IBM vs. SAS: The Battle over Data Analysis Software
Jim Goodnight, chief executive of SAS Institute, doesn't mince words. During a Nov. 10 talk at the Churchill Club, a gathering of Silicon Valley business people, the head of the closely held software maker disparaged Wall Street analysts, questioned the value of marketing staff, and told a joke involving Bill Clinton and the Pope that some people of faith might have found offensive. Goodnight is equally blunt about his competitors in the $9 billion market for data analysis software. In the past two years, IBM (IBM), SAP (SAP), and Oracle (ORCL) have bought companies that compete with SAS in providing software that can predict trends, identify profitable customers, reduce risk, or shave costs. Goodnight views the mergers as a chance to make hay. "We always look for any company that's acquired to be messed up for a year," Goodnight says in an interview. Goodnight and the rest of SAS will need to keep backing up the bold talk with results. The company has held up well during a recession that crimped rivals' growth. At SAS, sales this year will be unchanged from 2008, when they stood at $2.26 billion, according to Goodnight. Profit may decline by 4%. By contrast, revenue at German software giant SAP is expected to decline by 8% this year, and for Oracle, the large U.S. business-software company, sales slipped 1% for the 12 months ended Aug. 31. SAS specializes in software that helps companies extract insights from growing volumes of data. That's attractive because it is expanding even as demand for other kinds of software, such as applications that streamline business processes, has declined. SAS products are deeply embeddedSAS's growth comes partly because it can charge premium prices for its software, which lets statisticians predict future scenarios based on historical data. Versions of SAS products tailored for specific industries can start at $1 million to run a unit of a company, with annual subscription fees of 20% to 30% of the initial cost. "That makes the product somewhat pricey," compared with other vendors', says Bill Hostmann, an analyst at market research company Gartner (IT). Sales of data analysis software increased 22%, to $8.8 billion, in 2008, according to Gartner. SAS had about 15% of the market, the same as Oracle's share. SAP held a 24% share of the market and IBM 11%. SAS products are deeply embedded in the companies that use them. The software employs its own programming language and the statisticians and actuaries who use it are trained on the system and highly familiar with it. That makes it harder for customers to switch providers. IBM is at the forefront of companies hoping to lure SAS clients that may be looking for an alternative. About a quarter of SAS's revenue comes from copies of its software installed on IBM mainframe computers. That gives Big Blue an opportunity to convert customers to its products. "They're betting they can poach a lot of SAS's business off the mainframe," Hostmann says of IBM. Over the past five years, IBM has spent $12 billion to acquire 13 companies in data analysis and to beef up its own research and development in that arena. IBM paid $1.2 billion at a hefty premium for SAS competitor SPSS in a deal announced July 28.In April, IBM formed a group of 4,000 "business analytics" consultants, which the company expects to yield $2 billion in services revenues next year.IBM paid $4.9 billion for business intelligence software maker Cognos in 2007. Oracle and SAP have been buying, tooIBM's sales force is trying to persuade would-be customers that Big Blue can outperform SAS in providing the hardware, software, and consulting services they need to incorporate data analysis into their operations. "We want to position SAS as a niche play in statistics and data mining," says Rob Ashe, a general manager at IBM. "They only cover a small part of the domain." Oracle and SAP have also branched into the analytics market to add revenue growth. In 2007, Oracle bought Hyperion Solutions for $3.3 billion, and SAP bought Business Objects for $6.8 billion. At the low end of the market, SAS also is contending with the popularity of an open source programming language called R, which is used by Google (GOOG), Stanford University, and other prominent organizations to build statistical applications. SAS has several advantages as it tries to jog sales growth and fend off competition. Its software tends to be quick for customers to install and start using, although SAS hires some consultants from Accenture (ACN) and other firms to help customers get off the ground. SAS products for small companies can cost as little as tens of thousands of dollars to install, says senior vice-president Jim Davis. In 2010, the company's sales of new software licenses may grow by a double-digit percentage, although overall revenue might not increase, according to Davis. Goodnight scorns buyers, Wall StreetCustomers are finding new uses for SAS software, thanks to its ability to collect data from various sources and compile it for analysis. Shell uses the software to forecast the life expectancy of pumps on oil-drilling platforms in the North Sea. Banking giant HSBC employs it to screen credit-card transactions for fraud. Department store Kohl's (KSS) bought SAS to maximize profits from markdowns at its roughly 850 stores. "These are enormous computational problems," Goodnight says. SAS is using its $1 billion in cash partly to expand its Cary, N.C., headquarters. Next year, SAS plans to open a $70 million data center to expand into software delivered over the Web. Goodnight, 66, co-founded SAS in 1976 at North Carolina State University and owns two-thirds of its shares. John Sall, a co-founder and SAS executive, owns the other third. SAS is worth $10 billion to $12 billion now, says Goodnight, a billionaire who in 2009 ranked 33 on the Forbes list of wealthiest Americans. The CEO is loath to sell. "I've been asked by two major companies if we'd sell, and I said, 'Yes, for $20 billion,'" he says. "I have a lot of respect for the people who work at SAS. I don't want to see them get laid off because the company gets acquired." During his Churchill Club talk, Goodnight was even plainer. "We're still making a lot of money this year. Why should I lay off 3,000 people so we can say our profits went up?" he said. "I'm not going to listen to a bunch of 28-year-old kids on Wall Street telling you what your profit should be down to the penny." SAS's independent streak has served the company well for more than three decades. But the pressure is on Goodnight and his team to prove that it can navigate a wave of surging competition.