Oracle Hikes Prices to Fend off Flagging Dollar

Who has the audacity to raise prices in a soft market? Oracle does.

The business-software giant recently tacked 15% to 20% onto its fiscal 2009 prices. It's a bold move that gives the company more wiggle room in competitive sales negotiations. But it also addresses a fatal flaw in Oracle's worldwide pricing model.

This month, Oracle raised prices across the board, according to Jane Disbrow, research vice president at Gartner. The company had not raised per-server license prices in over six years, she said.

Increases of that magnitude "track with the industry," which had continued to nudge prices upward, says Stuart Williams, senior analyst at Technology Business Research.

Oracle's move follows a policy change at business-application competitor SAP within the past two months that effectively raised maintenance fees to match Oracle's.

Now, Oracle's new price hikes open the door for SAP to follow suit, Disbrow says.

Although it has so far not raised prices broadly, SAP has restructured some products in ways that push prices higher, Gartner analyst Daniel Sholler says.

Oracle is the leader in database software, but also has a broad portfolio of business applications and so-called middleware. SAP is the leader in business applications, but Microsoft is also strong in applications and database software. IBM is the middleware leader, also selling database and collaboration software. Big Blue said it has not raised across-the-board prices in the past year.

Oracle shares were off 2.7% to $22.08 in recent trading amid the market's broad selloff.

The effect of Oracle's increase, at least initially, will be to grow license revenue at a time when IT budgets are under pressure. IDC estimates worldwide corporate technology spending will slow to 4% growth for 2008, from a rate of 6% last year. But a Gartner survey of U.S. IT chiefs found that 25% reduced their budgets in the first quarter, while only 10% spent more.

However, Oracle's international revenue will begin to climb almost immediately, Disbrow says. The list increases are a reaction to pricing outside the U.S., which has fallen as the dollar has weakened, she says.

Unlike SAP, which prices software on a regional basis, Oracle sets worldwide prices. As a result, Oracle software has gotten cheaper abroad. Yet international customers who bought the software years ago at higher prices pay maintenance at a fixed percentage based on the original price. Those customers are paying more for annual support than customers who bought Oracle software recently.

The price increase addresses that disparity, Disbrow says. While both SAP and Oracle offer deep discounts of 50% to 60% off list prices, Disbrow expects Oracle to discount less outside the U.S., beginning immediately.

But don't look for a big, first-quarter jump in Oracle license revenue. Analysts say Oracle will likely phase in the new prices, with greater discounts being given initially and dropping in fiscal 2010.

Actual deal pricing will creep up slowly -- on a curve, Williams says.

Sholler says software prices and maintenance charges across vendors will tick up a couple of points every quarter over the next year. But all developers will keep increases just below the tripwire for switching to another vendor, he adds.

Landing new clients willing to pay hefty license fees is only part of the story. "License pricing gets you to the altar, and gets you married," Williams says. "Maintenance is the long-term relationship."

Oracle has built a revenue-generating machine by buying three dozen software companies in recent years whose clients pay regular maintenance fees entitling them to software upgrades. At BEA Systems, which Oracle bought in 2008, license fees made up just 36% of last year's revenue. Maintenance payments contributed $774 million.

During the first three quarters of the fiscal year just ended, Oracle's maintenance and upgrade revenue rose 24% to $7.5 billion.

Williams says he does not expect a shift in Oracle's maintenance pricing this year.

SAP recently changed its maintenance policy to match Oracle's by getting rid of a cheaper support option. SAP now requires customers to pay the 22% rate, in line with Oracle's, Disbrow says. It includes additional services, but SAP customers "are struggling with justifying those benefits," she said.

Avian Securities analyst Jeff Gaggin said in a note Wednesday he believes SAP is "struggling to generate business due to macro factors and competition from Oracle."

While SAP is well-positioned, "the macro environment is putting considerable pressure on deal sizes and close rates for applications, which is SAP's bread and butter," Gaggin wrote.

Author: Ivy Lessner @ www.thestreet.com