Oracle on the Bubble

Author: Eric Guyer

Oracle’s recent third quarter earnings miss was a not-so-subtle reminder of its software  maintenance based  profit model and tyrannical leadership style.  We should not be surprised that software support continues to grow.  Customers are effectively forced to renew while Oracle cranks the dial by 4% each year.  As for leadership, Safra, Mark and Larry seem to believe that their better-than-ever products would sell themselves if sales would just bother to walk past the fax machine for purchase orders.  In both cases, there are real issues to consider, especially when HP and Dell are proving that IT bellwethers can falter.

First, Oracle’s high-profit software support business is comparable to the sub-prime securities that drove 2008’s financial crisis.  It’s a bubble that is artificially propped up by byzantine policies rather than value.  Specifically, Oracle’s technical support policies of re-pricing, matching support levels, and license sets (along with sky-high list pricing) handcuff customers to perpetual maintenance fees.  This—more than any technical innovation from within Oracle in the past 20 years—is how Oracle remains dominant.  Whether you view this as brilliant or evil depends on whether you’ve ever sought to reduce operational expenses on Oracle software.

To reinforce the point, consider that support was 43%, 42% and 49% of total revenues in fiscal 2012, 2011 and 2010, respectively, at an average of 87% profit margin within the support organization.  Overall, software support was 72% of profit margin in fiscal year 2012.  This golden goose continues to lay eggs, but for just how long is in question.  The balancing act between reaping support and adjusting to the marketplace will grow more difficult for Oracle over time.

While this is interesting at the macro level—especially if you own ORCL—how to pop the Oracle bubble within your IT organization is vital to understand.  Unraveling yearly fees to Oracle is difficult, in part because Oracle punishes field sales reps caught helping a customer reduce annual support.  Said differently, Oracle executives will walk from a dollar of license revenue to protect a dime of software support, and sacrifice enumerable sales reps along the way.  The art and science of engaging Oracle to optimize Oracle’s perpetual support fees is NET(net)’s specialty.

Second, what shall we make of Oracle’s entrance into the hardware market?  In short, it’s a disaster; but you would only know that based on, well, actual systems sales.  While UNIX sales have been declining across all suppliers for years, Oracle’s nosedive is at the steepest pitch.  The executive team at Oracle argues that this is by design to eliminate unprofitable product lines.  The grave Oracle promises to resurrect from is especially deep, however.  Sun was 10% of server market share when acquired by Oracle.  It is roughly half that now, continuing to bleed and be dwarfed by IBM.  According to Safra, that is all about to change when the market place wakes up to Oracle’s brilliant strategy.

And that brings us back to how important software support is to Oracle.  Ironically, advancements made in M and T-series machines serve to erode existing install-base quantities of database.  It is simple math: faster machines require less software.  The historical antidote to this has been Oracle’s brilliant marketing of active-active clustering (aka RAC) on commodity hardware for the past ten years.  This type of deployment requires twice the software at three times the software cost.  Consolidation and virtualization to single-node deployments via Solaris Containers is a sprint in the opposite direction, towards highly utilized systems that offer up to a 10 to 1 reduction in total cores.

Most remarkable is Oracle’s fever pitch against IBM’s Power Systems.  If successful in taking a bite out of IBM, Oracle will have traded perpetual software support that lives on in perpetuity for lower margin hardware that has to be resold every three to five years.  As a side note, it makes far more sense for Oracle to give away x86 gear and discount the technology software less, much like wireless carriers subsidize the price of mobile devices to secure multi-year contracts.  In short, not only is Oracle’s hardware business tanking, but to pull it from the ditch is also a mistake over the long-term.

If we accept that Oracle is in the hardware market to stay, then the damning conclusion about its newest gear is that a Dell/VMware solution offers 30% more throughput at half the server cost.  The new T5-8 machine achieved a peak SPECint rate of 29.3 per core across 128 total cores according to Oracle’s benchmark page.  According to SPEC.org, Dell’s PowerEdge M820 (available last August) achieved 38.4 per core among 32 cores.  A simple configuration of both machines via each supplier’s online store totals the T5-8 at $250k while four Dell M820s total $140k.  Larry joked during the T5 announcement that you can have the faster machine but you have to be willing to pay less for it.  A more accurate statement would be that you can have Larry’s slower machine but you have to be willing to beg Oracle for more discount on the software to make up for the added cost.  Again, that is the opposite direction that Oracle should be headed.

Besides having its head buried in the sand (or worse), Oracle is counting on existing customers that remain committed to SPARC Solaris to buy the new line of servers.  Plenty of those IT shops exist, but not enough to sustain a profitable hardware business, and certainly not as profitably as software.  That leaves you a data center full of aging servers and infrastructure choices for the future of your business applications.  Unfortunately for Oracle, many (if not most) IT decision makers are leery of subjecting an even greater percentage of IT spend to Oracle’s sharp-teethed technical support policies.  And they should be.  You should be.  Even the greatest products can usher resentment when policies, not value, dictate the future.  To that end, the team at NET(net) can help you get the best of both worlds: technology that serves the business at a cost and contractual flexibility that keeps you, not the supplier, in control.

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2 Comments

  1. Excellent blog Eric. Thanks for sharing these insights. It’s interesting that you characterize Oracle’s profit margin for its maintenance business at 87% as Safra Catz is well known for famously saying on an analyst call that Oracle’s maintenance is 100% profit as their entire R&D budget is planned for, allocated and consumed in license sales.

    • Eric Guyer says:

      Thanks for the comment! The numbers are pulled from Oracle’s Form 10-K, which is an interesting read because what Oracle says is different from what is written down in a report to the SEC.

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