Information on the percentage of Microsoft‘s on-premise software licenses that have moved to a cloud-based, Software-as-a-Service (SaaS) model, how the future of this trend will look like, and the factors driving this migration trajectory can be found in this brief. The on premise software market is declining at about 4% per year and reports indicate that Microsoft’s Azure platform is among the top reasons why Microsoft dominates the SaaS market.
- Synergy Reseach Group reports that the on premise software market is declining at about 4% per year and that in 2016, on-premise software accounted for below 50% of the market.
- Finances Online highlights indicate that in 2008, only about 12% of firms used cloud-based technology globally and that by the end of 2020, about 73% of firms will be using SaaS technology globally.
- Microsoft, IBM, Dell and Oracle developed the hybrid cloud to enable their customers shift between the on premise and the cloud-based options and to eventually shift to the cloud-based option.
- Tech Crunch shows that with respect to the cloud-based technology, Microsoft has an advantage over IBM, Dell and Oracle because Microsoft already has a well-established cloud infrastructure.
- Tech Crunch reports that Microsoft’s cloud-based revenue in 2017 was about $6.9 billion and its cloud-based revenue grew to about $8.6 billion in 2018. This revenue increase represents about 24.6% growth. The 24.6% was determined by the calculation: ((2018 revenue — 2017 revenue/2017 revenue)*100) thus (8,600,000,000-690,000,000/6900000000)*100=24.6%).
- Based on the Tech Crunch report, it can be concluded the 24.6% growth in cloud-based revenue includes revenue from clients who shifted from the on premise option to the cloud based option.
Migration Growth Projections
- According to a 2019 report by Markets Insider, the value of the software as a service (SaaS) market was estimated at $134.44 billion in 2018 globally. The report indicates that the value for this market is likely to reach about $220 billion in 2022 and the CAGR for this period is estimated at 13.1%.
- Tech Crunch reports that the revenue generated by SaaS in the first quarter of 2019 was about $100 billion globally and that Microsoft accounted for about 17% of this figure.
- Tech Crunch indicates that Microsoft’s enterprise SaaS revenue is growing at about 30% annually and that its SaaS revenue in the first quarter of 2019 was about $10 billion.
- Synergy Research Group indicates that over the last 10 years, the cloud-based software market has gown over fourfold. Synergy reports that the on premise software market is declining at about 4% per year and that in 2016, on-premise software accounted for below 50% of the market.
- Forbes reports that Microsoft’s Azure platform is among the top reasons why Microsoft dominates the SaaS market.
- CCB Technology highlights that Azure is a public cloud computing platform that has various solutions, including Infrastructure as a Service, Platform as a Service, and Software as a Service (SaaS). According to CCB Technology, Azure can be used for analytics, virtual computing, storage, networking, and it can be as a replacement or as a hybrid for on-premise servers.
- Microsoft CEO, Satya Nadella, highlights that the hybrid cloud is the other reason why many firms are shifting to Microsoft’s SaaS. Microsoft reports that the hybrid cloud enables customers to operate both a public cloud and a private cloud. According to Microsoft, the hybrid cloud reduces the cost of managing software and enables firms to quickly handle large amounts of data.
Cisco only disclosed the percentage of its software revenue that is accounted for by subscriptions. As of May 13, 2020, 74% of Cisco’s software revenue was from software subscriptions. Cisco projected that between 2017 and 2022, its software revenue, as a percentage of total revenue, will grow from 22% to 30%, and its recurring revenue, as a percentage of total revenue, will grow from 30% to 37%. Cisco’s transition to the SaaS model is driven by the cloud and its strong partner network.
Percentage of Software Licenses That Have Migrated to SaaS Model
- Cisco has not disclosed the percentage of its software licenses that were migrated from a traditional, on-premise license model to a cloud-based, SaaS model, but it has shared the percentage of its software sales that are accounted for by software subscriptions. Because the SaaS model is a cloud- and subscription-based model, it is likely that these software subscriptions pertain to the company’s SaaS offerings.
- On May 13, 2020, Cisco reported that software subscriptions are already 74% of its software revenue.
- In its 2018 annual report, Cisco reported that software subscriptions accounted for 54% of its software revenue.
