Software's Sky is Not Falling
Last week's SandHill.com oped doomed the enterprise software industry to a future dominated by open source. A collective rebuttal to the argument asserts that any obituary of enterprise software is premature indeed.
By The "Enterprise Irregulars"
Aug. 07, 2006
I think SandHill.com must like provocative titles that attract readers and inflame controversy. It's been steamy enough on the East coast this August but the recent op-ed piece, "Is Enterprise Software Doomed?" by Guy Smith of Silicon Strategies Marketing, hit many hot buttons of insecurity for readers - most brought on by the advance of open source software.
I belong to a group of bloggers called the Enterprise Irregulars. We analyze the software industry from a variety of perspectives, that of software company executives, services providers, consultants and investors. Our common denominator is many, many years of watching companies, technologies and customers come and go from fashion in our rapidly changing industry.
The drama in Guy's piece made him sound like software's "Chicken Little." In it, he asserts that open source will change the software business to such an extent that the entire industry will end up extinct.
Guy is correct about many aspects of his argument: that business models are changing, that it is much more challenging to make a buck, that open source is having a big impact (particularly in middleware) and margins are plummeting. These are ideas that I and other Irregulars have espoused over the last year.
But Guy is overlooking many key facts about the reality of how enterprises buy software, how the current ecosystem of thousands of vendors sell software and how they make money doing it. My fellow Irregulars felt compelled to rebut Guy's argument in the article to follow.
No Guy, the enterprise software sky is not falling. It is being reborn - as you summarize at the end of your piece.
-- Erik Keller
Commoditization: Not for Every Part of the Stack
One of the central points of Guy's argument is that the IT stack can be completely commoditized. In his piece, he writes: "The entire IT stack can now be commoditized. With little effort a commodity stack can be deployed for 95 percent of all IT buyers. If you think this an absurd view, ponder for a moment what has already happened to the stack..."
Au contraire, I'd like to say that this IS an absurd view. For each layer of the stack, here's why commoditization is not a slam dunk.
-- Jason Wood
-
I belong to a group of bloggers called the Enterprise Irregulars. We analyze the software industry from a variety of perspectives, that of software company executives, services providers, consultants and investors. Our common denominator is many, many years of watching companies, technologies and customers come and go from fashion in our rapidly changing industry.
The drama in Guy's piece made him sound like software's "Chicken Little." In it, he asserts that open source will change the software business to such an extent that the entire industry will end up extinct.
Guy is correct about many aspects of his argument: that business models are changing, that it is much more challenging to make a buck, that open source is having a big impact (particularly in middleware) and margins are plummeting. These are ideas that I and other Irregulars have espoused over the last year.
But Guy is overlooking many key facts about the reality of how enterprises buy software, how the current ecosystem of thousands of vendors sell software and how they make money doing it. My fellow Irregulars felt compelled to rebut Guy's argument in the article to follow.
No Guy, the enterprise software sky is not falling. It is being reborn - as you summarize at the end of your piece.
-- Erik Keller
Commoditization: Not for Every Part of the Stack
One of the central points of Guy's argument is that the IT stack can be completely commoditized. In his piece, he writes: "The entire IT stack can now be commoditized. With little effort a commodity stack can be deployed for 95 percent of all IT buyers. If you think this an absurd view, ponder for a moment what has already happened to the stack..."
Au contraire, I'd like to say that this IS an absurd view. For each layer of the stack, here's why commoditization is not a slam dunk.
- Servers: Servers are certainly becoming commoditized, but Smith plays bait and switch here. He's referencing the commoditization of hardware and microprocessors when he's supposedly making an argument for the demise of enterprise software. Hardware does not equal software.
- Operating Systems: The numbers don't bear this out. Microsoft SQL Server is taking share alongside Linux, both at the expense of Unix. Furthermore, I have trouble accepting that Linux OS is really a commodity in the traditional sense. At the enterprise level, Red Hat Enterprise Edition is the pervasive option and that's really not a commodity product. Red Hat's Linux OS business has 24% operating margins last quarter (up from 12% a year ago); you would be hard pressed to find anyone who would define that as a pure commodity. Red Hat has leveraged an open source code base and made it its own. They've layered high end (and profitable) services that make it appealing to enterprises. How many companies do you know that simply run their own versions of the Linux OS kernel?
- Application Servers: LAMP is certainly massively popular, but since when have Java server vendors started reeling? Oracle's J2EE app server has become a $1 billion business in just two years, and last time I checked Oracle was still printing money with 40% operating margins. Meanwhile BEA continues to chug along thanks to a refined marketing message around SOA. Ironically, JBoss, the flag bearer for enterprise class open source app servers, is the one struggling. Red Hat (which acquired JBoss recently) just guided to a $0.04 per share negative impact from JBoss in FY07.
- Application Development: PHP and Perl are doing quite well, but since when has enterprise software explicitly made money from its scripting languages? Meanwhile the application testing and development tools market (Mercury Interactive being the poster child) continues to grow profitably and is arguably the hottest area for M&A consolidation.
- Databases: I'm a fan of Ingres, and believe they have an interesting message to tell the market. That said, how can Oracle be accused of "retreating to the high end" at the same time offering free product to the low end? The model of providing a low-cost/free version of core functionality to seed the market and sate the low end is nothing new; if anything that's good business. Again, look at Oracle's margins or IBM's software margins and tell me they're being commoditized.
- Applications: Maybe Guy Smith is talking to different corporate customers than I am, but every time I get a peek into what a CIO is doing, or looking to do I frankly don't hear these vendors mentioned. One has to be intrigued by what Sugar and Compiere and others are doing; but it's a long, long way from making a dent into the market share and installed base at the enterprise level. Even in the mid-market (which I define as $500mm revenues +), these solutions are still very much in a "show me" state.
-- Jason Wood
-
