Costly Cloud Losses

Former SAP employee Werner Daehn, one of the most savvy analytical observers of the SAP community, commented recently, “I’m not happy with axiomatically equating public cloud with high margin, because there is an important constraint to that: The cost of each additional customer must be zero.”

Cloud computing cannot mean savings for SAP customers on the one hand and a lottery win for SAP on the other. Naturally, there may be scaling effects resulting in operating costs below those of an in-house data center – but these effects are also available through outsourcing and hosting. The questions Werner Daehn asks are legitimate: “If SAP gains another S/4 customer, do they run on existing servers? Do they not need any support?”

His answer: “Additional customers most certainly generate additional costs – to quite a large extent. To make matters worse, public cloud software has a significantly higher complexity and thus higher costs. Furthermore, customers are not willing to pay n-times as much as before just to outsource the operation of the software. Reduced to this aspect, SAP does not have a public cloud, but an outsourcing offering.”

Apparently, SAP CEO Christian Klein sees the state of affairs similarly. To the great displeasure of the user groups, SAP wants to increase cloud subscription fees with a fixed index of plus 3.3 percent annually. Werner Daehn doubts whether the calculation will work out for SAP. He does not see a significant improvement in margins with a doubling of cloud sales: “Funnily enough, on-prem is actually better in this aspect. On-premises software is created once, and then 20 percent of the list price is collected each year as maintenance costs, and the operating costs (hardware, personnel) are borne by the customer. If the number of customers doubles, the revenue doubles, the costs stay the same, and the margin approaches 100 percent.”

Analysts confirm this on-prem view and have calculated that in the traditional license business, SAP has a margin of well over 80 percent. Consequently, Werner Daehn asks the rhetorical question: What happens to the margin if you abandon the on-prem business and move everything toward the SAP cloud?