Friday, December 09, 2005

Oracle' struggles to buy growth

It is interesting that Oracle's buying binge in the last couple of years has not enlivened its share price. As pointed out in a recent Forbes article, Oracle's price/earnings ratio (a simple measure of how strongly the market views a stock) is now the lowest since 1990. This is despite Oracle's superb operating margin of 31% (up there with Microsoft and better than SAP's also excellent 27%). The problem is clearly not profitability but perceived room for growth. Even its core database software license sales were flat in the last quarter. The database business is still very much the jewel in Oracle's crown, contributing a disproportionate proportion of Oracle's profits.

The strategic issues are that the database market is somewhat saturated, with Microsoft chipping away at Oracle's market share with ever its more functional SQL Server, and IBM continuing to revamp DB2. Although insignificant now, the open source mySQL at the least creates pricing pressure, as does SQL Server. Oracle's applications business has been thoroughly outclassed by SAP. And the Peoplesoft acquisition was very important in order to inject both extra market share and superior technology. Oracle's grab of retail software vendor Retek from the clutches of SAP was an astute, albeit defensive, move. Over the years Oracle has meandered into a range of other technologies, either by development or acquisition, but rarely with much success e.g. its MPP offerings, its lackluster business intelligence products, etc. This is less surprising, as large software companies usually struggle to diversify, especially the further they move from the area that originally made them successful.

Certainly the wielding of the cheque book has bought Oracle some market share, but it also brings with it a major technology challenge in trying to integrate the various technology platforms of the companies it has acquired in with its already sprawling suite of software. Oracle has long been known for its superb marketing and aggressive sales force, but its pushy tactics have alienated a lot of customers, which in the end must damage it. When household name companies start to contemplate the massive task of moving away from Oracle to SQL Server, not on technical grounds basically because they feel themselves commercially abused, then this indicates a depth of animosity amongst customers which eventually will come home to roost.

Oracle did a fine job of winning the premier slot on the DBMS business, outpacing often superior technology (such as Ingres) through relentlessly effective marketing and sales execution. It remains to be seen whether the trail of upset customers they left along the way will continue to haunt them as they try and bring back growth. Perhaps Larry Ellison should ask the Pythia, the priestesses of Apollo at the original Oracle of Delphi, for some guidance. Their predictions were usually cryptic, but further predictions could always be bought with more gold if the initial ones didn't meet expectations. Sounds a bit like Oracle's application strategy: if you can't build a set of applications that someone wants, then just buy vendors who have. Some things never change.

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