Larry Ellison is a very lucky guy: He has more money than anyone--except Bill Gates. He's CEO of the most powerful software company in the world--besides Microsoft. What's so bad about that? For Ellison, everything (by Andy Serwer., Fortune Magazine)
Analysts describe the new business Ellison is attacking as the "Internet applications business" and estimate it is a $30 billion market, growing by 25% a year. As for Ellison, he's dead set on wrapping his arms around the whole thing, starting with his suite of Internet-based integrated business applications, 11i, introduced this past spring. "I would be surprised if we didn't do it," he said in a recent conversation. A good many observers, of course, think that's crazy.
First of all, his scheme carries huge risk. The market for these software applications is changing at Internet speed and is enormously complex. Consider what these applications actually do: They take whole segments of a company's operations and streamline them--sifting through all the sales, financial, and customer data that a company might have and then distributing them to managers and employees in all sorts of usable packages. And now, thanks to the Internet, a company can tie suppliers and customers into this movable data feast as well. For instance, such programs can help salespeople on the road have access to the corporate data they need and can configure products on the fly for their customers. Still other applications totally reorganize supply-chain management. Not surprisingly, given the complexity of all this, Ellison's company doesn't have nearly the leverage in this world that Microsoft had when it started serving up suites of desktop applications to PC users.
And then, of course, there's the issue of how much the new strategy will benefit Oracle on Wall Street. Some analysts caution that even if the plan does work, its success is already factored into Oracle's pricey stock--right now ORCL has a forward P/E of 32, about the same as Microsoft's. "The debate isn't whether it's a great company," says Robertson Stephens analyst Eric Upin, "but how much Oracle's stock should be worth given the risk factors."
Over the past couple of years Oracle's "apps" sales have accounted for between 5% and 13% of revenues, depending on the quarter. And explosive growth beyond that threshold won't be as easy as Ellison makes it sound. One problem: Companies that are already leaders in enterprise applications--including PeopleSoft in the human resources category (see box); SAP, the giant German maker of enterprise resource software; and Siebel, in customer relationship management software--are migrating to the Web as well. What's more, a whole new crop of enterprise software companies has built entire businesses around the Web from the ground up: Ariba and Commerce One in procurement and exchanges, Broadvision in e-commerce, and i2 in the supply-chain arena. In any event the situation is so in flux that it would be hard for even the savviest Sand Hill Road player to pick a definite winner.
Meanwhile, there's a potentially big pricing problem with the Net apps suite strategy. Again, it's helpful to revisit the Microsoft Office analogy. When the Beast of Redmond began to bundle its desktop computing software for word processing, spreadsheets, and presentations, it was able to price the additional programs so dirt cheap that it knocked the competition (WordPerfect, Lotus) nearly out of the market. Oracle, however, would likely find such a marketing strategy--for example, essentially giving away an entire HR department's software for the price of a single program--to be a dangerous drag on its bottom line.
The aggressiveness of Ellison's strategy scares some. "Oracle hasn't been a leader in this business," points out Upin of Robertson Stephens, "and all of sudden they are talking about $1.3 billion in applications revenue for fiscal 2001 [May year-end]." Nor is Ellison's good buddy Andy Grove optimistic. "So often, when you see companies try to move from one area of dominance to another, they fail," says Grove. "I have my doubts about this one."
You don't have to be a software expert to understand what might be raising Grove's cautionary flags. Imagine taking all of a company's business software applications, ripping them out department by department, and replacing them with one global package. There's no small amount of institutional inertia that prevents companies from simply throwing over one app for another. These applications are to a large degree customized--and even though it will be far easier to make Internet-based apps fit a particular business without a lot of modification, it still is not an easy thing to pull off. Like crossing the desert on foot.
Nor is it easy to design standard apps that work for all the different kinds of customers that Oracle says it's trying to serve. An e-business has very different app needs than a manufacturer. A bank needs different kinds of apps than a trucking company. Ellison says he's aware of all this. He knows its an enormous job. But he's got the programmers to do it. "No other company could create a suite of applications," he says. "They just aren't big enough."
In fact, Ellison's loyal lieutenants say that size factor--and Oracle's famously aggressive sales pitch--is already working. "I see CEOs come in here and get on their knees and weep after we explain this to them," says Mark Barrenechea, head of Oracle's CRM business. Says Oracle EVP Jay Nussbaum: "I went with Larry to visit Sandy Weill at Citigroup. And after Larry pitched Sandy, Sandy said, 'You don't have to sell me anymore. I'm a numbers guy. This is awesome. I want some of that.' " (Weill confirms the conversation but says he phrased it a little differently.)
Still, rhetoric aside, Wall Street was clearly a little disappointed in Oracle's apps biz for the quarter ended in August. Sure, applications revenue grew more than 42%, to $156 million, but analysts like Goldman's Rick Sherlund were looking for 65% growth. Likewise, though Oracle CFO Jeff Henley predicts the company will have 50 corporate applications customers by the end of the November quarter, the company has just about 27 now, with the recent signing of Agilent. Interestingly, most of Oracle's applications customers thus far have been smaller businesses or divisions--or newer ones that don't have many legacy systems to throw away.
"I think you'll be able to tell if they're on track over the next few quarters," says Morgan Stanley software analyst Chuck Phillips. "Oracle's sales force needs to really focus on applications. And the company could use one key executive besides Ellison who champions this cause."
One likely scenario is that Ellison's applications strategy will initially play hit-and-miss, making it a rough ride for shareholders. As the whole business evolves, though, many are putting their faith in Ellison's ability to reshape these products and make them work somehow, somewhere. That sort of finessing is something Ellison is very good at. "Who knows [what the outcome will be]?" says Jobs. "But at least Larry is moving forward, going somewhere that makes sense. Then if he has to change, he will. You can't get anywhere by standing still."
Next Section: As with all things Oracle, in the end, it all comes back to Larry.
Vol. 142, No. 11
November 13, 2000