Software December 9, 2009, 9:31PM EST

SAP Sets Pace on 'Flexible' Software Pricing

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Subscription Growth

The proliferation of subscription software is also a response to the popularity of business applications delivered over the Internet for a monthly or annual fee, such as Salesforce.com's (CRM) customer management software, and online document and spreadsheet software from Google (GOOG). "The companies that aren't moving that way quickly enough are at risk of losing revenue," says Liz Herbert, an analyst at Forrester Research (FORR).

So far, subscription software licenses are a drop in the bucket for SAP and other large software vendors. Software subscriptions—including companywide licenses at SAP's 80 largest customers including Siemens (SI), Colgate-Palmolive (CL), and Apple (AAPL)—accounted for just 4% of SAP's software revenues in the third quarter, or $116.4 million.

Sales of software subscriptions are growing even as traditional software license sales decline. Sales at North American software companies that have reported quarterly results in the past six months declined by 9.6%, according to a Bloomberg analysis. Worldwide revenues from subscription software licenses, including software for IBM mainframe computers, is expected to grow by more than 21% annually to $71.8 billion by 2013, from nearly $34 billion in 2009, according to market researcher IDC. Subscriptions would account for one-fifth of all software sales by then.

Other big software companies are proffering subscription deals. Microsoft plans to offer users of its upcoming Office 2010 suite, due next year, the ability to rent an online version of the software on a pay-as-you-go basis. It also sells its Exchange e-mail software and SharePoint collaboration software on a subscription basis.

M&A Assistance

Adobe Systems on Sept. 15 paid $1.8 billion for Web traffic analysis software company Omniture, which sells software on annual or longer subscriptions, in order to collect a more predictable revenue stream between releases of its flagship Creative Suite software.

Database and business applications giant Oracle may also be poised to sign up more companies for software subscriptions rather than traditional licenses. New applications called Fusion that Oracle plans to introduce in 2010 may offer customers more options for letting Oracle host the software on its computers. If Oracle completes its pending acquisition of Sun Microsystems (JAVA), currently delayed by antitrust concerns in Europe, it could have new options for selling software loaded on Sun hardware on a subscription basis, analysts say. Oracle didn't make an executive available for comment for this article.

To be sure, software companies' earnings have held up better than the tech sector as a whole. Net income for North American software companies that reported quarterly results in the past six months grew by 0.7%, compared with a decline of 3.75% at all companies in the information technology sector, according to a Bloomberg analysis.

Vendor Bright Spot

Still, some analysts see the proliferation of subscription deals as a way for vendors to divert attention from sharply declining sales of traditional licenses. "That's all they've got going on," Brendan Barnicle, an analyst at Pacific Crest Securities, says of SAP's flexible licensing program.

During the first nine months of 2009, SAP's software licensing revenue fell 35% to $2.2 billion. By contrast, subscription revenue, including companywide deals at some of SAP's largest customers, increased 21% to $328.6 million. Oracle's new license sales fell 17% to $1 billion during its fiscal first quarter, which ended Aug. 31. Sales of "on demand" software, including software Oracle hosts on its own computers, fell just 8% to $180 million.

SAP President McDermott says investors shouldn't focus on subscription sales when measuring the company, since they account for such a small percentage of revenue. The subscription deals are "an incremental opportunity to grow a net new revenue and profit stream for our shareholders," he says. "We're not a company in transition."

Ricadela is a writer for BusinessWeek in Silicon Valley.