From Computer Business Review, a sister publication
As he watched the precipitous decline of Oracle’s share price in December, a decline that knocked $2.14bn off his $7.35bn paper fortune, Larry Ellison could have been forgiven for applying the old maxim ‘there is no substitute for experience’ to his number two executive.
By Kenny MacIver
Ray Lane, the 50-year-old operations chief handed day-to-day control of Oracle in 1993, has certainly built up plenty of that in his years at the database and applications software company, and before that as a consultant at Booz-Allen Hamilton and EDS, and as a marketing executive at IBM. But since the release of the Oracle8 database nine months ago, a telling gap has emerged in Lane’s career history, one that was underlined by Oracle’s second quarter ‘disappointment’ of a 4% rise in earnings to $187m on revenue up 23% to $1.61bn.
Fear of early bugs
Having joined Oracle in 1992 as Oracle7 was rolling out the door, Lane has no first hand knowledge of the kind of business upheaval that a major product launch can cause – especially when that product accounts for 70% of software sales. Wall Street certainly ignored any warning signs. In the build up to Oracle8’s release, Lane’s often-repeated statements – about how he saw no slowdown in database revenues after Oracle8 – were not challenged. But a look at the growth chart around the time of Oracle7’s release would have shown that revenue growth fell to 7% as customer evaluation and buying cycles stretched and the need to adapt applications to take advantage of the new features became apparent. That was on top of the fear of early bugs. The reaction to Oracle8 has been no different – after its release in June, Oracle’s database sales growth slumped to 6%, then in the latest quarter to 3%, down from 27% recorded over fiscal 1997. Even when the negative effect of the strengthening of the dollar is factored in, database revenues were only up 10%. If the Oracle8 doldrums were predictable, then a handful of other factors that exacerbated the slowdown – some of which raise questions about the health of the database market as a whole – were less so. Over the past five years, relational databases have gone from being the means of adding competitive edge to a corporation’s information processing, to be the cornerstone of most IT infrastructures. Without an RDBMS companies cannot run modern business software from the likes of SAP and PeopleSoft. Most data warehousing and decision support systems also depend on their target data being in a relational format. As a result, the world’s major organizations the ones with revenues of more than $500m – are already on board. They have typically signed three to five-year contracts for company-wide use of database software from either Oracle or one of its rivals – Informix, Sybase, Microsoft and IBM. Certain industries where Oracle has been highly active have already become saturated. In particular, the company says demand in the telecoms market – Oracle’s largest vertical industry sector and its most buoyant for many years – sagged badly during its latest quarter. License sales to US telecoms companies were up only 29%, a shadow of the 44% run rate in fiscal 1997. The same is likely to happen in other sectors. Certainly, the company is not looking to Asia for a recovery. Turmoil in those economies mean sales, at $211m were up only 1%, compared with 35% growth in fiscal 1997. However, 14% of that drop was due to weakening of local currencies. Currency slides were also a problem in Europe, but strengthening economies there helped keep the underlying figure looking healthy. Oracle Europe, Middle East and Africa reported revenues of $541m, up 24%. Those factors would have been enough to turn Oracle’s second quarter into its worst in five years. But one other factor made the Oracle stock sell-off a record breaker. Analysts have come to understand two things about Oracle’s future. One, that the 30% growth rate of the database market would drop by at least 10%, with market saturation and the pricing pressures associated with Microsoft NT/SQLServer. Second, that applications software, would pick up much of that slack. But after a period of steady 70% to 100% growth, the applications business has become wayward. License revenue growth in the past handful of quarters has swung from 4% to 96% and back down to 7%.
Schizophrenic role
Oracle has been searching for explanations: A tricky reorganization of the sales force around vertical industries; complex sales force compensation plans; the Year 2000 problem. What outside analysts are suggesting is that applications vendors such as SAP and Baan, who sell their software on top of relational databases, are increasingly unhappy about Oracle’s schizophrenic role as a database and applications provider. Most Wall Street analysts now have Oracle shares marked as a ‘hold’ or a ‘possible long-term buy.’ Oracle’s dominance of the database market, they reason, is growing, and Oracle8 take-up should follow a similar pattern to that of Oracle7. If Ray Lane can get round the saturation problem, he may even be around to apply his experience to the launch of Oracle9.