- Cisco’s SaaS offerings are spread across three product categories, namely, Infrastructure Platforms, Applications, and Security.
- The Infrastructure Platforms product category includes core networking technologies, the Applications product category includes software offerings that utilize these core networking technologies, and the Security product category includes all security-related offerings.
- Both Infrastructure Platforms and Security product categories include both hardware and software offerings, while the Applications product category includes only software offerings. As previously mentioned, Cisco’s software offerings include both software licenses and SaaS.
- The chart below shows how product category revenues have changed over time.
Projected Growth of the Aforementioned Percentage
- Cisco has not disclosed the projected growth of the percentage of its software licenses that were migrated from a traditional, on-premise license model to a cloud-based, SaaS model, but it has shared the projected growth of the percentage of its revenue that is accounted for by recurring revenue.
- In May 2020, it was reported that based on Cisco’s projections, the percentage of the company’s revenue that is accounted for by software will increase from 22% in 2017 to 30% by 2022, and that the percentage of the company’s revenue that is accounted for by recurring revenue will increase from 30% of revenue in 2017 to 37% of revenue by 2022.
Drivers of Migration to SaaS Model
- The cloud appears to be the main driver of growth of Cisco’s SaaS model. Cisco is an expert in networking and security, two things that companies find challenging when leveraging cloud technology and dealing with cloud environments that are composed of multiple cloud platforms and hundreds of SaaS applications.
- Five or six years ago, Cisco thought that the cloud would be its demise. At the time, Cisco sold mostly networking hardware, and most people did not believe Cisco could sell network subscriptions. Now that Cisco has positioned itself as “a network and security manager of the multi-cloud world,” the cloud has become a driver of growth for the company.
- According to Long View Systems, a Cisco Gold partner, “there’s not another company that has a suite of network and security offerings to support data mobility as customers move to and from the various cloud offerings on the market.”
- Cisco’s strong partner network is also instrumental in its transition to a SaaS model. CEO Chuck Robbins says Cisco’s successful transition to a recurring revenue and software-focused model is largely attributed to the company’s strong network of partners.
- Cisco is heavily reliant on its partners in driving recurring revenue growth.
As requested, Cisco’s press releases, investor call transcripts, conference speeches/keynotes, financial reports, and other disclosures were reviewed first for details about the company’s transition to the SaaS model. This step was followed by an examination of industry reports and media’s coverage of Cisco. We learned that while Cisco has not disclosed the percentage of its software licenses that were migrated to the SaaS model, it has disclosed the percentage of its software revenue that is accounted for by subscriptions. Given that the SaaS model is a cloud- and subscription-based model, it is likely that these software subscriptions are the company’s SaaS offerings.
IBM’s cloud-based, Software-as-a-Service (SaaS) model, IBM Cloud, is among the top four most preferred cloud providers by the US government agencies. The company expects its acquisition of Red Hat to further accelerate the growth of its cloud business. We have provided below the required information about the cloud-based, SaaS model of the company.
IBM SaaS-Based Model Adoption
- The company has not disclosed the percentage of its software licenses that have migrated from the traditional, on-premise license model to a cloud-based, SaaS model in its press releases, financial filings, or earnings call transcripts.
- However, as per the company’s 2019 annual report, IBM Cloud, which is its cloud-based SaaS platform, represented 27 percent of the company’s revenues in 2019, up from merely 4 percent in 2013. In 2019, IBM’s total cloud revenue grew by 11 percent YoY to $21.2 billion.
- According to the ‘Flexera 2020 State of the Cloud’ report, 15% of the enterprises currently have migrated to IBM Cloud, another 15% are experimenting or testing the same, and 9% plan to use it soon.
- According to the above-mentioned report, the IBM cloud adoption rate among the enterprises has fallen from 18% in 2019 to 15% in 2020.
- However, as per data from RightScale, IBM cloud usage trends depict that its popularity among enterprises increased from 10% to 15% between 2017 and 2018.
On-Premise to SaaS Migration Projections
- While the company has not provided any specific growth forecasts for enterprises migrating from its on-premise license model to IBM Cloud, it expects its 2020 full-year profits to beat the estimates on account of strong growth in the cloud-based SaaS business.
