Oracle cloud growth driven by threats to customers, claims shareholder lawsuit

Oracle executives weren't entirely honest about the company's 2017 cloud growth spurt, claim disgruntled shareholders

Oracle has been accused of mischaracterising its growth in cloud computing in a new lawsuit brought by two disgruntled shareholders.

They claim that the company made false statements over the growth of Oracle's cloud services in 2017, growth that rapidly slowed in 2018.

Rather than emulating the success of Amazon Web Services, they claim that Oracle's growth was made on the back of bullying existing customers into shifting to Oracle's cloud, particularly with threats to up their legacy database licence costs should they migrate to a rival's cloud service.

Oracle don't really work with anything but themselves... you basically have no reason to ever want to touch them

In particular, the law suit claims, Oracle used the stick of software licence audits to beat its customers into purchasing Oracle's own cloud services.

"Oracle relied on improper sales practices to railroad its customers into purchasing the company's cloud offerings. One such practice was to ‘audit' customers' use of the company's non-cloud software licences and charge those customers hefty penalties unless the agreed to shift their business to Oracle cloud programs," the law suit maintains.

It continues: "The company's use of audits was well known within the industry, but the extent to which the company was using threats of audits to coerce customers to purchase cloud products was not known to investors, and expressly denied by the company.

"In addition to threatening customers with audits, the company also decreased its customer support for certain of its on-premise and hardware systems in an effort to drive customers away from such systems and into cloud-based systems. The company also strong-armed customers by threatening to dramatically raise the cost of legacy database licences if the customer chose another cloud provider."

The most important factor with Oracle is that they are just not nice to deal with when it comes to licensing

The law suit, filed on Tuesday, was nosed out by The Register.

It goes on to claim that Oracle's senior executives breached their fiduciary duty to shareholders because they were aware of the nature of Oracle's cloud growth in 2017, but chose to paint it as a business success story, rather than the result (to a lesser or greater degree) of coercion.

Indeed, they even cite an analyst conference call in which such claims were brought up, and quote a company executive deflecting the question, while co-CEO Safra Catz was adamant that it was "absolutely not a one-year phenomena".

The company is accused of making "false and misleading" statements to investors because Oracle's management knew that cloud revenues "were driven, in part, by improper, coercive sales practices, which include:

(a) Threatening existing customers with ‘audits' of their use of the company's non-cloud software licences and levying expensive penalties against those customers, unless the customers agreed to shift their business to the [Oracle] cloud programs;

(b) Decreasing customer support for certain... on-premises or hardware systems, in an effort to drive customers away from such systems and into cloud-based systems; and,

(c) Strong-arming customers by threatening to dramatically raise the cost of legacy database licences if the customers chose another cloud provider."

However, Oracle's cloud push faltered when it revealed its latest quarterly figures on 19 March 2018, with revenue growth down by half, and forecast by the company to slow down even further in the following quarter, when it stopped stripping out its cloud revenues altogether.

Computing analysis: Of all the companies we talk to CIOs about at Computing, none arouse more passion than Oracle, and not necessarily in a good way - especially when the dictaphone is switched off and the CIOs can talk freely, off the record.

"The most important factor with Oracle is that they are just not nice to deal with when it comes to licensing," one ICT change manager in the public sector told Computing.

"We hated them. We didn't even go to trial with them. The number one issue for us was pricing," a CISO in the media sector told us.

While SAP's judicious management, especially around the SAP User Groups, helps to contain user disgruntlement over many issues, and Microsoft perhaps gets off more lightly than it should, CIOs reserve their sternest and most forthright invective for Oracle.

And that invective isn't just reserved for the company in terms of its licensing costs, but the small print within licences and the audits that CIOs often feel are unfair - designed to catch them out, rather than help them out.

"People are seeing massive spikes in their bills and they're wary of Oracle now. It's not that their stuff's not good, it's just that there doesn't seem to be a scale," the head of IT in the construction sector told Computing.

They continued: "You start with them and you're buying 1,000 instances, or something with them, and you grow a bit and you're now buying 1,000,000 [but] the amount you're paying doesn't seem to enjoy the discounts that you were expecting.

"You're being charged for a car that can do 200mph even though you never go over 50, but you're paying the premium of having a sports car with Oracle."

Many have looked to cloud and open source as a way of escaping the lock-jaw of Oracle databases and applications, even if that entails significant upfront cost. So it's no surprise that the company has been particularly aggressive in trying to push on-premise customers onto cloud contracts in a bid to head them off.

Indeed, the only surprise is that it has taken so long for shareholders to take notice, and that there have not been more court cases between Oracle and some of its less-than-happy band of customers.

Furthermore, Oracle's reputation is such that winning over new customers is probably one of the hardest jobs in IT.

"Oracle don't really work with anything but themselves. So unless you're heavily into Oracle, which is a whole other level of pain, you basically have no reason to ever want to touch them," a data loss security lead in the telecoms sector told Computing.

For Oracle, the latest court case is unlikely to serve as a wake-up call and, even if it did, for a lot of customers too much water has already passed under the bridge. They are already looking to check-out at the first reasonable opportunity.

Perhaps the most damning comment of all from Computing CIO interviews, though, came from the IT director within a financial services organisation, likening the "dinosaur" Oracle to Xerox.