Oracle List Prices Shift: Don't Panic

Recent changes to Oracle’s pricing may appear to be a simple price increase, but upon closer examination, factors such as dollar devaluation, renewed competition from SAP, and market assertiveness appear to play a bigger role in Oracle’s pricing strategy. Forrester recommends that clients continue to focus on actual price paid instead of discount achieved and leverage the enterprise software licensee bill of rights (LBoR) as a guide to software selection and negotiation.

Dollar-based pricing drives the bulk of recent ‘price increase’

On June 16, 2008, Oracle updated its localisable price lists and software investment guide. Applications previously priced at $3,995 per user rose 15 percent to $4,595 per user, and database pricing increased 18.75 percent from $40,000 per CPU to $47,500 per CPU. Other prices increased by approximately 15 percent. Despite Oracle’s role in vendor consolidation, increases during an impending economic downturn appear illogical. Forrester believes that recouping for dollar devaluation is the main rationale behind the recent price shifts. Here’s why:

Oracle offers one 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 percent to 35 percent range for multinationals, which purchase in the pound sterling, the euro, and to a lesser extent, the Japanese yen. As a result, price increases mainly affect the US, while other Euro zone countries will not see a major increase in real dollar terms.

Management aims for 50 percent profit margins. During the 2007 Q4 earnings call, Oracle CEO Larry Ellison stated a goal of reaching 50 percent margin and 20 percent earnings annual growth. With Forrester’s estimate that more than 50% of Oracle’s sales and sales expenses are incurred outside of the US, the currency issue has hampered this margin objective and created pricing arbitrage. In the past, Forrester and others have recommended that clients purchase in non-dollar currencies and take advantage of the currency arbitrage. Oracle’s pricing moves seek to mitigate this end-user pricing strategy.

Market competition plays a role as well

Oracle typically implements pricing changes every nine to 12 months to account for iterative changes and acquisition activity. Some of these recent changes reflect the level of competition Oracle faces in the market, such as:

Business intelligence (BI) minimum pricing cuts reflect a push toward SMB. Pricing models shift from enterprise pricing at $400,000 per customer for products such as financial BI analytics to an SMB-friendly $5,800 per named user with a 25 named user minimum. This change in list pricing reflects a minimum user drop from 69 users, effectively targeting the SMB market while raising the price for companies with more than 69 users.

App server increases reflect Oracle’s dominant market position. The price for BEA WebLogic Server is now $25,000 per CPU, a 47 percent increase from $17,000 per CPU. Currency fluctuations cannot explain this level of price increase. Forrester believes that one possibility could be an overall change in packaging that may include additional components. But thanks to the acquisition of BEA Systems, Oracle now has enough application server market dominance to drive up prices.

Contracts must account for the software ownership life-cycle

Software ownership spans across five phases: selection, implementation, utilisation, 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. Therefore, Forrester recommends the following to Oracle clients:

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 affect the final cost. Forrester expects the software market to remain competitive in the US, and licence 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 percent discount for 2008 would be required to achieve the same 20 percent discount in 2007 due to the list price increase.

Minimise maintenance fees. Maintenance represents the largest chunk of long-term application costs. Rates at 20 percent to 25 percent a year represent the equivalent of buying new software every five years and spending two times the original licence 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.

Leverage the enterprise software licensee bill of rights. Forrester’s enterprise software LBoR reflects enterprises’ best practices in negotiating software contracts and vendor partner agreements. Because leverage wanes after the initial selection phase, business process and applications professionals should immediately incorporate these best practices into the management of current vendor relationships and the wording of future vendor contracts.

Finally, Forrester believes that the dollar devaluation not only affects the price of oil, but now enterprise software as well. Therefore, one should 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.

R ‘Ray’ Wang is VP and principal analyst with Forrester Research. He can be reached at incomment@forrester.com