Take a look at Microsoft, Oracle, SAP, IBM and CA, the top 5 pure play software companies (granted IBM is a little service heavy still). That’s just not it, look at the next set of companies Epicor, BMC, Sage and Intuit to some extent, they are not that different either.

GM in its prime, or should I say when it was working itself towards the cliff, was a mishmash of a lot of acquired companies/products, some cannibalizing their own step-brethren. If it was not Saturn going against Buick it was Chevy going against Pontiac or GMC going against Chevy SUVs. GM countered every external competitive threat with financial incentives and/or 0% financing whilst continuously eroding its brand and market share. While it was overloaded with all the bloat (and a heavily draining UAW contract), GM had no semblance of innovation or leadership in its industry.Something had to give. Eventually GM threw up.

Look at the leading software companies now. Each of them has a portfolio of offerings that even the sales force within those companies have a tough time rationalizing and positioning. I still remember a meeting that we had with the alliance team in Microsoft. We were exploring the possibility of integrating our industry vertical focused application to the back-office ERP. Given that we were in the mid-market segment, we thought Great Plains would be a good fit. Having a couple of customers already using Great Plains might have influenced our thinking. But when we met the alliance team, we found that they were as confused as we were on which product line would be the right one to integrate – MS-Dynamics, Great Plains, Navision.The last thing I remember from that discussion was that based on the size of your company one could chose a different product line – not sure how a company would graduate to another product line when they grow – upgrades? migration? Would there be feature parity between those different lines? Anyway that is a discussion for another time.

I don’t mean to pick on Microsoft specifically – I still like their dividend every quarter. I am sure the story is not any different if I were to go to Oracle, SAP or CA for that matter. I can almost picture a restaurant-like menu being dished out to the CIO looking for a particular solution. Granted there would be nuances between each of those offerings but those very differences might mean the customer having to buy more than one solution to meet all their needs.

How does a company of that proportion innovate? As the software industry is going through some seismic shifts with technology, architecture, business models, in the form of Cloud Computing, SaaS, Open Source, how would companies with such large footprints adapt? Technology companies have for the longest time made mockery of auto manufacturers, pointing to them to show what not do, but over time it seems like are following the same beaten path.

GM went for market share and in the process accumulated many businesses that they had no reason to acquire. Eventually Toyota, recent challenges not withstanding, caught up and surpassed GM on the market share, with innovation, product quality and business smarts. The only innovation we saw out of GM during that time were large SUVs and very large SUVs while continued to see innovation on the financing side – 0% financing, 0% financing + $2000 cash., No payment for 2 years. Finally it came to realize that the only way to survive was to scale down to a meaningful size and create products that it can truly manage.

Software companies on the other hand have gone on acquisition binges to garner vast customer bases and consequently the lucrative maintenance revenue. While in some cases, it is great to have a more stable company acquire a failing one – (case in point Siebel, Sun acquisition by Oracle), what it has done is reduce the leverage customers get with adequate competition in the market. Customers are also increasingly becoming vary of customer support for the acquired products.

Given the similarities, an interesting question to ask is would the same fate befall the large software conglomerates?. Ned Lily of ERP Graveyard has an interesting way to look at it on his scorecard. Large companies as it is are swamps of bureaucracy. With acquisitions, the politics and land grab soon become a way of life in the merged larger company. The last thing on anybody’s mind would be innovation. Adaptability to new challenges amounts to making an elephant dance.The one thing the technology companies have going for them, and be thankful for, they are not subject to the same recalls as are the car companies.

In a seemingly strange twist, customer’s seem to be answering that question by their increasing adoption of SaaS. It seems like they are saying “I don’t need to buy a car when all I need is to get from point a to point b. I will just rent a cab.”

SAP has been under sustained pressure from multiple fronts for a while now. With Oracle making inroads into application space with a much robust portfolio of industry vertical applications, upstart SaaS vendors Salesforce, SuccessFactors, Intacct poaching customers and its own fiasco with the maintenance contract changes. All had compelled SAP executive management to do something. While some kind of deal was expected, Sybase deal definitely came from the left field. I was expecting it to be a SaaS acquisition.

SAP has long been touting mobile as its next big technology shift. Since the introduction of NetWeaver, it has slowly built up its mobile offerings organically and through its ecosystem partners. In fact, SAP and Sybase themselves partnered to deliver SAP’s flagship Business Suite to iPhone, Blackberry and Windows Mobile in 2009. Acquiring Sybase definitely gives a leg up on the mobile front against all its competitors.

