October 25th, 2006
Undermining the Support and Maintenance Market: Red Hat Today, Everyone Else Tomorrow?
Oracle's announcement that it will basically cut the legs out of Red Hat by offering a lower-cost support package sounded familar to anyone who's followed the likes of TomorrowNow, Rimini Street, and NetCustomer. All are companies that underprice Oracle's support costs for PeopleSoft, JD Edwards, and Siebel, and have been doing a relatively good job of taking customers away from the maintenance and support revenues that are an essential part of Oracle's burgeoning applications revenue picture.
While none of the above have made a dent in Oracle's marketshare or revenues, they are seeding the market with a very dangerous notion for Oracle, and pretty much anyone else in the enterprise software market: maintenance and support are over-priced. As Oracle has proved, and SAP did two years ago when it bought TomorrowNow, undercutting a competitor's support costs is a tempting competitive weapon, and one that Oracle has now used (borrowed, more accurately) to its advantage against Red Hat.
But beware all ye who venture down this path: Setting customer expectations that they could and should be paying less -significantly less - than they are paying now for support and maintenance could come back to haunt everyone in the enterprise software market. If the expectations are set that there should be a better price, then, capitalism oblige, the markets will follow suit. Which will do major damage to the revenue basis for every major and minor enterprise software vendor's financial model.
I doubt that Oracle's intention was to start a trend that could eventually harm its revenues, but it must be careful that a long term revenue hit could be a significant unintended consequence of this deal — and the ones like TomorrowNow and Rimini — that might come back to haunt Oracle and everyone else dependent on maintenance and support revenues.
And who isn't?
One footnote to my last blog: Oracle Chairman Jeff Henley's comment that buying a Linux company wouldn't be as remunerative as buying another apps company was right on the money: Oracle figured out a way to make an impact in this market without making a direct acquisition, saving on the capital and integration costs of an acquisition while hopefully reaping much of the revenue upside.
Joshua Greenbaum's opinions on enterprise software have annoyed enough vendors that he now checks under the hood of his PC every morning before he boots up. For disclosures of Joshua's industry affiliations, click here.
