Maintenance

Anybody who is in the enterprise software business knows that the thing we all lust for is not license revenue, it's the maintenance base. In fact, mature software companies will almost always generate more revenue from maintenance than they will from new license sales, because an enterprise license contract is a form of annuity.

This is partly why I'm non-plussed about the debate on hosting and subscription business models. Here's why, if the monthly subscription fee is just a way to break up the license fee into smaller chunks and bundle them with a term maintenance fee, then why do I care WTF you call it? Apparently many pundits on hosting v. licensing are unaware that enterprise customers are accustomed to paying a recurring fee to their enterprise software vendors. In a way, locking in a customer to a 3 year deal, as an example, is advantageous because as it is now most vendors have to sell their customers annually on the maintenance component, which can run as much as 20% of the license amount. Hosting, well that's just another way to deliver software, it doesn't have a meaningful impact on how you price it, or how your customers pay you for it.

All of this is relevant in the post Oraclesoft merger questions because as Shai Agassi pointed out in a WSJ article yesterday, "software companies don't own customers, we serve them." Of course, this was in relation to the announcement that SAP is acquiring TomorrowNow, a company that delivered support services for Peoplesoft customers. TomorrowNow is interesting because they were known for being particularly aggressive in their competition with Peoplesoft for maintenance business, in effect competing with Peoplesoft in an area that no enterprise vendor is accustomed to having competition in. To be sure, SAP's acquisition of TomorrowNow is an effort to provide an attractive transition plan for Peoplesoft customers who want to switch to SAP, but there's nothing that would convince me that a vendor shouldn't consider providing support services for competing products.

Comments

[ScottyM]

What TomorrowNow has shown is that enterprise customers are tired of paying 18-20% maintenance rates to vendors at monstrous gross margins, when the excuse for those maintenance revenues is either (1) maintenance costs, when a quick glance at the gross profitability of a maintenance revenue stream on any public enterprise software company's latest quarterly SEC filing will show you that these costs do actually not, in fact, exist or (2) to fund future R&D an product improvements, which are benefits that accrue to purchasers of future products, which you will be forced to upgrade to when support is discontinued on the current product.

I think TomorrowNow's early success with PSFT customers highlights the fact that enterprise vendors selling perpetual licenses are facing increasing pressure to greatly reduce maintenance fees.