Database rivals snap at Oracle's heels
Oracle is facing the biggest threat ever to its database dominance, as IBM, Microsoft and new competitors chisel away at its market share.
Although previous battles in the database software market were waged over features--with Oracle comfortably in the lead--the new battle is over pricing and customer service. IBM, which recently strengthened its database lineup, and Microsoft, known for ease of use and low cost, have surfaced as the software maker's strongest foes.
IBM, which will report quarterly earnings and new database revenue numbers Tuesday, says it has seen its database sales grow 19 percent and 36 percent in its last two quarters, respectively. Microsoft executives say their company's database revenue has grown more than 45 percent in each of the last two quarters. But the software maker, which will report earnings Thursday, doesn't break out specific database figures and declined to offer more details.
Oracle, in its most recent earnings report, said database sales fell 8 percent overall, with sales in the United States dropping 26 percent.
The company this summer repriced its database for the first time in years, partly in response to stiffer competition. But its database sales are declining, largely because of the slow economy, but also in part because of the premium rates it is charging, some customers and analysts say.
On top of that, new competition has sprung up, as specialty database companies catering to developers building new Web services in XML (Extensible Markup Language) are giving buyers new options.
At stake is the $8.8 billion-a-year market for database software. Such software is crucial to businesses because it allows them to store, manage and retrieve vast amounts of corporate and Web site data.
"People want an alternative to Oracle," said Giga Information Group analyst Terilyn Palanca. "IBM is finally a viable alternative. Oracle has been premium-priced for years, and IBM deliberately undercut prices to seed the market. And Microsoft has improved its product and sells straight to its Windows customer base, and has taken the No.1 position in NT sales away from Oracle."
With the specialty database companies still growing, analysts believe that IBM and Microsoft will remain Oracle's biggest foes--and they expect the trio to engage in a fierce turf battle for years to come. Analysts say that Oracle, with its huge customer base, has the wherewithal to fend off its rivals. But much depends on Oracle's ability to woo customers--not only with its sales, marketing and consulting efforts, but also with its broader family of business software.
Microsoft and IBM stole away some Oracle customers in the past year, analysts say, when Oracle angered its customers with a new pricing plan that made its database more expensive. This summer, at the launch of its 9i database, the company tried to appease its customers by introducing a new pricing plan that follows IBM's and Microsoft's lead.
"We credit (Oracle's) pricing missteps to help us gain in the last year," said Jeff Ressler, lead product manager for Microsoft's SQL Server database.
The high costs of Oracle do have some businesses shopping elsewhere. Dollar Rent A Car Systems, which has used Oracle's databases for four years, recently bought SQL Server for some of its needs, including Web site work and research and development projects.
"Really darn expensive"
"We were a pure Oracle shop up until the start of this year," said Peter Osbourne, Dollar's group manager for advanced technologies and decision support services. "Oracle is a great product, but it's just really darn expensive."
Osbourne said that Oracle charges a lot for maintenance each year, with an annual fee that gives Dollar upgrades to Oracle's technology.
"We do a number of research projects, and SQL Server is pretty cheap compared to buying an Oracle license," said Osbourne, who estimated that Dollar uses 90 percent Oracle 8i and 10 percent SQL Server. "We're not going to switch from these big boxes, because of the substantial hardware investments (in them already), but because we are price-sensitive, we will look at other databases."
Online bookseller Abebooks.com also is considering dropping Oracle because of its high cost. Earlier this summer, the seller of used and rare books considered switching to IBM's DB2 software, said John Snider, Abebooks' senior database administrator.
"The one complaint we have of Oracle is it's expensive," Snider said. "IBM's DB2 is an easy sell; it's a lot cheaper."
Abebooks uses Oracle's 8i standard edition and wanted to upgrade to the more expensive enterprise edition because it would allow the bookseller to duplicate copies of the database in multiple locations to prevent downtime, Snider said.
Over the summer, however, Abebooks decided not to upgrade because it couldn't afford Oracle's enterprise edition. The company's programmers wrote their own software to sit on top of the Oracle database to replicate it. Besides, Snider said, the work to migrate the company from Oracle to IBM would have taken weeks, or possibly months, of work.
Oracle would have charged $500,000--five times more than IBM. But IBM also would have charged extra for consulting services, Snider said. If it were just the database, he said, "it'd be a no-brainer."
But now, five months later, Abebooks is again looking to upgrade to a higher-end database--either Oracle or IBM--to get new database administration and management features that would allow it to keep its Web site up, Snider said.
Pricing will remain an issue among database customers because of reduced spending in a weak economy and because Oracle still charges twice as much as its big rivals (down from three times as much), according to analysts and Microsoft and IBM executives.
Narrowing the technology gap
"Pricing is certainly a factor, and it becomes more a factor when the gaps in product functionality between the leading player and competitors become narrower," said Robertson Stephens analyst Eric Upin. "Oracle still has terrific technology, but when the gap gets narrower, it's like the automotive industry, where people will be willing to pay less money for the fact they don't get leather seats. They like getting discounts."
Oracle holds the technological edge and regularly comes out with innovations that are copied by its rivals, analysts say. But IBM and Microsoft have been closing the gap, and although features are more important than price for large corporations, price is the bigger factor in the highly competitive market for medium-sized businesses.
