Commentary: Oracle's licensing scheme

By Yvonne Genovese, Gartner Analyst

Oracle's "new" delivery options have been preceded by several packaging iterations since Oracle BusinessOnline was introduced in 1998. This offering has taken many turns, and the question inevitably becomes: Which model works?

When Oracle BusinessOnline was announced, CEO Larry Ellison said that by 2001 most of the company's software sales would be online. That was a bold promise in an unproven market and produced less-than-successful results.

Oracle's original idea mirrored that of many ERP (enterprise resource planning) providers: The company would provide a true ASP (application service provider) arrangement, with customers paying a set price per user per month.

However, Oracle backed off from that arrangement for business reasons of its own--had Oracle sold a lot of set-price licenses, it wouldn't be able to show the big quarterly software revenues it wanted and would have to settle for a steady revenue stream. That might be better for the longer term, but would mean a short-term profit hit that Oracle didn't want to absorb in a soft market.

Moreover, an ASP arrangement initially may have looked good to midmarket enterprises--the main target of the service--but when the negotiations came, clauses talking about possible "security breaches" and "downtime" and a general lack of control scared away many potential customers.

The latest Oracle announcement seems to be an example of "if at first you don't succeed, try, try again." Oracle is now offering three schemes for its "E-Business Suite Online Any Place," as follows:

• Enterprises manage their own systems in-house.

• Oracle houses and manages both hardware and software.

• The customer is in charge of hardware and maintenance, and Oracle provides software and support remotely.

	See news story: Oracle software users getting more options

It's that last option, which allows customers to host their own hardware, that Oracle is presenting as a breakthrough, and it does give customers the flexibility of deciding where to house their servers. But it doesn't solve the big issue--the rent vs. buy dilemma.

That's a problem, at least partly because Oracle has one of the highest software licensing fees in the midmarket, with the average being around $300,000 per deal, and $175,000 per deal in the $100 million and below market. And coughing up a $175,000 up-front licensing fee is no small matter for an enterprise at the lower end of the market.

Oracle is also touting a new e-business infrastructure from Compaq Computer to lure potential customers with "pretested, highly reliable software and hardware certified configurations." That should be a good selling point for midmarket enterprises, but nothing is yet "proven" (to use Oracle's language).

Gartner believes that Oracle will have some difficulty getting this offering started up and that it should focus on getting good customer references, which has not been an Oracle strong point.

(For related commentary on analyzing software pricing, see TechRepublic.com--free registration required.)

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