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ReadWriteWeb | Reversing the Enterprise2.0 Pricing Model

Why is the Enterprise 2.0 market not taking off more strongly? The reason has to do partly with ill-conceived pricing structures: volume-discount (VD) schemes. Fix them, and you fix one of the obstacles preventing the market from expanding rapidly. And by fixing them is meant reversing them, in particular by using volume-increasing schemes.

Pricing Tied to Volume

Enterprise social computing offerings -- such as social networks or the numerous Twitter-for-the-enterprise applications that currently abound -- generally don't have complex pricing structures. They are volume-discount based: that is, the more accounts customers buy, and the more employees who use them, the larger the discount vendors give them, and the lower their average price per user will be. Some vendors advertise flat pricing schemes, but when a customer is big enough, a volume-discount deal inevitably creeps in.

Value and Cost Out of Balance

Volume-discount pricing structures are simple, tried, and true. So, why aren't they efficient?The reason is because of where returns on investment (ROIs) are located. Enterprise social computing offerings provide increasing marginal productivity as they scale, at both the individual and organizational level. The more that employees use a service, the higher the margin gained by their company in productivity, and the more the company extracts value from the product. A corporate customer that has 10% of its employees using a Twitter-like product won't extract as much value as one that has 50% of its employees using it.

Increasing returns to scale can come in different ways: positive network effect, viral economies of scale, distributed economies of scale, etc. All enterprise services offer some of these dynamics (or at least the simple network effect), and the better designed the product, the bigger these economies of scale. (Download this PowerPoint presentation of Umair Haque's work for more on the subject.)

If customers extract more value (higher returns) per user as the number of users increases, yet pay an ever-decreasing price per user (which is VD pricing), value and price have diverged. And this divergence is shaping the Enterprise 2.0 market. Let's look at the consequences, and keep in mind that the issue is symmetrical for vendors and clients: vendors see a divergence between price charged and value provided, and clients see a divergence between cost paid and value obtained.

The following graph is a simplification of the value and cost curves:

Note that the N axis is shown in relative, not absolute, increments: the marginal value derived from an employee using the application is a function of the percentage of employees already using the application, not of an absolute number.

Let's look at the cost-to-value picture if 10% of a corporate customer's employees use the application. Because the company hasn't bought many accounts (only enough for 10% of its total workforce), the discount is not big. Unfortunately, the value it gets from this 10% for a Twitter-like application is minimal. So the cost-value ratio does not make sense for the customer at this level. However, once a critical mass of employees starts using the application, the value per user is quite high; but the price, being heavily discounted, is low.

Adoption Harder than It Needs to Be

The pain point is right in the middle of these two extremes. A corporate customer evaluates software deployment with the end goal in mind. For enterprise social web services, that objective is usually to deploy it to 100% of employees and get the percentage of active users as high as possible. The business case hinges on this end goal.

Achieving the goal is possible in one of two ways. The first is to start small, bring on early adopters, demonstrate the application's value, and move gradually towards global deployment. In this case, you buy accounts as you need them, getting modest but increasingly higher discounts as your volume increases. The second way is to purchase the anticipated total number of accounts needed for global deployment, negotiating a fat discount right away.

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http://www.readwriteweb.com/archives/reversing_the_enterprise_20_pricing_model.php

The Wall Street Journal | Oracle: New Deals Decline, Maintenance Revenues Up

Oracle Corp., in a sign it is holding up in the recession, said it would issue a dividend for the first time and posted a 2% revenue increase and a 1% drop in earnings for its fiscal third quarter.

But the Redwood Shores, Calif., business-software maker also issued conservative guidance for its current quarter, citing the economy and the strong U.S. dollar, an indication it is feeling some effects from the downturn.

Associated Press

Oracle said it would begin paying shareholders a quarterly dividend of five cents a share starting in May. The payout will cost Oracle about $1 billion a year, relatively little for a company that generates about $8 billion in cash annually and is sitting on $8.2 billion in cash. It also leaves Oracle, which has bought 12 companies since the start of 2008, enough money to continue its acquisitions.

The software maker is announcing a dividend even as a parade of companies from other industries have shrunk their dividends amid the recession. Earlier this week, Alcoa Inc. cut its payout 82%. Last month, General Electric Co. slashed its dividend 68%. Dividends have also been cut or suspended by J.P. Morgan Chase & Co., Dow Chemical Co., Motorola Inc., Pfizer Inc., Textron Inc., Citigroup Inc. and Blackstone Group LP.

Historically, tech companies haven't issued dividends. Such payouts are usually viewed as the mark of a mature company, and tech concerns have typically been young, fast growers. But tech companies that do issue dividends, such as Microsoft Corp. and Intel Corp., haven't cut them and have continued to stockpile large reserves of cash.

Oracle's dividend announcement signals the company is well positioned to ride out the downturn and also gain market share, said Mark Murphy, an analyst at Piper Jaffray Co. "I don't think it's purely symbolic," he said.

Oracle's results also showed gains even as the economy suffered. The company said revenue for the quarter ended Feb. 28 rose to $5.45 billion from $5.35 billion a year earlier. Profit fell to $1.33 billion from $1.34 billion a year earlier, squeezed by the strong U.S. dollar. In constant currency, revenue climbed 11%, and profit was up 14%.

For the current quarter, Oracle President Safra Catz forecast the change in revenue would range between plus 2% and negative 3% compared with a year ago, assuming constant currency. She also forecast per-share earnings on the low end of Wall Street estimates.

Oracle's shares closed up 43 cents to $15.83 in 4 p.m. trading on the Nasdaq before rising as much as 7.4% in after-hours trading. Earlier this month, the company's shares had hit a new 52-week low of $13.80.

