WHAT'S WRONG WITH BUGGY WHIPS
Toward the end of Other People’s Money, Danny DeVito’s character, Lawrence “Larry the Liquidator” Garfield, speaks to the stockholders of the New England Wire & Cable Company.
“You know the surest way to go broke?” he asks rhetorically and then fills the silence with his own answer: “Keep getting an increasing share of a shrinking market.”
In case his point isn’t clear, Larry the Liquidator provides a trite but clear illustration: “You know, at one time there must’ve been dozens of companies making buggy whips. And I’ll bet the last company around was the one that made the best … buggy whip you ever saw. Now, how would you have liked to have been a stockholder in that company?”
So, given what’s happening in the software sector today, does this mean that I’m liquidating my Oracle position?
Nooooo. After all, at $13.56, Oracle was up 1.27% today (06 Sep 05), which tracked the overall NASDAQ. Still, $13.56 is more than 70% off Oracle’s five-year high of $46.31 (01 Sep 00), and I don’t think even Larry Ellison expects his company’s stock price to ever reach that level again.
However, technology stocks are largely governed by quarterly trends, so (for now) I’ll go with the majority of analysts and say Oracle’s a decent bet. But I’ll be surprised if I’m still holding five years from now.
Here’s the Opportunity (i.e., It’s Not a Problem)
Let’s say we’re playing Jeopardy: “I’ll take ‘Larry Ellison and Zoloft’ for $400, Alex.”
“And the answer is, ‘The enterprise application solution that will turn Oracle into the technology equivalent of the buggy whip.’”
Bing!
“What is ‘Software-as-a-Service’ or ‘SaaS,’ Alex?”
You’re skeptical: “Make Oracle obsolete?” Well, not today, but soon. If Larry (Ellison, not “the Liquidator”) isn’t concerned about SaaS, then why did Oracle revive, repackage, and rename Oracle On-Demand? And why is Oracle On-Demand the head-fake of all head-fakes? After all, it’s not really a departure from Oracle’s perpetual license. Oracle On-Demand merely allows Oracle license holders to host their Oracle products on Oracle-owned and -maintained servers. For a price.
Oracle and other perpetual license vendors (PLVs) don’t really want their customers to move to SaaS; that’s why they spend so much time telling tall tales about what’s wrong with the business model. OpSource’s Nick Blozan kindly calls it “FUD” (fear, uncertainty & dread); end users and independent software vendors (ISVs) will do well to recognize it for the horse hockey puck that it is.
The opportunity isn’t in knocking PLVs off their pedestals. The opportunity is in propelling the enterprise software market forward and making it more efficient, responsible, innovative, customer-friendly, and – most importantly – profitable.
These are all good things. Right?
The Difference Between Flak & Chaff
Well… “Wrong,” if you’re one of the legacy PLVs. Sometimes I wonder if these folks are in business to provide better products and services to their customers or if they just impress themselves with all the things they can make software do.
Features aren’t benefits if they’re not being used, and IDC suggests that less than two of every ten features are actually used by enterprise customers. Does that mean PLVs are spending too much on development? Does that mean they’re charging too much for their software? The answers to both questions are “Probably,” but what is crystal clear is that SaaS vendors will have shorter time to deployment for each release. (See Arena Solutions’ Eric Larkin’s discussion of bug fixes in “Replicating Software Revenue;” his points there also apply to new releases and upgrades.)
That, of course, leads to more PLV FUD: “With SaaS, changes are forced on all customers.” True, but it’s hard to imagine a scenario where the SaaS ISV – which has up-to-the-minute visibility into what customers are doing with the app – will change it in a way that doesn’t improve end users’ experience. Given IDC’s findings, PLV customers are waiting longer for less utility; with SaaS, they know they can have a greater impact on product / service development.
“But SaaS isn’t secure,” PLVs FUD. “You’re accessing it via the internet.” But that’s not a problem for Oracle On-Demand or eBay, which – looking an awful lot like SaaS – processes millions of secure transactions every day. How much of a problem is security for the customer’s intranet and the users who access it from outside the office? SaaS customers will be surprised to find that a true multi-tenant app often is more secure than existing extranets. (For example, OpSource’s SAS 70 compliance is baked into the enablement platform offered to all of its SaaS ISV customers.)
The real problem with SaaS, from the PLVs’ perspective, is that it seems to be undermining their business models and eroding their customer base. Truth is, the PLV model is already broken, and enterprise software customers are demanding less costly and more responsive solutions.
Gezhunteit
SaaS provides those benefits; the improved model is truly disruptive in that it has the potential of upsetting the industry’s legacy perpetual license structure. This is good news; it embodies the spirit and nature of capitalism, which Austrian economist Joseph Schumpeter described as “creative destruction.”
Schumpeter, a champion of entrepreneurship, said that the “process of creative destruction is the essential fact about capitalism,” and he would recognize that the SaaS revolution qualifies. Unlike myriad claims in the late ’90s that the dot-coms would change the entire American economy, SaaS is a specific technology that solves a particular set of demand-driven problems and that has matured to the point where it cannot be ignored.
Larry Ellison’s private investment in salesforce.com seems sufficient evidence, despite the FUD being spread by PLVs. Larry knows well a line from another movie:
“My father’s way of doing things is over,” Michael Corleone tells his girlfriend in The Godfather. “It’s finished. Even he knows that.”
