Oracle's Vision: Open to Interpretation
Will Oracle CEO Larry Ellison deliver a bag of coal or a stocking full of candy canes this holiday season? That's what investors want to know as the database king prepares to deliver its latest quarterly earnings report on Dec. 13. Ellison already warned the Street to expect revenue numbers running 10% below expectations due to the general economic malaise.
And that's not the only issue Oracle (ORCL) has to address. The company, which booked $10.8 billion in revenues last year, has seen its core database market come under increasing pressure from competitors IBM (IBM) and Microsoft (MSFT). Oracle is also trying hard to recover from missteps that upset customers over the past 18 months, including unpopular pricing tactics and a buggy software release.
Most important, Ellison is walking a fine line as he competes with many of his biggest partners and pushes into the business-software market, including customer relationship management (CRM) packages and Web applications server programs. Big Oracle users such as Siebel Systems and BEA Systems build their specialized software to run on top of Oracle databases.
SHIFTING TENTS. Now, Ellison&Co. want the whole enchilada. Oracle Chief Financial Officer Jeffrey Henley envisions a future where 50% of Oracle's revenues come from sales of applications software. "The growth rate is better. The market size is twice as big. Nobody dominates it. We think that's a tremendous opportunity," Henley says. What about Oracle's partners? "They have made a living by pitching a tent in our backyard and living on our customer base. Today, we can do what they do -- and they need to pitch their tents elsewhere," says George Roberts, Oracle's executive vice-president for North American sales.
That could mean bigger profits for Oracle -- but also alienated customers. "Oracle went very strong into the applications business and partners became their key competitors. That drove these partners over to IBM as an alternative," says Janet Perna, IBM's general manager for data management solutions.
At the heart of this ongoing battle are key philosophical differences in how software should be built and installed. Oracle claims companies save money on integration and gain reliability if they buy standardized software pieces from a single vendor. IBM, Microsoft, and the various application companies adhere to a so-called "best-of-breed" strategy which holds that companies should buy the best applications, then sew together an IT infrastructure with the help of system integrators.
ONE-STOP SYSTEM. Despite Oracle's six-guns-blazing approach, its history in going beyond databases towards full-blown installations is checkered. The company has long tried to push into the enterprise resource planning (ERP) sector, which is dominated by German concern SAP. These software packages link warehouses, factories, and showrooms to give companies better visibility into all parts of the production process. Progress has been slow, however. "Oracle was No.2 in the ERP application market in most of the last five to six years," says Dennis Byron, a vice-president at tech consultancy International Data Corp. (IDC). In 2001, Byron believes Oracle will finish second again, with 7.5% of the $23 billion ERP market, far behind SAP's 20% share.
Oracle's current product, dubbed the E-Business Suite, bundles in many more types of business software systems than its predecessors. That makes a one-package, wall-to-wall system more viable. The company also contends -- with some justification -- that many applications companies are starting to come around to Ellison's way of seeing things. For example, IBM competes directly with a key database customer, BEA Systems, in Web application servers. And human-resource management company PeopleSoft has added enterprise resource management (ERP) software and enterprise portal-building software to its existing offerings. "Every one of these guys said our strategy was stupid two years ago. Now, every one of them is trying to do the same thing," says Oracle's Roberts.
Still, Oracle continues to run a distant second -- sometimes a distant third -- in many of the sectors it is now trying to conquer. Ellison's troops captured 6% of the customer-relationship management (CRM) space in 1999, the first year that Oracle had a significant CRM module in the market. That compared to a 24% market share for CRM leader Siebel Systems, according to figures compiled by Gartner Dataquest. In 2000, Oracle's market share in CRM held at 6%, while Siebel's share rose to 28%.
P-R PROBLEMS. True, the CRM market soared from $2.1 billion to $4 billion during that stretch so Oracle's gross sales grew an impressive from 87%, from $135 million to $253 million. But Siebel Senior Vice-President of Products Richard Gorman says, "We see Oracle in less than 3% of the deals [for CRM equipment]. We know of no customer that is managing their call-center, sales, or service operations on Oracle Software."
The situation is similar in the Web application server space -- software that coordinates different applications run over the Internet. Analysts expect this relatively immature market to double in value each year, into a multi-billion dollar segment by 2003. According to Gartner Dataquest, Oracle runs a distant fourth behind BEA, IBM, and Sun Microsystem's iPlanet.
Naturally, Oracle sees it differently. Ellison&Co. claim to have improved the software enough to compete well with BEA and IBM in Web-application servers and expect big gains in the coming year. Oracle execs also claim to have hundreds of customers up and running on CRM and say they have made major market inroads in 2001, thanks to a raft of improvements added to its CRM modules.
More importantly, Oracle claims it has smoothed over its public-relations woes. Over the past year, the company phased out a controversial commission structure that, critics charged, encouraged sales people to jam through deals in the last few weeks of a quarter at any cost and to oversell companies on what Oracle equipment could do. The company also rolled back an unpopular database pricing scheme that charged users by amount of megahertz of processing power they used, substituting a more standard charge based on the number of processors running an Oracle database. That shift brought down the price by 50%, on average, for enterprise customers, but did not hurt Oracle's rich 33% to 35% gross profit margins, say company executives.
