Oracle avoids SaaS to keep margins up, raise prices

Oracle is one smart company...but its customer focus leaves a bit to be desired.

Oracle is a shrewd, shrewd company. As reported by Sarah Lacy in Businessweek, Oracle long ago recognized the potential for Software-as-a-Service, both to liberate customers and to decimate its profits. Noting that the two may very well go together, Oracle has demurred from jumping into SaaS:

On-demand software has turned out to be a brutal slog. Software sold "as a service" over the Web doesn't sell itself, even when it's cheaper and actually works. Each sale closed by these new Web-based software companies has a much smaller price tag. And vendors are continually tweaking their software, fixing bugs, and pushing out incremental improvements. Great news for the user, but the software makers miss out on the once-lucrative massive upgrade every few years and seemingly endless maintenance fees for supporting old versions of the software....

Why isn't Oracle a bigger player in on-demand software? It doesn't want to be, Ellison told the analysts and investors.

"We've been in this business 10 years, and we've only now turned a profit," he said. "The last thing we want to do is have a very large business that's not profitable and drags our margins down." No, Ellison would rather enjoy the bounty of an acquisition spree that handed Oracle a bevy of software companies, hordes of customers, and associated maintenance fees that trickle straight to the bottom line....In fact, the elimination of competitors enabled Oracle to raise its maintenance fees to the tune of 15% to 20% for U.S. customers in June....

In other words, if you're an IT buyer looking for cost savings, you're not likely to find it with your traditional vendor. They simply have no reason to save you money, and every reason not to do so. Open source and SaaS are tools of the newcomer to disrupt existing markets; proprietary licenses are tools of the incumbents to cling to existing markets.

Nick Carr concurs:

Anyone who thinks the software-as-a-service business is a gold mine is wrong. The economics are fundamentally different from those of the traditional software business - and not in a good way.

And so Microsoft spends itself to less profitability as it invests in its online services business, while Oracle, that has no compunction to get to the future anytime soon, mints money by buying out its competition so that customers have less choice...and more price tag. Brilliant and shrewd.

I just wish customers could feel that way.