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Global CIO: Oracle's Incredible Profit Machine: 22% Maintenance Fees

How important are your 22% annual fees to Oracle? It earned $3 billion on those fees last quarter while losing $800 million across the rest of the company.
"Regarding your maintenance question—software updates and support—obviously, that is really our subscribers—those are our users—they're paying both for support and the right to receive a new, without buying new licenses, our new products, and that's a number that's always going to go up because customers feel they're getting a fantastic value for it," Catz said. "But maintenance for us is really who our customers are and they're renewing at record rates because they're very satisfied with our products and we're advancing so quickly right now."

Other than Catz going a little Zen-y with the 'maintenance is who our customers are' riff, her answers were consistent with what she's said the past couple of quarters: that Oracle customers are renewing at record rates (would love to see Oracle's data on that) because satisfaction's high and Oracle is cranking out lots of new stuff that customers are eager to have.

Again, the numbers don't lie: even in a quarter when Oracle was able to stop the decline in new software licenses and in fact grew that number 2% from the year-earlier quarter, maintenance continued to claim an increasingly large slice of Oracle's overall revenue as it doubled the revenue of new licenses and more than tripled the revenue from services.

So it's unmistakably clear that Oracle has become increasingly dependent on maintenance fees for its financial health and its long-term survival. Even with the imminent acquisition of Sun and the expansion into new product lines that will immediately provide, it's essential to bear in mind that without its massive profits from your 22% maintenance fees, Oracle loses a ton of money. And it therefore needs to take its maintenance business incredibly seriously, which is a point i made three months ago in a column called Global CIO: Where Do Oracle's Profits Come From? after Oracle released its first-quarter numbers:

Catz didn't offer any detail on those renewal rates or satisfaction levels, but as I've said before, Oracle should charge what the market will bear—and if the market bears 22% and Oracle customers feel that's a fair price for the value Oracle is delivering, then bully for Oracle and for its customers. Most people are smart and will not put their money where it is not delivering a good return.

But—it is also possible that Oracle customers feel that at this time they don't have viable options to switch away from Oracle, and that while they are frustrated by the 22% fees and do not feel they're getting good value in return, the lack of options is forcing them to bide their time.

From many many conversations with CIOs, I believe this latter scenario is the real story. If that is indeed the case, then Oracle's playing a dangerous game of "Chicken," hoping that no viable alternatives emerge in the near term while dawdling its way along with its own leisurely cloud initiatives, which are most unlikely to provide the fantastic financial returns that the on-premise model currently does.

So kudos to Oracle but also a word of caution: any company that can build a business with a 92% publicly disclosed operating margin deserves a great deal of credit. And at the same time, any company with 92% operating margins will also draw a great deal of competition—so Oracle better not take that runaway customer satisfaction for granted.

RECOMMENDED READING

Global CIO: An Open Letter To Oracle CEO Larry Ellison

Global CIO: Where Do Oracle's Profits Come From?

Oracle Says Market's Improving But SAP's Unraveling

Global CIO: Oracle CEO Larry Ellison On The Future Of IT

Global CIO: Oracle-Sun A Bad Deal? Only A Fool Would Say That

Oracle Sees Unconditional EU Approval For Sun

Global CIO: Why Oracle's Larry Ellison Will Tell The EU To Pound Sand

IBM CEO Sam Palmisano Talks With Global CIO

Global CIO: Oracle Dumps HP After Co-Creating 'Most Successful Introduction Ever'

Global CIO: In Oracle Vs. SAP, IBM Could Tip Balance

Global CIO: Hewlett-Packard CEO Hurd's Strategy: The Infrastructure Company

GlobalCIO Bob Evans is senior VP and director of InformationWeek's Global CIO unit.

To find out more about Bob Evans, please visit his page.

For more Global CIO perspectives, check out Global CIO,
or write to Bob at [email protected].

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