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Database firms under commodity pressure

The database software industry will face a new pair of competitors in 1998: meager sales growth and narrow profit margins.

The database software industry will face a new pair of competitors in 1998: meager sales growth and narrow profit margins.

Faced with declining sales and the reduction of their core technology--database servers--to a commodity business, Oracle (ORCL), Informix Software (IFMX), Sybase (SYBS), and to a lesser extent IBM (IBM) are hoping to find new, more profitable ground in the coming year.

The top three database specialists, market leader Oracle, Informix, and Sybase, have all suffered financial difficulties and management turmoil in the past year, in large part because their core business is in a state of flux.

The high end of the database business, where software companies sell YEAR IN REVIEW multiple, big-ticket database licenses to large companies is slowing down, according to Melissa Eisenstat, an analyst with CIBC Oppenheimer. "The rate of adoption of databases by large organizations appears to be slowing down, which is inevitable following very rapid adoption over the last several years," she stated in a recent report.

Analysts and industry executives agree that the market for database software is changing from a high profit margin, big price tag business, to more of a shrink-wrapped commodity business where margins are slim and competition for control of a diminishing market is intense.

The poster child for this changing market is none other than Microsoft (MSFT). Driven by the success of its Windows NT operating system, shrink-wrapped database server software running on NT is one of the few growth areas in the market. And Microsoft is selling its SQL Server, as part of the BackOffice server software bundle, at an alarming pace.

That should be fertile new territory for the traditional database makers looking to augment slowing sales at the high end of the market. But NT sales alone are not enough to fuel double-digit profit growth in each and every quarter for what have become billion-dollar companies.

That's why Oracle, Sybase, and IBM are changing their focus from selling all-purpose database server software to pitching applications software, middleware, and specially targeted systems for decision support applications.

In the late 1980s, the client-server craze drove companies like Oracle to over $1 billion in sales, and propelled Sybase from $100 million in sales to nearly $1 billion by the mid-1990s. Informix, fueled by sales of software for large transaction processing systems, also came close to the $1 billion sales mark before being hit with a series of setbacks this year.

Now its time for deep thoughts among top management of those companies. "We are moving to the next cycle in the database business," said Janet Perna, general manager of IBM's data management software products group. "I'd say in the traditional segment, it's slowing."

What Perna really sees is a change in the growth areas. "I see a change in segments. Business intelligence software sales are growing. Oracle's traditional business is slowing. Look at what analysts project for online transaction processing software sales. They see a 6 percent compound growth until the year 2000. For business intelligence software, they see 40 percent growth," she said.

The turbulent database market is causing Oracle to reinvent its business, said Mark Jarvis, vice president of system products marketing at Oracle. "Oracle's business is changing. We're in the process of reinventing the company and moving into serving vertical businesses like telcos and utilities," he said.

Oracle, like IBM, is now more interested in providing services and selling entire packages of software, services, and consulting, said Jarvis. One drawback to the new plan is that sales cycles take longer, said Jarvis, since the complexity of sales is much higher.

Sybase, meanwhile, is relying heavily on its development tools and middleware products to pull it through. Recognizing that its most valuable products going forward will be middleware and tools, Sybase has put more emphasis on its Jaguar CTS transaction server and attendant tools in recent months.

Informix, bucking the trend, plans to continue to emphasize its database software as its primary product line, according to CEO Bob Finocchio.

And, though it will most likely be a much smaller company, Informix could find a niche that will keep it afloat.

Market watchers report that there are still two strong growth areas in the database business: shrink-wrapped sales on Windows NT and sales of database software for mainframe systems. IBM's Perna said that in the past year, the company has seen 8 percent growth in sales of database software for its System 390 mainframes.

However, the shakeup and lower margins could lead to a very different database software landscape in the coming years. According to Forrester Research, the only players left standing by 2001 could be Oracle, IBM, and Microsoft.