- As per Reuters, over the past few years, the company has been trying to shift its focus to the cloud-based SaaS business through acquisitions and also by selling some of its legacy businesses.
- According to Gartner, up to 60% of organizations will use an external service provider’s cloud-managed service offerings by 2022. This is twice the percentage of enterprises that were using the same in 2018.
- As per a 2018 survey by IBM, 85 percent of companies are already operating in multi-cloud environments, and 98 percent of them forecast that they will be using multiple hybrid clouds by 2021.
- A recent survey conducted by IBM Market Development & Insights (MD&I) also revealed that businesses are expected to deploy 57 percent of their on-premise workloads and applications into a cloud-based SaaS environment by 2021, up from 33 percent in 2019.
- As per a blog article from IBM, 75 percent of existing non-cloud, on-premise apps will move to the cloud by 2023.
Growth Drivers for Migration to IBM’s SaaS Model
- As per a recent CIO Dive article, IBM Cloud was found to have the lowest price across 67 cloud computing scenarios when compared to other SaaS players like Microsoft, Google, and AWS. It offered the lowest price in 28 scenarios and the highest in 13, making it the most cost-effective cloud vendor.
- In addition, it has more than 60 data centers on 6 continents in over 190 cities, which provide a wide global reach to its clients irrespective of their location.
- Also, the company’s hybrid multi-cloud platform offers tools known as IBM Cloud Paks, which reduce development time by up to 84 percent, eliminate up to 33 percent of integration costs for clients, reduce manual processes by up to 80 percent, and reduce operational expenses by up to 75 percent.
- IBM Cloud provides organizations a lot of flexibility and customization options that the other vendors don’t have. In addition, it has a cutting-edge blockchain offering and outstanding Watson cognitive computing capabilities.
While the company has not disclosed the percentage of its software licenses that have migrated from the traditional, on-premise license model to a cloud-based, SaaS model and the projection for the same, we were able to garner various valuable insights around the adoption of IBM Cloud and the projected industry growth for cloud-based, SaaS model adoption. We began by scouring through the company website, its press releases, financial filings, earnings call transcripts, management commentary, conference speeches, and company presentations, among others, but no relevant data could be found. All the data was focused around the features of IBM Cloud, the company’s revenue growth from its cloud business, and the recent acquisitions that it has made to grow its cloud-based SaaS business. Next, we searched through the industry reports from Gartner, Deloitte, McKinsey, Bloomberg, Flexera, etc., but all the publications provided industry level projections for cloud adoption, with no data specific to IBM Cloud. We also searched through media articles from Forbes, WSJ, Reuters, Business Insider, and Techcrunch, among others, but again no pertinent information could be located. All the information found was related to the various surveys conducted by IBM and other organizations on the state of cloud adoption by enterprises. Lastly, we tried to triangulate the data for on-premise to SaaS model migration by computing the percentage changes in the on-premise and cloud-based model revenues of the company. Hence, if the on-premise model revenues fell by x% and the SaaS model revenues increased by y%, we could have assumed that x% of the on-premise clients shifted to the SaaS model, and the rest (y-x) were new SaaS clients. However, the company has not provided any revenue data for its on-premise license model due to which the triangulation could not succeed.
As of February 2020, 37.3 percent of VMWare’s userbase has migrated from the traditional licensing model to its software-as-a-service (SaaS) subscription model. VMware’s SaaS offering is its fastest-growing division, with the segment reporting double-digit growth rates between 2015 and 2020.
Usage of SaaS-Based Subscription Model
- Prior to 2013, VMware only offered the traditional, on-premise licensing model, otherwise known as “perpetual licensing,” for use with its products. The company migrated to using both the perpetual licensing model and the cloud-based software-as-a-service (SaaS) subscription model with the introduction of the vCloud Hybrid Service (vCHS) in 2013.
- VMware remains the industry leader in the virtualization infrastructure software market for data center servers and computer desktops with a market share of 60 percent.
- Although the company did not directly disclose the percentage of its userbase that has migrated to the SaaS payment model, it provided a breakdown of its software sales by payment options in its annual report. The company generated a total of $3.2 billion in revenue from the sales of perpetual licenses in the fiscal year 2020, and $1.9 billion from SaaS subscriptions, according to its latest annual financial report released in February 2020.
