Fellow Enterprise Irregular and desconstructor of the ERP giants Dennis Howlett contributes this guest post on the ongoing Oracle (NYSE:ORCL) vs. SAP (NYSE:SAP) battle. He goes deep in looking at the ramifications of Oracle's recent lawsuit versus SAP and its TomorrowNow subsidiary that provides 'affordable' support for Oracle's J.D. Edwards, PeopleSoft and Siebel products:
Comments to one of Larry Dignan's posts suggest Oracle is up to its old tricks. While anecdoates make for great chatter, I'm wondering whether Larry Ellison has unwittingly handed SAP a winning card in the dirty tricks game that is Enterprise Software sales and support. Put aside for one moment the apparent support for SAP and consider informed facts.
Last year, Jason Wood noted that according to Lon Fiala, then VP of Global Marketing, TomorrowNow might have captured 1% of Oracle applications maintenance stream. At the time Jason asserted:
Oracle's trailing 12 month application-related maintenance and support revenues = $2.031 billion
If every penny of TN's 2005-6 revenue came from Oracle customers, then it might have taken around $20 million. SAP hasn't released detailed figures but reliable sources say TN has grown 'phenomenally' this last year, capturing deals in 8 new countries and picking up at least three $1million plus suuport contracts from Oracle. While those same sources will neither confirm nor deny, when I blurted a guess of current TN annual revenue running at $50-60 million, I was told: "You're not a million miles out." Even if I'm being sold a line and the current run rate figure is substantially less, TN has proven that maintenance can be delivered at less than industry standard rates. That's not quite the point. Even at $50 million, the total is barely a fleabite on Oracle's current maintenance revenues. It's the potential that matters.
The real threat to Oracle is the $1 billion of those maintenance revenues it potentially loses (Check TN's 50% offer to Hyundai UK) as increasing numbers of marquee customers realise they can get adequate software maintenance at affordable prices. Oracle claims it cannot understand how TN can make a profit at TN's prices. It uses that as an argument to imply that software developers need north of 50 percent to cover maintenance costs. Buyer advocates like Vinnie Mirchandani see things differently:
Irrespective of what happens to SAP's TomorrowNow unit after Oracle's suit, the cat is out of the bag. While Oracle in its suit makes the point that "the economics, and the logic, (of SAP's TN pricing) simply did not add up", actually the economics of software maintenance are extremely transparent.
Oracle's claim is specious. According to its latest results, support services yield 90% margins. Nothing I've seen in SAPs consolidated numbers leaves me to believe that TN is not capable of delivering a respectable return to its parent company. So how might SAP win in this ugly war?
Josh Greenbaum says that SAP has planned for this eventuality. One contact I spoke with seemed relaxed at the prospect of a legal tussle with Oracle: "Note they're not trying to say SAP is being unfair by going after the maintenance business." Maybe so. Let's assume that SAP deals with its 'problem' by quietly firing a few folk and forking over a few $million. Does that hand SAP a winning card?
SAP may 'help' legacy Oracle customers (PeopleSoft and JD Edwards) keep the lights on at 50% discount but sooner or later, it throws the spotlight back on SAP. How will SAP justify offering a discount on Oracle legacy products without drawing attention to the way it charges for its own product maintenance? While the current lawsuit may make SAP look like it is playing less than fair, BOTH companies have a huge amount to lose. Think I'm kidding?
SAP's 2006 maintenance revenue was stated at: €3.534 billion ($4.507 billion.) Adding the two companies' maintenance figures together, the minimum we're talking about is half of $6.5 billion. That's the amount SAP and Oracle customers could potentially save by using a third party maintenance provider, assuming that TN is profitable at its headline discounted figure. If SAP allows Oracle to kill off TN by letting Oracle pursue this lawsuit largely unhindered then it tacitly restores margin to Oracle, while preserving its own margins. It achieves this by stifling competition. SAP says differently asserting it will 'aggressively defend' the lawsuit. My sense is that with Henning Kagermann continuing as SAP's leader, SAP will not play Oracle's street fighting game. It's not the German way. That's OK. Such a position will keep the customer at the center of the maintenance cost discussion. Precisely where they should be.
Does Larry Ellison really want maintenance economics put under the spotlight? Oracle's last quarter was a blow out. Good for them. But how much longer can a business software company continue to justify earnings before tax north at 30% of revenue (.pdf) without users questioning applications taxes? Maintenance costs account for around 10% or less of total enterprise IT spend. If you're a CIO, then it hardly seems worth shaving a few points here when there are far larger costs on which to concentrate. But consider the impact of maintenance costs over time. As Vinnie says:
Fair maintenance pricing would be in a bell curve - gradually ramp up years 1 and 2, gradually ramp down starting in year 5. But today the software industry expects full rates from day one through termination
What Vinnie doesn't say is that around year 5, along comes the upgrade cycle and business goes through the whole charade again. The impact is clear. Run the same business applications for 5+ years and you'll likely pay twice over under the current industry standard sales and maintenance model but for questionable value. Maintenance at 20% and above of software license amounts to a perpetual tax on usage. Oracle may be trying to make SAP look bad but in doing so it is exposing a genuine customer cost issue that won't go away anytime soon. As Sadagopan neatly summarises:
Its time to question the logic behind the maintenance revenue stream of product vendors – in every other industry with scale, the maintenance charges or for that matter the service charges shall come down-benefits of scale would reach the customer. Strangely, [the] software industry has no such compulsions. Customers need to have credible alternatives for maintenance and the time to create such options are now – particularly when the enterprise software industry is undergoing massive changes .
A credit here or there will not assuage dissaffected users nor those who favour customer interests above those of the vendor community. If Oracle succeeds in killing off TomorrowNow then it will indeed be a sad day for enterprise software. Despite SAP playing good guy to Oracle's bad guy, I doubt that will happen. They're both in the same boat, which Ellison has deftly succeeded in holing from below. Let's see how much water gets shipped before this lawsuit is resolved.