Oracle-Sun deal still causing pain

Channel partners struggle to replace lost profits

When new management takes over, changes in methods and programs are to be expected; however, pulling the plug overnight on longstanding business arrangements is not.

But that’s precisely what happened when Oracle Corp. completed its $7 billion purchase of Sun Microsystems Inc. in January and immediately canceled a rebate program for its federal partners that 11 months later still has the resellers crying foul and the government itself unable to act.

“Oracle killed all back-end rebates in the federal space, zip, which was significant to the [resellers’] overall profitability,” said Alan Bechara, president of PC Mall Gov, a value-added reseller (VAR).

Although he called it “purely a business decision,” Bechara is among those not happy about Oracle suddenly ending the longstanding discount arrangement Sun had with its government resellers.

Under the Sun rebate program, partners could earn additional points collectible after the sale.

Bechara explained Sun partners could qualify in a number of ways, including obtaining and maintaining certain levels of technical and sales certifications on specific Sun products; marketing and advertising them through print ads, trade shows, catalogs and online; and specializing in certain Sun products and making advanced purchases.

“Oracle has a way of doing business, especially through the channel, and it’s probably the right way from a software perspective,” said Gary Brown, executive vice president at Force 3, a government reseller in Crofton, Md.

“But when you’re dealing with hardware, I think there are intricacies and differences between hardware and software sales,” he said. “Software tends to be much more commoditized.”

Brown explained that software products go through multiple tests and improvement versions even as they are being sold.

“Whereas on the hardware side, it really takes a lot of evaluation, demo-ing; in many cases, customers want to do a bake-off — for lack of a better term — and look at how one platform works in their environment compared to another” before they buy, he said.

Channel partners say that presale work of testing, adapting to clients’ specific needs and installation of hardware adds more to vendors’ costs as opposed to software sales, especially commercially available products.

With small profit margins in hardware sales, Sun’s back-end rebate program was an incentive to help channel partners make a bit more margin and boost their bottom lines, Brown said.

“It was pretty common knowledge that whatever your cost was, when there were back-end rebates, or dollars, you basically were selling it to the customer at your cost, and the only profitability you were making was the profit on the back end,” he explained.

Bechara, who also is chairman of the Sun VAR council, said ending the rebates meant the loss of millions of dollars for some of Sun’s top channel partners.

“If a reseller operates at 10 percent gross profit and 5 percent comes from rebates,” Bechara said, “when you take away the 5 percent in rebates, you just basically put me out of business.”

“If you have 10 percent [gross profit] in this business, you’re lucky to net 1 percent,” he added, pointing out a 5 percent loss then swings company’s profits to a loss.

As a result of the Oracle move, many channel partners have downsized their business with Sun, let employees go because they no longer can afford the overhead or gone out of business, Bechara said.

Because PC Mall Gov was never exclusively a Sun reseller — having relationships with other hardware providers including HP, IBM, Dell and Cisco — the company was able to weather the revenue decline from the loss of the Sun rebates, Bechara said.

“We took some hits. We lost some money; we let some people go,” he said. “And I can guarantee you that every one of Sun’s partners did that.”

Without specifically referring to the rebate cancellation, former GTSI CEO Scott Friedlander told an earnings conference call in August “there is deterioration obviously with the Oracle-Sun situation” that resulted in a second-quarter margin decline of 17 percent over previous years."

“Even if we hold the line on revenue, we will still lose on margin ultimately,” Friedlander said, “because of the difference in Sun Microsystems’ approach and Oracle’s approach.”

Several calls to Oracle’s corporate communications office seeking an explanation for the company’s action were not returned.

Asked if he believes Oracle killed back-end rebates out of concern for possible abuses in the program and the government’s best-prices requirement, Bechara said, “Given our experience and given all the rhetoric, we truly believe it was purely a profit move.”

To be fair, Bechara said he believes Oracle officials think they are trying new methods to return profitability to Sun, which was losing money when it was acquired.

If resellers find anything positive so far from the Sun acquisition, they say Oracle has a better marketing approach than Sun did.

“That’s one of the areas that Sun fell short. Sun created great products, innovative terrific products. But I think they weren’t good at marketing them,” Brown said.

“Oracle has much deeper pockets and can do a better job of marketing,” he said. “All the partners have seen an increase in the amount of marketing associated with how to optimize Oracle software using the Sun platform.”

Government resellers aren’t the only ones affected by Oracle’s post-acquisition moves, said Christine Callahan, who manages channel and alliance programs at ServiceKey in Atlanta and writes a monthly column for The VARGuy.

“Oracle as of Nov. 1 will no longer allow for the channel to write maintenance agreements," she said. "They’re taking all that business direct."

“But there’s been such a big pushback that I think they’re probably scrambling right now trying to figure out how to alleviate some of the problems they’ve caused for the channel,” Callahan said.

She added that one indication that Oracle might be rethinking some of its moves is that the company pushed back its announced plans to shut down its Partner Network from Oct. 15 until early November.

But Bechara said he wishes Oracle might have given some thought to a transitional period before instituting such far-reaching changes.

“But to go from 60 miles an hour to zero on the Beltway in the middle of the rush hour? Somebody’s going to rear-end you,” he said.

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