Tuesday, June 17, 2008

News Analysis: Multiple Factors Lead to Shifts in Oracle List Prices

Dollar Based Pricing Drives the Bulk of Recent US Based "Price Increase"

On June 16, 2008, Oracle updated its localized price lists and software investment guide. Applications previously priced at $3995 per user rose 13.1% to $4595 per user in US dollar terms. Database pricing increased 18.75% from $40,000 per CPU to $47,500 per CPU. Other price increases approximate 15% on average. Despite Oracle’s role in vendor consolidation, increases during an impending economic downturn appear illogical. Recouping for dollar devaluation is the main rationale behind the recent price shifts for the following reasons:
  • Oracle offers one single global price list. Unlike many vendors who account for global currency fluctuations with country, region, and industry specific uplifts, Oracle maintains consistent pricing in dollars. The dramatic devaluation of the dollar has led to a de facto discount in the 30 to 35% range for multi-nationals who purchase in Pounds Sterling, Euros, and to a lesser extent, Yen. As a result price increases mainly impact the US while other Euro zone countries will not see a major increase in real dollar terms. A closer look at country specific pricing for Germany shows that the Euro price has not changed in constant Euro terms.
  • Management aims for 50 percent profit margins. During the 2007 Q4 earnings call, Oracle’s CEO, Larry Ellison, stated an overall goal of reaching 50 percent margin and 20 percent earnings annual growth. Given Oracle's global presence and geographical distribution, a large proportion of Oracle's sales and sales expenses are incurred outside of the US and the currency issue has hampered this margin objective and created pricing arbitrage. In the past, key recommendations to end users include purchasing in non-dollar currencies and take advantage of the currency arbitrage. Oracle’s pricing moves aim at mitigating this end user pricing strategy.
Other Price Shifts Reflect the Level of Market Competitiveness
Oracle typically provides pricing changes on a 9 to 12 month basis to account for iterative changes and acquisition activity. Despite dollar based pricing being the main rationale for this recent price shift, some changes reflects the level of competition Oracle faces in the market. For example:
  • Business intelligence (BI) minimum pricing cuts reflect a competitive market. Head to head competition with IBM, Information Builders, Microsoft, SAP and SAS leads to a change in pricing strategy. Financial BI analytics moved from $400,000 per customer to $5800 per application user with a 25 named user minimum purchase.. This change at list pricing reflects a minimum user drop from 79 users, effectively targeting the SMB market but raising the price for companies with more than 79 users.
  • App sever increases may reflect Oracle’s dominant market position. Acquisition of BEA puts Oracle in the dominant market position. The price for BEA WebLogic server is now $25,000 per CPU, a 47.1% increase from $17,000 per CPU. Currency fluctuations can not explain this level of price increase. One possibility could be an overall change in packaging that may include additional components.

The bottom line for end users
Contracts Must Take Into Account The Software Ownership Lifecycle

Software ownership spans across five phases of ownership: selection, implementation, utilization, maintenance, and retirement. List prices represent one part of the cost equation. Maintenance fees, upgrades, and staffing have longer term implication and should be factored in contract negotiations and vendor selection criteria. Though Oracle’s specific price changes impact US based or dollar based markets the most, Oracle clients should:
  • Never pay list price. Most initial offers for enterprise software carry a discount. While discounting percentages may vary due to revenue recognition rules, list prices rarely impact the final cost. Expect the software market to remain competitive in the US and license discounts will remain in the same ranges.
  • Focus on total contract value, not the discount percentage. Because of the dollar based price increase, discount targets should factor in the price changes. A 30.4% discount for 2008 would be required to achieve the same 20% discount in 2007 due to the list price increase.
  • Minimize maintenance fees. Maintenance represents the largest chunk of long term apps costs. Rates at 20 to 25% a year represent the equivalent of buying new software every 5 years and spending two times the original license cost over a period of 10 years. Euro zone customers who purchased software prior to 2006 should renegotiate rates to reflect the recent dollar devaluation.
The bottom line for vendors.
Like Big Oil and Petrodollars, Dollar Devaluation Creates a Silicon Dollar Effect.
Dollar devaluation not only impacts the price of oil, but now enterprise software. Expect other US based software vendors with a global presence and single global price list to make changes to the “Silicon Dollar’ equation and raise prices accordingly.


(The personal contents in this blog do not reflect the opinions, ideas, thoughts, points of view, and any other potential attribution of my current, past, or future employers.)
Copyrighted 2008 by R Wang. All rights reserved

2 comments:

Jean-Michel said...

We're seeing some major discounting in France with Oracle DataBase despite the price hike in the US. Is this normal or is it because we're in the SME space?

R "Ray" Wang said...

Jean-michel, there is renewed competition for database in many markets. Depending on the strategic nature of the deal, you will tend to see different levels of discounting.