Software Maintenance Fees: Time For This Model To Change?
The slow economy plus alternatives such as SaaS and open source could pressure vendors into offering lower-cost options.
A 'Broken' Model?
Chiquita's Singh doesn't buy the idea that there's no other way. He points to the minicomputer and mainframe manufacturers, such as IBM and Digital Equipment Corp., that lost footing in the PC boom because they refused to acknowledge the emergence of cheaper and easier systems for customers. "The software model is broken," he says.
As open source, SaaS, and other disruptive models continue to mature, Singh says, more and more CIOs will be comfortable with them. "That's going to be a wake-up call for the software industry," he says. "We're three to five years away from it."
Hold on, says Oracle president Charles Phillips. Oracle has experimented with various licensing models over the years, but "people keep coming back to the licensing model that's simple and has worked." For Oracle, that model is an up-front software license price, often negotiable, with a 22% annual maintenance fee that's never negotiable. "We are sticklers on that," Phillips says.
'There's no magic in [SaaS] costs. Someone has to pay for developers and maintenance.'
- Oracle's Phillips
But how much profit is too much? Blaming the slowing economy, Oracle reported in December that its second-quarter net income was about flat compared with a year ago, while license revenue was down 3%. Maintenance revenue, which makes up 51% of its total revenue, was up 14%. The operating expenses allocated to "software updates and product support" total just 9% of its updates and support revenue, though Oracle notes that that revenue also supports product research and development.
Oracle CFO and president Safra Catz assured stock analysts in a conference call that "update rights," or maintenance, continue to be a "very profitable part of our business, and as the number gets bigger and bigger it's really impossible for us to actually spend our way through it, and so in general that's the sort of overriding thing that guides our margins."
Phillips says Catz was making the point to analysts that thanks to maintenance, investors needn't worry about Oracle becoming unprofitable during a downturn. Those profits, he points out, are a good thing for customers. "Support dollars go directly into products. Those dollars go into high-priced developers you have to pay to keep around," he says. About 22,000 people update and enhance Oracle's products.
Maintenance fees also have funded Fusion, a forthcoming suite that integrates the best of some 40 applications Oracle has built or acquired, which it plans to start beta testing this year. "There is only one company saying, 'I'm going to take your support dollars and build a whole new product line,'" Phillips says. "These are modern apps natively built in Java for modern business IT."
Indeed, Abramson of the Oracle user group says there's much customer excitement about Fusion, which has been in development for four years. "The message is getting much clearer," he says, "and as a user, I'm much happier in the way Oracle is explaining to me and showing me how it's coming together."
Critics of the status quo abound, however. One CIO who spoke on condition of anonymity says he recently dropped Oracle maintenance because too often he was told his software problems with Siebel couldn't be addressed by the regular maintenance support staff. He says he was referred to more experienced consultants, who charged a high hourly fee for what he thought should have been covered under his maintenance contract.
Gaston of Santa Fe Natural also complains of "poor" service from Oracle's global support center. "It might be four to six weeks before you get a response," she says. "You may never get an answer."
Phillips says that's not typical, and Oracle usually goes "well beyond" what might be expected: "If there's an issue, we're going to fix it."
Sometimes the problem has to do with lack of employee training on the customer's part, he says. And sometimes support queries result from something that has nothing to do with Oracle software, such as a customer changing a network router. Phillips notes that JD Edwards, part of Oracle's 2005 acquisition of PeopleSoft, is the only software company to win the J.D. Power and Associates recognition for customer service, which it earned from 2005 to 2007.
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