THE ORACLE SUBSCRIPTION PRICING TEST

So far, subscription-based software pricing hasn't produced more than a few sputters on the launching pad. Interliant, one of the few hosting services to offer subscription applications, so far has only five titles in its inventory (at subscription prices ranging from

$14.95 per month to $15,000 per year) and is conspicuously silent about its customer count. A year ago, IDC predicted that "rentable" software would be a $400 million business by the year 2001; more recently, IDC analyst Mark Lebitt admitted "the market is maturing slower than we anticipated."

But the subscription model for software is far from dead. Last week

Oracle announced an ambitious new program that puts one of the industry's biggest companies squarely behind subscription-based pricing. Instead of requiring customers to pay up front for its financial and operations applications, Oracle will soon accept monthly payments for remote hosting of these applications. In effect, Oracle has reinvented the old-fashioned and much-maligned service bureau--this time with an Internet twist.

In fact, Oracle has shrewdly positioned subscription-based software delivery as a full outsourcing service, not simply as an alternative pricing model. Thus, the new Oracle Business OnLine service promises a "professionally managed data center," with comprehensive 24x7 help desk coverage, network management, and disaster recovery. Business

OnLine customers, says Oracle president Ray Lane, won't have to

"worry about having the up-front capital, the IT infrastructure and the expensive personnel needed to undertake a complex applications implementation and keep it running over time."

By selling outsourcing services rather than applications, Oracle has almost certainly come up with a breakthrough concept. In effect,

Oracle takes full responsibility for successful implementation and for "total cost of ownership"--two risk factors that scare away many would-be buyers of enterprise applications. In fact, Lane has been telling Oracle insiders that he's convinced the new subscription model is Oracle's best hope for reviving a somewhat stagnant growth rate; within five years, he predicts subscription sales will produce as much as half of Oracle's total applications revenue.

To be sure, Oracle still has to deliver on its outsourcing promises.

So far, Business OnLine is still a pilot program with only a half-dozen customers; a full rollout isn't due until next year. But the blueprint for the program is detailed enough to answer many of the basic questions that pop up in discussions of subscription pricing models:

How will Oracle calculate monthly subscription fees?

Oracle is still fine-tuning its pricing formula, based on feedback from pilot customers. In general, however, Business OnLine subscriptions should look a lot like Oracle's traditional price sheet for enterprise licenses (and a subscription contract will probably cost as much over two or three years as a traditional license). Customers will be charged primarily on the basis of "named users" in their organization, with a discount for "casual users" who only occasionally need access to the application. Some applications, such as payroll and purchasing systems, will be priced according to the number of employees who are served by the application.

Will subscription pricing cannibalize sales of enterprise licenses?

Oracle clearly expects to use subscription pricing as a way to move the company down-market, into organizations with as few as 20 users on a system. A key part of that strategy is to minimize the cost of customization, which--for large enterprise customers--often greatly exceeds the price of the software itself. Oracle has promised to develop "rapid, standardized implementations, utilizing pre-configured templates that provide best practices business processes and options for various industries."

How will Oracle reach this segment?

That's a little fuzzy right now. Initially, Oracle plans to use its outbound telesales organization to reach smaller customers, with possible hand-offs to the Oracle direct sales force and to Oracle's network of independent sales agents. Oracle has also promised to let

"select partners"--such as third-party developers and Big Six accounting firms--operate Business OnLine centers for specialized market segments.

What about bandwidth constraints? Is the Internet fast enough to support the kind of transaction volume that Oracle customers expect?

No problem, according to Oracle. The latest Oracle database server has been optimized for true remote processing, leaving nothing but a

"thin client"--any machine that can run a simple Java-enabled browser--on the end user's desktop. Oracle claims that it can achieve up to a 10x improvement in network response time with this configuration, compared to the "fat" client-server architectures that SAP, PeopleSoft, and other enterprise competitors still use.

Will customers really be comfortable about parking mission-critical data on Oracle's servers?

Good question. Oracle will certainly have to prove that its Business

OnLine servers--and any third-party franchise partners--meet very high security standards. But smaller companies already outsource a fair amount of sensitive financial and transactional processing

(such as payroll), so the security issue probably isn't a deal-killer.

Oracle Corp., 500 Oracle Pky., Redwood Shores, Calif. 94065;

650/506-7000. Web: www.oracle.com.