MicroStrategy has long been a strong, independent and iconic leader within the business intelligence (BI) industry. Recent market developments, however, are presenting MicroStrategy with a Hobson’s Choice: commit itself to dramatically lowering its product’s Total Cost of Ownership (TCO) – thereby reducing the services revenue that represents the majority of its total revenue – or lose its whole business. The choice here is harder than it seems.
Before we delve into the underlying factors forcing this decision, let’s go over a bit of history. Founded in 1989, MicroStrategy emerged as the premium provider among the wave of ROLAP players that took over the BI market in the late 1990s and early 2000s. With a controversial CEO and a winning product, MicroStrategy quickly became a darling of Wall Street in the midst of the dot com boom and the stock price soared. Unfortunately, despite record revenues in the year 2000, accounting irregularities and the dot com bust combined to shatter MicroStrategy’s image, destroy its market momentum and crush its stock price. MicroStrategy responded to this crisis by expanding its Services offerings. Its success in this effort is evidenced by the fact that, while Services had never accounted for more than 45% of MicroStrategy’s revenues prior to 1999, its Services’ share of revenue quickly grew to over 55% in 2001 and 65% in 2006, enabling total revenue to surpass the year 2000 levels by 2004.
In 2007, the BI universe changed – Oracle, IBM and SAP bought all the lead players in the market EXCEPT for MicroStrategy. This was a classic good news / bad news moment for MicroStrategy. The good news was that Business Objects, Siebel Analytics and Cognos were no longer going to effectively compete with MicroStrategy for new green-field accounts. The bad news was that those acquisitions effectively locked MicroStrategy out of the major SAP, IBM and Oracle accounts. This left MicroStrategy competing with QlikTech and the other Discovery vendors for green-field accounts and with fewer than 100 customers with more than $1B+ in annual revenue since most such accounts were already owned by one of the big vendors. MicroStrategy adapted to competing with this new wave of faster, simpler, cheaper Discovery tools by emphasizing their premium capabilities and the incremental value that more complex analysis can provide. This emphasis naturally drove MicroStrategy into deals with more services and competing with the cheaper discovery tools resulted in lower solution pricing and operating margins. As a result, the percentage of revenue represented by services continued to expand and exceeded 73% in 2008 while operating margins fell from over 35% in 2005 to just over 18% in 2008.
MicroStrategy combatted the increasing margin pressure by adding new capabilities to its solutions. These solutions have varied from the silly (like Social Analytics) to the sophisticated (like MicroStrategy’s slick mobile offering). While most of these efforts have provided minimal impact to the financials, MicroStrategy’s early foray into mobile analytics did fuel rapid license revenue expansion in 2010 and 2011, enabling MicroStrategy’s license revenue to keep pace with its services revenue in 2010 and 2011 and enabling MicroStrategy to add over 100 of the $1B+ in revenue accounts typically owned by IBM, Oracle and SAP to its customer base. This success, however, did nothing to slow the rapid decline in operating margins, which dropped all the way below 3% in 2011. In addition, by 2012, the other vendors had caught up with MicroStrategy’s mobile solutions and its license revenue growth reversed – pushing Services revenue to over 75% of the company’s revenue for the first time.
Now, MicroStrategy is under increasing pressure from Discovery tools, like QlikTech, and Cloud vendors, like Birst, that offer faster, easier deployments with radically lower Total Cost of Ownership (TCO). MicroStrategy does not have the strong large-account base that the mega-vendors have that can provide some insulation from those competitive pressures. Instead, MicroStrategy is going to have to respond to them. It can do so one of two ways:
1) MicroStrategy could continue to respond by cutting its product price when competing with the newer, integrated offerings. This approach basically pushes revenue from product to services and results in diminished incentive to invest in the product that underlies the services revenue. This is the start a vicious cycle where diminished product revenue drives lower investment in that product, which further lowers future product revenue. In the short term, however, services revenue is maintained. Based on MicroStrategy’s declining operating margins and expanding services revenue percentage, this “slow death” approach appears to be its current strategy.
2) Alternatively, MicroStrategy could expand its underlying architecture so that it can provide value to both the data preparation and presentation tasks that analytics requires and radically lower the TCO of its solution. The traditional high-cost, high-risk approach of “once you have the datawarehouse, call us…” is unsustainable when competing with integrated products that accelerate the whole value chain like Birst and QlikTech. The dramatically lower TCO that the integrated approach inherently offers is putting unrelenting pricing and margin pressure on MicroStrategy. MicroStrategy could elect to embrace this fact and move towards it. This potential expansion of its value proposition and lowering of its TCO would involve real product risk but, if successful, it would bolster MicroStrategy’s product revenue – albeit at significant expense to its primary revenue stream: services. In fact, if its services revenue is NOT dramatically reduced, then the company has not addressed the core market imperative here.
To survive the pressures that integrated solutions like Birst and QlikTech are exerting, MicroStrategy is going to have to make a very painful choice: invest heavily in re-architecting its product so that customers can deploy solutions with less services in less time and at lower cost, thus preserving its license revenue but cannibalizing its Services revenue; or continue to discount its complex product but sell it with lots of services, which will maintain its Services revenue in the short term but which will cause its license revenue (and ultimately its Services revenue) to disappear in the long term. This is a Hobson’s Choice – where really only one path forward is presented. MicroStrategy just has to recognize that and choose wisely.