InformationWeek hears regular complaints from readers about the high cost of enterprise software. So a team of editors sat down with Phillips in his Redwood Shores, Calif., office earlier this month, and asked him to explain why software license and maintenance fees cost so much.
Phillips also talked about Oracle's upcoming Fusion Applications, the state of Oracle's acquisition strategy, and the impact that Barack Obama -- sworn in as President Jan. 20 -- will have on the IT industry.
InformationWeek: The tough economy has put more pressure on IT budgets. Most of what Oracle offers is licensed software that customers install on-site. But what about those who say software as a service is more affordable, since customers don't pay the full license and yearly maintenance fees?
Phillips: I'm not sure the licensing model solves everyone problems. We've been in software as a service a decade now, with 1.7 million subscribers. We're the only company that's flexible and offers both on-demand and licensed software. It depends on the application and the model that makes sense for it; there are some apps that are easy to implement for an on-demand model ... [such as] CRM. Other areas are more complicated [such as] supply chain and manufacturing.
Someone has to pay for the software to be updated, and that's the maintenance cost. If you want a [software] partner that makes money, they'll have to charge you something. There's no magic in the cost. Someone has to pay for developers and maintenance. We don't believe that because it's on-demand and multitenant, it's 90% cheaper.
InformationWeek: But are Oracle's on-demand offerings really SaaS? In most cases, customers still pay the license and maintenance fees for Oracle-hosted software. Many SaaS vendors claim true SaaS is multitenant, and having customers share the software lowers everyone's cost.
Phillips: Multitenancy is one way to administer a system to users. We have some multitenant customers. But we have others that say, "I like CRM On Demand, but I want my own server." All those models are growing for us, and the fact that we have all those models is a competitive differentiator for us. There are much stronger [data] privacy laws in Europe than the rest of the world, and that's why we've gained a lot of share against Salesforce.com in that region, because it can't accommodate that [multitenant] model.
InformationWeek: Some CIOs say that software maintenance fees across the industry are too high and getting worse. Oracle charges an annual maintenance fee that's 22% of the license cost. What's your response to those that claim the traditional cost model isn't working?
Phillips: It certainly has worked for a long time. People keep coming back to the model that's simple and has worked. [Customers] like owning their software. If they want support, that's an option.
Support dollars go directly into products, and dollars go into high-priced developers you have to pay to keep around. Those developers come up with the [software] enhancements, and there's a long list of things that customers want. We've got 22,000 developers, who are high-priced people, making those enhancements. If you want an enhanced product, you have to pay for it with support dollars. There's no other way to fund it.
InformationWeek: Some CIOs have told us that with some software issues, they're told the problem isn't covered under their maintenance contracts, and are referred to high-priced consultants. They felt their problems should be covered under maintenance contracts they've already paid for. Have you heard of this complaint?
Phillips: That's not something I hear a lot of. Usually we go well beyond [what's expected]. If there's an issue, we're going to fix it.
The problem [usually] isn't the result of a product defect; it's because someone didn't read the manual or get the right training. It's a how-to question, or, "I changed my router [and now there's a problem]." Then we end up calling Cisco. Normally, we're solving the problems. We build customer relationships that way, and have gotten all sorts of kudos for the quality of our support. We offer support across 147 countries -- it's one of the reasons people go with us.
InformationWeek: Why is Oracle often willing to negotiate on the price of a software license, but not on its 22% maintenance rate?
Phillips: We tend to optimize our pricing over the long term. We'd rather get a normal support cost and not negotiate on that, but on the license up front. So [the customer pays] 22% on a smaller cost. If you discount support to sell the license, then you can't fund products anymore, so we are sticklers for that. We'd rather take the hit up front.
InformationWeek: Oracle has been working on its next-generation Fusion applications for several years, and one of your execs told us it will enter formal beta this year. Some CIOs tell us it's hard to get clarity from Oracle on Fusion Apps.
Phillips: Until people can see and demo Fusion Apps, we can't reach everyone. It’s a complex topic without people out there demoing it. Generally, I think we've struck the right tone. We don’t want to spend 100% of our time [talking about a product] not shipping yet. We'll talk more about it when we ship it in volume.
With Fusion Apps, we're the only company even investing in next-generation applications. No one else is even trying to do that. Only [Oracle] is saying I'm going to take your support dollars and build a whole new product line. These are modern apps natively build in Java for modern business IT.
InformationWeek: Some people anticipate a more regulated environment with the new presidential administration. How will that that impact Oracle overall? What about your aggressive acquisition strategy?
Phillips: A more regulated environment, if it means more compliance and auditing requirements for customers, is good for our business. On our application strategy, so far we've diversified, so we're not worried about more scrutiny under a new administration.
InformationWeek: President Barack Obama seems to get IT, and says modernization of health care records is a priority in his administration. Do you think he'll have a positive impact on the IT industry?
Phillips: Having someone who understands what IT can do for the government is a good thing. As a citizen, I'm excited about that. Modernized health care records are something we've been hoping for two decades now. If it happens, it's more likely with this incoming administration than in the past.
InformationWeek: Has Obama's administration shown much interest in Silicon Valley's IT industry?
Phillips: They've been coming out. They’ve been in touch with a lot of technology people throughout the campaign. Barack is well plugged in.
InformationWeek: Back to your growth-through-acquisition strategy ... Many software companies' stock prices have plummeted in recent months. Does that create more opportunities for Oracle to acquire companies on the cheap?
Phillips: When you go through these slowdowns, for prices to adjust down takes time. There are some entities who think they're worth what they were worth a year ago. Psychologically [it takes time]. But it does create an opportunity for us to get someone, a very great opportunity, for a lot less ... [but] sometimes, people can stay irrational for a long time.
Note: For clarity and readability, this interview has been edited down from its entirety.