'I felt like we were being extorted' - a customer explains how Oracle tried to strong-arm it into a cloud sale

We just received a detailed report from a long-time Oracle customer on how Oracle used some ugly tactics to sell its cloud and other products the customer didn't want.

This is one person's account in response to a story we recently published about how Oracle has been using its "nuclear option" to boost cloud sales - that is, threatening customers with big bills for software they're using but haven't paid for, then making the threat go away if the customer buys credits for cloud services.

These tactics are something to keep in mind when Oracle reports earnings on Wednesday. As competitors have come at Oracle from all directions, its earnings have grown shaky. It's missed profit expectations for four of the last six quarters, including its last two fourth quarters. Revenue has been a miss in three of the last six quarters, too.

So Wall Street will be looking for how Oracle is ramping up its cloud sales (Oracle's future) and if it's still growing its traditional database and software sales (its highly profitable bread-and-butter products).

Oracle declined comment for this story.

Inside an Oracle "audit"

Here's what we heard from this Oracle customer, who requested anonymity because his employer did not authorize him to talk to the press.

The story began when the customer got a baffling audit letter from Oracle asking them to give Oracle an accounting of every computer server running software from another software company, VMware.

"In hindsight I should have involved our legal team immediately since they were requesting information that had nothing to do with Oracle," says the person who shared this story with us.

To be sure, Oracle has a real business need to audit customers. Oracle makes it very easy for admins to turn on new features or add more users, and then pay for that increased usage later. That system involves an "audit." All big enterprise software companies have a similar process.

But in this case, the customer hasn't added more usage of its Oracle database.

Oracle told the customer it wanted more money because the company was running Oracle software on servers that use VMware software.

The logic? The VMware software allows servers to cluster together so that applications, like the Oracle database, can move to any server. Customers love this. It means they can make sure their database never goes down, even if there's a problem with one server's hardware.

In Oracle's mind, using VMware like this means ia customer could potentially move the database to another server. Therefore, the company should pay Oracle for every server that runs VMware, regardless of if that server is actually being used to run Oracle's database.

That way of calculating would require the company to pay Oracle a LOT more money - not just once, but every year.

And Oracle could demand more money every time the company bought a new server and put VMware on it, even if VMware was used for apps that have nothing to do with Oracle.

Oracle's contract doesn't clearly require that

The odd thing is, Oracle's contract doesn't say that companies have to pay Oracle for every VMware server they own, experts say.

That doesn't stop Oracle from instigating such audits.

Oracle/VMware customers have been complaining about this situation for years. VMware has written white papers on it. There's a whole industry of software licensing consultants to help customers deal with such situations. These consultants run seminars to warn VMware/Oracle customers about it.

The one company that's reportedly been mum on how to correctly set up VMware with Oracle to make sure everything is licensed correctly is Oracle.

"Throughout the audit we pressed Oracle for a document that gave specific guidelines and expectations for Oracle customers on VMware," the Oracle customer told us.

"We got two answers, 1. that the VMware guidelines were an internal policy and that it was not written, and 2. that it was a written internal policy that is not available to customers....I was told that it would be too much effort for Oracle to maintain such a document."

This customer - who is admittedly angry at Oracle - has a different theory.

By not spelling out the VMware licensing requirements, Oracle can more easily "persuade those less knowledgeable about licensing" to pay Oracle more money.

By the way, we looked and couldn't easily find a document on Oracle's website that explained VMware licensing, either.

Screaming matches with Oracle reps

For months, the customer received letters and phone calls from Oracle demanding more money for its VMware servers.

The calls came from Oracle's managers and from various people in Oracle's License Management Services (LMS) group, the people responsible for Oracle audits.

"We even had phone calls with managers' managers. I cannot remember a phone call that did not turn into an argument or shouting match between us and those from Oracle. Every time, we simply asked where in our license did it say that we had to license CPUs that Oracle was not running on," the Oracle customer told us.

Oracle's answer was to point them to a document called the "Oracle Partitioning Policy," which isn't part of the contract.

In the end, this customer, which had been using Oracle's database for many years, insisted it was not using Oracle's software improperly, and did not agree to pay the software giant more money.

And then Oracle told them how to "make this audit go away"

As the standoff continued, Oracle "started throwing us bones," the Oracle customer told us.

The customer began to believe that the whole audit was instigated by their Oracle sales rep.

Oracle's sales in this customer's region had been soft, the customer discovered.

And, as several sources have told Business Insider, Oracle is paying sales people huge incentives to sign new cloud contracts, five to seven times higher commissions.

As we previously reported, licensing experts believe that more sales people are using audits to help increase sales this year.

"We've seen an uptick in aggressive audits and breach notices," says Craig Guarente, a former Oracle employee in the audit department who now runs a software license consultany called Palisade Compliance.

In this case, the sales person also got directly involved with this customer's audit and told the customer the audit would "go away" if the company decided to buy extra products from Oracle, such as ...

• A new Oracle database license that was four times more expensive.
• Oracle Virtualization, a replacement for VMware
• Expensive specialized servers to run its Oracle database
• Cloud services for products that had nothing to do with the database, such as software hosting services.

"I felt like we were being extorted into buying a non-related [cloud] product to make the audit go away," the customer told us.

The secret trick that couldn't be used

Rumor has it, there's a trick VMware customers can use if Oracle audits them in this way: send Oracle their VMware logs that proves they've never moved the database to a server that is not licensed to run Oracle.

Unfortunately, this company wasn't saving those logs for long enough to try that trick.

For now, the company is trying a new tactic. It is moving a bunch of its servers around in its data center to create a separate VMware cluster just for the Oracle database.

This still increases its costs by forcing it to buy some different software licenses while not letting it use those servers to their full potential.

And the customer worries that it's just a stop-gap measure.

VMware recently released the 6.0 version of its flagship software. The new software allows companies to move applications from one major cluster of servers to another (in geek speak, between VCenter installations). It's a great technical feature to offer, but Oracle's LMS audit team is already salivating.

"LMS has repeatedly told us that when we upgrade to [VMware] 6 they will have to approve our architecture. After this experience I believe that Oracle would not look out for our best interest and that they would turn the approval process into another money grab," the customer told us.

At this point, the company isn't planning on yanking out its Oracle database and switching to a different product. That's a big, painful, expensive project that would also require retraining its people. Plus the best database alternatives are from IBM and Microsoft, companies that also have licensing gotchas.

But the company has no desire to buy any new products from Oracle ever again, this person told us.