Is Oracle Abandoning License Revenues?
This morning Mark Murphy, a research analyst at First Albany Capital, published a note detailing his views on Oracle's potential move away from perpetual licensing to subscription pricing.
... More importantly, industry contacts state that the wheels have been set in motion from the highest level at ORCL to "do away with license sales" within roughly 18 to 36 months if possible. This reflects substantial change occurring in the software industry, wherein customers and investors have shown a strong preference for recurring subscription revenue models. Because the Street is myopically focused on new license revenue sales, we believe a move to a subscription model would enhance shareholder value for ORCL...
...From our perspective, there can be no assurance that Oracle will be able to transition its entire business to a recurring subscription model in the course of 18-36 months. Industry contacts state that Oracle would like to achieve the transition in this time frame, but the reality of the matter could necessitate a longer time horizon. However, our research has also been turning up more frequent cases in which Oracle is completing "enterprise agreements" in which the customer does not pay a perpetual license fee, but rather, pays a certain recurring annual fee that gives the customer the right to an "all you can eat" level of product consumption (with a few important restrictions). In addition, we are hearing about more cases where it is the customer that is pushing for this type of arrangement rather than Oracle, presumably because the customer would like to avoid a large upfront capital expense. It is possible that what we are detecting is Oracle in the early stages of experimenting with, and laying the groundwork, for an eventual move to an all-subscription business model.
Yet, Goldman Sachs' Rick Sherlund [i.e., Chairman Emeritus of sell-side software research] published a report today that flatly denies this contention:
Oracle management has responded to investor concerns that it may change to subscription accounting and away from licensing, indicating today that this is not likely. Given the difficult transition for other companies that have made the switch, we view this with some relief for Oracle stock, even though this has not likely been much of a drag yet on sentiment or the stock. We expect Oracle to continue to drive
investor focus on the recurring revenue stream and try to deemphasize the volatile quarter-to-quarter swings in license revenues, but a change in the business model to subscription accounting appears to be too extreme, and we are told is not something management is likely to do.
So, which is it? Is Oracle thinking long and hard about moving to a subscription or "all-you-can-eat" pricing model?
Remember, just because Oracle may be disavowing this move TODAY doesn't mean it can't quickly become a reality. What if Oracle fails to deliver on current expectations? What if they can't reaccelerate license revenue growth and recapture share lost on the applications front? With even less to lose at that point, why SHOULDN'T Oracle's Holy Trinity [Larry, Chuck and Safra] consider changing the ERP game?
Jeff Nolan certainly doesn't think it's out of the question; and he's at the epicenter of the behemoth Oracle and all other apps vendors are chasing.
This is the thing that worries me about the acquisitions that Oracle is making in open source software, what if they came to the conclusion that they would never overtake SAP in license revenues and that the only way they could beat us was by not fighting our war but changing it. If that’s the case, maybe what Ellison’s crew is doing is buying their own LAMP stack and replacing the “M” with “O” and bundling in Fusion middleware with it? That would be a game changer and definitely not fighting yesterday’s war. In a recent Credit Suisse conference interview, Ellison spent a great deal of time talking about subscription revenue and open source, which makes me believe he may have come to the conclusion that the only way he can beat SAP in the application business is to do something he believes we won’t be willing to do, namely take away the license component of our economic model.
Vinnie Mirchandani sees the possibility and ultimately thinks Oracle's customers need to pressure maintenance terms, as a result.
If you're to take a look a holistic view of Oracle's major moves over the last 18 months, a case can be made that all of them could be seen as preliminary steps toward the abandonment of license revenues...
- The Apps M&A Binge -- Oracle's M&A binge is now legendary, and I've written about it more times than I care to remember. 20+ companies, including consolidation of the applications market by taking over Peoplesoft [and J.D. Edwards with it], Siebel and Retek. Collectively, this was all about acquiring market share and scale. And the valuations that drove the purchases of these apps vendors was NOT about license revenues but about the present value of future maintenance revenue streams. These purchases were financial vehicles, much more than moves to acquire superior or complimentary functionality. When maintenance revenue streams are the driving focus of a multi-billion M&A binge, it's not out of the question to think license revenues may not be a long-term focal point.
- The Ongoing Open Source Binge -- Oracle's already bought Sleepycat, tried to buy MySQL and allegedly has its sights set on Zend and JBoss. When I originally blogged on Oracle's open source maneuvers, I had this to say:
I can understand why the industry is worried that Oracle may be willing to slash and burn the traditional software license model; I won't believe that until I see it. Honestly, what's the point of buying Siebel, Peoplesoft, J.D. Edwards, Retek and a dozen other software companies if Oracle is REALLY resigned to commoditizing its core franchise business [i.e., databases]? Ellison, Chuck and Safra have spent the last 13+ months convincing the world that buying up the apps vendors would generate unprecedented levels of cash flow at optimum margins, while allowing Oracle to regain some of the footing its lost to SAP over the last few years. Now we're being asked to "hang in there" while Oracle evangelizes open source at the same time?
The ONLY conclusion I can accept is that Oracle is seeing what IBM is doing via Gluecode, while also understanding that it's already "game over" in the applications market, and has simply decided to ensure it can control the database infrastructure layer without the fear of massive commoditization. Oracle has the capital to make these and many more acquisitions, but at some point, I and other shareholders are going to need to see tangible return on our investment [how are these moves helping increase shareholder value?].
Until I see some progress on the road to Fusion, I simply can't imagine Oracle has the boldness to actually move toward a subscription pricing at the expense of perpetual license revenues. However, there are enough data points to make that case; and Oracle has been known to change its strategy on a dime [not always a good thing if you're a fellow shareholder].
What do you think?
Note: At the time of this writing, I and/or funds I maintain discretionary control over, maintained long equity positions in ORCL & SAP but did not maintain a position [long or short] in IBM.
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