Oracle's rental moves: from bold to not so beautiful

A year after throwing its weight behind a bold plan to corner the market for business software rentals, Oracle instead finds itself an also-ran.

Ellison shares his vision: custom computers Larry Ellison, CEO, Oracle

Despite chief executive Larry Ellison's message a year ago that Oracle would not partner for software rentals--a route that rivals SAP and PeopleSoft had already taken--the giant slowly began opening up its tightly held hosting strategy earlier this year, signaling an attitude adjustment.

Oracle's initial strategy "didn't make any sense," said Joshua Greenbaum, an analyst who heads Enterprise Applications Consulting. "They've taken a hit on credibility...and, in retrospect, they clearly made a mistake."

A former Oracle executive, who spoke on the condition of anonymity, takes it a step further. Business Online, Oracle's own application service provider (ASP) division, "is a meltdown. It's a fiasco."

The ASP market, though poised for huge success, is in flux. Companies in the hyped industry offer to host software and services for a fee so customers don't have to install and run applications themselves. Other players in the young market have not crystallized plans and are still struggling to increase customer adoption of the new model.

According to market researcher IDC, customers are expected to spend $7.8 billion on ASP services worldwide, a huge leap from $300 million in 1999.

Since the launch of Business Online, Redwood City, Calif.-based Oracle not only has shifted gears in its strategy by partnering with several ASPs, including Center 7 and Agilera, but has played musical chairs with top leadership.

Oracle appointed Timothy Chou as Business Online president last November. Former president Chris Russell, who held the role for about a year, abruptly vacated the spot shortly after Ellison's strong declaration.

Adapting to change
After a few months of silence on its application hosting strategy, Oracle recently embarked on an "educational" tour to update the press and analyst community on the progress of the division. The company that charged out of the gates a year ago with a bold message is now just another competitor in a growing field.

"The reason we made the most recent press tour is to bring analysts up-to-date on (our ASP) strategy because things have changed," said Don Haig, vice president for Business Online. "We don't pretend to have perfect foresight" in this evolving market, he said.

Some former Oracle employees have said that the transition has been rocky and that there has been some uncertainty in the direction of the unit.

And while analysts have said Oracle has had difficulty perfecting the Business Online formula, the company is realizing that the strategy shift was probably its smartest move.

Shifting gears on its initial strategy "hurt them a bit and created an impression that they didn't have their act together" in the ASP market, said Art Williams, an analyst at Giga Information Group.

"But they are finally figuring it out," Williams said. "They can't own the whole thing."

Humble pie
AMR Research analyst Dave Boulanger said that while the shift was a blow to credibility, Oracle knows it cannot tackle the ASP market alone.

"You had Larry (Ellison) a year ago saying 'over my dead body, Oracle will partner with other ASPs'...Now he's come 180 degrees," Boulanger said. Customers don't just want hosted Oracle applications, he added, but hosted Oracle financials coupled with Siebel sales force automation and other applications from different software makers strung together.

SAP and PeopleSoft have already partnered with other application hosting companies, like Corio and USinternetworking, to address this customer demand. Several analysts have said that the more hosting partners a software company teams with, the more avenues it has to sell its software as a service, which is one of the major goals.

Now that Oracle is opening its strategy to include a slew of hosting partners, along with systems integration partners and network communication partners, analysts say the giant is on the right path.

"They definitely had a rough start...But on the other hand, the market is very forgiving if at the end of the day (Oracle) can start showing some success," Greenbaum said. "There's so much demand in the market that a software maker like Oracle could succeed despite the start it had."

Oracle's Haig said about 100 companies are using the Business Online service, with the majority renting Oracle financial and manufacturing applications. Haig added that Oracle plans to continue adding partners to the program, especially hosting partners that focus on a niche market or on a particular market that Oracle does not typically target.

"Oracle gets it," said Giga's Williams. "They are on the right track."