ERP Support Drama: How Far Will Oracle Go to Protect Its Golden Egg?
Oracle has been litigating against third-party support providers, including Rimini Street and TomorrowNow/SAP, for years. But today, one of its own partners continues to sell maintenance and support services. Customers are asking: Will Oracle try to litigate away all lower-cost support options, or just some?
Wed, February 24, 2010
CIO — What does Oracle (ORCL) think about those companies that offer third-party maintenance and support services for Oracle's software—for up to half off Oracle's price? Look no further than the names of these two lawsuits:
Oracle v. TomorrowNow and Oracle v. Rimini Street.
TomorrowNow (a now defunct third-party support player that SAP owned for a while) and Rimini Street have been the high-profile faces of third-party maintenance offerings for years, and their pitch is simple: ERP support for half off Oracle's prices on its PeopleSoft, JD Edwards and Siebel software. Customers pay software vendors annual maintenance and support fees on their software—which is calculated as a percentage of software licenses, in Oracle's case 22 percent. The fees cover technical support, major application releases, bug fixes and patches, and product update rights such as critical regulatory, legal and tax updates.
Judging by the ferocity of legal battles to date, Larry Ellison & Co. don't take too kindly to those who invade their hallowed maintenance turf. The crux of the lawsuits against TomorrowNow (formally against SAP) and now Rimini Street, which Oracle filed in January 2010, is this allegation: Massive theft and misuse of Oracle intellectual property, software and related support materials by said defendants through an illegal business model.
The cases have been contentious, intriguing and expensive. They also demonstrate the lengths to which Oracle will expend its vast resources to protect its intellectual property (IP) and multibillion-dollar maintenance and support revenue streams.
But what if one of Oracle's valuable partners—say, a reseller or system integrator or consultant—were to offer support services similar to those provided by Rimini Street? In fact, court documents show that Oracle has confirmed that there are such third-party support providers in its partner ecosystem. (Oracle's lawyers have made it clear that Oracle does not sanction this type of business activity.)
Therefore, the question is this: Should Oracle have a legal beef with those partners as well, since they offer a service based upon a business model that Oracle considers illegal?
And, just as important, is this question: If Oracle keeps pursuing litigation in the third-party support arena, might that discourage other potential service providers from jumping in and creating more competition, which also means less choice for its customers and more reasons to stick with Oracle?
"This is a gray area," says Ray Wang, partner for enterprise strategy at Altimeter Group. On one hand, Oracle has every right to protect its IP. Though, he points out, if Oracle and other vendors were serious about this area, they would work with third-party maintenance providers "to establish clear guidelines as to what would be the right way to deliver third-party maintenance in a way that would not infringe on [the software vendors'] IP."
But if Oracle's overarching intent is simply to protect is maintenance fees by intimidating the current and potential competition, then the result will be devastating for customers, Wang contends, because "this hinders users from a potential cost savings opportunity."
Maintenance and Support: Who Cares? You Should
Third-party support for enterprise software is entirely legal. It is, for the most part, very similar to buying a new BMW from an authorized BMW dealership, but taking it to an independent auto repair shop for servicing. Oracle, however, has an obvious problem with the way in which TomorrowNow and Rimini Street have gone about offering their services and their individual "business models."
While the legal wrangling can be intriguing, the world of maintenance and support is unglamorous as it gets inside today's businesses. Which is not to say it's trivial.
Rather, those fees, typically spread out among enterprises' financial ledgers and departments amid a sprawl of myriad vendor contracts, can go unnoticed unless examined and calculated in their entirety. On several occasions, that salient fact was pointed out to me by Vinnie Mirchandani, a former Gartner analyst and founder of vendor consultancy Deal Architect, which helps companies negotiate software engagements.
For the software vendors, however, the fees are a lucrative cash cow that keep on giving all year long. In Oracle's most recent quarter, for instance, Oracle enjoyed 92 percent software maintenance margins that delivered $3 billion in profits to its bottom line. That $3 billion offset a $800 million quarterly loss in the rest of Oracle's operations.