Oracle fees for maintenance and support under fire
Oracle's lucrative maintenance and support revenue is under pressure as customers fight the 22% annual fee.
Oracle maintenance and support -- a highly lucrative business for the company -- is under pressure in this down economy as cash-strapped customers balk at the annual fees.
Customers and partners alike report that accounts are either contesting Oracle's 22% annual fees, trying to pay for only the features and functions they use or opting out entirely -- most definitely not good news for Oracle. CEO Larry Ellison has said these fees are the company's most profitable business, and Oracle president Safra Catz has repeatedly noted their importance, even telling analysts that customers have no choice but to pay them. The 22% is calculated onreg the negotiated price of the software licenses sold.
Many Oracle watchers saw the vendor's multibillion-dollar purchases of PeopleSoft, BEA Systems and dozens of smaller companies as ways for the company to build an even bigger support and maintenance revenue stream. For its most recent quarter, which ended Nov. 30, Oracle saw its support and maintenance revenue increase by 14%, to $2.9 billion.
Oracle support cash cow under fire
But the recession is taking its toll, and several Oracle partners and customers said resistance to these fees is growing. One Java-centric VAR, who spoke on the condition of anonymity, said some of his BEA WebLogic customers are moving to alternative application servers just to get away from Oracle.
"I have two BEA/Oracle customers right now that are committed to converting from WebLogic," he said.
Some customers are foregoing maintenance altogether -- a risky move, because that means they are not eligible for updates and patches. And others are playing hardball: They want to pay for only the coverage they need, rather than for blanket support. Many customers are offering their VARs or integrators -- even those who don't typically specialize in the niceties of licensing -- a cut of any savings they can negotiate on the customers' behalf.
"There's definitely been a significant spike in the percentage of clients pushing back on Oracle support rates or who have let support lapse," said Eliot Colon, president of Miro Consulting, a firm that specializes in license negotiations.
For many of these the issue is simple: They lack the funds to pay.
The WebLogic installed base is a particular hot spot in this battle. Before Oracle acquired BEA earlier this year, the company charged 18% to 20% for support and maintenance. Oracle increased those fees to meet its own structure and also raised list prices on most BEA products.
That didn't sit well.
"What company comes in this climate and not only jacks up prices but support prices as well?" asked one frustrated BEA customer, who spoke on the condition of anonymity.
Oracle declined comment because the company is in a quiet period before Wednesday's quarterly earnings call.
If Oracle were to cave on support -- especially following Ellison's and Catz's statements on its profitability -- the company would "be killed" on Wall Street, one partner said. And the fact is, it's a relatively small world of buyers. If Oracle made concessions to select customers, the word would get out fast and the financial repercussions would be severe.
Colon said customers are asking for, and in many cases getting, slightly better discounts up front. But more importantly, he said they're also getting better terms and conditions in regards to licensing. Some have secured looser license definitions in terms of CPU cores, while others have won worldwide rights instead of regional rights.
"A few extra points [of discount] gets you only so far in reducing your budget, while expanding your rights can save you a lot more," Colon said.
The fact that key Oracle verticals like financial services are under fire doesn't help, said another licensing consultant.
"A lot more customers are coming to have conversations about how they can cut these fees," he said.
Oracle customers pursue fee negotiations
Customers are also talking more about parsing out maintenance or trying to cut deals with Oracle, so they only have to pay for the modules and functions they need, said Ray Wang, vice president with Forrester Research Inc.
"There is continued resistance to the fees," he said. "Customers wonder what is included. Do they have to take maintenance? Can they pay for maintenance only on software deployed, and how much of that maintenance is going back into the product?"
Scott Jenkins, CEO of The EBS Group, a Lenexa, Kan.-based Oracle partner, said his company is involved in a half dozen license consultations -- some with "very big customers" that want to cut their support fees.
"Oracle won't abate," Jenkins said. "Customers' options are to not pay support this year and miss upgrades. [But] then they' d have to re-up or get current in support [to get upgrades.] Or after a certain number of years, they could buy new licenses for perhaps less money than paying support in the interim."
Customers weigh Oracle maintenance options
David Rowe, senior vice president of marketing for Rimini Street Inc., would add another, self-serving, option: third-party support. Rimini supports Oracle software for half of what Oracle charges, Rowe said.
"Take your existing bill for maintenance, cut it in half, and then cut it further, because we let you drop maintenance for modules you're not using, whereas vendors have some very tough policies on that," he said.
TomorrowNow, an SAP AG subsidiary, had a similar business model until legal action initiated by Oracle put it out of business.
Wang agreed that third-party support is an option, and not just for Oracle. SAP also angered customers last year when it raised fees to match Oracle's.
"Many SAP and Oracle customers intend to push back their maintenance fees," he said. "Customers seek an option to just pay for tax and compliance updates without paying for future innovation. They are willing to pay for future modules when that time comes. If they can't access such options, they would prefer third party options like Rimini Street for Oracle [E-Business Suite] and SAP's applications."
And Oracle's history of deep discounting on software license sales to win deals is coming back to bite the company in some cases.
"Many customers who got 30% to 35% discounts thought they did well but now are learning that the prevailing discount at the time of the deal was maybe 65% and are angry that their support fee is calculated on what they now see as too a high price," Jenkins said