought in USD 3.86 billion, or 16 percent of the total. So that’s about 30 percent from software and 70 percent from services.

SAP’s numbers tell a similar story. In its last four quarters, which match up with calendar 2009, SAP posted total revenue of USD 14.481 billion, with “software revenues” contributing USD 3.5 billion, or 24.4 percent. Conversely, what SAP calls “software and software-related service revenues” came in at about USD 11.1 billion, more than triple that software figure.

The days of mega-purchases of software are for the most part behind us—and for SAP and Oracle to continue to grow, they must step aggressively into new revenue streams.

Larry Ellison said as much on Oracle’s earnings call: “We sell these applications a piece at a time rather than a big rip-andreplace strategy, so when people aren’t doing big ERP buys—by the way, ERP’s a rather mature market—we think we’re competing very well in ERP, but it is a mature market.”

Oracle’s diversifying into hardware but is also rapidly cranking up the support/services side of that business with only one choice for customers: premium level.

But aside from hardware, think of where Oracle and SAP have terrific opportunities to impart new value to customers:

#1 Deeper industry knowledge, more insightful best practices, more expertise in cutting-edge business processes.

#2 SAP has created a database from 4,000 clients revealing processes, best practices, and benchmarks. That could be of incredible value to all CIOs.

#3 With each vendor delivering and creating new on-demand and other types of non-premise (as opposed to on-premise) software, they’re beginning to sell even more services as opposed to more software.

#4 Now that Oracle and SAP have built the software plumbing used within hundreds of thousands of companies, why wouldn’t those two information experts try to become the owners/distributors of some of the strategic content that flows through those pipes? It is said that content is king, but distribution is the power behind the throne—and in this case, Oracle’s and SAP’s applications and other technologies give them ideal distribution

I fully realize that Oracle and SAP are in the business of managing and manipulating information and content, rather than owning and marketing and enhancing it. But the IT graveyard is stuffed with companies that failed to adapt to emerging needs. Plus, numbers don’t lie—and the numbers say that SAP and Oracle already are service companies.

Bob Evans is Senior VP and Director of InformationWeek’s Global CIO unit.
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