"Oracle is still more expensive, just not as much in the past," said Gartner analyst John Rubin. "(Costs) will still drive businesses toward DB2, but that by itself won't be the single differentiator."
Oracle executives scoff at the assertion that the company's products are more expensive. They say that IBM's DB2 and Microsoft's SQL Server 2000 databases no longer have a price advantage.
In June, Oracle Chief Executive Larry Ellison said that although his company's product is twice as expensive as IBM's, Oracle includes features that IBM charges for separately. If all the add-ons are factored in--for example, software that manages all types of content, such as Web pages and e-mail--Oracle is actually cheaper than IBM, he said.
"The price change has taken a lot of pressure off of us," said George Demarest, Oracle's database marketing director. "Every configuration that IBM shows where Oracle is more expensive, I can do the same comparison (to show) that they are more expensive."
But Rubin said Oracle's argument that it's cheaper doesn't hold up, since most customers don't need the extra built-in features supplied by Oracle. He agreed, however, that the company's new prices are more palatable to buyers.
With its head start, Oracle ranked first in the overall database sector in 2000 with 34 percent of the market, followed by IBM with 30 percent, Microsoft with 15 percent and Sybase a distant fourth with 3.2 percent, according to Gartner.
But Microsoft edged out Oracle 38 percent to 37.3 percent to claim the top spot for databases running on the Windows NT and Windows 2000 operating systems. While Oracle's share fell, IBM gained ground, growing from 15.2 percent of the market in 1999 to 18.5 percent last year.
In the market for databases running on the Unix operating system, Oracle has a commanding lead with 66.2 percent, followed by IBM with 14.4 percent. Informix, recently acquired by IBM, holds 6.7 percent of the market. Microsoft does not sell databases for Unix.
Analysts say IBM is making inroads in the Unix market. It has forged alliances with SAP and PeopleSoft to run IBM database software with their business software. The ERP (enterprise resource planning) and CRM (customer relationship management) software makers, which historically have targeted Oracle databases, are striking deals with other database makers because Oracle is competing against them with its own business applications.
"It's a two-horse race in Unix, and who knows? In three to five years, IBM could be No. 1," Giga's Palanca said.
She said Oracle hasn't devoted enough of its marketing resources to the Windows market, allowing Microsoft to take the lead. Some analysts predict that the smaller Windows market will equal the Unix market by 2005. If Oracle is not careful, IBM could quickly claim the No. 2 spot in the Windows market, Palanca said.
"IBM's been doing well in that market and pays more attention to marketing in that space," she said. "Oracle has not marketed to that market space very well."
Oracle's Demarest agreed that the Windows market will be a challenge. "We are comfortable with the Unix market, but there will be a battle on the (Windows) NT side," he said.
The XML factor
Added to the mix is a growing category of databases that focus on storing documents coded in XML, a Web standard for exchanging information, which many companies have begun using to conduct online trades with customers, partners and suppliers. The argument is that XML-specific databases allow businesses to store, manage and retrieve XML documents faster and more efficiently than regular databases can.
The early leaders in the market for these databases are Software AG, Excelon and Computer Associates International. The market, though still relatively small, has started to take off, growing from $10 million in revenue in 1999 to $77 million last year. Analyst firm IDC expects a $1.6 billion market by 2005.
"XML databases are just a blip. It's way too early to see what effect it will have," Gartner's Rubin said.
Executives at IBM, Oracle and Microsoft also say that XML databases are a niche market, but they're not taking any chances. They have already built support for the language into their general databases and say they'll continue to address the market through improvements to XML support in those databases.
Then there are the open-source databases, the creation of a handful of companies such as Red Hat, AbriaSoft and NuSphere, though analysts don't see them as a threat because the technology will mostly be used by smaller companies. Open-source software is collaboratively developed by software programmers who freely share the technology with one another.
Whatever the category of database, customers look at a variety of factors besides price, such as ease of use, customer service and the rest of the database maker's product family, analysts say.
Microsoft has the database that's simplest to use, followed by IBM and Oracle, analysts say. "It will take years for Oracle and IBM to close the gap on ease of use," Rubin said.
For Oracle, customer service has been a sore spot, said Giga's Palanca. "The tenor with IBM is that the customer comes first. It's always been an atmosphere of partnership," she said. "Customers don't like to deal with Oracle. They find Oracle very arrogant, particularly with support issues."
She cited an example in which some customers installing Oracle's clustering technology with a recent version of the company's database didn't get the help they needed. With the clustering technology, businesses can harness multiple servers to run a large database, sharing work or taking over from each other if one fails.
"When they ran into trouble, they wanted Oracle to provide expert guidance and couldn't find anybody," she said. "Long term, it could affect Oracle's market share."
Dollar's Osbourne, on the other hand, said the rental car company has received good service from Oracle.
Oracle executives say they are confident that their company will remain the leading database maker--and they are looking for new ways to increase market share. Since IBM acquired Informix, for example, Oracle has been wooing Informix customers to move to Oracle databases.
Despite the heavy competition, some analysts believe Oracle can remain the No. 1 database maker.
"Oracle is the Super Bowl champion, and when you win the Super Bowl, everyone in the league is trying to beat you," Robertson Stephens' Upin said. "Oracle is a well-managed company and very competitive. And yes, they can maintain their market position."
By Wylie Wong
October 15, 2001