SAAS Doesn't Pay, Oracle's Ellison Says

CEO Ellison knocks SAP's midmarket and on-demand strategy while failing to mention Oracle's own investments in SAAS. Oracle CEO Larry Ellison has some definite opinions on the software-as-a-service sector and reaching the lower to midmarket customers traditionally interested in on-demand software: neither area is worth pursuing.

During Oracle's fiscal first-quarter 2008 reporting call with analysts Sept. 20, Ellison expounded on SAP's release the previous day of its Business ByDesign suite, formerly code-named A1S. Ellison pointed out the "radically different strategies" of Oracle and SAP's growth plans and said he believes SAP is wasting its time pursuing the midmarket with an on-demand offering.

"Our strategy for growth is to find a way to add more value to the same customers we already serve, which are the large end of the midmarket and large companies," Ellison said. "What we're doing here is moving beyond ERP [enterprise resource planning] to industry-specific software."

Oracle, based in Redwood Shores, Calif., has pursued a vertical approach to the business applications market—in which it vows to beat global leader SAP—by acquiring best-of-breed technology vendors in specific industries, such as Retek in retail or I-flex in financial services. The strategy is to sell those core applications to its existing ERP and CRM (customer relationship management) installed base.

Oracle's strategy, according to Ellison, is "very different" than SAP's strategy of going after "small companies" with SAP's Business ByDesign suite.

After four years in development, SAP's Business ByDesign suite was announced earlier the week of Sept. 17. The suite is an on-demand, integrated suite of ERP, CRM and other back-office functional applications. SAP is targeting the midmarket first, expecting to add 10,000 customers to Business ByDesign's roster by 2010, and will likely tap its larger enterprise customers through departmental sales once it irons out the kinks of the new software.

Ellison said he believes SAP has taken a misstep with Business ByDesign—particularly in its approach to the midmarket. "We see the problem in that because we've looked at going downmarket," Ellison said. "We've looked very closely at it, and we think it's very hard to make money because there is no synergy. To go downmarket you need a new product and new product development teams. You spend a lot of money developing a whole new product for the low end. But you also need an all-new sales force because we don't call on those customers. We don't call on small businesses, and it's very expensive to call on small businesses. It's very expensive to do ERP implementations in small businesses. The cost of sales is high. The cost of implementation is high. There are virtually no synergies in sales, marketing, and product development and support."

Ellison said that while Oracle thinks the "small market" is interesting because it's large in size, he said, "We just haven't figured out a way to make a substantial profit in that market. We think it's hard to make money."

With regard to successfully selling to small companies, Ellison speaks from experience. Oracle has tried in the past, unsuccessfully, to sell its software to the SMB (small and midsize business) sector, with fair to middling success—results tough to handle for a company that is looking to be the global leader in application sales.

Ellison's statements regarding SAP are not unexpected given the company's strategy of knocking its biggest competitor in the applications market, particularly during Oracle's own earnings calls. What Ellison failed to point out is that Oracle paid a heavy premium of $5.85 billion for Siebel Systems, which had a significant on-demand offering. At the same time, Ellison personally owns about 41 percent of NetSuite, an on-demand ERP company that will compete directly with SAP's Business ByDesign suite.

NetSuite's technology was the basis for the Oracle Small Business Suite. In 2004, Oracle and NetSuite (previously NetLedger) severed their ties with regard to the Oracle Small Business Suite, but in marketing terms only. At the time NetSuite, which sold the Oracle Small Business Suite, changed the name to NetSuite Small Business. NetSuite is prepping for an IPO.

All that said, Ellison does have a point. SAP is tasked with building a (nearly) new channel to sell Business ByDesign—no easy feat for any company to do quickly. SAP currently has about 2,500 midmarket partners, and expects to push the software through its direct sales channel while it builds a partner channel.

"It is our obligation to create a market for our partners. 2008 is a year we are still testing [the Business ByDesign suite] out, so it will be pushed a little by SAP's sales force," said Leo Apotheker, Deputy CEO of SAP, based in Walldorf, Germany, during an interview with eWEEK. "Hopefully rather quickly we will be able to empower our partners so that at the end of the day we will be a full business partner."

Author: Renee Boucher Ferguson @ eweek.com