Commentary
3/29/2010
06:48 PM
Bob Evans
Bob Evans
Commentary

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:

"Apparently, Rimini is looking for ground rules for how it can deliver third-party services to Oracle's customers while being respectful of Oracle's IP," Wang said.

"Clearly, Oracle feels it is not in its interests to have such ground rules."

Caught in the middle are Oracle customers who say that in return for the 22% fees for support and updates that Oracle is charging, the customers are not getting an equivalent value. Many have asked Oracle to offer tiered support pricing and to create a pricing structure that maps to the various needs of various Oracle customers.

And while Oracle, in reply, has probably not used the exact phrase "Pound sand," that's surely been the message. One size fits all and one price suits all.

It's a hairy issue because while Oracle, as noted above, has not only the right but also the fiduciary obligation to vigorously defend its IP, so too does Rimini Street have the right to offer a legal alternative. And when that alternative was being offered at a savings of 50% off Oracle's mandated rates, it's no wonder Rimini grew too big to be ignored. (Late last year, using some financial data the privately held company released, I extrapolated that Rimini was on an annual revenue run rate of $200 million by the end of last year.)

The key issue, of course, is whether the Rimini alternative is a legal alternative. Oracle, of course, says it's not—as my colleague Paul McDougall wrote in his exclusive news story two months back:

"Oracle said Rimini Street is using ill-gotten materials to provide such services. 'This case is about massive theft of Oracle's software and related support materials through an illegal business model,' Oracle said in court papers filed Monday in federal court in Nevada."

And Rimini just as vociferously swears it has done nothing wrong, that it is being wrongfully targeted and abused by Oracle, and that Oracle is engaging in unfair competition to stifle the incursions Rimini has made into its customer base:

"Rimini Street is Oracle’s fastest-growing and leading competitor for the annual support of Oracle’s Siebel, PeopleSoft, and JD Edwards software products," a Rimini press release says. "In 2009, Rimini Street saw growth of more than 270 percent in year-over-year revenue, doubled its global workforce to 160 professionals, and accumulated nearly $150 million in sales backlog serving hundreds of Global, Fortune 500, mid-market, and public sector organizations around the world."

"Overall, Oracle has done a very very good job for its shareholders," said analyst Wang of Altimeter Group, "but some customers have different perspectives. The older customers want the ability to tier the pricing so they only pay for what they're using, which is mainly regulatory and tax changes. The newer customers don't see the disparity yet and they still need heavy levels of support as they get up to speed."

Wang, whose Software Insider's Point Of View is a terrific resource for anyone involved with acquiring for and managing enterprise software, last month wrote a compelling blog post called Why Users Must Preserve Their Third-Party Maintenance Rights. And he touched on that theme as he reflected on the current sentiments among some Oracle customers:

"We're hearing a groundswell of communication from Oracle customers saying they're not happy with these annual fees from Oracle. It's not near the level that SAP customers were at two years ago when they rebelled, but it's definitely becoming louder."

Industries need feisty newcomers who come in with disruptive ideas, technologies, business models and approaches—but they've got to be legal and ethical. The courts will decide whether Rimini has met that standard, but until then customers are stuck in the middle.

Oracle knows that very well. Oracle also knows that current Oracle customers evaluating the Rimini alternative might reject it out of fear over what this lawsuit might mean. And with $3 billion in operating profits per quarter at stake, Oracle's legal team is going to make the company's sales team look like bashful sissies by comparison.

But Rimini founder and CEO Seth Ravin is undaunted:

"Rimini Street looks forward to positively resolving its disputes with Oracle, and we remain focused on continuing to deliver award-winning, ultra-responsive service as always to our fast-growing client base who seeks a better software support value," he said in a company statement announcing its countersuit against Oracle. "Rimini Street will also continue to aggressively innovate its service offering and expand its popular service to even more software product lines as we continue to execute against our business plan."

RECOMMENDED READING:

Global CIO: Have Oracle And SAP Hit Tipping Point With 22% Fees?

Global CIO: How 22% Annual Fees For You Equal 51% Margins For Oracle

Global CIO: Will Oracle Or SAP Blink First On 22% Maintenance Fees?

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

Global CIO: Why SAP Won't Match Oracle's 22% Maintenance Fees

Global CIO: Oracle CEO Larry Ellison's Goodbye Letter To European Customers

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

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

Global CIO: An Open Letter To SAP CEO Leo Apotheker

Global CIO: Salesforce.com Surge Pushes SaaS Into Mainstream

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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