Oracle Has Customers Over a Barrel

ORACLE HAS CUSTOMERS OVER A BARREL

Reprinted from the September 21, 2009 issue of BusinessWeek

+1 978 589 5700

1-26942141.indd 1 10/1/09 2:32:58 PM STRATEGY & COMPETITION Oracle Has Customers Over a Barrel

As CEO Ellison tries to extend the company’s reach into hardware, more corporate clients fret about its high prices and tough tactics

By Steve Hamm and Aaron Ricadela it’s too expensive to switch to alterna- Over the past four years, Oracle Chief tives. “They’re extorting us. I’m very Executive Lawrence J. Ellison has unhappy with them.” Oracle declined been on an acquisition binge that has to comment for this article. brought all sorts of benefi ts to the It’s not just Oracle that faces such company. Aft er spending $30 billion customer confl icts. The wave of to buy 56 companies, he has doubled mergers and acquisitions in corporate the soft ware giant’s revenues to an es- computing over the past timated $24 billion this fi scal year and HOW TO half-decade has been PLAY IT sent Oracle’s stock surging. Ellison’s 070 massive, with 79 pur- latest deal is one of his most ambi- chases by Microsoft , 60 tious to date. His $7.4 billion off er for by IBM, 40 by EMC, and Sun Microsystems, which still needs 34 by Hewlett-Packard. The $1 tril- approval from European regulators, lion business has come to be ruled by would move Oracle into the hardware a dozen behemoths, and the soft ware business for the fi rst time and greatly market is dominated by just four: expand Ellison’s empire. Oracle, Microsoft , SAP, and IBM. Cus- But the company’s growing power, tomers like the simplicity of buying coupled with a surge in consolidation technology from fewer suppliers, but by other major players in the technol- they have also become more depen- ogy industry, has frustrated some cor- dent on those companies. It’s increas- porate customers. They’re concerned ingly diffi cult to negotiate over price that Oracle’s strategy is helping to or shift to alternative technologies. stifl e innovation and lock them into That dependence was one concern high prices. “Once you’ve made a deal raised by European Union antitrust with the devil, it’s hard to get away,” regulators on Sept. 3 when they says James Sims, chief information launched a probe of the Sun deal. The

offi cer of California grocer Save Mart issue: Sun owns MySQL, the leading

Supermarkets, who says he’s stuck open-source database soft ware pro-

with some Oracle products because gram, which is emerging as a competi-

1-26942141.indd 2 10/1/09 2:32:58 PM tor to Oracle’s world-leading database. If Oracle buys Sun, it could cripple or kill the rival product. “The Commis- sion has an obligation to ensure that customers would not face reduced choice or higher prices as a result of this takeover,” Competition Commis- sioner Neelie Kroes said in a statement. The inquiry increases the uncertain- ty around the deal, leading some analysts to speculate that Oracle could pull out of the agreement. Still, the probe is unlikely to stop the transaction. If pressured, Oracle could sell MySQL or spin it out as an independent company. The 65-year-old Ellison already wields enormous clout in the technology world, and that will only grow with the assets of Sun. If the deal goes through, he’ll possess one of the widest ranges of products for corporations in the industry. Oracle will sell every- thing from server computers and data storage devices to operating systems, databases, and soft ware for running accounting, sales, and supply-chain management. Ellison has hinted he may even develop applications for mobile phones and ultraportable netbooks. “The whole landscape of the industry could change,” says Eric Openshaw, vice-chairman and U.S. technology leader for Deloitte Consulting.

