Strategic Titans Validate Cloud Model—But Will it Work for Them?
SAP and Oracle are on a cloud buying spree. While that’s exciting for Wall Street it belies a bigger epiphany for the software industry. Thursday’s announcement of Oracle’s $1.9B acquisition of Taleo follows a pair of other big cloud deals: Oracle’s $1.5 billion purchase of RightNow and SAP’s play for SuccessFactors. By making these acquisitions, both of these traditional companies have validated that the cloud is the future of enterprise software. I believe that when we look back two years from now, we’ll say that the Taleo, RightNow and SuccessFactors acquisitions were the tipping point in the enterprise software industry finally shifting in earnest to the cloud.
Starting with salesforce.com, the business of building and selling business software fundamentally changed. Cloud based-vendors such as salesforce.com, Workday and, my company, Zuora, are stealing market share from traditional, on-premise software companies such as Oracle and SAP that they are finding uncomfortable. These old school enterprise providers know the power has shifted from the IT department to functional heads (e.g. insiders at SAP told industry analyst Dennis Howlett that 11 of its top customer CIOs have disappeared). They know that customers are choosing “on-demand” computing in lieu of traditional, on-promise software. They know that innovation in cloud-based software is measured in weeks while on-premise “innovation” creeps along at a glacial pace. And they know that customers don’t want to pay exorbitant, up front licensing fees for software that will become dated in a matter of months.
So what’s a big enterprise software company to do? In the early 2000s, ERP players tried building and marketing their own cloud apps, such as SAP’s “Business by Design” product. But in five years, SAP has signed on 1,000 Business by Design customers, less than half of 1% of its install base. Conversely, the significantly smaller SuccessFactors had racked up 3,500 customers in the cloud, representing 15 million subscription seats for its human resources solution. More importantly, SuccessFactors’ growth is off the charts, with 77 percent year over year revenue in the third quarter of 2011 and 59 percent year over year revenue for the first nine months of 2011. Rather than continuing to fight a losing battle, SAP elected to simply purchase SuccessFactors. Call it an attempt at cloud innovation via acquisition.
Oracle seemingly purchased RightNow for a similar reason. Salesforce.com has been taking CRM market share from Oracle (and Siebel, PeopleSoft and JD Edwards for that matter) for years. Apparently, Oracle believes scooping up RightNow will allow it to grab a bigger piece of the growing market for cloud-based CRM. But it’s yet another acquisition in a confusing mix of solutions, and one that flies right in the face of Oracle’s “private cloud” vision, which, as salesforce.com CEO Marc Benioff explains, “goes hand-in-hand with selling proprietary mainframes.”
Of course, Oracle and SAP aren’t the first monolithic, on premise companies who have tried to compete in the cloud via acquisition. In 2003, before being acquired by Oracle, Siebel gobbled up SaaS CRM vendor, Upshot, and subsequently launched its own line of cloud-based CRM. In that one stroke, Siebel signaled that on-demand computing was the preferred model for CRM.
But here’s the irony: Siebel had the right idea – realizing that the cloud was the future of computing – the company that most benefited from the acquisition was Salesforce.com. By buying Upshot, Siebel validated cloud-based CRM and, by default, Salesforce.com. Almost overnight, Salesforce.com was catapulted from a laggard position to the leader in cloud-based CRM. Needless to say, it has grown its position of dominance in the intervening years.
So why should anyone believe that today’s acquisition of Taleo presents any more of a threat to Salesforce?
The fact is that Oracle, SAP and Siebel each felt forced to buy SaaS companies to kick-start their own cloud efforts. They all acted in response to the market shift, not in a strategic, market-building way. They are admitting that they can’t compete against a better business model and against a better delivery model that customers prefer. SAP and Oracle were the prevailing figures of yesteryear and can’t simply acquire their way to success. They have to find another way to successfully compete – and be relevant – in the new era of the cloud. Because right now, who benefits most from today’s Taleo acquisition remains unclear, but I’d bet it won’t be Oracle.
Tien Tzuo is CEO of Zuora, a subscription commerce company based in Silicon Valley. Previously, he was the chief strategy officer and chief marketing officer at Salesforce.com. Opinions expressed here are entirely his own.
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