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How much in rebates did Oracle pay out to partners in the last fiscal year versus the new fiscal year?
It is a dramatically different picture. We have changed multiple elements of this. Prior to acquiring Sun, we actually as a company never paid any direct VAR rebates. We never paid any software rebates directly down to a VAR.
Our model was always to pay rebates based on quota attainment performance to the VADs and allow them to dole that out through their own differentiated marketing programs and economic programs down to the VAR community.
As we continued to acquire products and the support to the channel has grown, our market penetration down into the mid and broad market and even what some would call the SMB (small medium business) space has become more important. We wanted to take more control over the financial model that was put out to the VARs.
As (Oracle President) Mark (Hurd) would say if he was here, 'Look I want financial aid sent to folks that talk to the customers.' Nothing against the VADs. We want an economic model for them that is healthy because they are a huge part of our ecosystem. But we have got to have something that is a comp plan for the VARs that is directly from Oracle.
When we went through the reevaluation of how we did this economic plan we had a bunch of design goals: one was to have discreet rebate pools. We don’t talk a lot about it because there is a small audience that cares. But we have a discreet VAD rebate plan for those guys. Our base of VADs is shrinking.
That is a result of us going through and consolidating. When we acquired Sun we had hundreds of VADs around the world. We just can’t support that. It doesn't make any sense. We have no idea how Sun was supporting it. Well maybe we do. Pretty poorly. We wanted to do more with fewer, more strategic distributors that can get our products around the world. So we have a plan for those guys that is separate and discreet.
And then we basically redistributed some of that money. Part of the complaints we would get from the VADs is yeah you pay us rebates but the VARs know you pay us rebates so they come and basically demand (them). It is ransom or table stakes to come and pull all the rebates from us. So it was distributed wealth. Enough of that you guys have your comp plan and the VARs have their comp plan. So for the first time ever this fiscal year we had a VAR rebate for software. We had never done that in the history of the company. So for all the registered business there is a three percent rebate on all software.
Our software partners had pretty healthy margins already. So three points on top of whatever the final material margins are were pretty good. Then adding all hardware to that as well for the broad market. And then having this kicker margin of an additional five point rebate on these products that we deem as strategic products. Database Appliance would be added to that list.
So when you sell any of these products we really want to move aggressively into the broad market it is an additional three to five to eight points of rebate plus your material margin on those products, that is healthy especially when you consider the alternative to the Database Appliance being blades or Intel based products which margins on that family of x86 products in the industry is not high. So when we are talking about offering mid to high teens on that kind of a product family that is very competitive.
Talk about the rebate distribution to VARs.
We are actually going through the internal financial motions of distributing the first series of rebates out to the VARs based on the new economic model, but the feedback we are getting directly from these guys, and trust me they are not shy when they are unhappy, is they are thrilled. It is very competitive, more competitive than Oracle has ever been.
And by the way, they are saying the products are also more competitive than they have ever been in this space. So we are very, very bullish on it.
How profound a change is it for partners to get the hardware rebates directly?
It is huge. Based on the old model when all we did was pay rebates to a distributor. Whatever got passed down stream was highly subjective meaning some VARs were getting paid and others weren't getting anything. Now based on the economic plan that we have it is quantifiable. A VAR can go well I know I did these things so I am owed this amount of money. And I can expect it at the end of the quarter.
So you have gone from a model that was like I might get paid, I might not. What if my distributor doesn't make their number, and they don't get any rebate at all, well heck nothing is getting passed down. Now it is completely quantifiable, completely measurable. And you think about the kind of revenue that we are going to do through the channel this year, upwards of $7 billion.
What will that be up from?
Probably up from $6.5 billion. Pretty significant.
NEXT: Judson Althoff On The Margin Opportunity For Oracle's Hardware Software Engineered Systems
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