Though you often hear about how customers benefit from switching to Cloud services, the incentives that drive companies like Oracle into becoming a Cloud service provider (CSP) aren’t as well known. So, why has the Cloud become a priority for Oracle? What’s in it for them? What are the implications for customers?
Maintenance and Support Fees
Oracle customers are likely familiar with the concern surrounding the value and cost of Oracle’s maintenance and support services. This concern is the reason some companies that purchase Oracle’s on-premise licenses consider third-party support at a lower cost. With the option to purchase support elsewhere, Oracle is challenged with maintaining their support fee stream that is the lifeblood of their business.
In the past, Oracle combatted their customers’ ability to terminate on-premise license support with their “total support stream” fee, a contractual clause that binds all past, present, and future support streams together so customers cannot terminate support on any of the individual support streams without terminating the entire support stream.
Under a Cloud model, however, Oracle is no longer forced to validate the value of its maintenance and support services since they are bundled into one overall Cloud subscription. The Cloud eliminates the threat of third-party support services that were cutting into Oracle’s support revenue and inspiring contractual clauses like the “total support stream”.
Cloud customers don’t own their licenses in perpetuity, so they are essentially losing control over the applications and infrastructure that powers their business. Not only are Cloud customers far more dependent on their provider, but they also know that it can be extremely time-consuming, difficult, and expensive to switch CSPs. Oracle and other Cloud providers have increased leverage and have greater ability to lock-in their clients, making it easier to increase fees at renewal and grow their Cloud footprint.
Greater Margins and Revenue Opportunities
Oracle’s transition to the Cloud is a tradeoff between large net license fees with a small support revenue stream and a steady stream of medium-sized annual Cloud fees. A Cloud revenue model offers more consistent and predictable revenue than a traditional license-based model that typically has large revenue spikes due to on-premise net license fees. Overall, there is greater customer lifetime value under the Cloud model especially considering vendor lock-in and Oracle’s enhanced ability to increase fees at renewal.
Built-in Version Adoption
Upselling new products with additional capabilities to a customer base that is on various versions of on-premise software is a slow and challenging endeavor. Not only does the Oracle sales team need to upsell the new product capabilities and business value, but they may also have to convince customers to upgrade hardware or software to be compatible with the new product and realize the benefits of the additional capabilities. The upsell is blocked by the costs and obstacles of adopting the newer version.
When it comes to Cloud services, this sales barrier is eliminated. With everyone on the same software version and infrastructure provided by the CSP, there is no need for customers to upgrade their entire system to benefit from new products. This makes it significantly faster and easier to sell new products and expand a customer’s Cloud footprint.
Self-help Remedy for Compliance or Price Increase Disputes
As mentioned before, Cloud customers sacrifice leverage and are far more dependent on their provider. This increased dependence provides Oracle the ability to shut off service and cripple their customer in the case of a dispute.
This power drives and influences the behavior of both Oracle and their customers. Since customers lack a viable alternative, they are more likely to settle compliance disputes than fight, since it is in their best interest to do so. This same logic applies when a customer is faced with significant price increases at the time of contract renewal.
Switching CSPs in a short time frame is simply not a viable option. With on-premise perpetual licenses, customers always had the option of terminating support and exploring alternatives like third-party support, self-support, or a replacement software package, while still being able to operate their business. In the Cloud, those options are gone.
The benefits of migrating to the Cloud do not only benefit customers. In Oracle’s case, there are several incentives driving their transition to a CSP. Whether you have already switched over to Cloud services or not, time is running out to prepare for Oracle’s May 31st year-end close.
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