News Analysis: Oracle Waives Fees On Extended Support Offerings

Published on May 4, 2009 by R "Ray" Wang

Oracle President Charles Phillips pleasantly surprised Oracle Applications User Group (OAUG) Collaborate 09 attendees this morning during his keynote with the decision to waive Extended Support fees for a number of product lines through 2010 and 2011. As customers and prospects face one of the worst global economic crises, proactive relief on support and maintenance fees could not come at a better time.  Summary details of the program can be found in Figure 1.

Figure 1. Oracle’s Revised Support Policies

Oracle's New Support Offerings

(Source: Oracle Corporation)

Proactive change in support offering creates a win-win

Oracle’s move to address the support issue may stem from a variety of reasons but the main focus centers around improving the vendor-client relationship for a few reasons:

  • Responding to the global economic crisis.  Oracle has taken the initiative in listening to customers, partners, and industry watchers about customer reactions to the escalating costs of software maintenance.  Oracle’s Applications Unlimited and Lifetime Support Programs have been successful in retaining acquired customers and have shown customers that acquisitions need not be slash and burn with minimal reinvestment.
  • Providing more time for customers to adopt Fusion Apps. With the slow down, Oracle may be anticipating slower upgrade rates.  While no clear date and product road map has been communicated to customers, removing the price pressure on extended support fees provides customers with some breathing room on upgrade timing.
  • Mitigating attention on high profit margins and its M&A strategy. After touting record profit margins near 50% and continuing its M&A strategy with the announcement to acquire Sun, customers have become concerned about the impact of less choice in the market.   This move may appease regulators and industry watchers and show that Oracle has some self regulating policies.

The bottom line – user groups should now determine the minimum R&D percentage of investment from revenues

Oracle continues to gain economies of scale with each acquisition.  The good news – Oracle has the capacity to reinvest $2.6B per year into R&D and the real dollar amount has increased from 1.9B in 2006.  While this is a large figure, the bigger and more important issue – what percentage of the maintenance revenues have been reinvested?  Here’s where we find a slight drop from 12.6% to about 11.6% in 2008.  Consequently, like SAP’s users and user groups, OAUG and the other Oracle users and user groups should begin to track the ratio of R&D dollars that tie back to the amount of maintenance revenue.   In fact, they may want to take a look at the SUGEN KPI’s and see if they are applicable to Oracle’s environment.  R&D spend from maintenance and the need for Third Party Support options will be the key ownership issues for the next 5 to 10 years.  In any case, the need for preserving and strengthening independent user groups will be one effective check and balance in the consolidating world of enterprise software.

Your POV

Do you feel Oracle made the right move?  What have your experiences been like with Applications Unlimited and Lifetime Support?  Send me a private email to rwang0 at gmail dot com.  Posts are preferred!   Thanks and looking forward to your POV!

Copyright © 2009 R Wang. All rights reserved.

  • The announcement sounds as if you’ll be saving hundreds of thousands, and you very well may be saving big bucks if you’re a global Oracle enterprise with a well thought out global contract and a proper IT procurement office handling all transactions with software vendors. But the reality is that you’re likely only saving about 2%.

    Obviously, any financial relief for companies from any software vendor should be looked upon favorable.

  • Hi Ray,

    I just checked SAP’s website http://www12.sap.com/germany/about/investor/reports/gb2008/en/our-results/research-and-development.html. In 2008 they invested 1.6B Euro (2.12B USD) in R&D for business software solutions which is about 18% of revenue (non GAAP). This seems pretty significant.

    In a google search I find that Oracle has committed to spend $3bn USD (2.25B Euro) in 2009 – roughly 13% of revenue. This is against $23B in revenue and 37% operating margin as currently reflected in company stats on yahoo finance. I am not sure if this revenue number factors in BEA. Of course there is also the Sun revenue/maintenance stream to come and how that will factor into R&D investment.

    For the sake of discussion (given your previous points) it seems that pound-for-pound SAP is investing more into R&D (percentage) where as Oracle seems to be investing much more of its margin to scale through acquiring other companies.

    It seems that the core of Oracle’s strategy is clearly more focused on acquisition than development. This has shown good return for shareholders (myself being a small shareholder) but I have not come across many happy Oracle customers when asked about the return on value that Oracle’s acquisition spree has brought to them. Especially those customers whose products have been discontinued or phased out as a result of consolidation. You should talk to the CIO at Forrester and get his opinion :)

    I am not convinced that Oracle can actually piece their acquired products together to deliver on the ‘Fusion’ vision which was promoted to be 50% complete about three years ago (one year after acquiring PeopleSoft). What is truth and what is fiction? You have called vendors out on this appropriatly in the past! What impact will this have on stalling customers ability to innovate where IT is and must be a strategic asset for them?

    Now, I can’t speak to the merits of what SAP has brought to market as of late offerings (business suite 7 and business objects) – but to your point on ByDesign this is clearly a product that needs to be watched carefully and understood how the innovations in it will benefit the core customer base that funded its development through maintenance. Perhaps this is where John Wookey comes into play??? who knows.

    But I digress…

    In the end, the real question is where and how to place value on maintenance as it relates to the quality of support AND how ISVs reinvestment in solutions (R&D) that deliver TIMELY VALUE to customers ability to grow their business at a manageable cost. I think that we have to look at cost AND value which is so tough to do – as every company looks at value differently from a business and IT perspective (in terms of top line and bottom line scenarios).

