Who Wins As Oracle, SAP & Salesforce.com Fight For Growth In Cloud Based Services?

by Trefis Team
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Oracle (NASDAQ:ORCL), SAP (NYSE:SAP) and Salesforce.com (NYSE:CRM) are all big players in the cloud-based services businesses related to customer relationship management (CRM), enterprise resource planning (ERP), human resource planning, analytics and to some extent social media. While these companies have traditionally focused on different parts of the value chain, their businesses have since expanded and have started to encroach on each others’ core businesses. All three are also focused on cloud based software-as-a-service (SaaS), which is the biggest growth opportunity for them currently.

Oracle is a dominant player in the database and middleware market, and it facilitates the deployment of SAP’s ERP and CRM software. SAP is a dominant player in the ERP market and has held the top spot in this segment for a long time. Salesforce.com is a new player in the CRM market and introduced a disruptive way to deliver CRM. Salesforce.com enabled companies to have a CRM system with minimal implementation time as it deployed the software on the cloud and has since had a stranglehold on the cloud-based SaaS market.

The cloud-based SaaS market is an extremely volatile and competitive one with deep pocket players such as Oracle and SAP vying for a share of the market as well as other completely cloud-based players such as SugarCRM and Zoho. We examine the top three competitors below and discuss their relative strengths and weaknesses.

Check out our complete analysis of Oracle

Oracle – The Business Of Data And Its Manipulation

Oracle is the biggest player of the three in terms of revenues. The company had $39 billion in 2012 revenues with a gross profit of nearly $31 billion. Its biggest divisions are the database software licenses business, which account for nearly 36% of the company’s value, closely followed by application software licenses business (24%) and middleware software licenses business (17%).

Oracle’s main business focuses on database software which helps companies collect, process and store important customer and business information, and it is the base over which many ERP and CRM systems are built. There are many open source database software options, but many ERP and CRM systems are built on top of Oracle’s platform. For example, SAP makes application software that can be deployed while using Oracle’s database software.

Oracle has had significant success entering new businesses via acquisitions in the past and its cloud revenues came in at $230 million in the last quarter. While this is not very significant now, it can grow in the future as Oracle has had key wins in the CRM and human capital management (HCM) space from clients like Abercrombie & Fitch, Edwards Air, Expedia, Macy’s, T. Rowe Price, United Airlines, U.S. Bancorp, Whirlpool and Xerox. [1]

To put this number in perspective Salesforce.com, the top cloud CRM player in the world, earned revenues of $2.3 billion in 2011, that we estimate t0 reach $2.9 billion in 2012. Oracle can be a big threat to Salesforce.com as its quarterly cloud-based SaaS revenues are nearly 10% of Salesforce.com’s annual revenue. We currently estimate that Oracle has a market share of about 16%-17% of the global CRM market, which falls under its applications business.

SAP – The Business Of Analyzing And Making Sense of Vast Data

SAP is the largest maker of on-premise CRM and ERP systems, and its customers are predominantly large institutions that need to process vast amounts of customer and enterprise data across finance, marketing and human resource functions. The company had revenue of $20 billion in 2012 with a gross profit of $14 billion. The biggest division of the company is ERP software, which constitutes 34% of the business value, closely followed by business intelligence (BI) software (25%) and on-premise CRM software (17.5%).

The company builds application data and makes money primarily through sale of licenses but does not implement its software for its clients. It outsources implementation to partners such as Accenture and IBM, and this helps in keep its costs low. This model has made SAP extremely profitable in the past. SAP has its own set of database software to compete with Oracle, but it contributes a fraction compared to its ERP, CRM and BI software. We currently estimate that SAP has about 20% market share in the global CRM market.

SAP’s relatively new cloud and mobile businesses reported revenues of about $165 million (€128 million) in Q3, and much of this can be attributed to cross-selling to existing customers to access CRM and ERP data on the move. SAP measures well against $730 million in revenues that Salesforce.com earned in the latest quarter. The products of the two companies are not exactly the same, but they do play in the same CRM space.