- Based on these figures, we can safely estimate that the revenue generated from SaaS (subscription-based) licensing of its software accounted for 37.3 percent of the company’s total software revenue, which indicates that about 37.3 percent of VMware’s userbase has migrated to utilizing its cloud-based software-as-a-service (SaaS) subscription option since its introduction in 2013.
- Revenue from VMware’s perpetual licensing in FY 2020 = $3.2 billion.
- Revenue from VMware’s SaaS subscription in FY 2020 = $1.9 billion.
- Total software sales = $5.1 billion (i.e., $3.2 billion + $1.9 billion).
- Percentage of software revenue from SaaS subscription = 37.3 percent (i.e., $1.9 billion/$5.1 billion *100 percent).
Growth in SaaS Segment
- The cloud-based software-as-a-service (SaaS) offering is VMware’s fastest-growing division. In 2015, the segment represented 5 percent of the firm’s total revenue compared to the 17.4 percent it holds today.
- In a recent interview with CRN, VMware’s vice president of licensing and pricing, Ryan Knauss, stated that the company expects SaaS subscription and licensing to become the “bigger part of its business” — that is, the company believes SaaS subscription will account for the majority of its revenue in the near future.
- The company did not publicly share estimates regarding its future growth, but industry analysts expect VMware’s SaaS subscription to overtake its traditional perpetual license sales by 2025.
- VMware’s SaaS revenue grew 36.9 percent in 2016, 34.9 percent in 2018, 40.5 percent in 2019, and 44 percent in 2020.
- VMware’s SaaS revenue in 2015 = $502 million.
- VMware’s SaaS revenue in 2016 = $687 million (representing an increase of 36.9% from fiscal year 2015).
- VMware’s SaaS revenue in 2018 = $927 million (representing an increase of 34.9% from fiscal year 2016).
- VMware’s SaaS revenue in 2019 = $1,303 million (representing an increase of 40.5% from fiscal year 2018).
Drivers for SaaS Growth
- VMware’s vice president of licensing and pricing, Ryan Knauss, identified the increased flexibility associated with SaaS pricing as a key driver for its adoption. Companies are able to quickly scale up or down with their SaaS subscription plans based on their current demands, a feature that’s not possible with perpetual licensing.
- All backend operations and updates are handled by VMware in the SaaS model. This has created a hands-off approach from backend management operations that used to be associated with on-premise perpetual licenses, allowing IT operators to focus on other pressing needs. Another notable factor driving the migration to VMware’s SaaS model offering is the instant access to critical new features without companies needing to renew their existing subscriptions.
In 2019, Oracle’s revenue on its cloud-based license model was $26.7 billion and the on-premise model had revenue of $5.9 billion. It translates to a 5.92% growth in its cloud-based segment compared to the company’s revenue on this segment in 2017, while the on-premise license segment had a 4.73% decline. These figures were used as indicators that customers are increasingly migrating from the traditional on-premise license to a cloud-based SaaS model. Details are presented below.
Oracle Cloud-Based SaaS Model Adoption
- Oracle has not disclosed any information pertaining to the percentage of its customer migrating from the traditional, on-premise license model to a cloud-based, SaaS model based on its annual reports and financial statements, earnings call transcript, or press releases.
- However, based on Oracle’s press release for its 2019 fiscal year report (which ended May 31, 2019) with total revenue of $39.5 billion, its revenue from “cloud services and license support” was $26.7 billion. On the other hand, its revenue from its on-premise license segment was $5.9 billion.
- Cloud Services and License Support is Oracle’s segment that includes SaaS, PaaS (platform-as-a-service), IaaS (Infrastructure-as-a-Service), and other software support and product upgrades.
- SaaS margins account for 95% of the total revenue from this cloud segment.
- This segment accounts for 67.6% of Oracle’s total revenue (or ($26.7 billion / $39.5 billion) x 100). On-premise license segment accounts for 14.8% of the total revenue, followed by other segments like hardware (9.4%), and services (8.2%)
- In comparison, the revenue of cloud services and license support in 2017 was $23.8 billion and the revenue of on-premise license was $6.5 billion.
