Score a battle victory for SAP this week with its strong quarterly earnings and first gain in software license market share against rival Oracle in eighteen months. But it's not who wins the battle, as the old saying goes, it's who wins the war.
Which vendor is in a better strategic position? SAP says its innovation strategy is winning, tapping into a "structural change in the IT industry" whereby companies are spending less on commoditized hardware and more on software and innovation.
There's plenty of truth in this analysis, but don't expect to see a white flag from Oracle. Commoditized as hardware may be, it's a core piece of Oracle's end-to-end stack offering, which is aimed at helping customers to cut IT costs.
Which side will customers choose? That will play out in the earnings reports in the quarters and years to come. But IT buyers just might be looking for a third option as consolidation raises concerns about interoperability and price leverage.
The crux of the IT-spending shift that SAP highlighted this week is one in which more of your IT dollars are being spent on software and innovation and less on hardware and consulting. Where 85 cents per dollar used to be spent on hardware and consulting, that spending is shifting toward 60 cents per dollar, with fewer hardware refresh cycles and consulting projects freeing up money for software and innovation, William McDermott, co-chief executive officer of SAP, told financial analysts.
What's the evidence of this trend? You need only look at the financials of the major hardware companies, which "haven't reported the kind of numbers that we've reported," McDermott said in an interview with InformationWeek.
True, Dell and HP revenues were flat in the last quarter. Part of the story was that Apple's iPad took a big bite out of consumer PC sales, but growth in corporate sales was also less than robust. Among enterprise-focused vendors, hardware sales were down 6% at Oracle, while IBM had a 17.5% increase in the revenue of its Systems & Technology Group. (IBM clearly gained share from Oracle with its Power Server line, but its mainframe business also had a huge quarter.) By comparison, SAP's software revenue grew 26%, bolstering McDermott's software-outpacing-hardware analysis.
The IT spending shift is a very real long-term trend, according to Andrew Bartels, principal analyst at Forrester Research. Enterprise expenditures on hardware have grown 4% to 5% per year over the past decade, on average, while software has been growing 9% to 10% per year, Bartels says. The disparity keeps widening because Moore's Law keeps driving hardware costs down, he says. And cloud computing and virtualization are accelerating the trend by cutting into hardware sales.
Ray Wang of Constellation Research also sees the shift, but it's more like 70 cents of every IT dollar now spent on hardware and services, down from 80 cents in years past, he says. The trend is more about "less money going to keeping the lights on," meaning maintaining and administering existing deployments, Wang says. Outsourcing and data center consolidation are key trends cutting into hardware sales, he notes.
Companies are replacing aging hardware, but they're spending even more significantly on software, in part to avoid hiring more people, Wang says. That along with shadow IT spending on things like software-as-a-service and iPads has tech spending up 22% overall, he noted.
Will the pressures of the hardware business--relentless development cost rewarded by thin margins--ultimately be a drag on Oracle's prospects? Let's first consider SAP's strategy.
Innovation is the key theme SAP has been talking up since McDermott and Jim Hagemann Snabe became co-CEOs early last year. It's the company's label for its in-memory, mobile, and on-demand offerings. In-memory is highlighted by the Hana appliance, technology aimed at analytics today but expected to take on data warehousing and, eventually, transactional database duties.
SAP's mobile apps and infrastructure are mostly Sybase products, including the Sybase Unwired apps development and Afaria device management security platforms. SAP's on-demand offerings are led by the Business ByDesign SaaS suite but also include a Sales OnDemand app released in June, a Carbon Impact OnDemand app, and other offshoots planned for the same platform.
McDermott puts SAP in the same category with Apple and Google as "companies that are reporting strong momentum because they're following innovation strategies." That may be a bit of a stretch, but there's evidence SAP's innovation strategy is working.
The Hana appliance, for example, has a 400 million Euro ($570 million) sales pipeline, and SAP is counting on about 100 million Euros ($142 million) in completed sales this year, McDermott said. About 3,000 companies are embracing SAP and Sybase mobility apps and infrastructure, and the mobile sales pipeline is "in the same zipcode as Hana," he said, though he stops short of offering hard figures or average deal sizes.
