Oracle, which ranks first in database market share, has spent the first half of the year combating listless sales caused by the economic slowdown and renewed competition from IBM and Microsoft, which sell their databases at much lower prices than Oracle.
The new pricing arrangement is expected to bring Oracle's software pricing in line with pricing models from IBM and Microsoft.
Oracle Chief Executive Larry Ellison said the company has ditched its controversial pricing plan, called "power unit" pricing, in favor of a new model that lowers the cost of the company's database. Power-unit pricing forced customers using servers with faster processors to pay more. Now Oracle will follow IBM and Microsoft's pricing scheme and charge by processor, regardless of processor speed.
"This is a price reduction, and it allows us to sell more software," Ellison said in a press conference Thursday, adding that he believed it will help improve the company's bottom line. "I think we will gain a huge amount of market share."
Ellison defends Oracle 9i pricing
Larry Ellison, CEO, Oracle
The new pricing plan "is important because the No. 1 competitive pressure for Oracle is probably price," said analyst Jacqueline Coolidge of the Hurwitz Group.
The announcements, unveiled by Ellison at a press conference at the company's Redwood Shores, Calif., headquarters on Thursday, comes at a crucial period for the company. Database sales, which make up the bulk of Oracle's revenue, saw 6 percent year-over-year growth last quarter, far below the 19 percent to 32 percent growth rates reached last year.
Some Wall Street analysts predict database sales will be remain flat or fall as much as 10 percent year over year, when the company announces its fourth-quarter financial results next Monday.
While Oracle widened its lead in the overall database market, a recent study of last year's sales found that rival Microsoft narrowly surpassed Oracle in the market for databases that run on the Windows operating system. IBM is also gaining steam after gobbling up database maker Informix in a recent $1 billion acquisition.
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In the past, Oracle charged customers two ways: "named users," where the databases are licensed to specific consumers' machines, and "concurrent users," where the database can be accessed by a set number of consumers, no matter who they are. About a year ago, Oracle stopped offering concurrent pricing and started offering pricing based on power units, where Oracle charges based on the size and power of server processors.
The change forced about 70 percent of Oracle's customers to move to power unit pricing, which often resulted in overall higher costs, analysts say.
In some cases, Oracle's database software cost three to five times more than products from its competition, said analyst Terilyn Palanca of Giga Information Group.
"It's a substantial price increase, and it drove people crazy. Customers were having heart attacks. And that's why you saw some attrition and growth rates for IBM and Microsoft," she said.
IBM and Microsoft also sell databases with power-unit pricing. The difference was, Oracle charges not only for the number of processors, but also their speed, Palanca said.
But after Thursday's price changes, the enterprise edition of the 9i database will cost a uniform $40,000 per processor, while the standard edition will cost $15,000 per processor. In the next few days, Oracle will release to existing customers a plan to convert to the new pricing scheme, Ellison said.
With the new pricing strategy, Oracle's database software will still cost about twice as much IBM's, Ellison admitted. But Oracle's database will include extra features that IBM sells separately.
"We are twice as expensive as IBM. However, we have a lot more stuff. And IBM charges separately for that stuff," Ellison said. "If you actually start to add in all our features, (IBM is) actually more expensive than we are."
Meta Group says users should regard the next 10 months as a real beta test for the new 9i database software system.
Oracle executives have marketed Oracle 9i as faster, better performing, more secure and easier to manage than the company's previous products. Database-management software is used by businesses and Web sites to store, manage and retrieve vast amounts of data.
The product features new "clustering" technology--called Real Application Clusters--that will make the company's databases perform more reliably than before. Clustering lets businesses harness multiple servers to run a very large database, allowing servers to share work or take over from each other if one fails.
Oracle executives have touted the clustering technology as a way to reduce costs because companies can buy smaller and cheaper servers to run their databases, rather than having to buy one huge, expensive server.
Hardware and software makers announcing support for 9i included Compaq Computer, Dell Computer, Hewlett-Packard, EMC and Sun Microsystems.
The 9i product also includes built-in analysis tools designed to help managers and executives make better business decisions. The built-in tools for "data warehousing" let companies examine business information, seek out patterns and trends, and predict the future.
"Oracle has been pushing a lot of features, and they are staying ahead of the competition," Palanca said.
Jeff Grant, founder of T-Swat Consulting in Vancouver, Canada, said he was impressed when he tested out the 9i database.
"It rocks," Grant said. "A lot of stuff I do is e-commerce and security-based, and the security enhancements (in 9i) are pretty important. They've come a long way since five years ago."
Grant, a longtime Oracle customer who builds networks and computing systems for businesses, said the new clustering software is easier to use than Oracle's previous versions. Oracle's older clustering software, called Oracle Parallel Server, required specialized database administrators and also required developers to change software code to take advantage of clustering.
"It was a nightmare to set up," said Grant, who added that he expects to save money because the clustering software lets him use lower-cost smaller servers.
"It's a solid release," he added. "I haven't had any problems with the beta version. I haven't had it crash on me. And the Java is faster."