Red Hat To Oracle: Have You Tried Free?

Oracle probably isn't the first company that comes to mind when words like "austerity" are used. Perhaps for that very reason Oracle president Mark Hurd recently took to the blog-o-sphere to argue that going all-in with Oracle, even at a premium price, delivers better value. Ironically, Red Hat CEO Jim Whitehurst used the same LinkedIn blog platform just a few days earlier to argue a very different picture of what customer value looks like.

Hint: It looks a lot like "free."

Oracle Tries Out A Jobsian Reality Distortion Field

Hurd's post is somewhat surreal. Basically, it reads like an anti-Oracle screed, talking up the need for CIOs to do more with less, talking down legacy enterprise apps and infrastructure, but conveniently overlooking the fact that it Oracle that dominates IT budgets—and not in a good way. He derides applications and their underlying infrastructure that are 20 years old (some of Oracle's applications are 20 years old and its database is even older), insisting that "they require enormous funding to keep them fed and watered—and that’s why there’s nothing left over for innovation."

According to Gartner's recently released vendor rating for Oracle, Hurd should know. The Redwood Shores giant gets positive marks for its technology, and improved ratings on support. The one area that it went from bad to worse? Pricing. As the report notes:

IT procurement professionals express frustration with negotiating Oracle contracts, dealing with changes in pricing and license metrics—especially for Oracle acquired products—and the significant increase in audits. In surveys, IT procurement professionals consistently rate Oracle as the most challenging vendor with which to do business.

You don't increase your rate of audits unless you're trying to squeeze more money from an existing customer base. That's not surprising, given that Hadoop and other new technologies are hammering Oracle's technology relevance and pricing power, according to The Wall Street Journal. It's why Cowen & Co. analyst Peter Goldmacher calls argues that Oracle's biggest problem is that "they charge too much for their products." 

And yet Hurd is audacious enough to suggest that businesses want to work on big new initiatives "but you’re not able to capitalize on all those opportunities because so much of your IT budget is being sucked up by stuff in the basement that creates little or no value!" The exclamation point is his, as are the expensive maintenance contracts that Oracle and other tech giants use to generate revenue for the vendor, but little value for the customer.

An analysis from a few years back holds true today: maintenance fees don't translate into R&D investments.

Meanwhile, Back In Red Hat Land...

Just a few weeks earlier on the same LinkedIn Influencer pages, similar to what he argued here on ReadWrite, Red Hat CEO Jim Whitehurst also talked up customer value, but with a very different approach. Instead of developing all innovation itself, Red Hat, like other open-source companies such as SUSE, Hortonworks and others, relies heavily on open-source development communities. Open-source communities provide a huge amount of "raw material" of exceptional quality.

But some CIOs want more. Enter Red Hat.

Taking this core, free open source, "Red Hat adds value by providing businesses with stable, supported solutions that are dependable and reliable." Red Hat, in other words, adds support, code, testing or other value, and then charges for supported subscriptions to that product. In this way it's similar to a traditional maintenance contract, except that there's no upfront license fee, and value must be delivered every day to the customer to ensure they renew their subscription.

So it's not really much like a traditional maintenance contract at all.

Red Hat has "figured out how to harness the power of the open source development model while adding unique value enterprises need." Other companies, including Oracle for some of its products, also do this, complementing open-source software with high-value software and services. The key, Whitehurst argues, is that "All parties find value" in this equation, not just the vendor.

Sophistry Is Back In Vogue

All that said, Oracle makes a huge mountain of cash each year, and far more than Red Hat. While this may be changing, as enterprise IT increasingly chafes at low-value, high-margin products, it's clearly the case that enterprise IT finds value in Oracle's technology, even at outsized prices.

 The key for Oracle, going forward, is to change its pricing model to be more conducive to the subscription models familiar to cloud and open source. Legacy software vendors have tried to protect their outdated pricing models with long-term ELA contracts, but even this strategy is failing in the face of cloud and SaaS. Hurd argues that Oracle "gets" cloud and that it, coupled with engineered systems, position it to lead enterprise IT into the future.

Maybe. But I still can't shake the thought that Hurd's argument is correct, but that he may be the most singularly inappropriate person to be making it. Hurd's post would have sounded more credible coming from Whitehurst. Time will tell if CIOs agree.