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When Oracle reported its fourth-quarter earnings last week, CEO Larry Ellison made it clear on its call to analysts that the company has every intention of becoming the world’s top provider of on-demand software, even if it takes the company ten years.
With Oracle’s solid track record, is there any reason to doubt him?
Maybe.
Oracle’s historical earnings growth (setting aside its recent 7% profit plunge in the wake of weakened global IT spending), along with its continuing string of successful acquisitions, clearly demonstrates that the company’s business model works and works well.
But it’s a business model that’s largely predicated upon on-premise licensing and maintenance agreements that have been a cash cow for Oracle, even in such a lousy economy.
The challenge for Oracle, SAP and other big enterprise software companies is to find a way to expand their respective on-demand or Software-as-a-Service based offerings without completely cannibalizing their extremely lucrative on-premise revenue streams. That won’t be easy.
As enterprise customers continue to become more comfortable with placing critical applications in ‘the cloud’, they’re also becoming more knowledgeable and cognizant of the sharp differences in price points between SaaS agreements and what they’re historically been shelling out for on-premise software.
The cloud evolution, combined with the renewed focus on cost-cutting, is also leading an increasing number of CIOs and other CXOs to question the value of operating their own server farms which run premise-based software. Savvy IT leaders are pushing hard to reduce their fixed IT costs in order to make their organizations more nimble and responsive to new business opportunities as they arise. Big companies aren't about to suddenly dump millions of dollars they’ve invested in IT infrastructure but they are looking to make the transition to becoming much leaner organizations.
This all spells trouble for Oracle and SAP’s highly-profitable premise-based software licensing models. For his part, Ellison said last week that Oracle’s next-generation Fusion software suite -- which incorporates the best of its numerous acquisitions, will be on-demand ready when the company begins shipping it next year.
How Oracle manages to balance pricing between the on-premise and on-demand worlds without alienating its existing customer base is another question.
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