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

As a new investment report and an article in Barron's question the sustainability of the inflexible annual fees, we offer three scenarios for how this extremely important situation will play out.

Oracle and SAP seem to be nearing a point of having to make some hard choices about whether to consider modifying their one-size-fits-all 22% annual fees for upgrades and support. Wall Street will boil them in oil if they do because the 90% margins on those fees sure make overall earnings look good, but an even bigger risk could be that customers will begin putting the big guys on ice if they don't show some pricing flexibility in today's very different IT market.

Amid the prospects of fire and ice, let's take a look at three dramatically different scenarios for how this situation might play out, and then analyze the prospects for each (and for some extensive background and perspective on this topic, be sure to check out the "Recommended Reading" list at the bottom of this column):

1) SAP and Oracle stick to their guns. In this case, both SAP and Oracle conclude that since many customers keep signing up, they must not have a problem with the 22% fees. This could be true, but I think it's not—rather, with few alternatives at this time, big customers feel trapped because choosing to drop support altogether will likely be seen as unacceptable risk. Financial analysts proclaim the business model is superb, but customers sharpen their knives and look forward to the time they can be used.

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2) One of them seizes the initiative and flips the model. In this scenario, either SAP or Oracle, yielding to the inevitable, chooses to take the thrashing from Wall Street in exchange for becoming the white knight for customers by breaking down its monolithic support model into four different tiered levels, ranging from bare-bones support for a 7% annual fee, to 12% for a bit more, to 18% for broad coverage, and on up to 22% for the platinum-level, all-included plan. Wall Street howls but customer momentum surges toward the first-mover; for the second-mover, playing catch-up means always having to say you're sorry. And Wall Street stomps on this follower just as hard anyway.

3) Outsiders crash the party, but Oracle and SAP get the hangovers. This is the nightmare scenario for the two big enterprise players, and while it's one that we here at InformationWeek and Global CIO have been analyzing throughout 2009, this possibility picked up some considerable momentum this week as two Cowen & Co. investment analysts issued a report asking the question, "Maintenance Revenue: High Margin or High Risk?" and voted for the latter. Their report was then picked up by Barron's, which built around that report an article headlined, "An Emerging Threat to Oracle and SAP."

SCENARIO 1 Without question, both SAP and Oracle can make fairly eloquent arguments for why the option of standing pat is not just acceptable but is in fact the best for everyone: for them, for their customers, and for their partners. The rationale goes like this: the types of products they make are incredibly sophisticated and complex, and the realities of life are such that the current versions will need to be fixed at some point during their lifetimes while new versions need to be funded up-front so that they can have a lifetime. Without the annual fees, Oracle and SAP can argue, the customer is saddled with clunky and out-of-date enterprise applications, and the two big vendors are, sad to say, penniless and powerless to provide new products and compete on the world stage.

On the other hand, customers might say that while they're willing to admit that yes, the enterprise-level products are big and sophisticated and complex and, yes, they do need to be fixed periodically, I'm tired of you turning your problem into my problem. And as long as you promise to keep those inflexible annual fees in place, here's my equally permanent promise back to you: I will search relentlessly for alternatives to your products and services, I'll encourage peers to do the same, and I will take any opportunity I can to put the screws to you because I believe that's how you've chosen to treat me for the past few years.

There is incredible pressure from Wall Street on both companies to stand firm and maintain their excellent margins, and to put off until tomorrow the unhappy customers whose comfort would require that those margins be reduced. We will see if the pressure coming from customers and alternative providers meets or exceeds that margin pressue.

SCENARIO 2 Imagine you get this letter via courier from a top-level executive of Oracle or SAP:

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