With only 1,000 customers expected to be using Business ByDesign by year's end, SAP's on-demand revenue will scarcely register. But let's throw that in with Hana and mobility and call it 200 million Euros ($286 million) in top-line impact for 2011. That's a rounding error compared to the 12.9 billion Euros ($18.4 billion) in revenue SAP expects this year. Nonetheless, McDermott insisted that the bulk of the revenue boost has yet to come and that the innovation strategy is having an outsized impact on core application suite sales today.
"Once companies hear the in-memory and mobile story, they're confident that SAP has the best process, data, and mobility strategies of all the major software companies," he said.
Counting cloud, mobile, and analytics among the "big levers" in the IT market these days, Wang says, SAP has made "all the right bets." The BI and analytics bet (with SAP BuisnessObjects) has paid off particularly well, driving 30% to 40% of revenue, he estimates. But companies like Salesforce.com also are placing these bets, and the question for customers is who has the most cost-effective approach? That remains to be seen, says Wang.
How Oracle Stacks Up
For the last two years, the innovation at Oracle has been all about Exadata and the integrated stack. In the wake of Charles Phillips' departure as company president, software appears to have taken a back seat. Acquisitions have been small tuck-in deals, like this week's purchase of InQuira, a self-service knowledge management systems provider that will bolster Oracle's CRM offerings.
After several years of delay, Oracle's Fusion Applications are finally available, but the company has been very quiet about their release. No doubt, there will be a big splash at Oracle Open World in early October. But will the story be about applications or the vendor's one-stop-shop, single-stack approach? If the focus is on the apps, expect to hear about the innovative blend of on-demand, on-premises, and hosted deployment options. It won't be hard to outdo SAP's conservative embrace of cloud computing.
If the emphasis is on Oracle's stack play, expect to hear about IT manageability, vendor consolidation, and the promise of reducing the cost of keeping the lights on. Wang sums up the story line as "just buy the red stack, and we'll get rid of a dozen vendors and save you money."
Even if hardware business is commoditized, that doesn't mean it's not a strategic assets for Oracle, says financial analyst Brett Korsgaard of Koa Capital Management. In this recent article, Korsgaard speculates that Oracle's strategy is to "render hardware less relevant while it recoups the profits through value-added applications and systems software." Oracle's diverse product line has made revenue predictable, shielding results when new software license revenue might suffer, he says.
So there you have it: SAP's innovation story versus Oracle's stack appeal. SAP's fortunes appear to be on the rise for now. But Oracle's diversity may overcome what some see as an innovation deficit.
The wild card in this war is customers, who may not react to innovation or stack-appeal as expected. In fact, the rampant vendor consolidation of recent years has raised concerns about the vendors still standing.
In our just-released InformationWeek Analytics Enterprise Apps 2011 report, nearly two-thirds (64%) of 274 IT pros responsible for enterprise apps cited the "ability to integrate with existing systems and infrastructure" as the most important quality they look for from enterprise applications vendors. The next most cited quality, responsive service and support, came in at 38%.
Customers are mightily concerned about interoperability. They're also worried about counting too much on any single vendor. "We see more and more SAP customers becoming less SAP-centric," Wang says, "and we also see Oracle customers trying to create a buffer against the single stack."
The fear, Wang and others observe, is that overreliance on any single vendor will diminish a customer's ability to influence pricing. And that's the sort of fear that promises of innovation or IT cost savings might not overcome.
In our research 39% of respondents agreed with the statement "core ERP system(s) are crucial, but we have a heterogeneous environment that requires application-independent information infrastructure." That was the top response, but not far behind (with 31%) was the view that "our enterprise is committed to a core ERP system as the platform for running the business. We want to build and extend initiatives around this platform."
Even when companies commit to one ERP suite, chances are they have eggs in lots of other baskets. It's estimated that more than 60% of SAP customers, for example, run their apps on Oracle database. I don't see that changing quickly, and SAP hasn't bothered trying to aggressively push the newly SAP-certified Sybase ASE database on those customers as an alternative to Oracle database.
In fact, despite their market battles and legal feuds, SAP and Oracle have managed to agree on support for each of their hottest new products. That is, Oracle has cleared the way for SAP customers to integrate SAP Hana with Oracle databases running SAP apps. And SAP has recently certified Oracle Exadata to run SAP apps. That happened because customers demanding interoperability.