Oracle Feels the Software Squeeze
To see why Oracle Corp. Chief Executive Larry Ellison is so intent on gobbling up business software maker PeopleSoft Inc., look no further than Sabre Holdings Corp.
Two years ago, the multibillion-dollar travel services company set up an elaborate test to determine which database program could best handle the stresses of tens of millions of customers looking for the best airfares on its Travelocity.com website.
Sabre’s chief architect, Bob Offutt, figured that Oracle’s flagship database program would outperform its rivals. Instead, a program called MySQL, available for less than half of Oracle’s $2-million-plus list price, scored about the same.
“Everybody scratched their head,” Offutt recalled last week. And Southlake, Texas-based Sabre signed up for MySQL, an open-source product along the lines of Linux that is distributed, usually at low or no cost, by a small Swedish firm also named MySQL. Sabre joined an impressive customer lineup that includes Yahoo Inc., Google Inc. and Cisco Systems Inc.
Oracle was once the clear leader in the $14-billion global market for database programs, which allow operations dealing with masses of information to store, retrieve and manipulate figures. But Oracle has been scrambling recently to deal with stiff competition.
Although Oracle’s total database-related revenue of $7.7 billion is greater than IBM Corp.’s, for example, Big Blue passed Redwood City, Calif.-based Oracle in sales of new databases three years ago. And although overall sales of new databases increased 5% in 2003, Oracle’s new database sales grew by just 2.4%, putting it just shy of IBM with about one-third of the market. IBM is the foe Oracle faces most often when it bids for big-dollar contracts.
Oracle’s efforts to diversify by selling business software tools that run on top of its database programs -- the market where PeopleSoft plays -- aren’t faring much better. Documents introduced during the antitrust trial over Oracle’s hostile bid for PeopleSoft show that Oracle often slashes its list prices for such software by 70% or more and still loses deals to Pleasanton, Calif.-based PeopleSoft or to the biggest maker of such programs, SAP of Germany.
Meanwhile, Microsoft Corp., which enjoys a massive development budget and the ability to sell customers a full set of interlocking programs, is taking share from Oracle on the low end of the market with its own database program, called SQL Server. (SQL refers to a standard computer language for dealing with databases.) Microsoft won 19% of the global market for new database installations last year.
In testimony at the antitrust trial, Ellison and his colleagues were motivated to paint a bleak picture of Oracle’s competitive prospects. U.S. District Judge Vaughn Walker might be more inclined to let Oracle continue its quest for PeopleSoft, over the objections of government regulators, if he agrees that Oracle is facing threats from all sides and that its best shot at long-term survival was to get bigger.
Walker is scheduled to hear closing arguments July 20.
Industry analysts, database customers and competitors agree that Oracle is exaggerating the predictions of its possible demise. But they also concur that Ellison is correct in concluding that the database market has fundamentally changed.
“Are they going to grow the way they’re used to growing in the database market? No,” said Gartner Inc. database analyst Donald Feinberg.
One reason is MySQL, which Feinberg said “could become a major player” in the next three to five years.
Oracle executives declined to be interviewed for this story.
But at least in the past the company recognized the power of open-source software. Oracle was an early champion of Linux, the computer operating system program developed through a worldwide collaboration of volunteers. Oracle introduced a version of its database that could run on Linux in 1998, before most other big tech companies embraced it.
Since then, Oracle has tied its fortunes to the operating system by designing products to work on bundles of cheap, Linux-powered machines. The company even offers to oversee its customers’ use of Linux when Oracle databases are used on top of it. In that way, Oracle has helped Linux reach deep into big companies, where its use is now routine.
MySQL could follow a similar trajectory. In court, Oracle President Safra Catz testified that she viewed MySQL as a competitor.
The first version of MySQL came out in 1996, the work of Michael “Monty” Widenius of Finland, where Linux also began. He and a colleague were developing a system for a large retail chain to keep track of its inventory. As they added more functions, “it started looking like a database,” said friend Marten Micklos, an entrepreneur later recruited as privately owned MySQL’s chief executive.
The team’s free release attracted hundreds of thousands of users, and in 2000 the company shifted to an unusual two-tier method of distribution. The most basic software and its underlying code are still available free of charge and are downloaded 35,000 times daily; 5 million copies already have been installed, making it the fourth-most-used database in the world.
Versions with more features or technical support are sold for as little as $249 per computer, compared with about $5,000 for a bare-bones Oracle installation. Sabre and other large customers often buy even more sophisticated types of MySQL and install them on hundreds of machines.
By revenue, MySQL has less than one tenth of 1% of the market, but sales have doubled annually for three years and now stand at $12 million. The company turns a small profit from its operations and hasn’t touched the $20 million it received from venture-capital investors last year. Industry analysts at San Francisco brokerage Thomas Weisel Partners estimate that MySQL is a contender for as much as 20% of new database deals.
The easy availability of MySQL has popularized the technology, attracted helpful reports of bugs and kept the company’s full-time staff of 50 engineers motivated to make continual improvements to the product, Micklos said.
Knowing anyone can see their work, “those who produce it have much higher pride,” Micklos said. “Frontyard gardens are in much better shape than backyard gardens.”
MySQL will never have the same overwhelming army of unpaid contributors that has fashioned Linux into the most serious threat to Microsoft’s ubiquitous Windows operating system.
Database expertise is more rare, and fewer people need a database than an operating system, the core ingredient on any computer.
All that means MySQL isn’t likely to steal Oracle’s most lucrative contracts. In any case, Micklos said it wasn’t in his company’s DNA to shoot for the highest-function needs of the Fortune 500.
“I’m absolutely convinced there will always be a high end of the database market, where you can charge any price you can think of,” he said. “We produce at low cost and we sell at low cost. We try to be the Ikea of databases.”
In order to move upstream, MySQL would need to make major upgrades to the main product and get other companies to sell programs that use the database for managing sales, payroll and other business functions. SAP is working on such programs, but they will take a few years to develop, Micklos said.
“That’s the key event that needs to happen in order for MySQL to be validated in the marketplace and really move forward,” Gartner’s Feinberg said.
In the meantime, the database is creeping into big companies from the ground up. At Yahoo, software developer and MySQL expert Jeremy Zawodny first used it to run Yahoo Finance.
“It was a success, and within the next year, I had all these groups at the company banging on my door” to help them extend the database to Yahoo News, the My Yahoo personalized portal and elsewhere.
Other pieces of Yahoo run on more established databases. Yet even where MySQL doesn’t win, it is taking a bite out of Oracle’s bottom line.
At Sabre, Offutt decided that MySQL was good enough for the air travel system, where many more people look at prices than make reservations. For hotels, where the ratio of “lookers to bookers” is lower and transactions are more common, he decided to go with Oracle.
After losing the airfare contract, “Oracle came back with some extremely aggressive pricing, something we’ve never seen,” Offutt said.
That oft-repeated scenario is beginning to make Oracle executives nervous, analysts said. They said the company could afford a price war with SAP and PeopleSoft over the business software they all sell.
It can’t afford to be the next victim of the open-source movement.
