Oracle v. SAP

Posted: November 24, 2010 in Economics, Technology
Tags: , , ,

Oracle won its lawsuit against SAP in federal court.  Oracle had complained that a now defunct subsidiary of SAP had unlawfully used its intellectual property to provide third party support to Oracle customers and the jury agreed.

There are so many levels in this situation that I can’t get to all of them but one that interests me is the idea of a third party disintermediating the primary party (Oracle) to deliver a service that costs less.  This kind of thing happens all the time in the economy and the issue, as far as I can see, is that the third party made use of Oracle property without paying proper license fees.

I get all of that and I agree with the decision—you have to pay for what you use.  On the other hand, though, the existence of the third party in the first place poses an interesting question for everyone and casts a shadow on the conventional software business model.  Support fees are often calculated as a percentage of the license fee and both are rather steep with enterprise software, in part because of vendor lock-in.  So there’s a built-in incentive for customers to seek out any way they can find to lower their costs.

The idea of lowering costs is as old as capitalism because margin is, well, margin—the difference between what it costs you to deliver a product or service and what the customer pays for it.  But enterprise software customers have been complaining for years about high prices, especially the price of support and those costs suggest to me another example of the unsustainability of the conventional model.

Back when the addressable market for software was a relative handful of companies that could afford big iron, high prices made sense, if only because the cost of development, maintenance and all the rest had a smaller base to amortize the costs against.  But today computer hardware is cheap and abundant and it can even be rented from the cloud.  Software has become much more complex and labor intensive—and costly—in part because the addressable market has grown but so has competition.

If you compare the high costs of enterprise software with what’s on offer with cloud computing you see some big differences.  For years SaaS vendors have touted the advantages of a single monthly fee that includes not only hardware and software but all of the labor associated with service, maintenance and ongoing development.  It’s this model that is catching on in emerging markets in part because those markets simply cannot afford to support the old model.

So while I see the Oracle v. SAP verdict as just, I also see it as a milestone in the march to cloud computing.  The conventional enterprise software paradigm is hugely expensive and unsustainable in the long term, not only for customers but sometimes for vendors too.

So, what did you think?

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s