BIG BLUE BATTLE. Finally, Oracle Chief Marketing Officer Mark Jarvis has tried hard to rebuild burnt bridges between the company and its user groups, which felt slighted when Oracle decided to stop supporting popular older versions of its database last year. "For a couple of years, it was a little bit tough. Now, they are definitely more flexible," says Rich Niemic, president of the International Oracle Users Group and CEO of prominent Oracle consultancy TUSC.
In its core market, Oracle is hardly sucking wind. The company had a 38% share of the $8.2 billion spent globally on relational databases in 2000, according to IDC. That's ahead of IBM's 30% share and Microsoft's 10% and up from a 35.6% share the year before. That market will only grow at a 10% to 15% clip in the future, IDC estimates.
Oracle also hopes to grab customers from IBM's Informix database unit, which Big Blue purchased last April for $1 billion as part of a database growth strategy. IBM's Perna claims the company has not lost a single Informix customer to Oracle. Still, some analysts wonder whether Informix users, traditionally focused on cutting-edge products, might be attracted to Oracle's more advanced features.
HOLIDAY CHEER? Still, Oracle will certainly have its hands full. While few analysts believe Microsoft and IBM have database products that are the technological equal of Oracle's, the rivals are often perceived as good enough to do the job -- and cheaper to boot. "We are running a much leaner technology operation with [IBM's] DB2 than if we had gone with Oracle. We have one database administrator. We would have needed three times that many, at least, to run Oracle," says Mitchell Harad, the CEO of information-mining company GetRelevant.com.
If left unchecked, that perception could mean a much bigger fight down the road for Oracle in the middle and lower-end markets, both of which are areas the company wants to win. "IBM and Microsoft are breathing down Oracle's back on pricing. They still don't have technology that's on par with Oracle, but it's good enough for a lot of projects," says Kimberley Caughey, a software analyst with investment bank Parker/Hunter.
LUCKY 13? In the midst of these struggles, investors are hoping to get a glimmer of positive news from the Dec. 13 numbers. In 2001, Oracle boosted earnings by cutting costs while revenues stagnated. The company added $720 million to its top-line revenue figure between 2000 to 2001, according to Standard&Poors. But for a giant like Oracle, that's an increase of a mere 6.7% -- and the main reason why its stock is down 60% over the past year. It's now trading at around $14.50 a share.
While Ellison has made it clear that big, top-line growth is not forthcoming, at least a hint of improvement in faster growing markets is what Oracle shareholders will need to have a happy holiday season
And that's not the only issue Oracle (ORCL) has to address. The company, which booked $10.8 billion in revenues last year, has seen its core database market come under increasing pressure from competitors IBM (IBM) and Microsoft (MSFT). Oracle is also trying hard to recover from missteps that upset customers over the past 18 months, including unpopular pricing tactics and a buggy software release.
Most important, Ellison is walking a fine line as he competes with many of his biggest partners and pushes into the business-software market, including customer relationship management (CRM) packages and Web applications server programs. Big Oracle users such as Siebel Systems and BEA Systems build their specialized software to run on top of Oracle databases.
SHIFTING TENTS. Now, Ellison&Co. want the whole enchilada. Oracle Chief Financial Officer Jeffrey Henley envisions a future where 50% of Oracle's revenues come from sales of applications software. "The growth rate is better. The market size is twice as big. Nobody dominates it. We think that's a tremendous opportunity," Henley says. What about Oracle's partners? "They have made a living by pitching a tent in our backyard and living on our customer base. Today, we can do what they do -- and they need to pitch their tents elsewhere," says George Roberts, Oracle's executive vice-president for North American sales.
That could mean bigger profits for Oracle -- but also alienated customers. "Oracle went very strong into the applications business and partners became their key competitors. That drove these partners over to IBM as an alternative," says Janet Perna, IBM's general manager for data management solutions.
At the heart of this ongoing battle are key philosophical differences in how software should be built and installed. Oracle claims companies save money on integration and gain reliability if they buy standardized software pieces from a single vendor. IBM, Microsoft, and the various application companies adhere to a so-called "best-of-breed" strategy which holds that companies should buy the best applications, then sew together an IT infrastructure with the help of system integrators.
ONE-STOP SYSTEM. Despite Oracle's six-guns-blazing approach, its history in going beyond databases towards full-blown installations is checkered. The company has long tried to push into the enterprise resource planning (ERP) sector, which is dominated by German concern SAP. These software packages link warehouses, factories, and showrooms to give companies better visibility into all parts of the production process. Progress has been slow, however. "Oracle was No.2 in the ERP application market in most of the last five to six years," says Dennis Byron, a vice-president at tech consultancy International Data Corp. (IDC). In 2001, Byron believes Oracle will finish second again, with 7.5% of the $23 billion ERP market, far behind SAP's 20% share.
