Aug

27

Oracle’s 20% price hike (rock) + Slumping economy (hard place) = where do you go?

Filed Under business, cloud computing, problem-opportunity, regular reads, saas, technology, things to ponder about, trends, web 2.0 

A snip from an interview with Red Hat’s new chief exec:

Q: What’s your biggest surprise since starting at Red Hat?

A: I think I finally get the joke. I was a senior exec and, like every other senior exec, I had a huge IT budget. Mine was as large as Red Hat’s revenues last year. You sit there and say: “Why are my IT costs going up, but I’m getting less and less functionality?”

Every IT professional says the same thing: “My lights-on costs are going up. But — wait a minute — I bought a laptop, and it cost me half as much as it did three years ago, and my costs are going up?” I get the joke now.

If you look at the S&P 500, seven of the top 20 companies are tech and, other than Google, they’re not high-growth. But they’re just printing money because switching costs are so high. There’s this incredible amount of residual goodwill to Red Hat because we’re seen as an alternative to that. Oracle announced a 20-something percent price increase just as the economy starts heading south. How can you do that unless you’re pretty sure nobody can switch? High switching costs led to infrastructure cost creep. Once you get hooked, you can’t get off.

I chuckled as I read this. The switching cost problem sounds like the case between AT&T and Bell Atlantic in the 1980’s, which I coincidentally just recently blogged about recently.

Those who cannot remember the past, are condemned to repeat it.
— George Santayana, in his book The Life of Reason.

I think the comment about Oracle’s 20+% price increase is certainly good news for on-demand SaaS/cloud computing players - to disrupt the market. As companies start tightening their belts, the pay-per-drink model would inevitably look a lot more enticing.

Even when placed between a rock and a hard place (between the US economic slump and technology behemoths’ Oracle-style price increases), the numbers show that companies still can’t afford to cut back on technology spending. Technology is a business competitive advantage.

According to research firm Gartner, “It can be hard for a business to stay ahead if its technology is falling behind. That is one reason that despite an uncertain economy, worldwide information technology spending is on track to reach $3.4 trillion in 2008 — an 8 percent increase over 2007.”

PC sales (especially laptops) are surprisingly stronger than expected, according to S&P’s Equity Research. “The latest evidence came from the Aug. 19 earnings report from Hewlett-Packard (HPQ), which said unit shipments of PCs rose 20% from a year ago”

The bottom line is that businesses can’t afford to be without technology. And with such pricing pressures, online business apps are just much easier on the wallet. $50 per user/year for Google Apps, or $350 user/year MS Office.

Granted, Enterprise Web 2.0 still has a long way to go to fill the shoes of traditional on-premise apps, but I am confident that more innovation will come (I certainly plan on being a part of that innovation!), and SaaS/cloud computing/Enterprise Web 2.0’s benefits will be too good to ignore - and eventually, its benefits would exceed those from the traditional legacy on-premise apps.

From CNNMoney/Fortune: Merrill Lynch estimates that online business applications will grow to a $95 billion market within five years. The market for online office software is “wide open,” said Guy Creese, an IT analyst with the Burton Group.

“My lights-on costs are going up. But — wait a minute — I bought a laptop, and it cost me half as much as it did three years ago, and my costs are going up?”

Yeah. It doesn’t make sense.

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