At 50%+, Oracle’s operating margins have never been higher
The differentiation of Oracle’s database technology, however, has never been lower and the number of both core and specialized alternatives has never been greater.
So what’s going on? You, kind Sir or Madam, are being milked. What’s worse is that you, in an example of collective behavioral dysfunction, have inadvertently played a role in setting up the milking. What happened?
Like all smart CIOs you followed a bit of herd mentality when it came to core technology. Pity the poor fools who, back in the day, bet big on Ingres or Sybase. You played it safe and went with Oracle, IBM, or if your requirements weren’t too heavy, Microsoft.
The problem is, of course, that everyone executed the same strategy you did. Hence, the market created a system of increasing returns where the strong vendors got stronger and the weak ones died. The result: the RDBMS market is an (order of magnitude) $10B/year market, structured as an oligopoly with 3 players. Most other software markets worked out the same way.
You were focused on standardization. You realized that through a combination of decentralized IT decision making and growth-by-acquisition your organization had become a kitchen sink of enterprise software. You had everything. In order to reduce the administrative, training, and license acquisition costs, you fought tooth and nail with your divisions to standardize the environment. You said, “Heck, it’s all the same stuff in the end, folks, so let’s make Oracle our DBMS standard, Business Objects our BI standard, Documentum our ECM standard, and SAP our ERP standard.”
And you won. Mostly. There’s still some Cognos in finance. And marketing didn’t totally give up on Interwoven. But, for the most part, you won. You reduced the entropy of your IT environment and drove cost savings for your organization.
The problem is you’ve won the battle but lost the war. Why? Because if, as you say, the “stuff really is all the same” you shouldn’t standardize on the most expensive product. You should standardize on the cheapest.
Do you really need to be paying those big fees to Oracle for enterprise licenses? Wouldn’t MySQL do?
Are you really using all the functionality of that $1M/year Documentum ECM system? Wouldn’t SharePoint or Alfresco do?
For BI, do you need all the bells and whistles of BusinessObjects? Wouldn’t Pentaho or Qlikview do a fine job, at a fraction of the cost?
Switching costs. It’s hard to move off Oracle or Documentum and you don’t want to pay the nut to do so.
Organizational inertia. Your whippersnapper DBAs who were in their 30s in the 1980s are now in their 50s. They’re thinking that change devalues their knowledge and experience; some just want to cruise into retirement. But that’s their personal agenda, not your enterprise one.
Accounting: you made it free for your divisions to keep using Documentum, Oracle, or BusinessObjects because you bought an enterprise license. While this appeared to “save” you money on a per-license basis, and it helped support your standardization initiative, it squashed innovation in your divisions, reinforced the organization inertia, and has a lot of people using the wrong tool for the job, resulting in projects that either take more or more expensive hardware than necessary (Oracle is good at this), that take too long to develop, or that simply fail.
So, what do I recommend doing about all this? I suggest that you adopt these policies, which –- for full disclosure, are at least partially in the self-interest of this blog’s author:
Stop writing big checks for commodity software. Every time a big check comes along, ask yourself: is this software differentiated or commoditized? Be willing to pay a premium for differentiated software, and price shop commodity software. Call a group of your smartest staff together periodically to help you make the commodity versus differentiated call.
When you see a big check coming for commodity software, make a migration plan. My hunch is that most of the time, you can create a nice 3-year ROI in the transition from premium to cheaper software. (This reminds me of the time I visited an investment bank’s CIO asking about their Documentum strategy. The answer: “our Documentum strategy is to get off Documentum,” because we’re paying too much and using too little.)
Stop doing enterprise agreements that create poor economic incentives within your organization. Don’t pay $XM at the enterprise level, spread that as a “tax” across your divisions, and then make use of certain software “free.” It distorts project reality, creates false incentives, squashes innovation, and generates lots of hidden costs. If you want to negotiate a master agreement and discount rate, that’s fine. Shoot for centralized discounts without central planning.
Don’t worry that the prior policies will create mayhem. While I understand that you don’t want arbitrary taste differences increasing the entropy of your enterprise software portfolio, recognize that with the first policy you’ve solved that problem already. If you deem a category (e.g., core RDBMS, enterprise search) commoditized, then you are going to force people to pick on cost. You’ll get standardization on the commodity categories –- just on the least expensive alternatives. The only entropy you’ll need to manage will be on the differentiated software which, having dispatched the commodity majority, you’ll have time to explore, study, and exploit.
Why I am taking the time to write this note to you? Back in the 1980s I was a foot soldier in the relational database revolution, and today I’m the CEO of one specialized DBMS company and on the board of another.
