SAP and the Hardware Dilemma:
Does an Enterprise Software Company Also Need to Be a Hardware Company to Survive?
SAP is increasingly swimming in an ocean of hardware companies competing for its enterprise applications revenue, and in the process is becoming almost an anomaly in the market: a software-only leader in enterprise software. So when a reporter asked a panel of SAP executives whether the company could sustain itself with “just applications” to sell, it was one of those moments when the air felt completely sucked out of the room.
The panel, which took place during an SAP Academic Research Conference at the Computer History Museum in Mountain View, California, had some heft to it. Sitting around the table was supervisory board chairman and SAP co-founder Hasso Plattner, CTO Vishal Sikka, and Chief Scientist Ike Nassi, as well as several academics who had presented papers at the conference highlighting their joint research projects with SAP.
The reply, fielded first by Sikka, only began to scratch the surface of the issue, but Sikka’s answer was right on the money, literally: he said that the requirement for applications in the enterprise is hardly satisfied. He also agreed with a comment from one of the industry analysts seated at the table, adding that what constitutes an enterprise application has evolved and will continue to evolve dramatically. As that evolution continues, SAP’s business will grow to meet an increasing demand for next-generation applications.
How the Rest of the Big Four Stack Up
SAP’s image as a software-only company has come to the forefront as Oracle’s bid to own Sun Microsystems made the news. Assuming Oracle will prevail in the regulatory scrutiny, the company will join SAP’s two other main rivals as a combined hardware and software vendor. This will leave SAP in a position that is largely held today by smaller ISVs that are seen as takeover fodder, as opposed to long-term, economically viable, standalone entities.
To be fair, we’re not necessarily talking apples and oranges here. IBM has a strong hardware business, and a strong middleware and tools business, but it doesn’t have a lot of packaged enterprise software besides Cognos. Microsoft has a $5 billion hardware business focused on its Xbox gaming platform, in addition to a thriving $3 billion business selling branded PC and desktop accessories (mice, video-cams, and the like). Microsoft’s enterprise software business, by contrast, barely scratches out $1 billion in revenue every year.
Oracle’s Position on Hardware
That leaves Oracle (after the Sun acquisition) as the only one of the Big Four that can field a largely complete enterprise environment, including a full software stack and almost everything you need on the hardware side, except PCs and a storage system.
The question, particularly with respect to Oracle, is whether selling hardware provides an insurmountable advantage in the market, and what that advantage, surmountable or not, means to SAP and its customers.
Oracle’s position is very clear on the subject: The company believes that it can provide superior customer choice by offering highly tuned, specialized hardware systems to run its middleware and applications, in addition to supporting low-cost, commodity systems provided by its hardware partners. While Oracle isn’t necessarily talking about delivering turnkey appliances, that’s clearly a model being considered.
Where Does This Leave SAP?
What this highly tuned, specialized hardware-plus-software combination will mean with respect to SAP remains to be seen. But it’s important to consider that successful turnkey systems have traditionally been non-innovative, non-specialized systems intended to be sold to companies with limited IT resources.
Think back to the glory days of the AS/400, which powered the auto parts shop market (among other niches) with a well-considered — and largely IT-free — standalone system. The AS/400 eventually died off because hardware got cheaper, software became more user-friendly, and the IT skills of small- and medium-sized enterprises grew.
Lessons from the Database Market
There are a couple other examples of highly tuned, turnkey systems that sought market dominance in the database market — first with Britton-Lee in the 1980s, and continuing with Teradata, a thriving but increasingly marginalized software-plus-hardware provider to the data warehouse market.
That marginalization is due largely to the fact that Teradata is under assault in the cost arena by Microsoft SQL Server, which is becoming the database platform for some of the largest data warehouses in the world, all running on commodity Intel-based hardware. At the same time, Teradata is also under assault in the performance arena by the many column-based database architectures now coming to market, including SAP’s own in-memory database.
These examples make it hard to predict how Oracle will succeed in its two major mandates: provide competitive applications software to run on commodity hardware and — simultaneously — provide turnkey systems that can compete with other turnkey systems as well as emerging commodity-based solutions.
SAP’s Position on Software
Even if Oracle can pull it off, SAP’s position as a software innovator remains largely unthreatened. What Oracle/Sun will provide is innovation at the delivery platform level. This appeals to that traditional IT buyer, the CIO, and will certainly be of interest if Oracle can show significant cost savings or productivity gains from this hardware/software bundling approach.
This bundling strategy, however, is of little or no use to the line of business (LOB) manager or to the CIO trying to keep the LOBs happy: lines of business increasingly look to vendors like SAP and Oracle to provide innovation and competitive advantage in the form of applications and functionality, not lower hardware costs.
While it may be possible for Oracle at some time to show an LOB manager how its bundling strategy would yield greater innovation at the business level, that’s going to be a lot harder than showing how a piece of innovative software — regardless of the hardware platform — can provide competitive advantage and drive new revenue.
Driving Innovation with Applications
Which brings us back to Sikka’s comments: more and more of the value-add in the enterprise comes from innovation at the applications level, something that is SAP’s sole raison d’être.
A presentation at the Academic Research Conference provided a perfect example: John Williams, a professor from MIT’s Auto-ID Labs, delivered a talk on smart grids and the data and functional problems that these innovations present.
Solving these problems is a key element in global sustainability, and the solution will require seriously innovative applications, not bundled hardware. To pick up on the other thread in Sikka’s comment, the nature of the applications that solve the smart grid problem will be unlike any applications we have seen before.
This is SAP’s differentiator in a market full of vendors that are increasingly turning to hardware to solve their revenue and market problems. And it’s a powerful one that will provide strong growth prospects for SAP for a long time. Going down the low-margin, commodity hardware route might appeal to financial markets eager for M&A activity, but it’s not the only way for a software company to grow. Not by a long shot.
|Joshua Greenbaum has over 25 years of experience as a computer programmer, systems and industry analyst, author, and consultant. He spent three years in Europe as an industry analyst and a correspondent for Information Week and other industry publications. Josh regularly consults with leading public and private enterprise software, database, and infrastructure companies, and advises end users on infrastructure and application selection, development, and implementation issues. You can reach him at firstname.lastname@example.org.
October 02, 2009