RUNNING OUT OF TARGETS The consolidation strategy is clearly paying off for Ellison and his share- holders. While the major U.S. stock indices are down slightly over the last ﬁ ve years, Oracle shares have more than doubled, to 22. Ellison’s stock is now worth $25 billion, more than the $16 billion in Microsoft shares Bill Gates holds aft er giving $28 billion in stock to his personal foundation. Laura Lederman, an analyst at William Blair, says there’s a strong correlation between the acquisition strategy and stock price performance. “The acquisitions make Oracle a more strategic supplier to its customers,” says Leder- man, who rates the stock outperform. Some analysts have questioned whether the acquisition strategy is sustainable. The number of good,

sizable potential targets is shrinking

fast, which could mean tech giants that

depend on takeovers for growth will

1-26942141.indd 3 10/1/09 2:33:00 PM see their prospects dim. “When all the AN ABOUT-FACE Hotel, Ellison Ellison with Sun companies of size have been bought For decades, Ellison had nothing but called it the Chairman Scott and the costs wrung out, this group will scorn for tech companies that bought dawn of a new McNealy shortly be very low-growth and boring,” warns growth. Aft er co-founding Oracle with era in soft ware. after they struck the deal analyst Peter Goldmacher of securities $2,000 in 1977, he oft en took swipes at “There will be a fi rm Cowen & Co. Analysts are predict- rivals for “writing checks, not code.” handful of very ing that Oracle’s fi rst-quarter revenues, All that changed on June 6, 2003, large entrenched companies that will to be announced in two weeks, will be when he launched a hostile takeover dominate the technology industry,” he fl at to down in part because it’s the fi rst off er for rival PeopleSoft . During an predicted. quarter where the company won’t get a interview that day with Business- The scene was classic Ellison. He was big revenue boost from acquisitions. Week in a suite at New York’s Carlyle decked out in an exquisitely tailored

$23.3 ORACLE’S ACQUISITION BLITZ $22.4 REVENUES IN BILLIONS/ Conformia Software Key Acquisitions AdminServer Golden Gate Advanced Visual mValent Technology Relsys $18.0 BEA Sun Microsystems* Captovation VirtuaL Iron Agile ClearApp AppForge $ e-Test 14.4 Bharosa Global Knowledge Bridgestream Software 360 Commerce Hyperion $ Haley 11. 8 Demantra Interlace Systems Primavera HotSip Lodestar $ Context Media Skywire Software 10.2 MetaSolv Software LogicalApps G-Log Tacit Software Net4Call Moniforce No acquisitions i-ﬂex Portal Software Netsure Telecom Innobase Siebel Tangosol Oblix Sigma Dynamics OctetString Sleepycat PeopleSoft Stellent ProﬁtLogic SPL WorldGroup Retek Sunopsis TempoSoft Telephony@Work Thor Technologies TimesTen TripleHop

2004 2005 2006 2007 2008 2009 *Pending Data: Oracle Note: Fiscal years, ending in May