Another area the technologists in SAP have been making noise is around in-memory databases. They posit that with the need for real-time information, in-memory databases present a better (high performance) alternative to today’s relational databases. Oracle while publicly pooh-poohing the thought, has also been promoting in-memory database (TimesTen) as cache for its flagship Oracle database. It is conceivable that in-memory databases will have their day in the sunlight but to say they will replace relational databases might be a stretch.

While its database market share is nothing to crow about (stands at 3%), Sybase has acquired a portfolio of mobile solutions, embedded database, data management which is definitely something SAP can use to get some incremental revenue but I am still struggling to find the real cross-sell/upsell opportunities here. The deal announcement itself has some contradictions. SAP says they are buying Sybase for its in-memory database (while it was touting its own homegrown embedded database just a couple of months ago) and mobile technologies while majority of Sybase revenue today is still database revenue.

Besides I also see a few challenges with this acquisition.

1. SAP customer base until now is primarily made up of Oracle Database customers followed by IBM DB2 and Microsoft SQL Server customers. Being certified against Microsoft SQL Server might help them in some way to get some converts to Sybase Adaptive Server Enterprise, if any. But getting any traction in database replacements is close to impossible.
2. If, by any miracle, SAP sees any traction then they have the small matter of appeasing their hitherto loyal partners in IBM and Microsoft. If Oracle is giving it sleepless nights, having IBM and Microsoft also fighting against you in a deal is a lot to contend with.
3. To get to the point of replacing existing Oracle, DB2 or SQL-Server replacement, first, they have to get their Business Suite certified against Sybase Database. That is a good 6 months effort (not accounting for partners doing the same).
4. Sybase database customer base mostly have been Financial Services. To make things interesting, it has also been a big Sun Solaris customer base. Lot of custom, homegrown financial services applications where there are few opportunities to up sell any of SAP software.

Given all the challenges with the product delivery SAP have been having, it remains to be seen how this acquisition is going integrated into the SAP scheme of things. I am still trying to figure out which of SAP’s competitors are loosing sleep over this acquisition. I think none. Most of them would just read about it and forget it.

Just thinking out loud – SAP has been struggling to get its mid-market strategy right. Maybe the $5.8B (+ $400M in Sybase debt it is assuming) would have afforded it

1. SuccessFactors – $2.5B
2. Intacct – $1.5B
3. RightNow – $750M
4. To be integrate all of them – Boomi ($350M)

And let them run as individual business units as Sybase would be. This would have given it the mid-market and SaaS strategy by default.

Maybe just to tease them a little bit, Larry might throw a competing bid. But $5.8B? Maybe not.

Shelf ware to those who are not acquainted with software licensing is a term used to identify licenses bought but not used. It is not uncommon these days to think of many companies being saddled with licenses that are rendered useless either due to staff reductions, business unit shut down or acquisitions. While they are not used and paid for, companies are continued to be charged for their maintenance/support.

This is the last thing software vendors would like to hear while the discussion about increasing support charges from both SAP and Oracle is still fresh in their mind.

Software vendors who are already facing a wave of on-demand /SaaS offerings, open source alternatives will no doubt oppose this vehemently.  A string of third party support options surfacing for the large software is also threatening what was considered their gravy train (the maintenance revenue).

Given the change in the business dynamics and increased power vested in the customer in this bad economic climate, this concept of re-sale of unused licenses, if it came to pass, would definitely present a great opportunity to reduce the overall spend.

But with all the wishful thinking by customers, if the software vendors relent, this process is rife with challenges. Here are things I see as necessary actions that should happen involving the software vendor, original buyer and new prospective buyer (of the unused license).

1. The software vendor now needs to amend the original license contract verbiage to allow for such secondary market transaction with caveats. I am sure it is not free for all.
2. The software vendor also has to create process for migrations/transfers to be recorded in their service contract system so the new customer has to be recognized. The entire client services (sales, account management, support) process needs to align and recognize the new customer.
3. A new license transfer transaction need to be recorded between the three parties along with the transfer of obligations to the new buyer.
4. The new buyer should now make all the additional overhead payments (did you think the software vendor would do 1, 2, 3 for free?) and ensure compliance.

If both the seller of unused license and the buyer are lucky they will have the same hardware platform, processor configurations that the seller had or will need to make necessary investments to accommodate the newly acquire license.

Finally, there needs to be a marketplace to make this transaction. Logically you would think the software vendor themselves would provide a marketplace for a secondary market transaction. But then again why would they when they can sell anew.

