The WSJ reported this week that SAP will start to sell its core and most popular Business Suite product line via a subscription model. “It’s very, very clear that a cloud offering as a subscription is what customers want,” said Steve Lucas, SAP’s president of platform solutions.
What a difference a decade makes.
The software industry has been on an inevitable path to subscriptions since 1999, when Salesforce was founded. But just a few years ago, the software giants including SAP and Oracle were operating in denial. “The Cloud is just a fad,” Larry Ellison famously said. Even last year, SAP’s and Oracle’s “strategy” was to simply buy a few small SaaS players, while sticking with tradition in their core offerings.
But then, something happened. Leaders such as Adobe bravely went “all in” on subscriptions and shifted entirely from a perpetual license to recurring revenue model. Their stock has been on a tear since. I was talking with someone at Autodesk in Asia, who said all focus inside the company is now about showing recurring revenue. “Our stock was flat for years, but since we announced our subscription strategy,” he said, “all of a sudden it’s taking off.”
But now, even mighty SAP is capitulating. SAP said its revenue from traditional purchased software rose 3% last year, while revenue from online software and related services (e.g. Hana cloud offering) jumped 53%. That’s a tale of two cities.
Salesforce’s President and Vice Chairman, Keith Block, proclaimed last week that they’ll be passing SAP as the largest enterprise applications company in the world. On a trailing twelve month basis, Salesforce is a $4B company while SAP is $20B. So how can Block so confidently make his assertion? It’s all about growth. Salesforce, who just cracked Gartner’s list of top 10 largest software companies, has the highest growth rate by far in that list. SAP’s subscription revenue may be growing by 53%, but it’s a miniscule part of the business today.
So, by announcing a shift to a subscription model for its bread and butter ERP business, SAP is finally saying that the shift to Subscriptions is very real, and there’s no turning back.
SAP will share more details on their new Business Suite subscription model on next week’s earnings call. In the mean time, those of us thriving in the Subscription Economy: say welcome aboard SAP, and enjoy the ride!