The recent Oracle dispute with SAP regarding its subsidiary TomorrowNow offering Oracle clients cut price support and maintenance for Oracle products exposed a raw nerve in the Oracle business model.
Although Tomorrow Now was tiny, its activities undermined the very heart of what makes Oracle so profitable and valuable - its forward predictability of support fees. These revenues now represent over half of Oracle total sales, and with operating margins of close to 90%, Oracle support and maintenance fees represent the vast majority of Oracle earnings.
However, this cash cow is under attack and not just from third party support providers. With typical Oracle support and maintenance being calculated at 22% of net license fees, the price of support will exceed the license cost within 4 years and clients are struggling to justify the spend. Clients are increasingly looking at ways to reduce these operating costs but understandably find no lee-way from Oracle.
Oracle in fact is increasingly savvy at protecting its core asset, and it needs to be, as growth of new license sales, the lifeblood of support and maintenance growth, is under pressure as project spend at clients is reigned in. Lower cost products including Open Source options are an increasing threat to Oracle, particularly when it comes to the growth of unstructured data.
Oracle protection strategies include:
- Terms and conditions. Oracle agreements and policies have been continually updated in recent years to minimise client options to cancel support. To the dismay of many clients, even when support for say unused Oracle products can be terminated, Oracle policies on re-pricing of support generally mean the client gets no reduction in fees.
- Third party support providers will be prosecuted without prejudice as the SAP case demonstrates. This is now cutting into the Sun community whereby third party suppliers are being pushed out of the Oracle channel.
- Support cost annual increases were once somewhat discretionary, but now are the norm.
- The Oracle acquired products, resulting from Oracles spending spree, often had support calculated at lower percentages - no longer as Oracle brings them into its standard pricing policies.
So surely high discount Oracle Unlimited License Agreements (ULA) are a good way for clients to reduce costs?
The premise of a ULA is that a client will have uncapped rights to use a defined Oracle product set for a period, often 3 years. Pricing is set according to the clients anticipated growth in deployment.
Discounts are generally high and support fees are fixed. If at the end of the term the client is using more Oracle product than anticipated, the support fees are still fixed at the original rate and there is no more to pay.
Since the introduction of ULA’s around 2005-6 Oracle has been buoyant about their success and ULA’s are mentioned on many of Oracles earnings calls. The sales teams are also so excited about selling them that they are they often aggressively pushed.
To be continued
In the next post, we explore why Oracle is so keen on ULAs (if they are such great value to clients) and take a deeper look its sales tactics.