Down To Business: Oracle v. Rimini Has Huge Ramifications

Can the decades-old enterprise software model hold up against the forces of upstart competition and price arbitrage?
Seth Ravin is an imposing figure. Not because of his 400-pound frame. And not because the privately held company he runs, 4-year-old Rimini Street, is a financial behemoth; it isn't, even if it did report last week that its 2009 revenue rose 270% compared with the previous year.

No, Seth Ravin is imposing because of what he and his company represent: an alternative to the 25-year-old enterprise software business model, whereby the likes of Oracle, SAP, and Microsoft collect from their customers hefty annuities -- as much as 22% of the upfront capital expense of their software -- in the form of yearly maintenance and upgrade fees. As my colleague Bob Evans noted in a column in November, shortly after Oracle released its most recent financial results, those fees accounted for 55% of the company's revenue in the quarter and a whopping 91.9% of its operating profit margin. In calls with financial analysts, Oracle Co-President Safra Catz has essentially called those fees the vendor's golden goose.

Given that context, it's no surprise that Oracle is striking back at Ravin & Co. As Paul McDougall reported earlier this week, Oracle has filed a lawsuit charging Rimini with stealing its software and intellectual property so that Rimini can provide discount third-party support services -- as much as 50% off -- to Oracle's customers.

There's some history here: Ravin was a top exec at TomorrowNow, another cut-rate provider of Oracle support services, until SAP acquired the company in 2007. Subsequently, Oracle brought a similar suit against SAP and its TomorrowNow unit. SAP shut down TomorrowNow in October 2008; SAP's day in court with Oracle is scheduled for later this year.

In its latest lawsuit, Oracle argues -- repeatedly -- that Ravin's alternative business model is itself illegal. "This illegal business model is not new for Ravin," Oracle said in the 42-page complaint it filed on Jan. 25 in federal court in Nevada. "He helped create this illegal scheme at his prior company."

Specifically, Oracle alleges that Rimini unleashed automated bots on its Web site in order to download Oracle support materials after obtaining passwords from Oracle customers. "These intrusions have damaged Oracle's support services by causing the databases which host the software and support materials to freeze," Oracle said in its complaint. It also accuses Rimini of possessing illegal copies of Oracle's enterprise applications.

While I don't want to give short shrift to Oracle's serious charges, the much bigger issue here is whether the decades-old enterprise software model can hold up against the forces of upstart competition and price arbitrage. As Evans wrote in a column last July and Rimini reported in its annual statement earlier this week, the company is starting to shake things up with its discounted support for Oracle (including JD Edwards, PeopleSoft, and Siebel) and SAP applications. In 2009, Rimini says, it expanded its customer base to 300 companies -- nine of them in the Fortune 100 -- and increased its average contract length to seven years from five a year earlier. Rimini's alternative business model is gaining momentum because it speaks directly to a top CIO priority: Spend less of the IT budget on maintenance and legacy systems and more on new, customer-facing initiatives.

Oracle isn't the only entrenched competitor that's feeling the heat. Acknowledging the financial pressure its customers are under (if not the threat of upstarts such as Rimini), SAP this month pulled back from its plan to move all of its customers to Enterprise Support contracts at a pricier 22% per year, instead adopting a two-tier system that reintroduces a Standard Support option at 18%. SAP also froze prices for existing Enterprise Support contracts at the 2009 level of 18.36%, though its plan to gradually increase that rate will resume in 2011.

Oracle isn't budging from its 22% take-it-or-leave-it strategy. Instead, it's turning to the legal system for protection. The merits of its suit can't be judged without a full airing of all the evidence; the courts will ultimately decide. But suffice it to say that if Rimini is found to have broken the law, other alternative providers will emerge and figure out a different way to chip away at the decades-old enterprise software license model. As my colleague Bob Evans has noted before, markets, like nature, abhor a vacuum.

For its part, Rimini is promising a vigorous defense. "Enterprise software customers, like in any truly competitive market, deserve the right to have a choice of support options and vendors," Ravin said in a statement. "I believe Oracle's actions are an attempt to forestall competition and limit market choices for its software licensees."

What do you think?

Rob Preston,
VP and Editor in Chief, InformationWeek
[email protected]

To find out more about Rob Preston, please visit his page.

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