Global CIO: Oracle's Dazzling Profit Machine Threatened By Rimini Suit - InformationWeek

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3/29/2010
06:48 PM
Bob Evans
Bob Evans
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Global CIO: Oracle's Dazzling Profit Machine Threatened By Rimini Suit

The two-way litigation's nominally about intellectual property but is really about Oracle's phenomenally profitable support revenue.

Oracle was countersued Monday by a company one-one-thousandth its size and if you're wondering why Oracle decided two months ago to crank up the litigation machine by suing third-party maintenance firm Rimini Street for "massive theft," it all comes down to money. Lots and lots of money.

So much money, in fact, that going by the figures in Oracle's quarterly consolidated statements of operations released last week, the pot of gold from which Rimini Street had begun to extract a couple of morsels of gold dust accounted for more than $3 billion in Oracle operating profit for the three months ended Feb. 28.

That pot of gold is called "Software license updates and product support"—also known as maintenance fees, annual support fees, or 22% annual maintenance fees. But Rimini was offering comparable services for 11%—a huge savings in these cost-conscious times.

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That $3 billion figure alone is an impressive figure, particularly during these times of a sluggish global economy. But that $3 billion operating profit becomes remarkably impressive—and the reasons behind Oracle's courtroom vigilance become perfectly clear—when we consider that Oracle earned that operating profit on just $3.3 billion in revenue.

Here are the exact numbers: for the three months ended Feb. 28, Oracle generated revenue of $3.297 billion in the category called "Software license updates and product support." During the same period, associated operating expenses for that revenue line totaled $281 million, leaving an operating profit for software license updates and product support of $3.016 billion, for a truly memorable operating margin of 91.5%.

(For extensive background on Oracle and SAP and 22% maintenance fees, please be sure to check out our "Recommended Reading" section at the end of this column.)

But we've still got a little higher to climb on the remarkability scale for that $3.016 billion number because for the quarter the entire Oracle Corporation reported a total operating profit of $1.843 billion—surely a nice performance but hardly in the same league with what the software-support business cranked out.

That's what Oracle's defending—and what it will defend at all costs.

That's why Oracle is going after Rimini.

And that's why Oracle and will use every legal means possible to pulverize this feisty company that's built quite a following among medium-sized and large corporations that believe the service and quality level delivered by Rimini for 11% of Oracle's annual license fee was a lot more appealing than the 22% charged by Oracle.

Oracle, of course, has every right to sue Rimini and to protect its intellectual property and to protect the $3.3 billion update-and-support revenue stream on which its operating margin is 91.5%. It would be crazy to do otherwise—and say what you will about Oracle, it is not crazy.

Enterprise software analyst Ray Wang offered this perspective on the countersuit filed yesterday by Rimini in response to the charges of "massive theft" filed by Oracle in late January:

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