A confusing dynamic has been emerging in the software industry, caused by the inexorable shift to the cloud. Even before you can get into the analysis, though, you need to identify which cloud(s) you’re thinking about — e.g., infrastructure, apps, platform.
Also, once you’ve done that, you need to decide if you’re partial to technology or financial analysis. Either approach alone gives only half the picture, so you really need to engage on both fronts.
A big current topic centers on whether vendors have been growing their revenues fast enough to claim leadership positions in the cloud. If not, what happens to those that have not been growing fast enough to satisfy the finance folks?
Oracle is a case in point, and it has been subject to a lot of financial analysis that finds the company lacking. How you evaluate revenues, especially in comparison to peers, helps you figure out the price of a share of stock. It’s very hard to get to an apples-to-apples comparison, though.
“Oracle’s ability to adapt to the decline of the on-premises software business and the rise of cloud/SaaS remains in question,” wrote Stephen Simpson in a recent post on Seeking Alpha.
To which I say maybe because the analysis is only partly revenue-related. Of equal importance is the changing revenue model — taking in incremental revenue rather than a big license fee.
Moving to the cloud changes the business model, not just the product, and too often I see financial analysts applying old financial models to new technology and business models, and it doesn’t work well.
For most companies, the easiest customer to re-sell or upsell is one you’ve sold to before. However, migrating your installed base to the cloud is anything but easy if you sold them legacy solutions. The effort is more akin to selling for the first time.
No decision, which can be frustrating in any sales situation, is just as prevalent in an installed base as it is in the general market — even for an incumbent vendor.
So, in the horse race that some financial analysts insist on handicapping, a pure cloud vendor usually will look better than a legacy vendor moving to the cloud. On top of all that, when your analysis is based on revenue growth, you can get spurious results.
Even if a legacy vendor should induce an existing customer or a group of them to convert, the revenue impact likely would be a short-term reduction, because cloud revenue is recognized over time, not all at once.
We are unarguably in a transition state, so we see a mixed industry. However, if you go down the road a few years to a time when the major conversion from legacy to cloud is over, the whole industry will look more uniform, and comparisons will be easier.
It also will be a more fragmented market than we have now. Software vendors will have many complex relationships between themselves and infrastructure vendors, and it will be far from unusual for Brand A software to be running on Brand B infrastructure, even though both brands might offer both software and infrastructure.
All of this suggests that the plain of competition will have to change. It will change because the vendor communities want to avoid the zero-sum rut that markets invariably head toward in a commoditization push that leaves the survivors competing for pennies when they once competed for millions.
That’s why I see the industry morphing into a utility with a small oligopoly controlling most aspects of the market, likely under some form of regulation. A utility won’t care much about infrastructure, for instance, because it will all be the same from the perspective that it adheres to standards.
The electric utility industry is a fitting example. Electric devices are agnostic over how power is generated or whether it comes from next door or a thousand miles away, though some customers might prefer greener or cheaper solutions. However, vendors in the supply chain take responsibility for adhering to and maintaining standards, so that the product is uniform.
It’s doubtful at this stage if any of the enterprise software vendors will stub a toe getting to the cloud. Each has a unique path to travel that’s based on history and legacy constraints.
At this point, rather than comparing vendors in what is a very disparate market, it might be wise to look more at year-over-year comparisons and similar measures that track a vendor’s progress against the goal.
Revenues and revenue growth always will be important, of course. Still, the handwringing that goes into quarterly analysis, and that emanates primarily from looking at a still emerging market and seeing a long established one, obscures reality and benefits no one.