Oracle-SAP suit won't clear third-party support fog

Oracle CEO Larry Ellison is focusing the case on intellectual property, not the specter of third-party support

No matter the outcome of Oracle and SAP's sprawling intellectual-property dispute that goes to trial Monday, it will likely fail to clear up questions that have major financial implications for software vendors and customers around the globe.

The lawsuit revolves around SAP's now-shuttered subsidiary, TomorrowNow, which provided discounted support for Oracle applications. Oracle alleged that TomorrowNow overstepped its bounds, illegally downloading support materials and software in excess of customers' rights.

SAP has accepted liability for wrongdoing by TomorrowNow, and on Thursday also said it would not contest charges SAP itself contributed to copyright infringement. Now it wants the trial to center on damages due to Oracle, which it has estimated to be in the tens of millions. But Oracle wants SAP to cough up billions.

The trial could be a veritable clash of tech titans marked by weeks of colorful testimony, accusations and recriminations, if the recent series of public broadsides from Oracle CEO Larry Ellison is any indication.

But the case's central theme has become like so many others in Silicon Valley: one vendor accusing another of stealing its intellectual property. The issue of third-party support, which has a potential effect on every enterprise software customer, has been largely shunted aside.

That will not be the case with a related but much lower-profile suit Oracle filed early this year against a small company called Rimini Street.

Rimini Street was founded by Seth Ravin, a co-founder of TomorrowNow. Oracle has charged that Rimini Street simply repeats TomorrowNow's "corrupt business model."

But in contrast to SAP, Rimini Street has denied any misdeeds, and says it makes "extraordinary efforts" to protect Oracle's intellectual property rights.

In a previous interview, Ravin said Rimini Street anticipated Oracle's action and budgeted for legal costs accordingly. Ravin hopes the case will finally put to rest legal questions around third-party support, he said.

The stakes don't get much higher for software companies like Oracle and SAP, whose revenues heavily depend on annual support fees.

Charged as a percentage of the cost of licenses in use, usually 22 percent, over time they deliver far more revenue than the initial software sale. Indeed, vendors commonly sell software licenses at steep discounts, simply to get the customer signed up and the maintenance dollars rolling in.

Support revenue is not only plentiful -- it is highly profitable. Oracle, for one, has notched profit margins north of 90 percent on the line item.

Meanwhile, companies like Rimini Street cater to customers with stable systems and little desire for upgrades, which are only available with a vendor support contract.

The third-party support concept is commonplace for other types of products, said Altimeter Group analyst Ray Wang. "If I buy a Ford, do I always have to take it to the Ford dealer? Buyers would say it's anti-competitive if Ford told you [that] you had to use their tools and only their mechanics to service your car."

Perpetual software license agreements held by customers give companies like Rimini Street room to deliver services like bug fixes and regulatory updates, but they can't touch the source code, Wang said.

But while third-party support customers don't get upgrades, they also pay far less money for the service.

Oracle itself once acknowledged the appeal of third-party support. In 2006, it announced a partnership with Systime for supporting SAP's R/3 ERP suite, a precursor to the current Business Suite 7. R/3 is still in use at many companies around the world.

Neither company responded to requests for comment on the status of that partnership.

Only a handful of other third-party support companies exist. They include Spinnaker Management and netCustomer. In contrast to Rimini Street, they have kept a fairly low profile.

However, there have long been rumblings that much larger systems integrators provide some third-party support services, but keep such activities under tight wraps for fear of jeopardizing their relationships with software vendors on lucrative integration and implementation projects.

Some observers believe those SIs would be far less reticent if Rimini Street wins its legal battle with Oracle.

There's no question that the last thing Oracle, SAP and their peers want is a tidal wave of able competition for their prized support revenues.

And although many customers won't ever want third-party support because it doesn't include upgrades, the presence of many viable alternatives could potentially force vendors to lower their fees.

But the fact remains that many buyers and potential sellers of third-party support are still seeking clarity on what their software licenses entitle them to, Wang said.

The Oracle-Rimini matter could go a long way toward delivering that, but it may be a long wait. Barring a settlement, which doesn't seem likely given Oracle's vigorous pursuit of SAP, the suit isn't scheduled to conclude for years.

Chris Kanaracus covers enterprise software and general technology breaking news for The IDG News Service. Chris's e-mail address is Chris_Kanaracus@idg.com

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Tags Oraclebusiness issueslegalservicessoftwareapplicationsSAPintellectual propertyCivil lawsuitsApplication services

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Chris Kanaracus

IDG News Service
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