Why enterprise software costs so much

If you read the headline and thought, "Well, it must be because enterprise software companies spend so much on R&D, and so charge a lot of money to recoup their heavy investments!" you would be wrong. Very wrong. If you thought, "It must be because they have consigned themselves to an inane sales model that requires high-priced sales and marketing to fool customers into buying their software," you'd be closer to the truth.

These were my thoughts as I read Jason Maynard's analysis of why Tibco's growth has stalled:

We are maintaining our Neutral rating on shares of Tibco given the sluggish revenue growth and the need to add extra sales capacity in order to grow the business. With the stock trading at 12x EV/CFO it isn't expensive but it is hard to make a case for multiple expansion when it will take at least 2-3 quarters to see any signs of contribution from the sales expansion....

We hope management will re-evaluate their competitive position and consider the potential of linking up with a bigger player in the space that can leverage their technology assets. Given the inconsistent performance over the last few years we believe the best possible way to maximize value is through a sale to a larger software vendor looking to round out their product portfolio. We struggle to see how Tibco can grow license revenue much above 10% on a sustainable basis. [Emphasis mine.]

(Credit: Fairport)

Enterprise software companies spend much more on Sales and Marketing, on average, than they do on Research and Development. Customers, in turn, get what they pay for: Larry, the Sales Guy. Larry isn't a bad guy. He's just not the best place for enterprise customer to spend their money.

Any company needs good salespeople to thrive. The difference in an open-source company is that the salesperson is there to help close a sales process that begins long before the customer talks with "Larry." It begins when they try the software. Not a demo of the software. The actual software.

The open source "Larry" is there to help the customer through the final mechanics of the buying process. Where the price point is low enough, "Larry" is an online marketplace like Red Hat's RHX. You give your credit card, you get support for the product. Easy. No Larry.

Tibco's model works fine for Oracle, which is buying new ways to sell to existing customers. Hence, it can focus its sales resources on known customers. For most proprietary vendors, they tapped out new territories long ago, making future growth difficult. They should consider open source as a way to let their products find a market, rather than forcing open markets with expensive sales and marketing strategies.

In sum, Tibco and other traditional enterprise software vendors would do well to reconsider their distribution and sales models. Open source offers a highly viable, successful model: try before you buy, not pay and then pray.