As a Craigslist junkie I could not help but let my imagination go wild – think companies going to Craigslist and posting ads for selling unused licenses or shrink wrapped SAP CRM.

Wonder what others think about it? As a SaaS evangelist, I would beat the drum for such a process to happen, in the interest of the customer. As with anything commodity (and software is turning into one) there has to be a way for owner of the asset, a very expensive one at that, to salvage some value.

This clearly highlights another virtue of SaaS and pay-as-you-go metering model, where you can just as easily expand and throttle your usage based on the prevailing conditions in your company.

Ray’s Software Insider Blog

In the past SAP has always portrayed Business ByDesign as its on-demand offering albeit making it available only in a small subset of countries. It was a positioned as a complete on-demand suite counterpart for its on-premise SAP Business Suite. It was also targeted primarily at SMB customers.

But going by what John has outlined in his interview it seems like this new strategy is going to be different. To quote from his interview – “Here’s what SAP customers can expect in the coming months: function-specific software applications, available by subscription, that plug into customers’ on-site SAP Business Suite systems, and that SAP will host for customers using a multi-tenant architecture.” He also goes on to say “SAP won’t develop software services that compete directly, as independent SaaS applications, with companies such as Salesforce.com, Concur, and Ariba. Rather, all of SAP’s on-demand apps will be designed as extensions of Business Suite.“

This strategy is unique as Wookey says, and more complementary to the Business Suite. It is based on the platform multi-tenant architecture acquired from acquisition of Frictionless.

At the outset, based on these comments, it is easy to assume SAP is missing the plot or that it is just making some noise about SaaS yet again. Vinnie Mirchandani felt it was a “moat” strategy. Although it has been received with skepticism I have an alternate theory on why this might turn out to be a smart strategy.

Successful SaaS vendors in the business applications area, barring CRM as a category, have been primarily building solutions in three areas

1. the in-between areas where ERP vendors don’t have a solution and homegrown solutions are cannot scale or are tough to maintain.
   
2. Advanced solutions like predictive analytics, Talent Management, Performance Management, collaboration solutions that sit on top of ERP/CRM solutions.
   
3. Horizontal solutions with scaled down common ERP flows focused on SMB segment.
   

SAP already has about 25% of ERP, CRM and Supply Chain market – depending on whose numbers you go by. So SAP can do one of two things –

1. Entrust their product teams to enhance Business ByDesign to effectively compete with  nimble SaaS vendors. We all know who will win that race. It seems like SAP Management also knows that and hence it is not the strategy-of-choice they are pursuing. Add to that the financial dilemma of spending on BBD as Bob Warfield outlines.
   
2. Go after the up-sell opportunities in existing accounts and build industry vertical specific, value-added functions to sell into their existing accounts. This will serve two purposes. This will provide a way to slowly ease the existing customers into SaaS and considering that these are add-ons on top the Business Suite, it is conceivable that SAP can compete with nimble startups in this area.
   

While the SaaS meal is cooking in the SAP kitchen, Wookey would well to use a trick or two he learned from Uncle Larry’s M&A University and tuck-in a few more smaller SaaS vendors to kick start the closed-loop application ecosystem.

While this strategy looks good from the SAP point of view, John and his team should work out – the small matter of partners. SAP has long been known to be partner friendly in nurturing partners in building ancillary applications to augment the Business Suite. This has played a large role in the partner ecosystem. Now with SAP entering their turf, it remains to be seen how the partners will react to this announcement.

Disclaimer: The entire list is just my creation and I do not have any information on any of these deals. Call it my wild imagination.

Disclosure: I own stocks of HP, NetApp, Cisco, EMC, IBM, Oracle and EBay through various long term investments I have made. This post is merely in line with the other technology trends I watch.

Recent Large Deals

1. HP Acquires EDS for 13B
2. Oracle Acquires Sun for 7.4B

10 Deals I think will happen

Yahoo acquired by Microsoft.

They have beaten around the bush enough. It is time to kiss and makeup. With every passing day – Google is eating their lunch so the sooner they make a decision and move on they have some chance of combating the Google lead in search and encroachment into other MS areas. The Microsoft M&A team would do well to take a course in the Oracle M&A university to quickly integrate the plethora of things the two companies do – Search, Ad Networks, Webmail, Email, MSN/Yahoo Portals, Groups .. I could go on for another day. This integration project should put the Vista release schedule to shame. I like Yahoo the company. Personally though, I would like them to say “the search race is over” and kill their search or sell it and keep their focus on content and maybe one day Google would acquire them, which is a better home.

