Competition, Slumping Sales Cloud Oracle’s Outlook
When it came time last week for Oracle Corp. Chief Executive Larry Ellison to address investors and analysts on the software giant’s quarterly conference call, he didn’t talk about why the company had just reported its first drop in annual sales since he founded it 25 years ago.
Ellison’s brief speech didn’t cover the company’s grim projections of more falling sales over the next six months, which were sending Oracle shares down as he spoke, or even the just-concluded legislative hearings in Sacramento into whether Oracle and a partner firm had tried to influence state officials with donations coinciding with the award of a massive no-bid contract assailed by auditors as wasteful.
Instead, Ellison spent all his allotted minutes assaulting the methodology of a 6-week-old Gartner Dataquest study that found IBM Corp. had edged out Oracle as the No. 1 seller of database software.
Larry Ellison really, really doesn’t like being No. 2.
That goes for his company’s market share and its perennial runner-up status behind Microsoft Corp. in sales by pure software companies. And it goes for yacht racing, and weekend bike rides with co-workers, one of whom swears that after Ellison fell behind on one trip, he refused to go again until he had practiced enough to be sure he would stay ahead.
And that’s not to mention Ellison’s No. 5 spot on the Forbes list of the wealthiest people (behind Microsoft founders Bill Gates and Paul Allen).
Now it appears that Ellison, 57, is either going to stay miserable or learn a new way of dealing with the world.
Oracle’s stock has plunged from above $46 two years ago to a multiyear low of $7.25 this month, closing Friday at $8.12 on Nasdaq.
The company that Ellison owns a quarter of just posted a decline in its annual operating income. And he is staring at a future battling two bigger firms--IBM, which sells high-end databases rivaling Oracle’s, and Microsoft, which is quickly gaining ground with cheaper systems.
To a remarkable degree, Oracle’s problems spring from Ellison’s unflagging desire to win at all costs, according to former employees, customers and analysts.
Oracle declined to make Ellison or other executives available for interviews.
More Competition
A fantastic salesman, Ellison created and led a corporate culture that remains driven by the people who close the big deals. That culture has gotten Oracle, based in Redwood Shores, Calif., in trouble with regulators, and it has left many more customers than the state of California feeling hustled.
The difference now is that those customers can go somewhere else when they need gear to house their data.
“The market has become more competitive,” said Gartner analyst Betsy Burton. “IBM and Microsoft are offering a viable alternative, and that has left the door open to companies to consider them because they’re sick of negotiating with Oracle.”
IBM, which sells databases that run on the biggest mainframe computers, on mid-range Unix machines and on small Windows systems, won 34.6% of the $8.8 billon spent on databases in 2001, up from 33.7% the year before, according to Gartner Dataquest.
Microsoft’s share grew to 16.3% from 14%, and Oracle slipped to 32% from 34.1%.
Oracle is telling investors it slowly will do better as the economy starts to pick up and more big companies adopt its improving suite of business software.
And it’s still far better to be an Oracle investor than a dot-com or telecommunications investor--gross profit margins are a fat 75% and have improved slightly in each of the last three years. The company’s operating profit, though down, still totaled a highly respectable $3.6 billion in the fiscal year ended in May.
But analysts don’t see an easy way for profit to go up much when sales keep going down.
Customers cite many reasons for jilting Oracle.
Oracle charges relatively high prices for its technologically strong products that are harder to justify internally as companies try to rein in expenses.
As the overall growth in databases slows, Oracle has been pushing applications that use the databases. But it runs up against niche market leaders such as PeopleSoft Inc. in managing human resources planning and Siebel Systems Inc. in managing relations with customers.
So many bugs riddled the first versions of Oracle’s all-in-one management system, called Oracle 11i, that many research firms advised their clients not to adopt it. And because the applications effort pits Oracle against firms that it allied with in the past, some buyers feel safer with vendors that let them mix and match more easily.
“Oracle has really alienated the application vendors by directly competing with them,” said Janet Perna, IBM’s general manager of data management products. “When a customer is deploying a solution, it might be an IBM database on a Sun Microsystems server with a Siebel application. IBM’s strategy has been to embrace the application companies.”
Of course, IBM can afford to come off neutral--its most profitable division is the one that tells companies how to integrate various pieces of technology hardware and software.
When it comes to deciding which should be the lead provider, many companies feel safer going with IBM. That’s the reason Prasuna Dornadula, chief technology officer of health-care service provider CareTouch Inc., switched from Oracle to IBM databases.
“You have to integrate all these things, and you need consulting services for the integration,” Dornadula said.
IBM also can afford to undercut Oracle’s prices.
“IBM continues to bundle database licenses in with mainframe maintenance renewals, services, hardware and just about anything else it can throw in the pot,” two Morgan Stanley analysts wrote in a report to investors this month. “It’s a war of attrition funded by IBM’s other, healthier businesses.”