Mark Logic makes an XML server which can save great amounts of time and money in creating applications against unstructured information, replacing the combination of an RDBMS, an enterprise search engine, and an application server. Not only can Mark Logic manage 100s of TB of XML, the system eliminates the object / relational/ hierarchical impedance mismatch between Java, SQL, and XML that hampers developer productivity. Mark Logic was recently named the fourth fastest-growing IT company in Silicon Valley.
Aster Data makes a specialized data warehouse DBMS that runs on low-cost commodity hardware with a shared nothing architecture and leverages in-database MapReduce technology for parallelism and high scalability.
And during the past 25 years or so I’ve watched the market evolve. While I fully understand the policies and market forces that have led
us to where we are, I feel like we’ve come full circle. Vendor power is now concentrated in the big three. Vendor margins top 50%. Big vendors don’t innovate; they consolidate. Inertia has set in customer organizations. And there’s a major platform shift in progress; last time it was mainframe to minicomputer, this time it’s cloud.
Things feel a lot to me the way they did in 1985, just past dawn of the relational revolution. So in one way I’m writing to point out the oft-overlooked obvious: stop paying premium prices for commodity items. And in another way I’m saying, take the money you save in so doing and invest it in innovation technologies that:
Drive competitive advantage (which will matter again as we come out of the Great Recession)
Enable the Internet-scale applications you’ll need to face the coming information deluge
Reform the application development stack in ways that make sense for the coming generation of information applications, not that made sense for the last generation of data-centric ones.
Thank you for reading my note. If you have any questions or comments, please give me a ping at dave-dot-kellogg-at-marklogic-com or comment on this post.
But, in a surprisingly turn, Microsoft then claimed that it was never intended to be funny. It was, they said, a spoof, an attempt to make fun of themselves. Frankly, I have trouble believing it, but Charles Cooper of CNet makes the case here. Even if it is true — even if they deliberately made a horrific video in order to draw lameness cries only to say “fooled you, it was supposed to bad” — then all I can say is what the heck were they trying to accomplish?
Either way, it’s lame and a huge waste of resources. The only question is whether they aggravated the first assault by deliberately setting out to waste my time with the second.
Now, having done a few song re-writes and participated in a few skits of my own, some might cry foul. Which, in turn, raises the question of what makes some internal corporate videos so fun and what make others so lame. To me, to make it work, the sketch must:
Play off one or more real internal issues
Include a degree of irreverence
Generally be performed by company executives and not paid performers
Not be a transparent attempt at motivation
At least make an earnest attempt at humor
And finally, take it easy on the budget. Managers squeezed to their last $50K on the final budget pass in December don’t like to see $100K vaporized by marketing before their very eyes a few weeks later.
Here are a few quotes from the Microsoft press release:
Microsoft hosted in Cambridge today a number of independent software vendors (ISVs), including Novell Inc., Mark Logic Corp., … to launch this collaborative, community-based initiative. The Cambridge event is the first in a series of labs around the world that will bring together vendors to test interoperability between their implementations of well-known document formats […] will test interoperability between existing implementations of Office Open XML Formats and the Open Document Format (ODF) …
[…] said Jean Paoli, general manager for Interoperability and XML Architecture at Microsoft. “The labs are designed to bring technical staff together to roll up their sleeves and test interoperability between implementations of formats and address issues that are identified either in those implementations or in the translation technologies used to work across formats.”
[…] said Andy Feit, senior vice president of Marketing at Mark Logic. “Enhancing document format interoperability between MarkLogic Server and other products in the marketplace will make it much easier for our customers to deploy applications for content assembly, reuse and delivery.”
Kelly appears near the end, so you’ll need to hang in there a bit to see him. The video is in total about 4 minutes long. Check it out!
Competition. While MarkLogic is not a search engine we did end up competing with Fast at several major media (i.e. publishing) accounts, so they had my attention.
Seen this before. Fast reminded me of MicroStrategy, against whom we successfully competed at Business Objects, but whose tactics caused me more than a bit of angst over the years. (One might argue this comparison was prescient.)
Speaking out. I felt that despite the presence of evidence (e.g., financial analyst reports from a Scandinavian bank that did some pretty convincing analysis) that things were awry that everyone (i.e., industry analysts, customers) seemed to turn a willing blind eye first to the indicators of the problems and then to the problems themselves — either dismissing them entirely or as characterizing them as simple “accounting issues.”
Knew the right way. Also, from my near-decade’s worth of experience at Business Objects, I had a strong sense for what I felt was the “right way” to run a European software company. Basically, play by the same rules as everyone else — dual list on the NASDAQ and report financials under GAAP.
Anyway, with the Microsoft acquisition, I figured the story was done. While I was always amazed at the valuation — particularly for a company in the midst of an accounting scandal — the problems were well publicized and I figured Microsoft had to have looked into every angle.
Even as it agreed in January to plunk down $1.23 billion to buy a promising but problematic search company in Norway, Microsoft knew that the company had some accounting matters to address.
