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Oracle customers complain of cloud coercion

In December, Oracle won its day in court – but a poll reveals a sales tactic based on audit threats combined with heavy cloud discounts

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Earlier this month, a poll by the Itam Review identified anecdotal evidence that IT departments are being offered significant discounts to buy Oracle Cloud. The poll comes just six weeks after a US court dismissed a case that alleged Oracle had misled investors over Oracle Cloud subscriptions.

Experts generally do not put Oracle in the same league as the hyperscale cloud providers. Gartner’s Magic Quadrant for cloud infrastructure as a service report of July 2019 placed Oracle Cloud Infrastructure (OCI) as a niche player, best suited to enterprises requiring cloud infrastructure as a service (IaaS) for Oracle applications and for applications that require an Oracle Database.

This may be one of the reasons the company is pushing its cloud capabilities. In the earnings call for its second-quarter 2020 filing, the company reported revenues of $6.8bn in its total cloud services and licence support business, up 3%.

In a transcript of the earnings call, posted on the Seeking Alpha financial blogging site, Oracle CEO Safra Catz said this represented over 70% of total company revenues, and most of it was recurring revenue. But the $6.8bn figure includes the company’s revenue from maintenance and support contracts, which Oracle customers pay annually for software support, bug fixes and upgrades. Catz stated that on-premise licence revenue was $1.1bn, down 7%, as more of its customers were buying cloud instead of traditional licences.

Gartner’s Magic Quadrant for cloud infrastructure as a service report noted that many of the features developed for OCI would not be extensively used by Oracle’s core customer base. According to Gartner, Oracle is building capabilities mainly in response to request for proposals, which are often designed around the capabilities of the established hyperscale providers.

Discussing the poll, Martin Thompson, founder of the Itam Review, said: “We’ve known for a long time that Oracle sales reps are incentivised heavily. They receive an absurd amount of commission to sell cloud, and so they go to great lengths to sell Oracle Cloud, in spite of whether companies need it. Everyone knows this is going on.”

For example, said Thompson, Itam Review readers have reported that if they renew their on-premise contract, they might receive a 30% discount, but if they also opt to purchase Oracle Cloud, the discount is 60%.

In a number of instances, the Itam Review found that Oracle customers were being coerced into buying cloud services. “We were in an audit situation three years ago,” one user told the Itam Review. “Even though we had been licensed properly, due to mergers and acquisitions, Oracle figured out that the licences were not properly ‘transferred’ to the new companies. Oracle then threatened us with a fine of over €150,000.”

“Oracle sales reps receive an absurd amount of commission to sell cloud, so they go to great lengths to sell Oracle Cloud, in spite of whether companies need it. Everyone knows this is going on”
Martin Thompson, Itam Review

The user said Oracle offered to waive the penalty if €50,000 of Oracle cloud licences were purchased instead. “We agreed to do so, fixed everything, got that certificate of compliance,” the user said. “We never used that Oracle Cloud because we did not need it and because that cloud was not technically effective.”

Competitive challenges in the cloud

For Thompson, the poll illustrates the challenges that Oracle faces as it tries to establish itself as a major cloud provider in a market dominated by Amazon Web Services (AWS), Microsoft Azure, Alibaba and Google Cloud.

Oracle will often argue that its products work best on the Oracle Cloud because its engineers fine-tune and optimise the Oracle workloads, but Thompson said: “Oracle does not have a compelling enough offering. It is an economies-of-scale game.”

Even if Oracle’s claims about being able to run its software better on the Oracle Cloud are valid, said Thompson, a CIO who chooses an alternative cloud provider can always decide to buy professional services from Oracle to improve the performance.

Robin Fry, a solicitor and legal director of Cerno Professional Services, said: “We are seeing, as part of any audit settlement, strong pressure to acquire some Oracle Cloud products, even if the customer confirms they have little interest in using them. It’s possible that Oracle management do not have visibility on this, but there’s an obvious difference between securing some minimal cloud purchases as part of a substantial audit settlement and the customer moving to Oracle Cloud.”

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Thompson added: “In traditional software sales, you could do ‘smoke and mirrors’ with deals because there was no material cost in selling software. But the cloud is very different. It costs money to build out IT infrastructure.”

This means that heavy cloud discounting that does not lead to cloud subscription renewals is a financial drain, said Thompson, and the cloud provider may have to build out its IT infrastructure to support customers that do not renew their subscription.

Court dismisses Oracle Cloud subscription case

In 2018, the City of Sunrise Firefighters’ Pension Fund began a class action against Oracle, alleging securities fraud, which claimed that the company had misled investors on the strength of its cloud business. Oracle argued that the case should be dismissed.

Court papers published on CaseText reveal that a confidential witness, who worked at Oracle as a regional sales director across the Middle East and Africa, claimed: “Executives were instructed to offer customers a 90% discount on on-premise licences if they purchased $300,000 worth of cloud subscriptions.”

On 17 December 2019, the US District Court, Northern District of California, San Jose Division, dismissed the case. 

US district judge Beth Labson Freeman ruled: “Because plaintiff (City of Sunrise Firefighters’ Pension Fund) fails to adequately plead that defendant (Oracle) made any false or misleading statements and that they did so with scienter [knowingly], the motion to dismiss is granted.”

However, the court gave the City of Sunrise Firefighters’ Pension Fund until 17 February 2020 to file an amended complaint, which sets out the securities fraud allegation in chart form.

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