Oracle Has Customers Over a Barrel

Posted by admin on Sep 10, 2009 10:32:00 AM

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

Over the past four years, Oracle (ORCL) Chief Executive Lawrence J. Ellison has been on an acquisition binge that has brought all sorts of benefits to the company. After spending $30 billion to buy 56 companies, he has doubled the software giant's revenues to an estimated $24 billion this fiscal year and sent Oracle's stock surging. Ellison's latest deal is one of his most ambitious to date. His $7.4 billion offer for Sun Microsystems (JAVA), which still needs approval from European regulators, would move Oracle into the hardware business for the first time and greatly expand Ellison's empire.

But the company's growing power, coupled with a surge in consolidation by other major players in the technology industry, has frustrated some corporate customers. They're concerned that Oracle's strategy is helping to stifle innovation and lock them into high prices. "Once you've made a deal with the devil, it's hard to get away," says James Sims, chief information officer of California grocer Save Mart Supermarkets, who says he's stuck with some Oracle products because it's too expensive to switch to alternatives. "They're extorting us. I'm very unhappy with them." Oracle declined to comment for this article.

It's not just Oracle that faces such customer conflicts. The wave of mergers and acquisitions in corporate computing over the past half-decade has been massive, with 79 purchases by Microsoft (MSFT), 60 by IBM (IBM), 40 by EMC (EMC), and 34 by Hewlett-Packard (HPQ). The $1 trillion business has come to be ruled by a dozen behemoths, and the software market is dominated by just four: Oracle, Microsoft, SAP (SAP), and IBM. Customers like the simplicity of buying technology from fewer suppliers, but they have also become more dependent on those companies. It's increasingly difficult to negotiate over price or shift to alternative technologies.

That dependence was one concern raised by European Union antitrust regulators on Sept. 3 when they launched a probe of the Sun deal. The issue: Sun owns MySQL, the leading open-source database software program, which is emerging as a competitor to Oracle's world-leading database. If Oracle buys Sun, it could cripple or kill the rival product. "The Commission has an obligation to ensure that customers would not face reduced choice or higher prices as a result of this takeover," Competition Commissioner Neelie Kroes said in a statement.

The inquiry increases the uncertainty 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 everything from server computers and data storage devices to operating systems, databases, and software 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.


The consolidation strategy is clearly paying off for Ellison and his shareholders. While the major U.S. stock indices are down slightly over the last five 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 after 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 Lederman, 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 see their prospects dim. "When all the companies of size have been bought and the costs wrung out, this group will be very low-growth and boring," warns analyst Peter Goldmacher of securities firm Cowen & Co. Analysts are predicting that Oracle's first-quarter revenues, to be announced in two weeks, will be flat to down in part because it's the first quarter where the company won't get a big revenue boost from acquisitions.


For decades, Ellison had nothing but scorn for tech companies that bought growth. After co-founding Oracle with $2,000 in 1977, he often took swipes at rivals for "writing checks, not code." All that changed on June 6, 2003, when he launched a hostile takeover offer for rival PeopleSoft. During an interview that day with BusinessWeek in a suite at New York's Carlyle Hotel, Ellison called it the dawn of a new era in software. "There will be a handful of very large entrenched companies that will dominate the technology industry," he predicted.

The scene was classic Ellison. He was decked out in an exquisitely tailored gray suit and collarless black shirt. A Steinway baby grand served as a backdrop. Ellison argued the era of consolidation would be good for customers, too. With fewer suppliers, he said, customers could rely on the remaining players to manage the difficult task of stitching together different software programs, rather than handling the chore themselves. He also said larger companies would be able to invest more in next-generation products. "We're going to bend over backwards to make PeopleSoft customers happy," he said.

It was a pledge he made repeatedly as Oracle bought one software company after another. Ellison told customers it would support their products for years to come, and they didn't have to switch. At the same time, Oracle embarked on an ambitious development project, code-named Project Fusion. The idea was to rewrite all the software for its run-the-business applications, from accounting to planning, melding together the best features from products the company had acquired.

