It wasn’t long ago that Oracle looked invincible - on the path to global IT domination.
It overcame the European Court of Justice blocker over its Sun acquisition after it outmanoeuvred Neelie Kroes of the European Commission; it controlled Java and thus Android; it beat SAP for record damages over the TomorrowNow subsidiary; it completed its 75th acquisition, Larry goaded HP CEO Apotheker into desperate strategic blunders and the Oracle share price was at a 10 year high with the market cap gap with arch-rival IBM at less than $30bn. Third party support vendor Rimini Street was getting sued before it gained traction.
How things have changed in a few months - the Sun acquisition is not delivering and hardware sales have dropped 5 quarters consecutively; the SAP damages were appealed and reduced by over $1bn whilst SAPs performance soars and as does its hardware; IBM have outperformed and increased its market cap value by over $85bn; Google thwarted Oracle over Android; HP is fighting back over Itanium chip support with a claim for billions; Rimini Street has quadrupled its revenues from Oracle support and now its fight with German second user software company Usedsoft GmbH has resulted in a potentially devastating ruling by the ECJ about the right of software license purchasers to sell on the license when its use was no longer needed.
The argument for a second user software license market
Oracle fought this case to prevent a market in second user Oracle licensing. For Oracle, this could be deeply destabilising to its current dominant position whereby surplus licenses (shelf-ware) cannot be credited or redistributed. Currently, even cancelation of support fees can result in additional costs which infuriate Oracle clients.
Not surprisingly, Oracle clients often loaded with many years’ worth of unused surplus licenses have been quick to contact us to try and understand what they ruling means.
Oracle Europe has yet to issue a reaction. From what we see of the ECJ ruling it seeks to liberate a market for license assets by ending the on-sell restriction, but it doesn’t seem to address the real and non-penetrative blocker - support and maintenance fees and services.
So if Oracle cannot prevent a client from selling on a surplus license grant, can the right to support and maintenance also get sold on? And if so, is Oracle obliged to renew the support annually at the price set by the original sale?
If S&M cannot be freely ‘re-sold’ the market will be pretty small as most Oracle clients are enterprise level organisations that need the certainty of support, security patching and upgrades.
If the ECJ has liberated the true ability of organisations to sell on both licenses and support, there will be seismic repercussions across the sector including Oracle sales, its client’s procurement functions, the Oracle distribution channel and the associated counterparts of all software authors.
What would be the impact on Oracle?
The enterprise software market is so proprietary, closed-market and monopolistic that it is extremely difficult to envisage just how much disruption that this ruling could cause. Typical enterprise vendors such as Oracle derive most of their profits from support and maintenance (S&M) - this S&M which is hugely profitable originates from new license sales.
Oracle has had a volatile year to date, missing its Q2 earnings for the first time in 10 years. This ruling could have immediate and material impact on its European sales and profit contribution which could impact its share price substantially if its business model is forced to change. As we start to understand the deeper implications of the ruling, clients would be well advised to focus on understanding their true license position then entitlement and deployment reviews.
Expect defensive plays and counter actions from Oracle. Watch this space as we look to explore how Oracle will defend its crown jewels - eternal support and maintenance revenue streams.