Oracle Case Study

Oracle Case

Q1.          Describe the key aspects of Oracle’s business: what does it sell, to whom, and how?  How has its business success reflected the unusual economics of software?  (3 pts)

Oracle’s main product is their relational database management system which they provide to users as a software while they also develop and distribute a host of products to interface with this database system.  These products have applications in financial reporting, manufacturing management, computer aided systems engineering, and office automation.  

The company has 2 main lines of revenue: license and sublicense fees and maintenance agreements along with consulting and training services.  

The company licenses ORACLE products to end users under license agreements.  These end users are organizations of all sizes in both the public and private sector.  Some of Oracle’s main customers include the federal government, Proctor and Gamble, Apple, and Verizon.  Oracle also enters into agreements where the company licenses ORACLE products and receives license and sublicense fees from original equipment manufacturers (OEM) and software value-added relicensors (VAR).  For the OEM contracts, Oracle receives an initial nonrefundable fee and further sublicense fees based on how many copies of the software was distributed.  For the VAR contracts, Oracle receives a development license fee as well as the initial nonrefundable fee and sublicense fees.  Sublicense fees are ordinarily a percentage of ORACLE’s list price.

Oracle receives revenue from maintenance agreements whereby the company provides technical support and telephone consultation on the use of the products, problem resolution, system updates, and user documentation.  The revenue received from the maintenance agreements is a fee that is a percentage (ranging from 7.5%-22%) of the list price of the license being used, payable at the end of the maintenance period.  Oracle also receives revenue by providing consulting and training services to its customers related to its software products.

The company has a direct sales force which mainly focuses on larger corporate clients.  The salesforce at the company has been known on occasion to offer extended payment terms to a potentially valuable customer in order to close a sale.

Its business success has been one of very rapid growth which accurately reflects the unusual economics of software. Moreover, once you create the valuable software, it is essentially dependent on how many customers you can get and how many licenses you can provide in order to grow revenues.  Oracle was able to have some R&D breakthroughs in the early 80s as they developed and eventually released their flagship product.  Once they perfected this system and developed supporting products, they were able to grow their revenue very fast by expanding their customer base and using an aggressive direct sales force.