This is the first of a two-part series on Oracle licensing policies and how IT pros can manage Oracle licensing expectations and costs.
A recent story in InformationWeek compared managing software licensing to mountain climbing. IT organizations seeking to lower annual fees for Oracle software may feel more like they’ve been thrown into a deep, dark hole. Melodramatics aside, many organizations have fewer options than seem plausible or fair, and are left wondering what to do to unravel a decade or two of contractual decisions.
It’s no surprise that Oracle makes a lot of money on software license updates and product support. Expensive, inflexible support renewals garner the loudest complaints about Oracle. What may be a revelation, however, is how many customers become inadvertently complicit to these annual fees.
The majority of Oracle software is licensed based on how many processor cores Oracle is installed and/or running on. Some simple math, including a multiplier of between .25 and 1.0, is necessary to assess how much software is deployed. Policies for virtualization, high availability, disaster recovery, development and tire-kicking dictate whether Oracle expects use to be formally licensed.
Also significant is Oracle’s various contractual options. You can license Oracle “by-the-drink,” across the enterprise based on employee count or revenue (common with SAP deployments), and the infamous unlimited license agreement (ULA). There are other variations, but these are the most common.
Things get complicated when looking at the combination of these licensing concepts with Oracle’s support policies. The policies themselves aren’t especially byzantine, but keeping the dots connected throughout years of doing business with Oracle can be.
Three important Oracle licensing support concepts
The three pertinent technical support concepts are license sets, matching service levels and repricing. These three policies, along with the inflexible nature of support renewals, cause the most frustration for Oracle professionals.
A license set refers to all products related to each other via code base, such as Oracle Enterprise Edition, extra-cost options such as partitioning and management packs. Matching service levels refer to Oracle’s policy that prohibits support of a subset of products from within a license set. Together, these two policies dictate Oracle’s all-or-nothing approach to software support.
But the real kicker is re-pricing. To understand re-pricing, we must first remember that software is unique in that there is essentially no cost to creating copies; click “save as” and the supply chain is complete. This gives software publishers like Oracle immense latitude with discounting. And by latitude, I mean somewhere between 0% and 90+% percent off list price. Support is then 22% of net license fees and due annually. This may seem all well and good, but there are drawbacks.
To illustrate, imagine licensing 10 processors of Oracle Enterprise Edition at a 50% discount, totaling $237,500 in net license fees. Accounting for Oracle’s annual cost increase of roughly 3%, support for the contract will grow to about $58,800 in the fifth year of renewal. Were you to call Oracle for relief on this contract by terminating three processors, you may expect the updated support renewal to be $41,160, for a savings of about $17,700.
Oracle has what it refers to as standard discounting, which for this transaction would have been 25% off. The updated support renewal, then, would be recalculated at the standard, less optimal discount. So there would end up being no savings – just less product on support for the same cost. You would need to eliminate enough software from the renewal to catch up to standard discounting, and the smaller the resulting list license, the smaller the discount. Eliminating half of the processors, for example, would only save $14,387.50, resulting in a new renewal amount of $44,412.50 for five processors.
The bottom line is that if you understand repricing, you understand the core of Oracle’s business model, how it generates so much high margin cash and what will dictate its product strategy for many years to come.
In the next article, we’ll discuss the subtle decisions that, when combined with repricing, reduce an organization’s leverage to save money, negotiate, consider alternatives or otherwise maintain flexible operational expenses.
This was first published in October 2011