- Using a compound annual growth rate (CAGR) calculator, the 2019 revenues from these segments indicated a 5.92% increase on cloud and a 4.73% decline on the on-premise license segment (see calculations in the research strategy section). These figures indicate that customers are migrating from the traditional on-premise license to a cloud-based SaaS model.
Projections on On-Premise to SaaS Model Migration
Based on the CAGR derived by comparing the 2017 and 2019 revenues from the cloud-based and on-premise segments of Oracle’s total revenue, we were able to get the projected values of these segments from 2020 to 2023. 2020 projected cloud-based model revenue = 2019 revenue + (2019 revenue x CAGR)
Using this calculation, therefore:
2020 projected on-premise license revenue = 2019 revenue + (2019 revenue x CAGR)
Using this calculation, therefore:
Growth Drivers for Migration to Oracle Saas Model
- Oracle’s modern SaaS model has built-in analytics and other capabilities that customers find attractive. Some of these capabilities include easy personalization solutions depending on business needs which can be customized through updates, data portability, and its ability to speed-up innovation cycles.
- In a SWOT analysis done by Constellation Research on Oracle’s cloud capabilities, it was noted that one of its strengths is its “[h]ighest identicality of cloud and on-premises functionality”. It is capable of delivering flexibility in its ability to migrate from on-premise to cloud solutions.
- Market experts also stated that this growth is driven by the innovations in the SaaS solutions. These include the integration of artificial intelligence (AI) or adaptive intelligence that helps companies learn and adapt to user data and behavior, and machine learning (ML) that drives less human-reliant management. Chatbots, blockchain, and the internet of things (IoT) are also considered as some of the vital technologies that are increasingly significant in its future SaaS offerings.
To get the percentage of Oracle customers that have migrated from the traditional on-premise license to its cloud-based SaaS model, we initially checked through its website, annual reports, financial statements, and investor call transcript, or press releases. We also looked for information from other credible sources, but this is not directly available. To check whether customers are actually migrating from the traditional to the cloud-based model, we instead searched for the 2019 revenue information of Oracle’s cloud-based segment and its on-premise segment from its previous revenue inform.
In a 2018 article published by Forbes, it was projected that Oracle’s cloud-based model revenues will have a 5-6% year-over-year increase while on-premise license revenues will fall up to 3%. To have more concrete figures, we used 2017 and 2019 Oracle revenues from these two segments. Based on the available data, we used a CAGR calculator to get the percentage of growth (or decline) of the revenues from these segments.
For the cloud services and license support segment (where SaaS is 95% part of): — Starting value: $23.8 billion (2017) — Ending value: $26.7 billion (2019) — No. of periods: 2 years (2017 to 2019) — CAGR: 5.92% (growth)
For the on-premise license segment: — Starting value: $6.5 billion (2017) — Ending value: $5.9 billion (2019) — No. of periods: 2 years (2017 to 2019) — CAGR: -4.73% (decline)
In the absence of a directly available data, we used these segments’ revenue information as indicators that customers are increasingly migrating from Oracle’s traditional on-premise license model to its cloud-based SaaS model.
SAP recorded about 39% surge in cloud sales in 2019 due to the continued migration of customers to cloud-based SAP models. The number of SAP customers who recently migrated from traditional (legacy) platforms associated with on-premise licenses to SaaS platforms with cloud-based licenses has changed from 0.36% in 2008 to 14.49% in 2020.
License Migration From On-Premise Legacy Platforms To the Cloud-Based (SaaS Capable) Models
- A 2018 study reported by the International Journal of Engineering Research & Technology (IJERT) was conducted among organizations using SAP platforms. The study performs an analysis of the money spent on on-premise or cloud-based SAP platforms. As of 2020, about 14.49% of organizations had replaced their spending on on-premise traditional SAP applications or licenses with cloud-based SAP licenses or applications with Software as a Service (SaaS) features.
- As of 2008, only 0.36% of SAP platform users had migrated from an on-premise platform to cloud-based platforms. This figure grew to 1.25% in 2012.