Oracle's current product, dubbed the E-Business Suite, bundles in many more types of business software systems than its predecessors. That makes a one-package, wall-to-wall system more viable. The company also contends -- with some justification -- that many applications companies are starting to come around to Ellison's way of seeing things. For example, IBM competes directly with a key database customer, BEA Systems, in Web application servers. And human-resource management company PeopleSoft has added enterprise resource management (ERP) software and enterprise portal-building software to its existing offerings. "Every one of these guys said our strategy was stupid two years ago. Now, every one of them is trying to do the same thing," says Oracle's Roberts.
Still, Oracle continues to run a distant second -- sometimes a distant third -- in many of the sectors it is now trying to conquer. Ellison's troops captured 6% of the customer-relationship management (CRM) space in 1999, the first year that Oracle had a significant CRM module in the market. That compared to a 24% market share for CRM leader Siebel Systems, according to figures compiled by Gartner Dataquest. In 2000, Oracle's market share in CRM held at 6%, while Siebel's share rose to 28%.
P-R PROBLEMS. True, the CRM market soared from $2.1 billion to $4 billion during that stretch so Oracle's gross sales grew an impressive from 87%, from $135 million to $253 million. But Siebel Senior Vice-President of Products Richard Gorman says, "We see Oracle in less than 3% of the deals [for CRM equipment]. We know of no customer that is managing their call-center, sales, or service operations on Oracle Software."
The situation is similar in the Web application server space -- software that coordinates different applications run over the Internet. Analysts expect this relatively immature market to double in value each year, into a multi-billion dollar segment by 2003. According to Gartner Dataquest, Oracle runs a distant fourth behind BEA, IBM, and Sun Microsystem's iPlanet.
Naturally, Oracle sees it differently. Ellison&Co. claim to have improved the software enough to compete well with BEA and IBM in Web-application servers and expect big gains in the coming year. Oracle execs also claim to have hundreds of customers up and running on CRM and say they have made major market inroads in 2001, thanks to a raft of improvements added to its CRM modules.
More importantly, Oracle claims it has smoothed over its public-relations woes. Over the past year, the company phased out a controversial commission structure that, critics charged, encouraged sales people to jam through deals in the last few weeks of a quarter at any cost and to oversell companies on what Oracle equipment could do. The company also rolled back an unpopular database pricing scheme that charged users by amount of megahertz of processing power they used, substituting a more standard charge based on the number of processors running an Oracle database. That shift brought down the price by 50%, on average, for enterprise customers, but did not hurt Oracle's rich 33% to 35% gross profit margins, say company executives.
BIG BLUE BATTLE. Finally, Oracle Chief Marketing Officer Mark Jarvis has tried hard to rebuild burnt bridges between the company and its user groups, which felt slighted when Oracle decided to stop supporting popular older versions of its database last year. "For a couple of years, it was a little bit tough. Now, they are definitely more flexible," says Rich Niemic, president of the International Oracle Users Group and CEO of prominent Oracle consultancy TUSC.
In its core market, Oracle is hardly sucking wind. The company had a 38% share of the $8.2 billion spent globally on relational databases in 2000, according to IDC. That's ahead of IBM's 30% share and Microsoft's 10% and up from a 35.6% share the year before. That market will only grow at a 10% to 15% clip in the future, IDC estimates.
Oracle also hopes to grab customers from IBM's Informix database unit, which Big Blue purchased last April for $1 billion as part of a database growth strategy. IBM's Perna claims the company has not lost a single Informix customer to Oracle. Still, some analysts wonder whether Informix users, traditionally focused on cutting-edge products, might be attracted to Oracle's more advanced features.
HOLIDAY CHEER? Still, Oracle will certainly have its hands full. While few analysts believe Microsoft and IBM have database products that are the technological equal of Oracle's, the rivals are often perceived as good enough to do the job -- and cheaper to boot. "We are running a much leaner technology operation with [IBM's] DB2 than if we had gone with Oracle. We have one database administrator. We would have needed three times that many, at least, to run Oracle," says Mitchell Harad, the CEO of information-mining company GetRelevant.com.
If left unchecked, that perception could mean a much bigger fight down the road for Oracle in the middle and lower-end markets, both of which are areas the company wants to win. "IBM and Microsoft are breathing down Oracle's back on pricing. They still don't have technology that's on par with Oracle, but it's good enough for a lot of projects," says Kimberley Caughey, a software analyst with investment bank Parker/Hunter.
LUCKY 13? In the midst of these struggles, investors are hoping to get a glimmer of positive news from the Dec. 13 numbers. In 2001, Oracle boosted earnings by cutting costs while revenues stagnated. The company added $720 million to its top-line revenue figure between 2000 to 2001, according to Standard&Poors. But for a giant like Oracle, that's an increase of a mere 6.7% -- and the main reason why its stock is down 60% over the past year. It's now trading at around $14.50 a share.
While Ellison has made it clear that big, top-line growth is not forthcoming, at least a hint of improvement in faster growing markets is what Oracle shareholders will need to have a happy holiday season
