Oracle dips, Net soars

Last week Oracle (ORCL), one of the pillars of the enterprise software world, reported disappointing revenues and earnings results. No matter how the company's officers try to explain it away, Oracle's slow growth isn't a mere one-quarter dip. It's a symptom of a slowdown in the market for big client/server systems and a signal of the rise of the Net in the corporate world.

Oracle's quarter was uncharacteristically weak, showing only 3 percent year-to-year growth in the company's database business and 7 percent year-to-year growth in its applications business. In a conference call with investors after the quarterly earnings were announced, Oracle officers blamed the weakness on several things: (1) turbulence in the Asian markets, which has become the veritable El Niño of the tech world, (2) restructuring of the company's sales and marketing units, and--in my opinion the most significant point--(3) weakness in both the federal and telecommunications markets.

As one would expect, Wall Street investors reacted negatively to Oracle's news, bringing the company's valuation down by more than 35 percent. By the end of last week, Oracle's $32-per-share stock price had dropped to $21 per share. But the company's woes aren't just its own. Oracle has been a bellwether stock for years now, and its current shortfall points to a market trend.

What is really going on is a shift in demand from expensive, large-scale client/server systems to Internet-based architectures. Large corporations worldwide are rapidly reaching a saturation point in large-scale client/server systems like those provided by Oracle, PeopleSoft (PSFT) and SAP. In other words, most everyone who's going to buy a database, or large-scale applications that run on big databases, has already done so. As a result, these companies are moving quickly to Internet-based systems that Internet Enterprise Software (IES) companies, including Ariba, NetDynamics, Netscape, BroadVision, and others, deliver.

Telecommunications companies and federal business, the very vertical markets Oracle pointed out as weak, will be strong if not the strongest vertical markets for some of these IES companies in the future. I'm willing to bet that there will be very little fallout from Asia reflected in these companies' results.

So we are at an important inflection point, at the brink of a sea change. Corporations are shifting, turning their sails toward the Internet, and using Net-based services for core business operations. The days when a company's Web efforts were assigned to a creative engineer or a technically inclined marketing person as a part-time project are over. Internet deployment and Internet projects are infecting and spreading like viruses across corporate departments.

In the early days of the commercial Internet--a mere 12 to 18 months ago--corporations were satisfied to use Internet-based technologies for basic cost-saving. Mostly, it was a matter of substitution: Memos went by email instead of paper; Web-based bulletin boards cut down on team meetings. Now, these same companies are looking to make money from the Internet as well.

Many of us are now familiar with the success stories: Dell (DELL) taking in over $2 million per day; Amazon.com (AMZN) growing revenue to become a 30-store chain of book superstores in less than three years' time. But how about all their competitors? Aren't Compaq (CPQ) and Barnes and Noble (BKS) now aggressively responding? And what about industry-specific marketplaces that have been created--such as Fast Parts for electronic components--or that currently are being created? These examples point to the fact that the Internet is shifting from being solely regarded as a cost-saver to also being considered a revenue-generator. (By the way, Internet revenue-generation is happening at a cheaper price point than that of traditional enterprise software.)

We are indeed in a very dangerous time for traditional enterprise software companies, with customers smelling cost-saving and revenue-generation strong enough to want to taste it. The trend toward the Net over enterprise software could fundamentally challenge a lot of companies that have been thriving on the fat of the corporate land, and could create some new wizards at the same time.

The faint smell of something burning at Oracle is just the first indication of what's cooking. I'm not arguing about the usage within corporations of enterprise software--clearly Oracle and PeopleSoft software still has its place--it's just that I don't see where future growth for traditional enterprise software companies is going to come from, or where their new customers are going to be found.