What does Oracle think about those companies that offer third-party maintenance and support services for Oracle's software—for up to half off Oracle's price? Look no further than the names of these two lawsuits:
Oracle v. TomorrowNow and Oracle v. Rimini Street.
TomorrowNow (a now defunct third-party support player that SAP owned for a while) and Rimini Street have been the high-profile faces of third-party maintenance offerings for years, and their pitch is simple: ERP support for half off Oracle's prices on its PeopleSoft, JD Edwards and Siebel software. Customers pay software vendors annual maintenance and support fees on their software—which is calculated as a percentage of software licenses, in Oracle's case 22 percent. The fees cover technical support, major application releases, bug fixes and patches, and product update rights such as critical regulatory, legal and tax updates.
Judging by the ferocity of legal battles to date, Larry Ellison and company don't take too kindly to those who invade their hallowed maintenance turf. The crux of the lawsuits against TomorrowNow (formally against SAP) and now Rimini Street, which Oracle filed in January 2010, is this allegation: Massive theft and misuse of Oracle intellectual property, software and related support materials by said defendants through an illegal business model.
The cases have been contentious, intriguing and expensive. They also demonstrate the lengths to which Oracle will expend its vast resources to protect its intellectual property (IP) and multibillion-dollar maintenance and support revenue streams.
But what if one of Oracle's valuable partners—say, a reseller or system integrator or consultant—were to offer support services similar to those provided by Rimini Street? In fact, court documents show that Oracle has confirmed that there are such third-party support providers in its partner ecosystem. (Oracle's lawyers have made it clear that Oracle does not sanction this type of business activity.)
Therefore, the question is this: Should Oracle have a legal beef with those partners as well, since they offer a service based upon a business model that Oracle considers illegal?
And, just as important, is this question: If Oracle keeps pursuing litigation in the third-party support arena, might that discourage other potential service providers from jumping in and creating more competition, which also means less choice for its customers and more reasons to stick with Oracle?
"This is a grey area," says Ray Wang, partner for enterprise strategy at Altimeter Group. On one hand, Oracle has every right to protect its IP. Though, he points out, if Oracle and other vendors were serious about this area, they would work with third-party maintenance providers "to establish clear guidelines as to what would be the right way to deliver third-party maintenance in a way that would not infringe on [the software vendors'] IP."
But if Oracle's overarching intent is simply to protect is maintenance fees by intimidating the current and potential competition, then the result will be devastating for customers, Wang contends, because "this hinders users from a potential cost savings opportunity."
Maintenance and Support: Who Cares? You Should
Third-party support for enterprise software is entirely legal. It is, for the most part, very similar to buying a new BMW from an authorized BMW dealership, but taking it to an independent auto repair shop for servicing. Oracle, however, has an obvious problem with the way in which TomorrowNow and Rimini Street have gone about offering their services and their individual "business models."
While the legal wrangling can be intriguing, the world of maintenance and support is unglamorous as it gets inside today's businesses. Which is not to say it's trivial.
Rather, those fees, typically spread out among enterprises' financial ledgers and departments amid a sprawl of myriad vendor contracts, can go unnoticed unless examined and calculated in their entirety. On several occasions, that salient fact was pointed out to me by Vinnie Mirchandani, a former Gartner analyst and founder of vendor consultancy Deal Architect, which helps companies negotiate software engagements.
For the software vendors, however, the fees are a lucrative cash cow that keep on giving all year long. In Oracle's most recent quarter, for instance, Oracle enjoyed 92 percent software maintenance margins that delivered $3 billion in profits to its bottom line. That $3 billion offset a $800 million quarterly loss in the rest of Oracle's operations.
Estimates of the overall market for third-party maintenance and support vary widely: from hundreds of millions annually to $20 billion (that's from a 2009 Cowen and Co. research report). Analysts and industry watchers all say that it's a market that's growing. Rimini Street's 2009 revenues, for example, increased 270 percent year over year and the company has expanded its operations outside the United States.
Is There a Problem Here?
Like most other high-tech conglomerates, Oracle maintains close ties to a range of firms in its partner channel. Oracle's is mammoth: A 21,000-company-strong partner system that is stocked with system integrators, resellers, independent software vendors and consultants who help companies install and use the vast array of Oracle software products.
But Oracle does not extend licensing or partnership agreements that allow its partners to sell support and maintenance for its PeopleSoft, JD Edwards or Siebel products.
One partner in particular, however, offers an intriguing case study: CedarCrestone, a US consulting, technology and managed services firm, claims to be the "largest independent provider of managed services for PeopleSoft" products. It is an Oracle Platinum Partner, no less. The Oracle association is, in fact, a key part of CedarCrestone's selling point and painted all over its website.
"As a Platinum Partner of Oracle, CedarCrestone has extensive expertise in Oracle technology and Oracle applications with specific expertise in PeopleSoft Enterprise, Oracle E-Business Suite, and Fusion Middleware," according to CedarCrestone. Its website is virtual billboard of Oracle partner awards.
Though it's not made obvious on CedarCrestone's website, one of the company's offerings is maintenance and support for PeopleSoft applications. CedarCrestone recently christened a maintenance and support deal with the Tucson Unified School District (TUSD) in Arizona. The meeting minutes for TUSD's Dec. 8, 2009, "Governing Board Regular Meeting" note this:
Award of Request for Proposal (RFP) No. 10-63-12—PeopleSoft Maintenance and Support, awarded to CedarCrestone in a multi-term contract beginning December 18, 2009 with renewal options through June 30, 2012, in the estimated amount of $75,000.00
The deal was the result of an RFP process started in the fall. An excerpt from the 71-page CedarCrestone RFP to the TUSD, signed by CedarCrestone Business Development Manager/Public Sector Chris Myers and obtained by CIO.com, states:
Our Managed Services group offers clients alternative deployment solutions for PeopleSoft applications, including Hosting, Application Management, Upgrade Lab, Tax and Regulatory Support, and Remote Development.... With [CedarCrestone] Extended Tax and Regulatory Support, clients are kept in regulatory compliance without using a licensed PeopleSoft application update as a starting point.
Given the previous Oracle litigation with TomorrowNow and Rimini Street, this would appear to be an awkward business-partner situation—at best. At worst, a borderline litigious one. (CIO.com's calls and e-mails to Oracle and the Tucson Unified School District CTO office, requesting interviews for this article, were not returned. Kristin Kullmann, CedarCrestone's VP of marketing and strategic alliances, declined to comment.)
So why hasn't Oracle litigated or attempted to stop its trusted and valued partner, CedarCrestone, from offering a service that Oracle specifically doesn't sanction among its partners and is one that Oracle contends is based upon a business model that can be illegal?