- A recent survey conducted by LeanIX and PwC reveals that about 20% of organizations have already migrated to S/4HANA ahead of SAP ECC’s retirement (or end of life) scheduled for 2025, while about 49% plan to transition in 2020.
- According to a report dated June 27, 2019, and credited to SAP, about 18% of its customers that have used its traditional (on-premise) software licenses or applications across a variety of industries had already migrated to its new S/4HANA platform as of June 2019. S/4HANA has cloud-based and SaaS features as well as on-premise SAP features. It can also be deployed in hybrid mode.
- By the end of 2019, about 72% of SAP customers were yet to begin their migration process to move over to the S/4HANA SAP platform. This data indicates that not more than 28% (that is, 100% — 72%) of legacy SAP platform users had migrated to the S/4HANA platform by the end of 2019.
- About 54% of legacy SAP platform customers hope to switch to SAP S/4HANA within three years (by 2022).
- In its second-quarter filing, SAP revealed that about 50% of SAP S/4HANA customers are “net-new” customers. The above statistics indicate that the remaining 50% of SAP S/4HANA customers, which are not new, may include those migrating from traditional SAP platforms.
Factors Driving Migration of Traditional SAP Platforms to Cloud-Based SaaS Models
- One key driver pushing organizations to adopt the new SAP software suite with cloud-based and SaaS features is lower capital expenditures (CAPEX) and operating expenses (OPEX). Retiring an organization’s legacy systems to deploy SAP S/4HANA on the cloud eliminates a significant part of CAPEX costs and streamlines existing operating expenses.
- A company that recently migrated to the SaaS-based cloud SAP model has achieved a 30% reduction in its total cost of ownership (TCO) post-implementation
- Other factors that motivate enterprises to migrate from the traditional on-premise SAP platforms to cloud-based SaaS models include the consolidation of diverse infrastructure, reduced maintenance costs, and benefits from other prestigious technologies. Infopulse claims it has helped an extensive French IT services provider to enjoy the listed benefits by migrating to utilized cloud-based SaaS SAP applications. The company successfully consolidated fractured users and IT infrastructures within its cloud infrastructure and retired an outdated data center.
- Another benefit of migrating from traditional on-premise SAP platforms to cloud-based, Software-as-a-Service (SaaS) models is to automate data reporting and data accumulation and to free up vital system resources. Massachusetts Institute of Technology (MIT) recently migrated from an on-premise SAP ERP 6.0 instance to its new SAP managed services platform hosted on SAP HANA enterprise cloud. This migration has helped MIT to free up vital resources and efficiently work on projects with high values.
- Other advantages of cloud-based, Software-as-a-Service (SaaS) SAP models include enhanced user experience, simplified processes with low latency, increased data reliability, real-time accounting processes, and instant insights into core financial status of organizations.
- Cloud-based, Software-as-a-Service (SaaS) SAP models also offer a reduced data footprint. They also provide the latest tools and skills required to implement the Internet of Things as well as digital transformation within the business world. It also offers significant improvements in accountability, among other benefits.
The research brief seeks to uncover the percentage of SAP’s on-premise software licenses that have moved to a cloud-based, Software-as-a-Service (SaaS) model. It has reviewed academic journals, credible media reports, press releases, financial reports, and several other resources related to SAP. A limited number of resources have elaborated on software licenses that have migrated from the traditional, on-premise license model to a cloud-based Software-as-a-Service (SaaS) model. An International Journal of Engineering Research & Technology (IJERT) provided insights on the percentage of SAP’s on-premise software licenses that have moved to a cloud-based, Software-as-a-Service (SaaS) model. Uncovered insights reveal the percentage of on-premise spending on SAP platforms that has been replaced by spending on cloud-based models. Data relevant to on-premise SAP platforms and cloud-based Software-as-a-Service (SaaS) model from several case studies is used to confirm uncovered insights. There are limited quantitative insights specific to cloud-based Software-as-a-Service (SaaS) SAP models. The research uses the estimated adoption rate SAP S/4HANA (a platform with SaaS features and is deployable on the cloud) as a proxy for the number of software licenses that may migrate from an on-premise license model to a cloud-based Software-as-a-Service (SaaS) model by 2022.