Microsoft has a similar war chest helping the sales of its SQL server for Windows machines.
An Issue of Trust
Many other Oracle customers and ex-customers point to a much more basic problem--the issue of trust.
“Some of their pricing and licensing practices have tended to overshadow their good technology,” said Meta Group analyst Mark Shainman. “It’s imperative that Oracle not be looked at as the Evil Empire and tries to be seen as more of a partner.”
In the California debacle, state Atty. Gen. Bill Lockyer and others are looking into why a few government employees approved a no-bid, $95-million state contract with Oracle, under a tight deadline set by the company, at the same time that a $25,000 Oracle donation was headed to Gov. Gray Davis.
The state auditor found that the contract could waste as much as $41 million in taxpayer money, and four state employees and an Oracle lobbyist have lost their jobs in the ensuing melee.
Other public agencies have felt ripped-off as well. In Toronto, public hearings will begin Monday on why the city bought 10,000 Oracle licenses through a third party, instead of 1,000 directly. The city council asked a judge to investigate after determining that the purchase was a “serious miscalculation” that might have lacked the proper approvals.
And in the wake of the California deal, other states and cities and private companies are tightening rules designed to ensure competitive bidding. The public sector is a major Oracle target, providing more than 13% of the firm’s $9.7-billion annual revenue.
“California is making more organizations stop and think and go through the due diligence,” Shainman said. “They need to understand the pricing models not only of Oracle but also the competition, and then leverage the competition.”
The Sacramento investigation is just the latest and best-publicized event in a history of aggressive salesmanship that dates to the company’s earliest days.
Aggressive Practices
In the beginning, the hard-sell approach championed by Ellison made strategic sense.
Ellison acknowledges that the company started by cribbing from IBM’s published guidelines for the first language for “relational” databases.
The system was a minor revolution, because it allowed people to pull up data in unanticipated ways. Instead of a record distributor just looking at one customer’s history or its own sales by month, it could look for what type of music sold best to heavy buyers in midsummer.
Although Oracle beat the slower-moving IBM out the door with the first product based on IBM’s research, it didn’t have much of a head start and had stronger competition from the beginning. Ellison consistently made claims about Oracle products that he acknowledges weren’t true--or at least weren’t true yet--and then pressed his engineers to make good.
“In the early days we did not scrupulously make clear what was in the design spec [specification for future versions] and the language spec and what was actually in the current version of the product,” Ellison was quoted as saying in a 1997 book, “The Difference between God and Larry Ellison,” by Mike Wilson.
Some early Oracle buyers lost their jobs because of the glitches, which sometimes ate their companies’ data.
But the early market share gains gave Oracle momentum and eventual dominance, reaffirming Ellison’s belief in the importance of selling hard.
The mentality also extended into sales reporting, and the Securities and Exchange Commission sued Oracle in 1993 for double-billing, sending invoices for work that wasn’t performed and booking sales that could be canceled later. Oracle settled the case and paid the government $100,000.
The marketing exaggerations have continued in recent years, including Oracle’s November claim that its 9i database was “unbreakable” (it wasn’t) and that it saved $1 billion by using its own e-business suite (layoffs helped, too).
And many customers say they felt more like prey than partners this year, when Oracle told them it would recalculate what they owed under one pricing plan and that it would stop providing technical support for older software products earlier than the buyers had expected.
“Clients have told Gartner that some Oracle sales staff are limiting customers’ purchasing options by making them choose the option that costs the most,” Gartner Dataquest wrote in March.
Other customers complained that Oracle representatives told them, “Since we haven’t heard from you [in new orders], we’re going to charge you more for maintenance or we’re not going to support you,” said Carol A. Parks, president of systems integrator Aureus Solutions Inc. in Monrovia, Md.
A Good No. 2
Ellison is trying to improve things. The company no longer is at war with the independent Oracle Applications Users Group, a consortium of more than 2,000 firms that swap survival tips and lobby Oracle for better service.
And it is phasing out extra commissions for sales staffers who close deals at the end of the fiscal year, a practice that led to high-pressure wheeling and dealing.
But the main thing that has kept Oracle in check over the years has been a series of steady Ellison deputies, from Oracle co-founder Bob Miner to Ray Lane, all of whom have left the company. Some have founded competitors, and some haven’t disguised their dismay at Oracle’s treatment of the people paying its bills.
“The view of customers is ‘screw ‘em,’ ” aid Lane, now a venture capitalist, said in March. “I’m embarrassed by it.”
With a CEO who not only relishes the sales razzle-dazzle but also flies planes, races yachts through deadly storms and has broken his neck body-surfing, Wall Street analysts say Oracle’s lack of a good top operating officer--and potential successor--is its biggest single problem.
But Ellison said after Lane left nearly two years ago that he would never have such a strong backup again, and his low-profile board hasn’t pressed the issue.