“You know the surest way to go broke?” he asks rhetorically and then fills the silence with his own answer: “Keep getting an increasing share of a shrinking market.”
In case his point isn’t clear, Larry the Liquidator provides a trite but clear illustration: “You know, at one time there must’ve been dozens of companies making buggy whips. And I’ll bet the last company around was the one that made the best … buggy whip you ever saw. Now, how would you have liked to have been a stockholder in that company?”
So, given what’s happening in the software sector today, does this mean that I’m liquidating my Oracle position?
Nooooo. After all, at $13.56, Oracle was up 1.27% today (06 Sep 05), which tracked the overall NASDAQ. Still, $13.56 is more than 70% off Oracle’s five-year high of $46.31 (01 Sep 00), and I don’t think even Larry Ellison expects his company’s stock price to ever reach that level again.
However, technology stocks are largely governed by quarterly trends, so (for now) I’ll go with the majority of analysts and say Oracle’s a decent bet. But I’ll be surprised if I’m still holding five years from now.
Here’s the Opportunity (i.e., It’s Not a Problem)
Let’s say we’re playing Jeopardy: “I’ll take ‘Larry Ellison and Zoloft’ for $400, Alex.”
“And the answer is, ‘The enterprise application solution that will turn Oracle into the technology equivalent of the buggy whip.’”
Bing!
“What is ‘Software-as-a-Service’ or ‘SaaS,’ Alex?”
You’re skeptical: “Make Oracle obsolete?” Well, not today, but soon. If Larry (Ellison, not “the Liquidator”) isn’t concerned about SaaS, then why did Oracle revive, repackage, and rename Oracle On-Demand? And why is Oracle On-Demand the head-fake of all head-fakes? After all, it’s not really a departure from Oracle’s perpetual license. Oracle On-Demand merely allows Oracle license holders to host their Oracle products on Oracle-owned and -maintained servers. For a price.
Oracle and other perpetual license vendors (PLVs) don’t really want their customers to move to SaaS; that’s why they spend so much time telling tall tales about what’s wrong with the business model. OpSource’s Nick Blozan kindly calls it “FUD” (fear, uncertainty & dread); end users and independent software vendors (ISVs) will do well to recognize it for the horse hockey puck that it is.
The opportunity isn’t in knocking PLVs off their pedestals. The opportunity is in propelling the enterprise software market forward and making it more efficient, responsible, innovative, customer-friendly, and – most importantly – profitable.
These are all good things. Right?
The Difference Between Flak & Chaff
Well… “Wrong,” if you’re one of the legacy PLVs. Sometimes I wonder if these folks are in business to provide better products and services to their customers or if they just impress themselves with all the things they can make software do.
Features aren’t benefits if they’re not being used, and IDC suggests that less than two of every ten features are actually used by enterprise customers. Does that mean PLVs are spending too much on development? Does that mean they’re charging too much for their software? The answers to both questions are “Probably,” but what is crystal clear is that SaaS vendors will have shorter time to deployment for each release. (See Arena Solutions’ Eric Larkin’s discussion of bug fixes in “Replicating Software Revenue;” his points there also apply to new releases and upgrades.)
That, of course, leads to more PLV FUD: “With SaaS, changes are forced on all customers.” True, but it’s hard to imagine a scenario where the SaaS ISV – which has up-to-the-minute visibility into what customers are doing with the app – will change it in a way that doesn’t improve end users’ experience. Given IDC’s findings, PLV customers are waiting longer for less utility; with SaaS, they know they can have a greater impact on product / service development.
“But SaaS isn’t secure,” PLVs FUD. “You’re accessing it via the internet.” But that’s not a problem for Oracle On-Demand or eBay, which – looking an awful lot like SaaS – processes millions of secure transactions every day. How much of a problem is security for the customer’s intranet and the users who access it from outside the office? SaaS customers will be surprised to find that a true multi-tenant app often is more secure than existing extranets. (For example, OpSource’s SAS 70 compliance is baked into the enablement platform offered to all of its SaaS ISV customers.)
The real problem with SaaS, from the PLVs’ perspective, is that it seems to be undermining their business models and eroding their customer base. Truth is, the PLV model is already broken, and enterprise software customers are demanding less costly and more responsive solutions.
Gezhunteit
SaaS provides those benefits; the improved model is truly disruptive in that it has the potential of upsetting the industry’s legacy perpetual license structure. This is good news; it embodies the spirit and nature of capitalism, which Austrian economist Joseph Schumpeter described as “creative destruction.”
Schumpeter, a champion of entrepreneurship, said that the “process of creative destruction is the essential fact about capitalism,” and he would recognize that the SaaS revolution qualifies. Unlike myriad claims in the late ’90s that the dot-coms would change the entire American economy, SaaS is a specific technology that solves a particular set of demand-driven problems and that has matured to the point where it cannot be ignored.
Larry Ellison’s private investment in salesforce.com seems sufficient evidence, despite the FUD being spread by PLVs. Larry knows well a line from another movie:
“My father’s way of doing things is over,” Michael Corleone tells his girlfriend in The Godfather. “It’s finished. Even he knows that.”
posted by Ken Boasso at 15:55
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