Oracle's license revenue, a closely watched figure that shows how many new deals the company closed in the quarter, fell 6% from a year earlier. It grew 3% in constant currency.

That drop was offset by an 11% increase in so-called maintenance revenue, which comes from software updates and product support that customers pay for on an annual basis. These payments account for more than half of Oracle's revenue.

The increase in the third quarter followed a 14% jump in this revenue in the second quarter and indicates that while businesses have cut back on tech spending, they aren't willing to cancel their support contracts.

http://online.wsj.com/article/SB123740295588874689.html

Information Week | SAP Teams with Sybase to Offer Mobile Business Apps

iPhone, BlackBerry Get Business Boost From SAP, Sybase

The deal marks an important step toward providing mobile employees with access to SAP software, regardless of the types of smartphones they're using.

By Mary Hayes Weier 
InformationWeek 
March 11, 2009 03:55 PM 

SAP and Sybase today said they're working together to improve access to SAP business applications from a variety of smartphones and similar devices, including the iPhone, BlackBerry, and Windows Mobile handhelds.

Sybase, although largely known as a database company, has a growing business for mobile technologies. Sybase offers a mobile application development environment, device management software, and middleware for managing transactions between back-end systems and handhelds.

SAP and Sybase are working to better integrate their technologies, and some of these improvements will materialize as enhancements to SAP NetWeaver Mobile, which is SAP's development platform for mobile enterprise software, the companies said.

Currently, giving mobile users access to SAP applications requires considerable integration and development work, even if customers are using NetWeaver Mobile, Sybase, or another mobile middleware offering. The new partnership is designed to result in "out-of-the-box functionality" for access to SAP from many types of mobile devices, said Bill McDermott, SAP's CEO of global field operations, at a New York press conference Wednesday. Collaboration among SAP and Sybase engineers and marketers is under way, he said.

Still, it appears much more work needs to be done to advance the partnership from a vision to reality. SAP and Sybase didn't provide specifics on how they'll productize the partnership and said such capabilities won't be available until late 2009 or 2010. McDermott added that the offerings will be "fairly priced and affordable."

The partnership is a smart move for SAP, however, and possibly one it should've forged sooner.

Many businesses are struggling with the complexities of extending customer contact lists, human resources approvals, and other types of business functions from their core software applications to employees' smartphones. This challenge is complicated by the continual influx of new devices, updated mobile operating systems, and changing device designs.

It becomes even more complicated when employees want to use their preferred devices. Some businesses are starting to support the iPhone for employees, providing access to Microsoft Exchange and SharePoint, for example, through newer iPhones' native support of Exchange ActiveSync. But to date, SAP has primarily only supported Windows Mobile on rugged handheld devices. It does have a deal with Research In Motion to develop an SAP CRM application for BlackBerrys.

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http://www.informationweek.com/news/personal_tech/smartphones/showArticle.jhtml?articleID=215801941

VentureBeat | SynapSense Raises Further $7m - Data Center Monitoring via Wireless Sensors

SynapSense, a Folsom, Calif. company that users wireless sensors to track thermal, pressure, and humidity conditions in corporate data centers, has raised $7 million more in additional financing.

Its customers include the New York Stock Exchange and Verizon among others.

Data centers are the places where companies store their servers and other networking and power gear. Companies are increasingly looking for ways to make them more efficient, and SynapSense’s real-time tracking of data center conditions has drawn some buzz for the high level of scrutiny it provides companies looking to save costs and become more efficient.

Notably, Robert Bosch Venture Capital GmbH, the venture arm of the large European company, Robert Bosch, has joined the investor group backing the company, which includes existing investors Emerald Technology Ventures, Sequoia Capital, American River Ventures, Nth Power and DFJ Frontier.

The company said it will use the financing to expand its wireless monitoring products beyond the data center. It has now raised a total of $17 million since 2006. 

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http://venturebeat.com/2009/03/09/synapsense-gets-7m-to-track-your-data-center-with-wireless-sensors/

GigaOM | Why Amazon is Bucking the Trend

Jeff Bezos, when he was peddling the new Kindle on Charlie Rose the other night, kept using the word “seamless.” He wasn’t talking about the device itself, of course, but the experience of the customer that uses it. Whatever you think about the Kindle, Bezos’ choice of that word goes right to the heart of Amazon’s own strategy, and the reason why the company, its operations and its stock have held up so well in the past few months. Everyone knows that Amazon’s e-commerce site succeeded because its interface was intuitive to the point of being completely natural. What isn’t discussed as much is the ethic behind that success: Simplicity is hard. Just as Amazon went to great lengths and expense to make the Kindle experience seamless, it has gone to a considerable amount of trouble to adhere to what is a very simple corporate strategy: Make it easy for the customer, and make it cheap.

What’s hard about that approach is sticking to it over year after year, even when technology is changing quickly and, more importantly, markets are extremely volatile. The success of such an approach could be found in another piece of news out of Amazon this week that didn’t get as much attention as the Kindle but as far as the company’s long-term outlook goes, could prove more important. It’s about to become almost debt-free.

By March 27, Amazon plans to redeem the outstanding principle on its convertible subordinated notes due next year. Amazon offered the notes in 2000, and they accounted for $335 million of the company’s long-term debt at the end of 2008. After the notes are redeemed, Amazon will have only $133 million in long-term debt outstanding. That’s a far cry from the $2.8 billion in debt it held six years earlier.

There are a couple of things to note about this. The first is that, in a market in which companies are in need of new financing and yet unable to find it, Amazon is using cash to escape from debt. Few companies’ operations are that healthy, and the ones that are will likely emerge from the recession much stronger than their peers.

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http://gigaom.com/2009/03/01/why-amazon-is-bucking-the-trend/