Maintenance fee nerves jangling at Oracle?

Oracle bending to customer demand or playing a crafty hand?

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Chris Kanarakus reports that Oracle has waivered extended support fees. Given what we know about Oracle’s masterful account control in its customer base you might be forgiven for wondering why this is the case. Citing Forrester analyst Paul Hamerman, Kanaracus offers several possible explanations including:

Keep customers happy while not force marching to Fusion
Waiting for Fusion to reach feature/function parity with eBusiness Suite
Keep customers from straying into the arms of third party maintenance providers like Rimini Street

I sense the decision is much more pragmatic. As Kanaracus observes, maintenance fees are extraordinarily lucrative, generating gross margin north of 90%. Until recently, maintenance fees have been a small fraction of total IT spend. When weighed against for example the cost of upgrade, they often look like little more than a rounding error. So what has changed? I sense there are several factors in play:

Direct IT department spend has stagnated or is falling yet demands for IT to deliver value are rising.
Newer technologies and especially those that are sold on a consumption basis are coming in directly via line of business departments rather than IT.
While most commenters recognise that cloud based applications will remain a minor part of the overall landscape for the immediate future, the long term threat is real for incumbents like Oracle.
Oracle, like every other incumbent on-premise player is desperate to maintain margins while figuring out a way of getting on the cloud bus.

My guess is that Oracle is viewing this combination of factors as creating an environment where treading lightly keeps the cash register ticking over while giving the company breathing space. The question in my mind is just how long that breathing space will last.

In The New Technology Elite, Vinnie Mirchandani makes the bold statement:

For too long IT has been an expensive and low-payback back-office investment. Now technology in the companies’ products is allowing them to generate revenue and growth.

As I look back over time and think about the numerous ERP failures, the lack of genuine innovation, the stress that some companies have felt and yet balance that against the fat margins companies like Oracle, SAP, Infor, Microsoft and others make I wonder whether the maintenance chickens are finally coming home to roost.

In Oracle’s case, the problems are compounded by a less than stellar performance in its hardware story. As Larry Dignan observed:

The problem, however, is that Oracle saw new software license revenue gain only 2 percent in the second quarter from a year ago to $2 billion. Updates and support revenue was up 8 percent to $4 billion. Hardware systems revenue fell 14 percent from a year ago to $953 million in the second quarter. In addition, Oracle couldn’t blame currency fluctuations either—the growth rates in constant currencies mirrored the actual results.

As Oracle closes out its Q3, analysts will be watching all line items to better understand where the real weaknesses are in Oracle’s business model.