EMC acquired by Cisco

Cisco has slowly but surely expanded and built a decent software business beyond its core networking business. It has also started entering into server/hardware business to compete with the IBM/HPs of the world. It already provides storage network switches and EMC would become a natural extension and also would give it a legitimate presence in the storage and software space.  EMC on the other hand is facing increasing challenges from Sharepoint, Oracle and IBM. HP could make a run at EMC as well but I think Cisco will eventually prevail. Documentum/eRoom would nicely complement the WebEx collaboration part in providing a strong competitor to the advances Sharepoint in making.

NetApp acquired by HP

As a rebound from EMC failure, HP will turn around and acquire NetApp. I think it would be a better fit for HP. Considering it still has large “turkey” EDS to digest, a focussed company like NetApp would be an easier desert.  IBM, Oracle and would be interested parties but Dell might make a concerted effort to acquire NetApp as well. HP is the only big storage vendor who does have a Cloud Storage strategy and acquiring NetApp would give it just that.

Twitter acquired by Google

Once deterred Google will make a sweetened offer to acquire this red-hot phenomenon. While it took sometime for Google to figure out the real business model behind YouTube, doing the same on Twitter would not be a tough problem. Apart from the corporate twitter business there are other opportunities that Google could go after. Look for Google Talk and GrandCentral to integrate into Twitter (think broadcast vmail from Twitter to your GrandCentral account – would be nice).

Skype acquired by Google

While EBay has announced its intention of spinning off the company through an IPO, it makes a lot of sense for Google to acquire Skype and use it alongwith GrandCentral etc. Once Skype goes public then there is unnecessary expenses in managing the shareholder approvals etc. It is much cheaper to acquire it before it goes public. Google can merge Google Talk with Skype (think Google Video and YouTube) and the combination of Skype and GrandCentral would be a much better corporate offering.

Sybase acquired by Microsoft

With Oracle acquiring Sun, IBM and Microsoft will be on the hook to do a deal to counter some of the leverage Oracle gains. While Oracle tries to convert the Sybase customers on Solaris to Oracle, Microsoft can get those same customers (in Financial sector). Given that the underlying codebase is essentially the same it would not be a big challenge but it definitely gives a foothold for MS in large accounts.

Citrix acquired by IBM

This is a me-too deal. With IBM shoved aside in Sun and NetApp deals, IBM will try and use this deal to expand into desktop virtualization space. Also Citrix’s product line of GoTo Meeting, Netscaler would allow IBM to effectively compete with Cisco’s WebEx and other application delivery tools.

TerraData acquired by HP

Just like people say Oracle was the most logical buyer of Sun, thanks to the friendship between Larry and Scott, this deal is all but certain given Mark Hurd’s past association with Terradata when it was part of NCR. Given the beating IBM got in losing out Sun, IBM could also make a play for TD to get back at Oracle in the Data warehousing space but HP will eventually prevail.

RedHat acquired by IBM

With Oracle gaining control of Java and MySQL and Solaris, expect Oracle to de-focus linux for a bit while trying to identify ways expand Solaris. IBM will use this opportunity to get cozy with Red Hat and get control on RHEL, JBoss and other middleware products.

Research in Motion acquired by Dell

Dell has by-and-large been a by-stander on the deals outside of being mentioned. It is on the lookout for the next growth area. The hardware business is not growing fast enough, the storage and services business is hyper competitive. So Dell will use this acquisition to get into the duopoly of Apple and RIMM of mobile computing. RIMM is already seeing Apple looming large in its review mirror and having the muscle of Dell and corporate accounts behind it would help it get further into corporations.

Bonus deal

For patiently going through my list, I offer a wildcard bonus mega deal

SAP and IBM merge to combat Oracle

Rumors surfaced a couple of years ago that SAP and Microsoft tried to do something. But the sheer magnitude of the deal (and the imminent regulatory scrutiny – not to mention the multiple product lines of business applications – none of any significant note, better sense must have prevailed.  IBM wounded from attacks by Oracle, HP and Cisco and a SAP trying to figure out where it stands in the new landscape of mega vendors decide that they can go after their common enemy in Oracle in arms. IBM has a large SAP service business and lot of SAP customers already use Cognos and DB2 – makes for a better synergy.

Let me know what you guys think. I know lot of you think this is utter b.s. But do let me know.