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9/23/2009
01:12 PM
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Oracle Mulls Shift To Subscription-Based Pricing

Oracle, it seems, is trying to hammer out a strategy to more heavily embrace the most radical faction of the SaaS movement, one that completely upends the traditional software vendor profit model: Subscription-based pricing. If what Oracle said Tuesday in a Web event is true, this could be a huge shift for the software giant.

Oracle, it seems, is trying to hammer out a strategy to more heavily embrace the most radical faction of the SaaS movement, one that completely upends the traditional software vendor profit model: Subscription-based pricing. If what Oracle said Tuesday in a Web event is true, this could be a huge shift for the software giant.Oracle launched the virtual Web event, around midmarket software announcements, with a live video keynote address featuring some Oracle execs and a presentation about what's new. There it was in the presso: new pricing options will include "subscription-based pricing."

As noted in a story posted earlier today, that means Oracle will offer SaaS beyond the two apps (On Demand CRM and Beehive) it now offers, for all or some of the business applications it sells to midsize companies. The question is how exactly it plans to do that. When I asked Mark Keever, the Oracle VP who heads up midmarket apps, about subscription-based pricing in a follow-up call Tuesday, he didn't have any more details he could share with me right now. But, his group did have permission to say that subscription-based pricing would be available for midsize companies.

In the meantime, Oracle Co-President Safra Catz is apparently crunching some numbers. "It's on Safra's desk," Keever said.

This won't happen with a big bang. In June, CEO Larry Ellison insisted in a quarterly earnings conference call with analysts that Oracle will be the "No. 1 on-premises application company, and the No. 1 on-demand application company," Ellison said. This will require a "very gradual shift over a period of a decade," but Oracle expects its on-demand business to grow faster than its on-premises business.

So that leads to the question of, what is the future of Oracle On Demand? So far-except for the multi-tenant CRM On Demand and Beehive-Oracle On Demand is pretty much the same traditional hosting model that's been around for a long time. You pay Oracle standard license fees and ongoing maintenance fees, which includes what they charge you to host your software in their data center or yours, and how much management they take over for that software. The status quo for how Oracle makes money hasn't really changed with Oracle On Demand. It's not subscription-based pricing, in which you pay a set fee per user, and can add or drop seats on a monthly basis.

Now, the SaaS vendors of the world-Salesforce.com, NetSuite, RightNow, SuccessFactors, etc.-will insist that true SaaS is multi-tenant. Groups of customers share the same core application, which is upgraded for all the "tenants" at the same time. Usually, but not always, SaaS is subscription based, meaning customers pay a standard price per month per user, and can drop or add users monthly.

Customization options are minimal. Even Microsoft is doing subscription-based pricing now with Exchange and SharePoint, and plans to do it next year with Office apps.

Oracle sells the same business apps to the midmarket as it does big business; all those apps it's spent more than $30 billion acquiring in recent years, including JD Edwards, PeopleSoft, Siebel, Demantra, Agile, just to name a few. To make some or all of those applications subscription-based would be a huge shift for Oracle. It has to be considering how this will change how it collects licensing and maintenance revenue from 25,000 midsize customer companies. This is a company, I've been told by several CIOs, that does not easily release you from software maintenance contracts, even those apps you're not using anymore. But it's going to offer monthly subscription fees across the midmarket?

It's on Safra's desk. Some CIOs I've talked to about their experiences with Oracle negotiations have characterized Catz as the bad cop. The one who scrutinizes contracts to make sure they're suitably profitable in terms of ongoing maintenance. She's the one Larry pass the microphone to in those quarterly calls, to assure investors that Oracle continues to make a boat load from maintenance fees. She's also the one who is probably the most responsible for Oracle's 50 percent profit margin.

So how is Oracle going to do subscription-based pricing, and is that going to require Oracle to invest heavily in a multi-tenant architecture? And if it goes multi-tenant as an option for midmarket, is that going to result in lower overall software costs for customers, or will Oracle come up with a pricing scheme that essentially repackages what customers would have paid into annual license and ongoing maintenance fees into a monthly subscription fee spread over the life of the contract?

It's on Safra's desk. The calculator is out. Midmarket customers are clamoring for on-demand options, Keever said. No doubt, they're probably getting calls from NetSuite, Workday, and other SaaS providers, saying we can lower your software costs and IT management responsibilities. Crunch, crunch, crunch go the numbers on Safra's desk. I'm very curious to see what she comes up with.

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