Luxury goods and enterprise software share similar fates
Enterprise software is about to face the same discounting pressures that luxury goods companies are, and it's about time.
Reading The Wall Street Journal on Friday, I was struck by an article detailing the changing fortunes of luxury goods manufacturers like Burberry and Emanuel Ungaro, and how much they mirror those of enterprise software vendors. Recent discounting by luxury goods companies has led once-loyal customers to question the price tags they once resolutely paid:
...[M]any fashion-industry veterans believe last fall's steep discounting of European designer goods by 70% or more did lasting damage to the perception of luxury. People now feel like they were ripped off by high prices all along--and they are vowing never to pay full price again. If you can buy a Michael Kors wool dress for $230 on sale,...you may wonder if the original $2,400 price wasn't a bit high to begin with.
Bingo. This is precisely the doubt rising amongst CIOs as they review licensing and maintenance costs with their software vendors. One recent example comes from TechWeb Global CIO writer Bob Evans, who wrote an open letter to Oracle CEO Larry Ellison criticizing Oracle's fat pricing in lean times:
The issue that needs your fresh thinking and attention in today's brutal economic climate is the one-size-fits-all, nonnegotiable 22 percent annual maintenance fee Oracle charges your customers.
As you well know, those customers are desperately trying to cut costs and conserve cash, and are exploring every possible option for doing so. You can help those customers very directly while also advancing Oracle's cause in a variety of ways by being willing to modify your stance on that single-tier, unmodifiable policy....
Mr. Ellison, it's easy to see why you like the current system, where someone pays, for example, $4,000,000 for a software license and then pays you $880,000 every year for "maintenance." And maybe CIOs will continue to find that's a fair exchange of value. But maybe they won't....
To which I'd add, "Let's hope they don't." The current enterprise software pricing model is unconscionable. It shifts all the risk of an IT purchase to the buyer, who must buy on faith with limited recourse if the software doesn't perform as marketed, or even if the intended project dies, leaving the customer with software licenses that it can't use.
Open source and Software-as-a-Service (SaaS) turn this bloated, outdated model on its head, insisting on a pay-for-value and pay-as-you-go model that benefits customers through lower costs, lower risk, and higher performance. It's therefore no wonder that Red Hat, the leading open-source vendor, continues to grow in a shrinking economy, as Forbes recently pointed out.
In my own open-source business (Alfresco), I've seen incumbent, proprietary competitors drop prices by as much 100 percent...and still lose. Why? Because even at a 100 percent discount on the license, Oracle, IBM, etc. charge maintenance pricing that is far out-of-line with the value their software actually delivers.
Luxury goods companies are recognizing the need to lower the cost of their wares, because they simply aren't worth the inflated price tags they've long commanded. Enterprise software is the same. That BMC maintenance contract you're considering renewing? It's not worth it. Go with Hyperic or Zenoss or another open-source provider instead, and save money while maintaining or boosting productivity.
Yes, you can.
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