Salesforce.com has significant clout in the cloud-based CRM market and SAP in the on-premise business. SAP 360 is SAP’s cloud offering that competes directly with Salesforce.com. SAP is trying to integrate its hugely popular analytics platform with CRM, and we expect this to boost its share in the cloud-based CRM market in the long run. However, SAP is likely to differentiate its cloud offering by coupling it with its in-memory analytics software, HANA.

The revenue from HANA was $106 million (€83 million) in the last quarter, and it is key to SAP’s long term strategy as the company will eventually feature the product in its core offerings. SAP recently announced roll out of enterprise applications coupled with in-memory computing and has unveiled its first product in the line, SAP 360 Customer. This is the first large-scale transactional system to run HANA. [2]

Salesforce.com – Disruptive Cloud CRM Technology

Salesforce.com is the top player in the cloud-based CRM market, and we estimate that the company has a 40% market share in the $5 billion global CRM SaaS market. While this market is currently small compared to the on-premise CRM market, we expect more users to shift to a cloud-based system to save costs and time. We also expect this market to grow to about $20 billion by the end of our forecast period. This is the primary reason for traditional CRM players like Oracle, SAP and Microsoft, to shift focus to cloud as it will eventually be a bigger market than the on-premise space.

As expected, the biggest division of Salesforce.com is the cloud based CRM, which accounts for about 56% of the stock price estimate, followed by other cloud-based apps such as Chatter, which accounts for about 34%. The company earned about $2.9 billion in 2012 with a gross profit of about $2.3 billion. However, the company is experiencing increasing costs and issues with recent acquisitions.

In the previous quarter, it reported a loss of $220 million despite an impressive revenue growth of 35%, mainly due to rising costs. The cost of revenues as a percentage of sales has been trending higher and is currently at about 20% while R&D costs have risen by more than 50% to $114 million and marketing expenses are up by more than 40% annually at $428 million. As the company enters new businesses, we expect this to grow faster than revenues in the short run before trending lower.

Salesforce.com has beefed up its social media offerings by acquiring Buddy Media, a social enterprise software that enables clients to listen, engage, gain insight, publish, advertise and measure social marketing programs. In a recently filed 8-K, the company revealed that Buddy Media is losing money, and in the six months ended 30 June, 2012, it reported a cumulative net loss of $20.5 million. This is likely to weigh on Salesforce.com’s earnings in the short term, and we will keep our eye on how its acquisitions are faring.

Oracle And SAP Close The Gap On Salesforce.com

Salesforce.com enjoys a majority advantage in the cloud-based SaaS market, but Oracle and SAP are deep pocket companies and have the institutional client base to leverage short term growth.

It will be easier for SAP and Oracle’s customers to shift to cloud services offered by the two companies as opposed to moving to Salesforce.com. This cross-selling is the primary reason for the growth exhibited by these two companies. However, this is a short term fix as many small and medium enterprises are looking for quick implementation at reasonable cost, something in which Salesforce.com maintains a lead.

Both Salesforce.com and Oracle are trying to gain success in social media analytics, and currently it seems like Oracle has the upper hand as the latter struggles with integrating its acquisitions. This being said, social media analytics and marketing campaign management tools are primarily cloud-based. Salesforce.com has the advantage in this market with its significant experience in the field and might be able to turn the direction in its favor.

Oracle and SAP are not only competing in the ERP and CRM markets, but with SAP’s popular HANA platform, the ERP giant has made significant in-roads into the database and analytics market. While Oracle is still the leader by a long shot, the gap is closing. However so far SAP is not showing enough interest in the social media analytics market.

Salesforce.com may have a comfortable lead over Oracle and SAP, but the gap is closing.

Innovation is the key to success for software developers, and this is where Salesforce.com seems to have yet another advantage. It is integrating Chatter to its HCM and CRM systems to give these systems a social aspect, and this is driving sales. This collaboration tool built into its applications is a big draw as it helps create a social network within the organization, leading to higher interactivity and collaboration. This may help Salesforce.com keep its lead, and the main concern for the company is its ballooning costs, which is likely to hinder growth as well as its competitiveness.

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  1. Oracle Earnings Transcript, www.seekingalpha.com, Dec 18, 2012 []
  2. SAP Puts CRM On HANA, www.zdnet.com, Nov 13, 2012 []
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