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Global CIO: Oracle, SAP, And The End Of Enterprise Software Companies

Their service revenues are almost three times higher than software revenues and the trend is continuing--what does that mean for CIOs?

(Welcome to our fifth and final installment in our Oracle Week series, in which we analyze the good, the bad,and the ugly aspects of Ellison's stated intention to overtake IBM in high-end servers and SAP in applications. For links to those and other pieces, please see our "Recommended Reading" list at the end of this column.)

Oracle and SAP are no longer software companies that also sell services; rather, they have gradually become services companies that also sell software. And because that evolution is changing in fundamental ways the relationship between CIOs and those two strategic, here's the big question: how can you ensure that those changes benefit you as least as much as they benefit Oracle and SAP?

Forget for a moment about Oracle's acquisition of Sun because that's not what I'm talking about when I say Oracle's no longer a software company. No, the transformation I'm talking about here involves where SAP and Oracle get their revenue today, and where that trend is heading in the future. Let's take a look at a few numbers that illuminate this strategic shift in direction:

In its last four quarters, Oracle has reported total revenue of $24.18 billion. Yet less than one-third of that revenue comes from the sale of new software, or what Oracle calls "new software licenses": $7.143 billion, or 29.5%. The remaining $17 billion in Oracle revenue for the last four quarters came from two categories: "software-license updates and product support" (also known as 22% annual maintenance fees) brought in $12.71 billion, or 52.6% of total revenue; and Oracle's services/consulting business brought in $3.86 billion, or 16% of the total.

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So that's about 30% from software, and about 70% from services. With that mix, shouldn't Oracle be called a services company?

Then there's SAP, whose numbers tell a very similar story. In SAP's last four quarters—which match up with calendar 2009--it posted total revenue of $14.481 billion, with "software revenues" contributing $3.5 billion, or 24.4%. Conversely, what SAP calls "software and software-related service revenues" more than tripled that software figure, coming in at about $11.1 billion. (On SAP's website, the "financial highlights" section lists the company's results in Euros; I used a conversion rate of 1.3571 to show those results in dollars.)

Do these numbers matter? Do these percentages tell us anything about where SAP's business and Oracle's business are headed, or are these various splits just funny-money accounting exercises that don't mean anything to customers?

I think it's naive to dismiss it all as just accounting tricks. I also think it's naive to say, "Well, all those services-type numbers involve software so it's all the same." Huge, well-run companies like Oracle and SAP don't play games with their financial results, and to my way of thinking, when you get three times as much revenue from services as you get from software, that makes you a services company.

It also means the days of big, blunt, mega-purchases of software are for the most part behind us--and for SAP and Oracle to continue to grow, they therefore need to step aggressively into new revenue streams other than software to keep investors happy.

Larry Ellison said as much in his remarks late last week during Oracle's earnings call when he described the success his company's been having with sales of vertical-market applications:

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