    My point with SAP in the original response is that they are working hard to do this (from an IT perspective) which is admirable regardless of how they got to the point based on the pummeling they took from customers. SAP still has much to prove with the KPIs and I hope they learn from this and use the experience with customers to advance collaboration more deeply – to regain credibility as a customer focused company (which was tarnished last year).

    Oracle on the other hand is infamously NOT customer centric. They are wall street centric (which is not entirely bad). But again…are we advocating value to shareholder OR value to customer.

    Thanks for the thoughtful exchange!!!

  • Hi IT Vendor Watcher,

    You raise an interesting point. The bottom line for SAP is that they raised maintenance and have yet to prove value. They went out of their way to talk about how good their program was but did not leave a tiered choice. But the bottom line – over the past 10 years, you always got less of a discount with SAP than Oracle on license and paid 17% of the net price for maintenance. Over a 10 year period, the ownership cost was still higher than getting a huge discount on license with Oracle and paying 22% of the net price for maintenance. If you do the math, you’ll see that a comparison of license and maintenance costs for an apples to apples deal, Oracle customers got a better deal. Now that SAP has raised maintenance, we are seeing better deals on license. But if you were an original customer who got an okay deal on license and now got jacked up on maintenance, I think you’d be quite upset. SAP could have been more proactive in addressing this issue. Now you’ve paid more for license and maintenance, making your 10 year cost even higher than Oracle’s. Oracle’s announcement here is proactive not reactive to an outrage by SAP customers. It’s a small step but still a reduction and not coerced by angry customers. Making 50% profit margin is obscene in this market and that fact is not lost upon me.

    Now, another way to look at this is where did your SAP maintenance dollar go? Where did your Oracle maintenance dollar go? SAP’s spent billions of its maintenance revenue trying to make NetWeaver work and launch ByD at the same time. One could argue this has had limited success. Oracle’s put its acquisitions to use in generating more free cash flow via acquisitions and building economies of scale to deliver support and maintenance. The scale of Oracle’s approach will pan out as a win-win if the investment % in R&D stays constant. As you may note in the report, this is the more important factor I have tried to emphasize. If 10 companies in an industry each spent $3M a year on maintenance, after 5 years, that would be $150M committed to the product. Do you think Oracle or SAP puts $150M back into the product for an industry – NOT! In fact, they barely put 15% of the maintenance revenues back into the product 4 years after a product introduction. However, Oracle’s scale allows them to create more efficiencies with its common componentry in the long run and that will pay dividends in overall strategy. SAP is still trying to rationalize its suite of products into Business Suite 7 without the benefit of a huge external recurring maintenance revenue base that it can draw profits from.

    Here’s where I am encouraging Oracle users as well as all software users to really look at what is the right percentage that should go back to the product. Oracle clearly is spending more on R&D as a dollar figure than before. It’s percentage of R&D spend is still above 11%. They can keep doing this b/c of scale. However, should 50% of your maintenance dollar go back or should it be 15%? What’s a fair number. that is the next battle and I’m encouraging all user groups to ask this question!

    R

  • Hi Ray,
    I have enjoyed reading your blog for the past few months.

    I must admit that I am a bit surprised by your soft and kind stance toward Oracle, given the focus/energy that you have dedicated to pushing big IT vendors to demonstrate and stand-by the value of maintenance (not just price).

    As an example, SAP took a significant beating in the market over the past year by their customers (direct and through user groups) and by media/bloggers and analysts such as yourself – as they made a move to increase maintenance from 17% to 22% (over a five year period). Oracle has always been at 22% and they have been unscathed by criticism.

    I have also been a critical watcher of SAP but it seems to me that they have done the hard work over the past six months to negotiate real issues with customers to establish value for maintenance through their KPIs and benchmarking efforts (great collaboration). They have made a bold move to stand behind the value of their support. How does this move by Oracle compare – as they (oracle) profit significantly from acquired maintenance streams – as a holding company for solutions?

    I would have expected a stronger stance from you – to advocate as strong and passionately for Oracle users as you have done for SAP users and to empower them to demand more. The move by Charles Philips lacks serious substance and credibility. It does not benefit all customers and in no way does it show a commitment to value of customer investment.

    Oracle is extremely cash wealthy and Safra Catz has referred to maintenance as ‘free money’ on multiple occasions http://blogs.wsj.com/biztech/2008/09/25/oracle-customers-pay-us-for-stuff-wed-do-anyway/

    Even Alan Bowling from SAP User Group in UK sees this as a poor response by Oracle http://sapusers.wordpress.com/2009/05/04/oracle-responds-to-saps-change-on-maintenance-well-sort-of/

    Thomas Wailgum’s post on CIO.com yesterday also offers an interesting point of view http://advice.cio.com/thomas_wailgum/oracles_wed_better_do_something_moment

    It would be great to see deeper analysis by you on the maintenance comparisons that would serve not only as a call to action for Oracle (and their customers) but also for other ISVs to substantiate a strong commitment to value of maintenance. This is a critical issue for IT customers and to ISVs to maintain integrity of the software license business model.

    IT Vendor Watcher

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