Some Oracle customers told BusinessWeek they are satisfied with the company and look forward to the Fusion applications. "We absolutely welcome them. We can take advantage of the unification of the applications," says Raymond Payne, president of the Oracle Applications Users Group, an association of Oracle customers. Ian Abramson, president of a similar organization, the Independent Oracle Users Group, acknowledged there's some frustration among customers with Oracle's high maintenance fees, but most understand the fees are necessary to pay for steady improvements to Oracle's products.

Other customers are fed up with what they call Oracle's high prices and tough tactics. Alaska Air Group (ALK) had bought databases from Oracle and other applications from PeopleSoft, Siebel Systems, and Hyperion. Oracle later bought all those companies, leaving the airline stuck with a single supplier for all of its core technology. This year, because of the recession, Alaska Air Group renegotiated lower fees with every one of its software suppliers-except Oracle. "They won't budge on pricing, and we're totally locked in," complains Kris Kutchera, vice-president for information technology at Alaska Air. "The bigger they've gotten, the stronger they've gotten, and it's harder for customers to get a deal."

Oracle has raised prices over the past couple of years, even as demand has softened along with the weak economy. The high-end edition of its database costs $950 for each person authorized to use it, up 19% from two years ago. The price for Oracle software to run Web sites is up 17% in the same period.


One sore point with customers is the company's audits. Most software companies audit their customers occasionally, checking through their offices and tech systems to make sure they're paying for all the software they use. But Oracle has a reputation for being unusually aggressive, says Jane Disbrow, an analyst at Gartner Research (IT). She says Oracle's policies can be confusing, and contracts with customers often don't clearly spell out their rights. As a result, some get presented with bills ranging from $200,000 to $4 million after they get audited. "It's easy to be out of compliance with Oracle licensing. They do nothing to help people stay in compliance," says Disbrow. "Then they audit you and hand you a big bill."


Some customers are fighting back. Sims, of Save Mart, says he could save 75% in annual maintenance fees if he were able to shift his computing systems to run on an open-source database provided by software company Ingres. But he feels he's stuck with Oracle for existing computing applications because it costs too much up front to switch technologies. Meanwhile, he's building all the new applications he can on the Ingres database.

The giant Japanese telecom provider Nippon Telegraph & Telephone (NTT) is going even further. It's replacing many of its Oracle databases with another open-source package, PostgreSQL. Takeshi Tachi, a senior manager in NTT's Open Source Software Center, says PostgreSQL is now good enough to be used in some of the company's most critical computing systems. He expects NTT will save $10 million a year with the switch. Ed Boyajian, CEO of EnterpriseDB, which sells PostgreSQL to NTT, says he's seen plenty of interest since Oracle said it was buying Sun and MySQL. "A lot of attention has shifted to us," he says.

Small and medium-sized software companies such as EnterpriseDB acknowledge they face major hurdles when they take on the giants, but they argue that they can play a vital counterbalancing role. "Technology purchasers are concerned that they'll be locked into a single vendor," says Sohaib Abbasi, chief executive of Informatica (INFA), a Redwood City (Calif.) company that sells software corporations use to manage their data. "We assure companies freedom of choice."

One trend that could increase the opportunity for software upstarts is the advent of so-called cloud computing. Over the long haul, experts believe many companies will shift from running computing tasks on their own servers to running them from remote server farms, or clouds, over the Internet. That shift may require software giants to sell their products in a new way, collecting fees over many months rather than pocketing huge checks up front as customers install the programs.

The change is also expected to make it easier for corporations to switch from one technology service provider to another. Oracle and the other software giants would have less power over customers. "Where the world is going and where Larry is going are in conflict," says Marc Benioff, chief executive of (CRM), an Oracle competitor that delivers its software over the Net.

Still, corporate customers that feel squeezed by the giants may have to change their behavior if they really want more choice in the market. After the dot-com bust, corporations largely turned their backs on startups because some of them failed to deliver on their promises. To foster more innovation, customers may need to risk doing business with young companies again. "If they want to see new technology they'll have to be more open to the startups," says Marc Andreessen, the Internet pioneer who is now a venture capitalist. "They'll have to be more willing to experiment."

(by Steve Hamm and Aaron Ricadela- Business Week)