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January 30, 2012
By Steven Zolman
At the end of November, 2011, Oracle reported its Fiscal Q2 results, and for only the 2nd time in the last 5 years, reported a sequential reduction in annual maintenance income.
See chart below:
This is a significant development, mostly because of how Oracle charges for maintenance. When Oracle sells software licenses, it also includes the first year of annual maintenance at 22% of the net license value – and there is no option to ‘unbundle’ and not pay the first year maintenance charge. So, if Oracle sells $2 billion of software in a given quarter (which it roughly did in Q2 of Fiscal Year 2012), that means Oracle would also gain $440M in annual annuity income in the form of ongoing maintenance services and support revenue. To demonstrate a sequential reduction of nearly $40 million in the quarter (which they also roughly did), means they would have actually had to have lost annual annuity income of more than $480 million in the quarter (12 times what the $40 million sequential reduction illustrates). This is astounding actually, when you consider the near tyrannical policies Oracle enforces in its annual maintenance processing, making it all but impossible for clients to reduce their payment obligations, short of outright cancellation of all maintenance on all products that share an order (or have been bound together). If that trend continued for four quarters, Oracle would lose nearly $2 billion, half of its existing book of maintenance business.
The other very significant concern for Oracle is that maintenance revenue disproportionately counts towards profitability. Measured as a business unit, Oracle reports maintenance profit margins in the 96% range. Of additional concern is that Oracle maintenance was down across the board, and in both hardware and software.
As we have been working with clients in 2011, we have seen very significant scrutiny on annual maintenance costs, mostly as our clients continue to focus on ways to reduce costs, while concurrently evaluating newer technology choices like SaaS and Cloud Computing, displacing aging legacy applications that are Oracle centric. Another factor that needs to be considered is the continual pressure from firms like Rimini Street and others who offer third party support services at advertised rates of 50% off the cost of Oracle.
With threats from SaaS providers like Workday, taking share from the old legacy PeopleSoft base, and Salesforce.com, taking share from the old legacy Siebel base, it’s not entirely surprising to see Oracle maintenance stream diminish as Clients modernize their approach to leverage SaaS and Cloud Computing. In 2012, we will be watching this trend closely, and monitoring the already draconian Oracle licensing rules and company policies regarding the (in)ability for Clients to dial their maintenance costs to meet the value they are receiving. The forecast is grim. NET(net) expects more tyrannical policies to emerge as Oracle tries desperately to hold on to its extremely profitable maintenance revenue – and disruptive suppliers concurrently try to chip away at this behemoth funding engine.
Hi Steve,
We had the same issue when we consider dropping maintenance on a single product from an multi product order.
They also increase the cost of maintenance every year at renewal. This continues even if the cost exceeds the then current list cost.
Kirk,
Thanks for the feedback. Unfortunately, it's an all too common story.
On a fairly regular basis, Oracle leverages a little known provision in its agreements called a re-pricing provision.
This provision grants Oracle the rights to re-price maintenance on the remaining licenses of any Oracle order if the maintenance on any of the other licenses that were part of that order is cancelled. This is referred to as cancellation of a partial license set, and it’s a no-no in Oracle’s mystical world of supplier policies.
The thought being, Oracle would look to protect its pricing integrity so that customers couldn't buy huge quantities of products to get high discounts, and then cancel maintenance on all but a few of them, effectively getting disproportionately low maintenance on the much lower number of licenses due to the higher discounts at the time of purchase. This argument doesn’t really hold water if you consider that clients would need to capitalize the purchase of all these excess licenses with the sole intent to just cancel the maintenance on them so they could get a better per unit deal on maintenance on the remaining assets. Strange.
Think of it like this. If you buy two new mobile phones for $500 ($1000 total), and you pay $100 a month for service on each ($200/month total), and then you cancel one of the phone contracts and throw that phone in the trash, your mobile provider will start charging you $220/month on the one remaining phone (not the $100/month you were paying), right? No? Oh, wait a minute... it doesn't work like that even with the biggest monopolies in the world, hmmm, so why does it work like that with Oracle?
Having the ability to use dials in your agreement to govern the value of your investments without punitive and collateral damages is a good ambition. When it comes to dealing with Oracle there is definitely a right way and a wrong way to do this, and there's not much information available out there in the market on what is the right way, but there certainly are a number of clients who will attest that they did it the wrong way, just like you attest, so you are not alone.
If you would like to speak with us about how we have helped clients do it the right way, we're happy to help.
Cheers!
We tried to cancel maintenance on some of our Oracle products and they came back and raised the maintenance prices on the licenses we didn't cancel which ended up costing us more than we saved. How can they charge us more to support less? Makes no sense.
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