Oracle Lowers Prices, But Not Far Enough

Oracle lowered the license fees on its entry-level database and launched an incentive program to encourage companies to migrate away from other vendors. But its dependence on database revenue threatens its long-term ability to meet customer demand for lower prices.

The Bottom Line: Oracle’s new price incentives signal that it is beginning to accept the demand for lower database costs, but it still has much further to go. Oracle needs to offer more for less, focus on functionality customers want, and diversify its operations.

What It Means: To compete with Microsoft’s SQL Server, Oracle has lowered the per-processor license fee for Standard Edition One, its 4-month-old entry-level database server, to $4,995 from $5,995, the same list price as SQL Server Standard Edition.

However, anyone considering Standard Edition One over SQL Server Standard Edition needs to consider the fine print:

• SQL Server Standard Edition can be used with four CPU servers, while Standard Edition One is limited to two.
• SQL Server Standard Edition includes licenses to Business Intelligence (BI) software, Reporting Services, at no additional charge. Licenses to Oracle’s BI functionality must be purchased separately.
• Even if the initial license fees are the same, the total costs between the two will likely be different because of the costs of ongoing technical support.

Oracle also announced the inception of a Safe Switch program. Those migrating off of DB2, SQL Server, Informix, or Sybase can receive a trade-in credit of up to 100% for database licenses.

The Takeaway: Many customers are well underway in consolidation projects and willing to absorb short-term migration costs--but only if long-term costs will be lower. The prospect of consolidating from less expensive databases onto Oracle should give customers pause. Even if there are no initial license fees because of a Safe Switch credit, customers could still suffer high costs from ongoing technical support, future licenses, porting custom code, and retraining or replacing database administrators.

Oracle sees the light, but its lack of diversification is beginning to bruise

Several developments are making current database prices unsustainable: the commoditization of databases, increasingly heavy cost containment pressures, customer dissatisfaction with costs, the migration of business logic into application servers, and the emergence of open source databases.

IBM and Microsoft have been responding with relative agility. IBM has been slowly cutting prices, focusing on Linux, and emphasizing Global Services. Microsoft has been expanding the scope of its licenses and making a scaled-down version of SQL Server available for free.

However, Oracle has been hesitating, facing a hazard that the others aren’t--significant loss of revenue. Consider the following:

• Higher prices argue for fast, large changes. Customers associate substantially higher overall costs with Oracle, compared to DB2 and SQL Server. Oracle needs to lower prices dramatically to respond to deteriorating market conditions and change the customer perceptions that are responsible for adoption and retention.
• A lack of diversification argues for slow, small changes. Oracle is far more dependent on database revenue than IBM or Microsoft. Price cuts of any true substance would put significant revenue at risk.

The Takeaway: Customers, of course, don’t care about Oracle’s income statement; they want lower prices. The totality of this environment puts efforts to diversify, such as the proposed acquisition of PeopleSoft, in the critical path of Oracle’s future prosperity.

Conclusion: Oracle needs to be bold, but careful. Here’s what we think Oracle should do:

• Cut prices on the Enterprise Edition. Changing the price-value tradeoff of Standard Edition One is a good start. However, the Enterprise Edition is the most widely adopted version of Oracle, and is behind most customer dissatisfaction over cost. With many midmarket customers using Enterprise Edition, price cuts can’t wait much longer.
• Diversify. In the next 10 years, Oracle has to reinvent itself. Increasingly, the attention of CIOs is being captured by packaged applications, which transcend commodity products like databases, hardware, and operating systems. Oracle has to be successful in this space--and this goes well beyond PeopleSoft.
• Deliver more functionality for the money, but only needed functionality. Aside from reducing prices outright, customers will find more value by bundling other technologies that customers want. Including BI functionality with the database server, or including the database with Oracle Applications, would be a fine start.

AMR Research originally published this article on 12 February 2004.