“Beware Greeks bearing gifts” is a cautionary axiom that applies to any situation where a suitor (or vendor) seems to be offering something for nothing. Although customers might not see it as a Trojan Horse, Oracle’s cloud competitors should view its new rewards program as a promotional incursion on their turf. Although the program seems innocuous enough — cash (on OCI spending) for credit (on application support) scheme long employed by credit card companies, airlines and grocery stores — given Oracle’s continued dominance of enterprise databases and adjacent markets, the program could tip the balance as organizations consider migrating on-premises systems to a cloud platform.
The more you spend, the more you save
Oracle Support Rewards is a straightforward loyalty program that offers credits usable for technical support to incentivize spending on Oracle Cloud Infrastructure (OCI). The program capitalizes on the fact that all production Oracle deployments entail a support contract and targets organizations already considering migrating Oracle workloads to a cloud service. The pitch is, why use BYOL to move an Oracle system to AWS when you can shift it to OCI and get most, if not all of your software support contract covered via rewards?
The rewards program provides 25-cents on the dollar of OCI spending as a bonus that can only be redeemed to offset support bills. Furthermore, Oracle’s best customers, i.e. those with an all-you-can-eat Unlimited License Agreement (ULA) bank credits at an even higher 33% rate. Thus, in Oracle’s ideal scenario, a ULA customer with a $1 million annual support bill could entirely offset the costs by spending $3 million on OCI services. Rewards credits are added to Oracle’s other volume discount program that yields up to 25% off the standard price for OCI bills above $10 million annually.
Of course, spending $3 to save one only makes sense if you were planning to spend that $3 somewhere else that doesn’t offer a rebate. And herein lies the logic behind Oracle’s strategy:
- Assuming that the customer is committed to Oracle software over the medium-to-long term (a significant, but not unreasonable assumption) and therefore will require a software support contract regardless of where the application is deployed.
- Further assume that the organization is unwinding its data centers by migrating some existing and most future applications to cloud infrastructure (again, eminently defensible and even more likely post-pandemic as executives saw the benefits of cloud scalability and deployment agility.
- Add incentives to improve the lifetime NPV of using OCI versus an alternative cloud including option to convert application support charges to cloud app subscriptions, BYOL license flexibility and universal credits with escalating discount tiers for OCI services.
- Once on OCI, customers add incremental spending on new cloud services that Oracle’s cloud marketing VP Ross Brown says can be many times the amount of an organization’s initial commitment.
- Convert software customers using BYOL on OCI to recurring-revenue PaaS and SaaS products like Autonomous Database and Fusion Cloud ERP.
In unveiling the rewards program, Founder and Chairman Larry Ellison summarized Oracle’s cloud pricing strategy as offering low everyday prices" with transparent, published discount rates. How ironic that Oracle wants to become the Walmart of cloud operators.
Oracle can talk all it wants (and does!) about having the best, most cost-effective cloud for enterprise and SaaS workloads with managed, self-tuning services and better security, but money talks. For a product where the lifetime support costs might be higher than the initial software investment, any opportunity to lower them by choosing OCI over a competitor is a powerful incentive.
Sacrificing short-term margin for long-term revenue streams
Oracle is making the same pivot from license and support fees to XaaS subscription revenue as every other software vendor born in the pre-cloud era. The attractiveness of ARR (annual recurring revenue) to both company investors and financial analysts is evident in the stock performance of companies like Adobe that have already made the shift. Although not a perfect comparison, one look at the price charts of Oracle, Adobe and Salesforce over the past three and a half years shows that one of these is not like the others.
Examining some key financial ratios also illustrates how Wall Street values a dollar of SaaS revenue and earnings more highly than a dollar of license and service income. While the comparisons aren’t perfect, Oracle’s stock price could explode through multiple expansion if it can convert most of its revenue from upfront licenses and support contracts to recurring cloud subscriptions.
Indeed, Adobe is the quintessential example of a company that successfully migrated its products and customers from software purchases to annual subscriptions. Starting its conversion to SaaS products 9 years ago, more than 90% of Adobe’s revenue is recurring (ARR).
Derek du Preez recently summarized another “stellar” quarter at Adobe, noting how its SaaS products were well-positioned to address changing business needs last year as organizations were forced to rapidly shift to online work and commerce (emphasis added):
Adobe's three core cloud offerings are closely aligned to the investments in digital tools we've seen from organizations during the COVID-19 pandemic, which is likely what is spurring the company's impressive growth. The need to collaborate digitally (document), engage creatively and build experiences that matter to customers and employees is standing Adobe in good stead. Execution will obviously still be key over the long-term, but it is in a good position to take advantage of market trends. Whilst the three distinct clouds have their independent draws and appeal for buyers, it is also true that they complement each other as organizations seek to not only operate digitally, but also engage digitally.
In contrast, Oracle’s revenue has gone slower for a decade, with a meager 2.6% CAGR since June 2011. Ellison and company sorely need some of the juice a cloud subscription model can provide and, like Adobe before it, see converting its large stable of existing customers as the prime opportunity.
As I wrote almost three years ago, Oracle’s future is in SaaS, not IaaS, but the new rewards program shows that it correctly understands that for most of its customers, SaaS is, at least initially, a bridge too far. The path to cloud subscriptions runs through infrastructure services. Furthermore, since Oracle needs cloud infrastructure to operate SaaS at scale, like Amazon with AWS, it might as well package it into OCI infrastructure services.
By providing several discount, migration and reward programs, Oracle hopes to reduce the friction and cost of cloud adoption by using OCI versus its competitors. Offering a simpler pricing model and published discount schedule further improves the odds customers will choose OCI (and eventually Oracle SaaS) over AWS or Azure.
The irony of Oracle trying to be the Walmart of cloud computing isn’t lost on customers that have fought with its sales force and byzantine license agreements. Indeed, Oracle’s history might be too much to overcome for organizations that have longed for any excuse to change vendors. However, the company has been aggressively introducing cloud technologies like its new Arm instances, Dedicated Regions and high-IOPS block storage that improve price-performance and simplify hybrid cloud deployments. Thus, it’s a mistake to write off OCI as too little, too late. Instead, it’s best understood as a path moving customers to Oracle’s SaaS and PaaS products, where they’ll generate years of predictable and growing ARR.