Home It’s Official: Legacy Tech Vendors Are In Permanent Decline

It’s Official: Legacy Tech Vendors Are In Permanent Decline

SAP has missed key financial projections five times in the last 10 quarters. Oracle has whiffed four times in the last seven quarters. IBM has done better, but has tripped over earnings and revenue in the last two quarters. Microsoft? It has gone four straight quarters striking out on guidance for big areas of its business. Across the board these and other legacy vendors blame sales execution or macroeconomic factors.

Perhaps they should instead blame their technology.

Ignoring Secular Changes In The Technology Landscape

As The Wall Street Journal notes of Microsoft, while “still a vastly profitable company [it] remains stymied in its efforts to adapt to a range of new computing platforms and approaches.” It’s not alone. Each of the companies listed, as well as EMC and VMware, has struggled to catch up with sweeping industry trends like cloud computing and open source.

While these vendors naturally want to blame something easily within their control for the misses, as Oracle has, this isn’t a problem that can be fixed by throwing more high-priced sales executives at it, as Cowen & Co. analyst Peter Goldmacher stresses:

We are concerned that Oracle is mistaking a secular change in the technology landscape with economic weakness and doubling down on distribution as the solution. We believe that we are in a major technology transition as IT buyers are increasingly turning to newer apps and data management technologies that offer more robust and flexible functionality at dramatically lower prices. 

Goldmacher is referring to both open source and cloud computing, but arguably it’s cloud computing that is shaking up yesterday’s dominant tech vendors. Some, like IBM, have spent years reorganizing their businesses to deemphasize slowing businesses like hardware. Others, including IBM and Oracle, boost earnings by acquiring companies and cutting costs, enabling them to grow inorganically even as markets shift.

Bolting On The Cloud

Indeed, this may be the light at the end of the tunnel for these big tech vendors. While their traditional businesses are facing headwinds, each sees significant promise in the cloud or other new technologies. SAP, for example, has HANA, a successful in-memory database. While Goldmacher questions whether it’s growing as fast as SAP claims, it still offers a bright spot in SAP’s otherwise murky forecasts.

More promisingly, IBM’s cloud business was up 70% in the first half of the year. While the actual revenue numbers behind that growth are shrouded in mystery, as InformationWeek‘s Doug Henschen illustrates, IBM’s last 30 years reflect a constant willingness to relentlessly reinvent itself in the face of shifting technology trends. 

In like manner, Microsoft is hoping to extend its Office monopoly into the cloud with Office 365, which is now tracking toward $1.5 billion in annual revenue, and Azure, its cloud hosting service that has also apparently crossed the $1 billion hurdle. Neither number will do much to staunch stanch the bleeding in its Windows and Office businesses, but they’re on the right track.

Oracle, for its part, also undoubtedly has plans to reinvent its legacy businesses for modern application workloads. But thus far, things like its private cloud initiative, whereby it installs hardware and software in a customer’s data center and lets the customer rent this “cloud” from Oracle, mostly look like an attempt by Oracle to extend its legacy business model into the future. Good luck with that. Oracle traditionally hasn’t needed luck, though: what it can’t seem to invent, it buys. From business applications to the popular MySQL database, Oracle’s big wallet has helped it to remain relevant.

But Can They Embrace The Cloud Business Model?

The bigger question isn’t these legacy vendors’ ability to embrace new technology. Each, to varying degrees, has shown its willingness to do so.

What remains to be seen, however, is whether they can shift their businesses to subscription revenue models, particularly for cloud services that tend to be offered at significantly lower price points. For companies built on the premise of large upfront license fees and ongoing maintenance commitments, the subscription model common to cloud or open source essentially removes the license fee and simply retains maintenance. 

Will technology’s incumbent vendors be able to subsist on maintenance fees alone? Perhaps. But they’re currently structured for a very different pricing model, and arguably the Salesforce.com’s and Workdays of the world are going to further wreak havoc on their revenue models and, hence, their earnings reports.

Image courtesy of Shutterstock

About ReadWrite’s Editorial Process

The ReadWrite Editorial policy involves closely monitoring the tech industry for major developments, new product launches, AI breakthroughs, video game releases and other newsworthy events. Editors assign relevant stories to staff writers or freelance contributors with expertise in each particular topic area. Before publication, articles go through a rigorous round of editing for accuracy, clarity, and to ensure adherence to ReadWrite's style guidelines.

Get the biggest tech headlines of the day delivered to your inbox

    By signing up, you agree to our Terms and Privacy Policy. Unsubscribe anytime.

    Tech News

    Explore the latest in tech with our Tech News. We cut through the noise for concise, relevant updates, keeping you informed about the rapidly evolving tech landscape with curated content that separates signal from noise.

    In-Depth Tech Stories

    Explore tech impact in In-Depth Stories. Narrative data journalism offers comprehensive analyses, revealing stories behind data. Understand industry trends for a deeper perspective on tech's intricate relationships with society.

    Expert Reviews

    Empower decisions with Expert Reviews, merging industry expertise and insightful analysis. Delve into tech intricacies, get the best deals, and stay ahead with our trustworthy guide to navigating the ever-changing tech market.