To paraphrase Charles Dickens, Q2 2010 seemed like the best of times or the worst of times for the big software vendors.  For Microsoft, it was the best of times; for IBM, it was (comparatively) the worst of times; and for SAP it was in between.  IBM on June 19, 2010, reported total revenue growth of just 2% in the fiscal quarter ending June 30, 2010, with its software unit also reporting 2% growth (6%, excluding the revenues of its divested product lifecycle management group from Q2 2009).  Those growth rates were down from 5% growth for IBM overall in Q1 2010, and 11% for the software group.  In comparison, Microsoft on June 22, 2010, reported 22% growth in its revenues, with Windows revenues up 44%, Server and Tools revenues up 14%, and Microsoft Business Division (Office and Dynamics) up 15%.  And SAP on June 27, 2010, posted 12% growth in its revenues in euros, 5% growth on a constant currency basis, and 5% growth when its revenues were converted into dollars.

What do these divergent results for revenue growth say about the state of the enterprise software market? 

TECH DYNAMICS: Last Friday, June 25th, the US House and Senate reached agreement on a financial reform bill, which is likely to pass and be signed into law.* At first glance, this legislation has nothing to do with the IT industry directly. But buried in this bill is a provision regarding debit card fees, which could serve as a model for how end users of software could bring about a change in something that is very important to the economics of the software industry — software maintenance fees.

Now, software maintenance fees have been one of the givens in the software industry in perpetual license deals. Typically set at 18% to 22% of initial license fees, they are fixed in stone. An enterprise software buyer can try to negotiate a discount on a license fee; a really smart one can negotiate a deal where the maintenance fee rate is applied against the discounted license fee, not against the list license fee. But software vendors rarely discount maintenance fees. 

Why? Established software vendors depend heavily on maintenance fees for the bulk of their revenue. Almost half (49%) of SAP’s revenues and Oracle’s applications revenues in 2009 came from maintenance fees. Oracle’s middleware business earned 55% of its calendar 2009 revenues from maintenance fees.

And yet maintenance fees are one of the biggest sources of complaint from enterprise software buyers. Every so often this dissatisfaction breaks into the open. SAP faced massive client unrest when it raised maintenance fees for most customers during 2009. SAP tapped the biggest vein of resentment about maintenance fees: fees on old software. Old software is the crux of the problem with maintenance fees: It tends to be stable and therefore requires little support.

TECH DEVELOPMENTS:  With SAP's release of its Q1 2010 earnings, it is clear that those who saw an irresistible shift from licensed software to software-as-a-service (SaaS) are a bit premature in their obituaries for the licensed software model.  SAP's license revenues increased by 11% in euros, and by 18% when its euro revenues are converted into dollars at the average exchange rates in Q1 2010 and Q1 2009.  Oracle's license revenues for its fiscal quarter ending February 2010 rose by 13% in US dollars (and 7% in euros).  Among other vendors, Lawson reported a 28% increase in its license revenues (in dollars), and Epicor reported 23%. 

These growth rates partly reflect how badly licensed software (which is treated as capital investment) got hit in the general cutbacks in business corporate investment in 2009, as panicked companies scrambled to conserve cash and avoid having to borrow from shut-down financial markets.  However, I think there's more to the recovery than rebound from depressed levels a year ago.

Forrester's surveys of companies about why they don't like software-as-a-service consistently turn up five reasons: 1) inability to customize; 2) difficulty in integration to other systems; 3) security of data and information; 4) worries about pricing models that put clients on a constantly rising escalator; and 5) lack of SaaS products.  SaaS vendors are addressing all of these, and there is no question that these barriers are eroding.  But they still persist, and mean that the license software model has a high degree of persistence in software categories like core ERP systems (integration and security of core data), industry-focused applications (need for customization), eProcurement products (integration to ERP systems), and contract life cycle management products (security of contract data).  

Oracle is about to launch its Cloud Computing strategy with a worldwide roadshow. What does this mean for Oracle customers and partners?

First of all, Oracle remains a technology platform provider and will not jump into the hosting business themselves for PaaS. Only for the space of hosted applications, will they remain in the OnDemand hosting business. Let’s have a look at the SaaS and PaaS segments separately: