Depending on whom you ask, Oracle’s transition to the cloud has been either specious or successful. Last week’s quarterly earnings gives us a little insight into the true state of things – as do recent claims the vendor is increasing software audit activity involving its Java software. While NPI hasn’t seen this activity first-hand, there is reason to believe we will in 2017.
The issue primarily centers on the use of Java Standard Edition (Java SE). While it’s free to use the programming language and platform to write apps, it is not free to install said apps on enterprise Windows devices for end-user use. This requires Microsoft Windows Installer Enterprise JRE Installer for which enterprises must pay a fee.
According to articles by Business Insider and The Register, sources say Oracle is focused on making sure customers aren’t getting a “free ride” with its Java solutions and are fully paying for proper use. In fact, it’s hired 20 Java specialists to support its License Management Services (LMS) department. Oracle typically charges $40 to $300 per user (or $5,000 to $15,000 per processor) running the software. Some Oracle customers are seeing six-figure audit penalty fees.
It’s important to note that Oracle hasn’t been too concerned about Java software compliance until recently. This solution-specific audit activity is timed with growing concern that Oracle isn’t on track to more fully transition its business to the cloud.
Interestingly, the numbers tell a more positive story.
The good news: Cloud revenues are up 62 percent to $1.1 billion. By and large, this is offsetting the contraction in its on-premise software business, which saw a 20 percent decline in revenues. SaaS and PaaS are the clear winner in this growth, with $878 million in revenues and 81 percent year over year growth. Co-CEO Safra Catz has told analysts that Oracle’s “cloud revenue will be larger than our new software license revenue next fiscal year when the transition will be largely complete.”
The bad news: Oracle’s IaaS offerings represent only a small portion of cloud revenues – just $175 million in sales last quarter and only a 6 percent increase. Oracle has been very vocal and aggressive in its pursuit of IaaS market leadership, and has positioned itself against Amazon as a prime competitor. Revenues for Amazon’s IaaS business (AWS) have increased by 55 percent to $3.23 billion.
This begs a rather blunt question: Is Oracle’s audit behavior a sign of difficulty increasing cloud revenues, or is Oracle just cementing its reputation as being difficult to do business with?
My take is “both.” Oracle has never shied away from a competitive showdown, even at the expense of the slack vendors typically cut loyal customers. Audit activity from Oracle has been on the rise for the last two years and we expect the trend to continue into 2017 and beyond.
Our advice to Oracle customers is to understand your use rights for Java SE if you’ve downloaded it or plan to do so. You also need to understand the hot buttons driving audit behavior from its LMS division. Java is just one example of where the vendor plans to extract more revenues in the form of compliance penalties in 2017.