Squeeze play: Databases get ugly
Forbes Digital Tool
By Julie Pitta
THE $9.5-billion-a-year database market grew 10% last year, a respectable rise for a product that has been around for 20 years. So how is it that once-promising players Sybase and Informix have been struggling and Oracle, the market leader, warns of tough times ahead?
The answer, in a word: Microsoft.
Microsoft is roiling the database business with cutthroat pricing, product bundling and sweet deals for customers and software developers—the same tactics by which it dominated PC software, earned the enmity of competitors and provoked a bitter U.S. antitrust lawsuit that charges Microsoft, in effect, with the crime of giving consumers too good a deal.
Now the software giant has vaulted into a three-way race with number one Oracle and number two IBM. Sybase and Informix are fighting to stay relevant and scurrying into market niches they hope will prove too small for Bill Gates' voracious appetite.
The bitter irony in this war is that Sybase armed its mortal opponent. In 1989 Sybase, which makes databases for giant companies using minicomputers costing half a million dollars, agreed to license its programming code to a PC software maker with annual sales of just $805 million—Microsoft. It seemed like a good idea at the time: How could a little desktop software company ever be a threat to the high end of the market?
Rivals scoffed when Microsoft first entered the market with a kludgy, underpowered product. In typical fashion, Microsoft kept grinding away at it: The 7 in SQL Server 7's name means the product is in its seventh major iteration; the latest version came out in January.
"It took us a release or two to give the traditional competitors in the database market a scare," says Douglas Leland, the Microsoft group manager who oversees marketing for SQL. He now is drawing a bead on Oracle. "Our friends in Redwood Shores [Calif., where Oracle is based] are going to feel the pressure."
Just how serious is the threat? SQL Server 7 sells for as little as $100 per user, one-third the price of Oracle's cheapest database and almost one-fifth the price of the main offerings of Sybase and Informix.
The lowball pricing wins converts. "Why did I pick Microsoft? It comes down to one thing: cheapo, cheapo, cheapo," says Stuart Mowat, director of decision support for HarperCollins Publishers. He uses SQL to store 200 gigabytes (equivalent to 300 CD-ROMs) of customer information previously stored on an IBM minicomputer.
Moreover, Microsoft offers an additional 50% discount to any customer that dumps IBM, Oracle, Sybase or Informix to switch to SQL. "I expect they'll eventually give it away," grumbles Robert Finocchio, Informix chief executive.
Lavish perks further entice Microsoft "partners." To land HarperCollins, Microsoft threw in the free services of a database expert for four months, Mowat says. That's a $50,000 value. This year Microsoft will spend $600 million on such inducements. That has forced Oracle to set up a $500 million fund of its own.
"They are a monopolist," Oracle Chief Financial Officer Jeffrey Henley says of his rivals in Redmond, Wash. "They'll do a lot of wild things to beat someone down."
Monopoly doesn't really describe Microsoft's position in databases—not yet, anyway. Microsoft has a 6% share in the market, to Oracle's 43%. The difference between the two firms is more in staying power. Microsoft has $19 billion in cash; Oracle has $2.1 billion. In a price war, which is what the programmer freebies are all about, Microsoft will have the upper hand.
High-powered databases, which scale mountains of payroll, inventory and other data, are the Ferraris of software: complex, pricey and a world apart from Microsoft's PC products. SQL isn't as muscle-bound as rivals' software—but it is powerful enough to win over corporate accounts that rebuffed it in the past.
"Anybody who tells me they can't run their business on SQL Server 7 must be NASA," says David Lish, a vice president at Transamerica Corp. The San Francisco insurer installed SQL to track 100 million U.S. properties and refer prospects for flood insurance to other insurers.
But the threat isn't so much that Microsoft will steal dozens of big corporate accounts. Most already have high-end databases; switching to a new one can be prohibitively expensive and a hassle. "Once you've deployed a database, it's very hard to move," says James Griffin, a marketing director at Sybase.
And the big-company market is saturated anyway. The real threat is that Microsoft will eat up all the growth in the untapped segments that offer the richest opportunity: small and midsize businesses. These clients are too small for high-powered databases running on UNIX, yet they pose a lucrative market for databases running on NT, says analyst Carl Olofson of International Data Corp.
That is why some developers are tailoring their products to Microsoft. Symix Systems Inc., a $100-million-a-year-plus designer of manufacturing software in Columbus, Ohio, passed over the Oracle platform two years ago in favor of Microsoft, which chipped in a subsidy for marketing and training.
"Our customers have maybe one person doing technology. Microsoft's product is simpler than the others, and that's very important," says Stephen Sasser, president of Symix.
Spacelabs Medical Inc., which makes medical devices and related software, has dropped Sybase to gear its hospital automation system to Microsoft's SQL. Andrew Pitts, a Spacelabs product manager, says the Sybase version required a $100,000 midrange computer, while the SQL version runs on a Dell server that costs $42,000. But he cites a second reason that is more ominous for Sybase: Its slide in recent years makes him nervous. Says Pitts: "Their support has gone downhill, and their prices are going up."
Sybase professes to be unconcerned, but then, it has underestimated Microsoft before. Its stock peaked at $57 back in 1994, for a total market value of $4.4 billion; these days the shares hover at around $10 after the company lost $1.15 per share last year. Informix hit a high of $36 in 1996, giving it a market capitalization of $5.4 billion. The shares are down to a third of their high. At $12, they go for 40 times earnings.
All of which makes you wonder what might have been—what if Sybase hadn't handed over its software code to Microsoft a decade ago? Who let that happen? Mark Hoffman, who founded Sybase in 1984.
These days Hoffman runs Commerce One, a small electronic-commerce outfit in Walnut Creek, Calif. About a year ago his new company was shopping for a database. And which one did it buy? Microsoft's. "It works fine," Hoffman says. "And we got a good price."
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Same old FUD from Redmond. |
