Big Shift to Enterprise Cloud Software

One of the big shifts happening in the enterprise software business is the adoption of the Cloud. This is already the dominant model for the consumer Internet space (e.g. Google, Facebook). The overall myth was that large companies are so concerned about security and privacy of data that they will be reluctant to let go of running these applications in-house. Then about 3 years back, Oracle’s CEO ridiculed the cloud as vapor. But the landscape has surely changed and will change even faster going into 2012. Why do I say that?

Recently SAP bought Success Factors at a very high valuation and many saw that as a desperate move to get into the Cloud. Oracle also bought RightNow in the same vain and there is a strong possibility that Oracle will acquire NetSuite in the next twelve months (NetSuite addresses mostly the SMB market). SalesForce.com (SFDC) has been growing and its valuation has gone quite high. The new entrant Workday (founded by the founders of Peoplesoft) has been doing very well. Someone said it is valued at almost $2B with yearly booking rate of $300M. Not bad for a five year old company. Workday addresses the HR space, but is moving to financial applications as well. It wants to be known as an “ERP Replacement” company, not just an “HR Company”.

Most of Workday customers are the large enterprises such as Tyco, AIG, Flextronics, etc. These customers are replacing legacy applications from SAP and Oracle with Workday’s SaaS suite offered through the Cloud. The advantages are obvious for the customers – same version always, new functions added more frequently, vendor takes care of upgrades, less cost paid to SI’s. The traditional applications typically require a 5 to 6 times expense (over product license cost) on consultants (SI’s) who keep customizing the apps. Workday claims their customers have a 90% reduction on SI cost, which is a big deal.

The challenge for the enterprise Cloud vendors is the revenue model, where they do not get the hefty license dollars up front. Hence their investment (both capex and opex) is quite high. For example, Workday has taken investment of $250M to date, counting the last round. But if they can sustain like SFDC, then there is a thriving growth business. By the way, Google has a growing enterprise business and currently brings $1B revenue which is not bad at all. They clearly are focused to make this part grow faster in future.

This is not good news for legacy enterprise application companies like SAP and Oracle. They have to re-invent (or acquisitions like Success Factors and RightNow) quickly to catch up with this shift to the Cloud by large enterprises. Oracle is more likely to ride this bandwagon sooner than SAP. As per the SI’s, they need to re-invent also to at least keep their current clients happy. That means they have to shift from “customization” of code to more reconfiguration of business processes.

The Next Web Architecture

I was listening to Roger McNamee’s predictions of technology investment trends and came across two new terms – Hypernet and Hyperweb. The first term is where the Internet is overlaid with smartphones. He says that smartphones are now 50% of the web devices and growing. The second term refers to the software infrastructure for the Hypernet. The current infrastructure of mostly “index search” (read Google) is not going to work for the Hypernet. We need HTML5. Here are his ten hypotheses for tech investing.

1. Next Web Architecture = Hypernet + Hyperweb

2. The decline and fall of Windows unlocks revenue. Software development on Windows is declining. The new focus is the Web, Apple OS, and open source. In 2011, Windows devices will be less that 50% of the Internet, down from 95% four years ago.

3. Index search is peaking. Google search on mobile and tablets is much lower than on PC and Android does not fix that. New search is content-focused, such as Twitter (real time search), Wikipedia (facts), Linked-In (business people), or Facebook (social, taste,..).

4.  Apple’s model threatens the Web. Web is more flexible, but Roger calls it Digital Detroit and one gets mugged easily. Apple’s iOS App model simplifies access to information on the Internet. HTML5 can be a threat to Apple when every content-provider starts using it.

5. HTML5 is game changer for publishers. Developers can embed audio and video easily replacing Adobe’s Flash. It will be disruptive. Content producers will redesign their sites to reduce power of Google and ad networks.

6. Tablets are hugely disruptive. iPad has replaced DVD as the most actively adapted tech product ever. So far, Apple dominates this market. The number 2 (Kindle Fire?) is yet to emerge.

7. First wave of “Social Web” is over. Facebook has won the platform war as the new Windows. But going forward, social will be a feature of every product.

8. Smartphones in the US = Apple + 7 Dwarfs. Android has more units but Apple gets almost all profits. Also Android has some serious security issues.

9. Wireless Infrastructure is competitive threat to the US. US has the least capable wireless infrastructure in the developed world. This will impact productivity and competitiveness  in a big way.

10. Integration of TV and Internet could be disruptive. The convergence of Web and Television has the potential to disrupt cable and satellite, but it may not happen.

These are interesting and thoughtful hypotheses and like any predictions they are unknown in terms of velocity (when would it all happen), but certainly we see several of these at play even now.