1-26942141.indd 4 10/1/09 2:33:01 PM gray suit and collarless black shirt. A except Oracle. “They won’t budge on NTT’s Open Source Soft ware Center, Steinway baby grand served as a back- pricing, and we’re totally locked in,” says PostgreSQL is now good enough to drop. Ellison argued the era of consoli- complains Kris Kutchera, vice-pres- be used in some of the company’s most dation would be good for customers, ident for information technology at critical computing systems. He expects too. With fewer suppliers, he said, Alaska Air. “The bigger they’ve gotten, NTT will save $10 million a year with customers could rely on the remaining the stronger they’ve gotten, and it’s the switch. Ed Boyajian, CEO of En- players to manage the diffi cult task of harder for customers to get a deal.” terpriseDB, which sells PostgreSQL to stitching together diff erent soft ware Oracle has raised prices over the past NTT, says he’s seen plenty of interest programs, rather than handling the couple of years, even as demand has since Oracle said it was buying Sun and chore themselves. He also said larger soft ened along with the weak economy. MySQL. “A lot of attention has shift ed companies would be able to invest more The high-end edition of its database to us,” he says. in next-generation products. “We’re costs $950 for each person authorized Small and medium-sized soft ware going to bend over backwards to make to use it, up 19% from two years ago. companies such as EnterpriseDB PeopleSoft customers happy,” he said. The price for Oracle soft ware to run acknowledge they face major hurdles It was a pledge he made repeatedly as Web sites is up 17% in the same period. when they take on the giants, but Oracle bought one soft ware company they argue that they can play a vital aft er another. Ellison told customers it AGGRESSIVE AUDITS? counterbalancing role. “Technology would support their products for years One sore point with customers is the purchasers are concerned that they’ll to come, and they didn’t have to switch. company’s audits. Most soft ware com- be locked into a single vendor,” says At the same time, Oracle embarked on panies audit their customers occasion- Sohaib Abbasi, chief executive of an ambitious development project, ally, checking through their offi ces and Informatica, a Redwood City (Calif.) code-named Project Fusion. The idea tech systems to make sure they’re pay- company that sells soft ware corpora- was to rewrite all the soft ware for its ing for all the soft ware they use. But tions use to manage their data. “We run-the-business applications, from Oracle has a reputation for being un- assure companies freedom of choice.” accounting to planning, melding to- usually aggressive, says Jane Disbrow, One trend that could increase the gether the best features from products an analyst at Gartner Research. She opportunity for soft ware upstarts is the company had acquired. says Oracle’s policies can be confusing, the advent of so-called cloud com- Some Oracle customers told Busi- and contracts with customers oft en puting. Over the long haul, experts nessWeek they are satisfi ed with the don’t clearly spell out their rights. As believe many companies will shift company and look forward to the a result, some get presented with bills from running computing tasks on their Fusion applications. “We absolutely ranging from $200,000 to $4 million own servers to running them from welcome them. We can take advantage aft er they get audited. “It’s easy to be remote server farms, or clouds, over of the unifi cation of the applications,” out of compliance with Oracle licens- the Internet. That shift may require says Raymond Payne, president of the ing. They do nothing to help people soft ware giants to sell their products in Oracle Applications Users Group, an stay in compliance,” says Disbrow. a new way, collecting fees over many association of Oracle customers. Ian “Then they audit you and hand Abramson, president of a similar orga- you a big bill.” nization, the Independent Oracle Users Some customers are fi ghting back. Group, acknowledged there’s some Sims, of Save Mart, says he could Business Exchange frustration among customers with save 75% in annual maintenance fees Oracle’s high maintenance fees, but if he were able to shift his comput- Read, save, and add content on BW’s most understand the fees are neces- ing systems to run on an open-source new Web 2.0 topic network sary to pay for steady improvements to database provided by soft ware com- Oracle’s products. pany Ingres. But he feels he’s stuck Is Larry Replaceable? $ Other customers are fed up with with Oracle for existing computing * what they call Oracle’s high prices and applications because it costs too * , -- tough tactics. Alaska Air Group had much up front to switch technolo- - - . bought databases from Oracle and gies. Meanwhile, he’s building all the *$01 $ 4556* other applications from PeopleSoft , new applications he can on the Ingres $ -* Siebel Systems, and Hyperion. Oracle database. * later bought all those companies, leav- The giant Japanese telecom provider .9* : . ing the airline stuck with a single sup- Nippon Telegraph & Telephone is go- plier for all of its core technology. This ing even further. It’s replacing many - bx. businessweek.com/enterprise- year, because of the recession, Alaska of its Oracle databases with another software/reference/ Air Group renegotiated lower fees with open-source package, PostgreSQL. every one of its soft ware suppliers— Takeshi Tachi, a senior manager in

1-26942141.indd 5 10/1/09 2:33:02 PM months rather than pocketing huge in conﬂ ict,” says Marc Benioff , chief some of them failed to deliver on their checks up front as customers install executive of Salesforce.com, an Oracle promises. To foster more innovation, the programs. competitor that delivers its soft ware customers may need to risk doing The change is also expected to make over the Net. business with young companies again. it easier for corporations to switch Still, corporate customers that feel “If they want to see new technology from one technology service pro- squeezed by the giants may have to they’ll have to be more open to the vider to another. Oracle and the other change their behavior if they really startups,” says Marc Andreessen, the soft ware giants would have less power want more choice in the market. Aft er Internet pioneer who is now a venture over customers. “Where the world the dot-com bust, corporations largely capitalist. “They’ll have to be more is going and where Larry is going are turned their backs on startups because willing to experiment.” ^

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