Oracle – Protecting the Support Revenue Stream


Oracle’s support fees represent the Golden Goose that must be protected at all costs. We know, big surprise, right? But just exactly how does Oracle go about ensuring that its support fee revenue stream will continually increase and subsequently feed the Oracle M&A machine?

Here are some (but not all) of the policies and practices Oracle has adopted over the years to protect and increase support fee revenues.

1.  Prohibit cancellation of support on a line item basis – Oracle requires that support fees must be paid for all products contained in an Ordering Document and for the entire quantities licensed of a particular product. This would also include paying support fees on other Ordering Documents if product quantities are licensed under numerous Ordering Documents. So if after 5 years you wish to stop paying support for products or quantities that were never deployed, you are out of luck. Unless you are also willing to forego support on ALL the products licensed under the applicable Ordering Documents.

2.  Prohibit termination of a subset of licenses – Similar to the above scenario, you may be willing to terminate licenses you have paid for but were never deployed or are no longer in use as a means to reduce support costs. Now this prohibition is not entirely true, as you may request to terminate licenses on a subset of products contained in an Ordering Document. However, Oracle’s policy is that any line item termination will result in a re-pricing of the support fees for the remaining products in the Ordering Document at the then-current list prices and standard discounting levels. Oracle’s rationale is that discounting is provided on a custom bundle basis, and that by terminating products and quantities that formed the basis for the original discounting no longer qualifies the remaining licenses for those negotiated discount levels. In our experience, such re-pricing of support fees typically results in only slightly reduced support fees, if any reduction at all, compared to the previous support fee total for the Ordering Document prior to partial license termination. So while the termination option is available, it is typically not financially viable or comparable in terms of savings.

3.  Prohibit suspension of licenses and associated support fees – Oracle has provided this right in the past but with the caveat that reinstating such suspended licenses requires payment of all accrued support fees from the suspension date through the reinstatement date times 150%. The additional 50% is a penalty or administration fee.

4.  Prohibit cancellation of prior licenses when licensing additional quantities – This is somewhat of a new practice with Oracle. The situation arises when you acquire licenses over time at relatively uncompetitive discounts and/or have been subject to years of annual support fee increases, and then pool together requirements for a large purchase that will garner much more competitive discounting. Oracle is concerned that you will purchase all your license quantities under the new, more competitive deal and then subsequently terminate the prior Ordering Documents. If Oracle senses such a situation is likely, they will add language in the new Ordering Document expressly prohibiting cancellation of prior Ordering Documents that have the same products as those in the new Ordering Document.

5.  Merge support streams under an Unlimited License Agreement (ULA) – If you decide to enter into a ULA for a period of time due to forecasted demand, and the products under the ULA include products that you have previously licensed under prior Ordering Documents, Oracle will merge the support streams together of all applicable Ordering Documents. There can be benefits to this as Oracle will typically provide some level of protections against annual support fee increases which will apply to the newly merged total support stream. But the drawback is you can no longer terminate support on the prior Ordering Documents.

6.  Limit divestiture assignment rights – There are a number of complexities when it comes to assignment, divestiture, and acquisition rights. We will focus only on one aspect. Oracle will limit your right to assign license as part of a divestiture to include a certain percentage threshold of your business (i.e. greater than 25%). Oracle’s concern is that you may decide to create a subsidiary, divest that entity, assign a subset of licenses to the divested entity (licenses you no longer use and wish to terminate support), and then the divested entity terminates support on the assigned licenses. This is a little trick sometimes used to separate out the licenses you want from those that you no longer wish to keep across your entire Oracle portfolio to circumvent Oracle’s support termination rules. So Oracle defines some meaningful percentage of your business as a threshold for allowing an assignment/divestiture to ensure the assignment/divestiture is being made for real business reasons and not just to terminate support fees.

7.  Aggressively prevent competition – Oracle has been very aggressive in suing TomorrowNow (which SAP acquired many years ago) and is currently suing Rimini Street claiming they have an illegal business model. Not coincidentally, Seth Ravin started and sold TomorrowNow to SAP and is now the founder and CEO of Rimini Street. Ravin is also a former PeopleSoft employee (acquired by Oracle). Oracle’s claim in both lawsuits is that the third party must utilize Oracle proprietary information – to which they do not have a license or otherwise lawful permission to use – in order to provide support services to customers. The long-term effects of the Oracle v. Rimini Street lawsuit (and countersuit) have the potential to alter the third party maintenance provider business model altogether. If Oracle can prevent third parties from being able to support Oracle products then Oracle will have created a monopoly for which it can continue to increase support fees even more aggressively.

From a big picture perspective, the more Oracle can grow and protect its support revenue stream, the more money it has for acquisitions. The more acquisitions Oracle makes, the more revenue streams it acquires. This in turn reduces competition and allows Oracle to become even bolder in its support fee increases and rules. It is a well orchestrated strategy designed to entrench Oracle’s revenue streams and enrich its shareholders for decades.

Make sure you find ways to mitigate the downstream impact of Oracle’s Golden Goose business practices while you are negotiating a deal and have high leverage. Especially in the long-term, you simply cannot afford to let Oracle get away with the above listed methods for increasing its support fee revenues.

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  1. Sebastian Grady

    April 20, 2012

    Dave,

    I am the President of Rimini Street and just wanted to mention that your blog is one of the most insightful pieces of information I have ever seen posted on this subject.

    At the end of the day, customers want choice and in this economy if their vendors are continuously increasing prices and decreasing support and new features at the same time, the model begins to break.

    We built Rimini Street to offer that choice and to offer it at 50% of the current cost. Knock on wood, we have seen a more than 100% increase in quarterly sales bookings in our most recent quarter despite the Oracle litigation efforts so most customers can see through this and are voting for choice.

    Thank you for you effort to shed light on some of these practices that are certainly not widely known in the market.

    Sebastian
    sgrady@riministreet.com
    http://www.riministreet.com/

    Reply
  2. J.S. Bickley

    April 18, 2012

    Oracle also includes language that forces the organization to terminate its license rights to products that have support dropped. Have you seen any methods for working around this “perpetual license termination” clause?

    Reply
    1. UpperEdge

      April 20, 2012

      Oracle has a well thought out strategy and very tight agreement language designed to maintain its leverage on keeping and increasing its downstream support revenue. The agreement language you are referring to provides that if a customer wishes to de-support a subset of licenses, then they must also terminate those licenses to achieve the reduction in support fees. It further states that the support fees on the remaining licenses will be subject to re-pricing in accordance with Oracle’s then current support policies, pricing, and standard discounting.

      To answer your question, we have seen some customers be able to negotiate park and suspension rights which allows them to park a subset of licenses and suspend the associated support fees without terminating the licenses or subjecting the remaining licenses to re-pricing of support fees.

      Reply