PeopleSoft bid a sign of weakness for Oracle
Oracle's attempt at a hostile takeover of its rival is yet more evidence of the database giant's struggles to find solid footing in the applications marketplace.
PeopleSoft bid a sign of weakness for Oracle
By Mike Ricciuti To the astonishment of many colleagues, it wasn't one of the usual rivals: It was a company based in Germany that had no customers in the United States. "I said that there is one company we will need to face, that all of this will come down to, and that's SAP," said Koch, the former head of Oracle's business application division. Thirteen years later, the company is still struggling to cut the German software maker's lead in the same market--a contest that should have been a slam dunk for Oracle, given its dominance in the database systems that form the foundation for business applications. The applications industry has become increasingly important as Oracle has lost market share in a slowing database business, a fact that was underscored in the company's $5 billion hostile takeover bid for PeopleSoft last week. "Clearly, Oracle is not as successful as they should be and not as successful as they want to be" in the applications market, said Jim Shepherd, an analyst with AMR Research. The PeopleSoft move is a marked departure for Oracle, which has typically sought to annihilate its competition rather than join forces. For all its bravado and aggressive tactics, the company has had only limited success in expanding beyond its central business of selling database software. That has raised important questions about Oracle's leadership. For years, Ellison has led the company as co-founder and chief executive with unparalleled autonomy, and industry veterans have questioned whether Oracle needs some fresh blood to see it into the future. Some sources even wondered if the PeopleSoft bid was little more than a publicity stunt to satisfy Ellison's larger-than-life It is not difficult to see why personal motives are suspected in this incestuous business. PeopleSoft CEO Craig Conway is a former Oracle executive, as is Tom Siebel of Siebel Systems, one of Oracle's rivals. Conway has apparently taken things personally, calling Oracle's takeover bid "atrociously bad behavior from a company with a history of atrociously bad behavior." "I know that Larry believes that the database business is past its peak and that Oracle needs to be broader," said Koch, who ran the company's applications business until 1994. "It was something that we talked about regularly. We didn't want to discover ourselves suddenly making buggy whips and wondering what the heck happened to our market." There is no denying that Oracle desperately wants to grow its applications business, which will account for more than $2.5 billion in revenue this year. Although recent economic slowdown has stalled competitors SAP, PeopleSoft and Siebel, the decline of Oracle's applications business has been even steeper, down 23 percent between 2001 and 2002. "Behind the offer for PeopleSoft is Oracle looking for a new area of growth, something they can build on for the future, since database sales have leveled off. Database sales are tied to application sales. So buying PeopleSoft's customer base is buying a captive audience for database sales," said Laurie Orlov, an analyst at Forrester Research. Oracle remains the leader in database sales, which account for nearly 80 percent of Oracle's software license revenue, according to company reports and analyst estimates for the fourth quarter. In all likelihood, however, the database business won't come close to the double-digit growth of years past--so Oracle has been left scrambling for new ways to make money. Yet the company's experience in business applications has not inspired universal confidence in its ability to compete outside its core business, let alone sustain an impressive growth trajectory. As Orlov said, "Oracle has never shown that they understand the applications business very well." Analysts and former executives say Oracle's efforts to expand its applications business have been tempered by the company's dual role as partner and competitor. SAP, PeopleSoft and other rivals partner with Oracle for the database software that forms the cornerstone of their business applications. So Oracle must walk a fine line to avoid alienating some of its best customers. Moreover, Oracle has a perception problem in the marketplace. "People see Oracle as a database and tools company rather than as an applications company. A big reason for that is that Oracle for many years tried to use their database sales force and techniques to sell applications, and that was not very successful," AMR analyst Shepherd said.
Oracle's sales force, for example, was accustomed to closing a new database deal in a week or two. By comparison, it can take six to nine months to complete an enterprise resource planning (ERP) software contract--hardly a motivating schedule for sales representatives working on commission. Oracle only recently created a sales force focused entirely on selling applications. In January, the company announced a sales reorganization at its annual AppsWorld conference. Koch eventually got the unit back on track. But software quality has been a problem for Oracle at various times. More recently, customers complained that the company's 11i applications suffered from The Larry factor Oracle has not had a clear No. 2 executive since Ray Lane abruptly "I think it's a much better approach to have eight strong No. 2s than one," Ellison said in a conference call with Wall Street analysts last summer. "I like the current model. I love the current management team." Although Lane was the most visible case in recent years, many other senior executives were said to have left at least in part to escape a long history of bitter internal politics from the CEO's office on down. Even the young star once believed to be Ellison's choice to succeed him, a senior vice president named Ellison is well aware of his reputation for arrogance but says he is simply misunderstood. "I hear this all the time: Larry's driven (them) away. Only the losers remain. All the good people left," he told financial analysts last year. "That's very weird. I'm proud of the fact that when a person leaves the company, he becomes CEO of a company. That's proof we have good talent over here." Koch explains Ellison's conflicts this way: "He hires people who feel very strongly about what they do. The result is that very few of them last very long because none of them will kowtow to Larry, or he wouldn't have hired them in the first place." "Craig Conway is a strong, very capable guy," Koch added. "That's why when Larry says that Oracle is the best thing for PeopleSoft, Craig says that Larry is a sociopath." Microsoft looming The software giant has over the past few years expanded its efforts to build a successful business applications division by acquiring Great Plains Software in the United States and Navision in Europe. While it generates less than a fifth of the revenue of Oracle's business applications unit, Microsoft plans to invest more than $2 billion over the next 12 months to make its Business Solutions unit a player. PeopleSoft could give Oracle a much larger share of the coveted medium-size business market, which is seen as one of the few growth areas in business software. "The bid for PeopleSoft is basically a play to gain customers and market share," IDC analyst Henry Morris said. Microsoft is also targeting small and medium-size businesses, as are market leader SAP and specialized customer relationship management software companies, such as Siebel. Given recent economics in the software business, this land grab for business applications customers makes sense--especially for a company like Oracle, which is accustomed to lasting customers. "Once you get an applications customer, in all probability you have them for the next 15 to 20 years," Shepherd said. "You can sell them services, maintenance and additional products. It's a long-term revenue stream." |
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