Expanding Section: Understanding Oracle’s Support Based Model

This research opened with the Oracle database because the Oracle database is central to everything else Oracle does. However, Oracle’s profits are in its support, which has historically been quite rare for Oracle customers to cancel if they continue to use Oracle software.

In fact, without Oracle’s support margins, Oracle, the Oracle financial model would fall apart.

This is explained in the following quotations from Seeking Alpha.

“Oracle derives 52% of its revenues from maintenance. Those revenues have operating margins of 94%. The cloud accounts for 8% of revenues and has gross margins (gross not operating) of 48%.

Indeed, the maintenance revenue that Oracle derives from its installed database software is by far the largest profit contributor to the company.

Investors may not realize the extent to which Oracle relies on maintenance revenues for both its top line and more important its very high level of operating margins. By one calculation, Oracle’s support operating margins constitute more than 100% of the company’s operating profit.”

Oracle’s financial health is currently centered around its ability to get its customers to hander over support renewals. This is why even the small bite taken by third-party support providers like Rimini Street is a cause for concern by Oracle.

Oracle has many similarities with the software vendor SAP, which also has a similar margin on its support.

How SAP and Oracle Use Support Margins

In both cases, the vendors only have a few good or differentiated products. For SAP this is the ERP system, and for Oracle, this is the database. For example, SAP has over 315 products, but outside of their large ERP system, there is no SAP product that can be said to actually be superior to other products. With Oracle, once outside of the Oracle database, there is no Oracle product that does not have a better competitor in that space, and in many cases, most of the competitors in the space are superior to the Oracle or SAP entry.

The limitation is that while SAP or Oracle will sometimes purchase leading applications, as time passes, those applications have fallen in relative capability as well as value as both SAP and Oracle increase the prices of those products they acquire. And neither vendor has shown the ability to improve their acquisitions. This is the strategy of non-innovative companies. It is why Oracle and SAP operate more as holding companies than technology companies.

  • The combination of high prices for the products of each company, along with the support overhead dramatically draw down the value of Oracle and SAP ownership.
  • Neither SAP nor Oracle competes on the basis of product competitiveness outside of their single products, instead, they use salesmanship and the established account relationship to push more and more products into their customers.

As we discuss other topics around Oracle’s support, there is this background from which the other items should be analyzed.

Category: Oracle