Implications of Oracle On-Premise License Migrations to the Cloud

During Oracle’s FY 2017 Q2 earnings call, Larry Ellison provided some clarity as clients migrate their on-premise licenses to the cloud with respect to application licensing and support fees, database licensing and support fees, and new cloud subscription fees.  We found it very enlightening and wanted to highlight what Mr. Ellison said for our clients and followers of our blog.

Mr. Ellison was responding to a question regarding database licensing growth but also went in a different direction to explain what will happen from a licensing and support perspective as customers migrate their on-premise solutions to Oracle’s cloud solutions.

From an application perspective, when customers migrate their business suite on-premise applications to Oracle’s cloud based Fusion ERP for example, customers cancel their on-premise application support fees and start paying monthly cloud subscription fees.  The up-front licensing fees and support fees for on-premise applications up to the time of migration are a sunk cost, but the support fees going forward are cancelled and replaced with the cloud subscription fees.  This seems straight forward and Mr. Ellison went on to say that Oracle wants customers to do this because Oracle will make more money this way.  Keep in mind that this was an earnings call with Wall Street bankers, so the answer was meant to explain how the shift to cloud will impact revenues and profitability long-term.

But database licensing is a different model.  A customer does not exchange a database license for infrastructure as a service (IaaS).  They must bring the database license with them and now instead of running the database on their own on-premise servers, the customer now runs it on Oracle’s IaaS, or Amazon’s IaaS, or Azure’s IaaS.  In other words, there is no cloud database license, IaaS only provides the infrastructure or hardware for running the database.  Therefore, when a customer migrates the running of their Oracle database license to Oracle’s or a third party’s IaaS, the customer must maintain the Oracle database license and continue paying support fees.  Additionally, if the customer’s database requirements grow or require updating depending on the hardware they are running their database on as part of IaaS, a customer must pay additional database license and support fees to account for this growth or change in requirements whether the database is running on-premise or under an IaaS agreement. These database licenses and support fees never go away and will continue to grow over time.

As there has been some confusion regarding which fees are cancelled, which fees remain, and which fees are new when migrating Oracle on-premise licenses to the cloud, we appreciate Mr. Ellison’s explanation. To summarize:

• On-premise application support fees get cancelled and replaced with new cloud fees going forward.
• On-premise database licenses and support fees are never cancelled when migrating to IaaS, but new IaaS fees are added going forward. These new IaaS fees should be somewhat offset by eliminating all the fees for purchasing and supporting the hardware related to running the database licenses on-premise.

We have a wealth of experience advising clients in negotiating with Oracle and would love to receive your feedback and thoughts.  Please do not hesitate to post a comment.  You may also contact me directly at jlazarto@upperedge.com if you would prefer a more discrete discussion regarding your specific circumstances.