Now, it appears, the acquired company, Fast Search & Transfer, may have some criminal matters to work out: Suspicions about the Norwegian search-engine company’s revenue reporting are now in the hands of the Oslo police.
Norway’s financial supervisory authority, Kredittilsynet, said its review of Fast Search’s previously disclosed accounting problems not only appeared to have violated accounting standards, they may have broken the law too.
In its haste to grab Fast Search, however, Microsoft looked past the company’s problems: They include, but aren’t limited to, accounting irregularities that began to appear as Microsoft began to look over its books.
In the second quarter of 2007, Fast Search reported an operating loss of $38 million on revenue of only $35 million—a full $20 million below forecasts. The loss widened in the following quarter, leading the Norwegian stock exchange to delist Fast Search on December 12.
That same day, Fast Search said it would review its accounting for all of 2006 and 2007. The latest unaudited results show revenue growth of 7 percent for last year, which is far below Goldman’s forecast.
Kredittilsynet, the supervisory agency, was equally determined. It referred Fast Search to investigators at Økokrim, the Norwegian National Authority for Investigation and Prosecution of Economic and Environmental Crime.
Økokrim last week concurred that the nature of the irregularities and the amount by which Fast Search apparently inflated its accounts were serious matters warranting prosecution. But the agency said it was too busy to open a criminal investigation.
Rather than let the matter rest, the market supervisor turned it over to the Oslo police for investigation. Aftenposten, a Norwegian newspaper, characterized Kredittilsynet’s decision to involve the police as an unprecedented step in that country.
In the interview Balmer talks about Google, the Yahoo! deal, Apple, his three types of day [see below], Silverlight, the Facebook investment, Fast Search & Transfer [see below], the number of emails he gets per day (~60), and he even gives out his email address: firstname.lastname@example.org.
On his three types of day:
With customers. From 730 AM to 800 PM and then get on [private] plane to next city.
Doctor in office. Wall to wall meetings all day. “Exhausting.”
Think, write, and research.
On Fast Search & Transfer:
Fast is company had internet and website/corporate products. Sold off web search. They have great for high end search on enterprise and engines that can search web sites. Tech fantastic and team is great. Anxious to build both ways. Love company/people. Great integration plan – more to say.
This is consistent with my thesis for why Microsoft bought Fast (to fend off the Google Appliance in high-end enterprise search, aka, the best defense is a good offense). However, I’d not previously heard the message that they want to build Fast out “both ways” — i.e., in enterprise search and in their Internet search offerings.
The only part of the acquisition that continues to amaze me is the ~8x revenue-run-rate price. That kind of multiple is in-line for high flyers, i.e., for healthy, high growth enterprise software companies. But Fast was in the midst of unwinding a world-class accounting mess, complete with lots of AR write-offs and a revenue restatement. I’d think companies in that situation are usually lucky to trade for 1-2x revenues.
Much as the the price SAP paid for Business Objects wasn’t surprising until you noticed that Business Objects was about to announce a quarterly miss, nor is Microsoft’s price for Fast surprising until you consider the not so easy to overlook financial mess. Personally, I would have guessed a sale in the $300M to $500M price range, proving that I’m not always right.
My current speculation is that there must have been a bidding war for the price to get so high. The fun question then becomes who else was bidding, why did they want it so bad, and what are they going to do now that they’ve lost?
I’m Dave Kellogg, advisor, director, consultant, angel investor, and blogger focused on enterprise software startups. I am an executive-in-residence (EIR) at Balderton Capital and principal of my own eponymous consulting business.
I bring an uncommon perspective to startup challenges having 10 years’ experience at each of the CEO, CMO, and independent director levels across 10+ companies ranging in size from zero to over $1B in revenues.
From 2012 to 2018, I was CEO of cloud EPM vendor Host Analytics, where we quintupled ARR while halving customer acquisition costs in a competitive market, ultimately selling the company in a private equity transaction.
Previously, I was SVP/GM of the $500M Service Cloud business at Salesforce; CEO of NoSQL database provider MarkLogic, which we grew from zero to $80M over 6 years; and CMO at Business Objects for nearly a decade as we grew from $30M to over $1B in revenues. I started my career in technical and product marketing positions at Ingres and Versant.
I love disruption, startups, and Silicon Valley and have had the pleasure of working in varied capacities with companies including Bluecore, Cyral, FloQast, GainSight, MongoDB, Recorded Future, and Tableau.
I previously sat on the boards of Granular (agtech, acquired by DuPont), Aster Data (big data, acquired by Teradata), and Nuxeo (content services, acquired by Hyland), and Profisee (MDM, exited to Pamlico).
I periodically speak to strategy and entrepreneurship classes at the Haas School of Business (UC Berkeley) and Hautes Études Commerciales de Paris (HEC).