License vs. Service and Support Revenue: Some Historical Clarity

A blogger I honestly have never heard of in my 25+ year in high tech has used his 30+ year in high tech to claim that “tech journalist” Bob Evans is recirculating a “meme” that Bob is writing because he is both lazy and ill-informed about the historical revenue split between new license revenues and service and support revenues in enterprise software.

I’ll try to skip discussing Bob’s alleged laziness as unworthy of comment, except to say that the blogger, Dennis Byron, ironically claims that Bob is lazily recycling old material, and to support his claim Byron gleefully recycles so much of a previous post that it takes up fully half of his new post. ‘Nuff said.

The laziness comment is also pointless because Byron’s main point, that the fact that software companies’ practice of gleaning a majority of their revenues from service and support — one of the points of Bob’s recent post —  is “decades old”, is  patently false. Actually, as someone who has covered this issue very closely for decades myself, the trend in enterprise software through the end of the last decade was that license revenues often outstripped service and support revenues by a factor of two or more.

The dotcom bust and the subsequent recession, less than a decade ago, began a significant restructuring  of this revenue split, but up until then enterprise software companies prided themselves on having a much larger proportion of license revenues to service and support revenues. It was only as growth slowed down that the annuity value of service and support began to be seen as a key element in company longevity and stability.

What Byron forgets or never knew in the first place is that, until the last decade, the number one metric for a successful enterprise software company, especially publicly-traded ones, was customer growth. He does acknowledge that only  fast growing companies have more license than service and support revenues. But what he seems not to realize is that what we consider the enterprise software market today largely didn’t exist when Bob and I started our careers in the 1980s, and that the companies in that sector today were on a fast growth path until, as I stated, the last recession. That meant customer acquisition was job number one, and the revenue split reflected that. The change Bob is referring to happened not decades ago, to reiterate, but barely one decade ago at best.

Lazy is as lazy does.

6 thoughts on “License vs. Service and Support Revenue: Some Historical Clarity

  1. Sorry you didn’t get the summer fun in my recent blogpost. I guess “add sailing” and ending the post with “Fore!” was too subtle.

    But your information above about the historic maintenance/license/services split among enterprise software suppliers is incorrect.

    Perhaps you are just looking at the historic maintenance/license split but even that should approach a 1:1 ratio very early in a successful traditional enterprise software supplier’s business plan. For SAP, the cross over came in 2001 according to its SEC filings (and revenue recognition rules changed around that time as well; apples to apples, the cross over might have been earlier). For Oracle it was 1997. For JDE, it may have been true prior to its 1997 IPO (if not, the company was already approaching the 1:1 ratio at that time according to its S-1).

    Another thing that might confuse your readers is that historically maintnenace service was often termed as being “licensed” in the 1990s (see Mapics 10-K of 1997).

    It’s hard to find older documents electronically but this pattern goes back away (as I said IBM actually used different accounting). As I said in my July and April posts Microsoft and others did not use this model at first but depended on partners (before evenutally acquiring the partners and adopting the model). But this is how it was done “back in the day.” To pretend this is new news as InformationWeek does is just not accurate.

    Of course with a SaaS model, the distinction is not there at all.

    • Dennis,

      Sorry I didn’t understand how much fun you intended to be having, the tone of the post looked more smarmy than fun, IMO.

      SAP may have crossed over in 2001, which is right on the timeline I mentioned in my post. But that was mostly an artifact of the recession: SAP was trying its hardest to land massive license deals and outpace its service revenue, but the economy intervened. The strategy clearly intended for license revenue to outstrip service/maintenance revenue, it’ was just hard in a recession.

      You’re also mixing nomenclature a little too freely if you’re putting Oracle in the mix in 1997. At that point in time your analysis must be based on their DBMS revenue. But however you slice it, DBMS software has never been characterized as enterprise software (it may be that way in reality, but not in the terminology of common use). Enterprise software is ERP, CRM, HRMS, etc., that’s how Bob Evans uses the term, that’s how I use, and that’s pretty much how the rest of the market uses it.

      You’re right about JDE, though they were a special case: JDE’s AS/400 base provided an unusual ratio of service to license revenue that skewed JDE’s revenues even in 97: Back then the AS/400 line was already a legacy system, and there were virtually no new sales to balance out the extremely lucrative maintenance revenue stream from the AS/400 line.

      I you look at SEBL, PSFT, and virtually any other enterprise software (and not MSFT, which didn’t have enterprise software until its Great Plains acquisition), the pattern is clear: the only viable growth strategy was customer acquisition at all costs, everything else was an afterthought, including maintenance and service revenue.

      Josh

  2. In 2001, the first Daily Wire I ever wrote for META Group was to announce that for the first time in its history SAP had more revenues for services than for new licenses. The company by that time was 27 years old. Both Evans and the blogger are telling us something we already knew but at least Evans has his facts straight.

  3. Hi Josh—intriguing discussion! The major point of my column that seems to have stirred Dennis into a lather was that IT vendors large and small are changing rapidly and profoundly right in front of our eyes. For the inside-the-industry folks, this might be ancient news (Michael: my apologies for being 9 years late to your party), but for a lot of CIOs and other business executives immersed in running shoe companies and trucking companies and investment houses and global retailers, such transitions are not always so apparent. How might this affect long-term strategic decisions and relationships? How might it influence a trial of a lower-priced SaaS provider? How might it be applied–or not–in contract negotiations? How might it be leveraged to gain some scrap of competitive advantage? For myself, being but a simple ink-stained wretch trying to be of some simple service to my audience, I guess i’ll just have to risk the ongoing scorn of my betters in the punditry class and continue to focus on the needs of the people who actually buy and use all this stuff.

    • Calling yourself an ink-stained wretch dates you even more, Bob. Bleary-eyed wretch, typing-fingers-to-the-bone wretch, maybe. But ink went the way of the paperless office, wherever that went, and with it a generation of ink-stained wretches went out to pasture (mixing metaphors on the way…..).

  4. Pingback: Enterprise Software: Don’t Believe Everything You Read II | Stocks and Sectors

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