Oracle Finds Competition at the Core
By Joe Bousquin
Senior Writer
10/26/2001 07:41 AM EDT
At Oracle (ORCL:Nasdaq - news - commentary - research - analysis), it's not just an applications problem anymore.
While the company has been punished by investors for poor showings in its applications software business, there are now growing signs that its legendary dominance in the database software market is also beginning to slip. Tech giant IBM (IBM:NYSE - news - commentary - research - analysis) has aggressively targeted the database market over the past two years, and analysts say it's now taking market share from Oracle. Oh, and Microsoft's (MSFT:Nasdaq - news - commentary - research - analysis) nipping at its heels, as well.
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Thursday, Salomon Smith Barney analyst Gretchen Teagarden downgraded the stock to neutral from outperform, in part because of increased competition in the database market from IBM.
"We believe that customers running both ORCL and IBM databases will be favorably biased toward IBM for new deals," Teagarden wrote. "IBM is offering very competitive pricing terms by bundling its software in with other services and hardware." (Salomon hasn't done underwriting for Oracle.)
Oracle shares closed down 71 cents, or 4.8% Thursday, at $13.95.
Staying Flat in a Growing Market
And while industry analysts maintain that the database market is still growing, Oracle's database license revenue actually declined by 8% during its fiscal first quarter, which ended in August. Compare that with IBM's September quarter results, during which its database license revenue for Unix and Windows NT operating systems grew by 56%. The Unix market is where Oracle dominates, claiming two-thirds market share for those systems.
Microsoft has been muscling its way onto Oracle's main turf as well.
"While Oracle has gone to a flat to negative growth rate in its database business, it's obvious that the market is still expanding, and that Microsoft and IBM have gained at the same time," says Terilyn Palanca, an analyst at Giga Information Group. "So, it might be something beyond the economic trouble that's affecting Oracle."
Oracle didn't return a call seeking comment for this story. Analysts say that while companies that already use Oracle haven't been switching to IBM, new deals are becoming increasingly more competitive.
In 2000, Oracle owned 33.8% of the worldwide database market while IBM commanded 30.1%, according to Gartner Dataquest. Microsoft was a distant third at 14.9%, according to the firm, though strong sales of its SQL Server database product have been hurting Oracle as well.
And while Oracle's market share grew by 19% in 2000, compared with 11% growth for IBM, analysts say much of Oracle's growth was attributable to the surge of dot-com companies that set up shop with Oracle systems. Now, as many of those Internet firms have vanished, it appears that Oracle's momentum has gone with them. Database market share numbers for 2001 are not yet available, but IBM's purchase of Informix earlier this year is expected to bolster the firm's market share even more.
Pricing Themselves out of the Market?
There are other reasons for Oracle's database decline. One is price. While analysts uniformly say that Oracle's database technology is top-notch, the company charges customers more for its software than IBM does. Oracle tried to address that price gap earlier this year by changing the way it charges customers, but its software still costs twice as much as IBM's, according to analysts.
And some say that price cut didn't come soon enough.
"With Oracle's pricing debacle, they basically opened the door for IBM to come in and become a very competitive player, especially in the Unix space," says Mark Shainman, an analyst with research firm META Group. "Now, Oracle's pricing cut definitely put some soap on the rungs of [IBM's] ladder, but it might have been too little, too late."
The fact that Oracle writes business software applications to run on top of its database while IBM does not might be having an effect as well.
Independent software vendors, or ISVs, such as PeopleSoft (PSFT:Nasdaq - news - commentary - research - analysis) and Siebel (SEBL:Nasdaq - news - commentary - research - analysis), make their bread and butter from applications. Analysts say they are reluctant to tell their customers to run Oracle's database underneath their own programs because Oracle is competing with them.
In March, Salomon Smith Barney analyst John B. Jones Jr. said IBM would likely benefit from that practice.
"A portion of Oracle's current database growth problem, we believe, is being caused by its practice of competing with ISVs on the solution side of its business who are using Oracle's database products," Jones wrote then. "If you are an ISV selling a solution against Oracle, why would you want to use Oracle's Database Products with your solution? The answer is you wouldn't if you could find an alternative."
To top it all off, Oracle has a reputation for being a thorny partner to work with, and the high-profile departure of President Ray Lane in 2000 has only bolstered that outlook. IBM's Global Services team, on the other hand, is widely regarded as a cornerstone of the company's success.
"If you draw the analogy back to the mid-1990s, [smaller database firms] Sybase (SY:NYSE - news - commentary - research - analysis) and Informix had a lot of success simply because they were the alternative to Oracle," says Giga's Palanca. "Account management was difficult to deal with. Now, we're in a situation where there are alternative choices once again, and there's enough of an issue in customers' minds to drive them to other vendors."
"It may be a more interesting market here for a while, finally," Palanca adds.
If that's the case, Oracle might have the misfortune of living in interesting times. |
