There have been recent rumblings in the IT blogosphere of a new Oracle licensing paradigm under which Oracle will offer unlimited use of its core database and technology products for a fixed annual fee in perpetuity. As your trusted advisors in the realm of IT technologies and services, we would be remiss if we did not share with our faithful readers a view of what we know today and our perspective.
There are scant details available about Oracle’s new Perpetual User License Agreement (“PULA”) and it is unclear how many of these agreements have actually been executed. One Oracle insider that we spoke with stated that only a handful of these deals exist and the PULA is only being offered to very large and/or strategically significant customers. Perhaps Oracle will begin offering this option to a broader client base in the near future.
Oracle has several licensing structures aside from its traditional component-based model, and the concept of an unlimited license is not entirely new. For some time, Oracle customers have had the option to execute an Unlimited License Agreement (“ULA”), which typically provides 3-5 years of unlimited use of an identified set of products. Once the ULA term expires, the customer certifies their level of deployment, which becomes their license entitlement going forward.
The PULA is supposedly a bit different from its ULA cousin though, as the PULA has no set end date. The fixed annual fee is determined upfront based on estimates of the client’s Oracle estate and anticipated use, and it will be offered at that price in perpetuity (presumably with adjustments for inflation). Consideration of this model should be done carefully, and we will identify some potential issues, but first we will discuss what Oracle’s motivations might be for offering this licensing option.
Why Would Oracle Offer Unlimited Use In Perpetuity?
The answer, as always, is money. Oracle missed the mark in Q4 with revenue decreasing 5% and the company is seeing significant challenges to its core database product, especially from open source database companies. It is clear Oracle needs to be proactive in motivating customers to commit to using their database moving forward in order to retain its current base and to stimulate growth.
By offering a PULA as a solution for a company’s entire database needs, Oracle can box out the competition and prevent them from taking bites out of the whole. Aside from the PULA database component, there are also rumors that Oracle will require PULA customers to commit to use Oracle’s products over competitors’. Additionally, this licensing model is aimed at boosting sales by allowing the PULA to be pitched to a company’s C-Suite as an ideal option for rip and replace scenarios.
It is purported that once Oracle is able to entrench itself in a company through a PULA, the recurring annual fee will resemble the pricing structure of Software-as-a-service (SaaS) and Platform-as-a-Service (PaaS). This is excellent news for Oracle. Larry Ellison has publicly stated that SaaS and PaaS are “stunningly profitable” for Oracle – they will produce three times the revenue of a typical on-premise software license deal. This level of profitability perfectly explains why Oracle is willing to offer PULA to its customers in perpetuity.
What Are The Potential Benefits?
Though we have our reservations about PULA, customers may realize some benefits. For anyone who has been through a painful Oracle audit process the thought of unlimited use may be appealing as it would alleviate all future audit fears. The unlimited and perpetual nature of the PULA provides a level of predictability, which is clearly desirable.
Additionally, the cost structure has potentially meaningful financial benefits. First off, it allows the client to avoid the significant upfront capital expenses associated with a traditional licensing model. Secondly, the annual fee can likely be chalked up as an operational expense rather than a capital expense, which has proven to be a successful selling point for SaaS and PaaS. By presenting the PULA as an annual fee, Oracle can avoid the typical sticker shock associated with a purchase of this magnitude—though we do not yet have details on just how expensive this may be.
What Are The Potential Issues Or Drawbacks?
I hate to sound like a cynic, though any advisor becomes skeptical after years of negotiating with vendors, but I do see several issues with this new license offering. After all, Oracle’s contracts have not historically been overly favorable to customers. Some of the issues that will need to be explored include the following:
- Price: It is probably safe to presume the PULA model is going to be a very expensive option. We are yet to see any actual pricing, but this is likely not going to be the least expensive option for customers.
- Growth, Acquisition, & Reorganization: How the PULA deals with acquisitions, divestitures, reorganization, and organic growth has the potential to be the most important issue associated with this new licensing model. There are a multitude of questions that will need to be answered: Will there be true-up charges associated with certain thresholds of acquisition or growth? Can the customer exclude entities that are acquired but which do not intend to use Oracle? How will an acquired entity’s existing Oracle licenses be accommodated?
- Exclusivity: As mentioned above, some sources have suggested a PULA excludes customers from using Oracle competitor’s products. It is debatable whether such a contract would even be enforceable, but this concept of Oracle exclusivity is concerning.
- Estimations & Under Utilization: Measuring the size of a customer’s Oracle estate and predicting future growth can be challenging. As with a ULA, under a PULA model the customer bears the risks associated with under deployment. If the customer does not deploy as estimated, then they will not realize the full value of the PULA and will be overpaying for the licenses.
- Conversion of Existing Licenses: I am curious to see how Oracle goes about converting existing licenses, and how it prices the existing Oracle estate owned by the customer into its PULA price.
As more details become available we will keep our readers updated. Clearly it will be important to see what is contained in the fine print in order to avoid any contract landmines.
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