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March 7, 2006 4:38 pm

Sergio Giacolletto, Oracle: Eye on the future

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Oracle’s takeover frenzy these past two years has been remarkable even by the standards of the technology industry.

PeopleSoft, Siebel, JD Edwards and Retek, among others, have all been swallowed, leaving the enlarged Oracle with a dominant position in many of the countries that make up the Europe, Middle East and Africa region, headed by executive vice president Sergio Giacoletto.

Oracle now faces the challenge of melding these disparate enterprise software systems into a coherent whole, and persuading customers who do not welcome the acquisition to stay put while it does so.

It is also trying to target smaller companies, who represent the best prospects for growth. At the same time, the dynamics of the industry are changing, as open source software threatens the company’s core database business.

Oracle has put 9,000 developers to work building the next generation of Oracle applications, in an initiative dubbed Project Fusion, or Project Confusion to its detractors.

The first results will appear in 2008. Until then, Oracle will continue to develop new versions of the old JD Edwards, PeopleSoft and Siebel software, which will be supported until 2013.

“The new customer in 2008 will typically start with the new platform. Existing customers have the next five years to decide when to do the migration,” says Mr Giacoletto. The company has even been selling new versions of JD Edwards and PeopleSoft, he says.

In fact the strong performance of the acquired companies may have masked weakness in Oracle’s own applications business. According to a recent report from investment bank Merrill Lynch, revenue in the applications business was down 45 per cent for the latest quarter, when the effect of the Retek and PeopleSoft buys is stripped away.

Mr Giacoletto suggested that this was just the result of a few big deals. “The quarterly numbers tend to be a bit volatile,” he says. “A couple of big deals made a difference. In the long term, if you look at the combined PeopleSoft and Oracle against SAP in Europe it has been relatively stable.”

The enterprise software market is stable, largely because few companies come to market looking for a new provider. In general, they will only switch when acquired by a company that uses a different system.

Oracle and SAP are now fighting for the less saturated smaller end of the market, where a number of regional software companies still survive – along with that fearsome competitor, Microsoft.

Smaller enterprises typically buy their business software through a trusted reseller that will also provide integration and consulting services. These firms hold the key to Oracle’s ambitions.

“More and more vendors don’t want to be tied to Microsoft because Microsoft is also competing against them,” he says – referring to Microsoft’s strategy of selling small business applications as a bundle with their server software, potentially cutting resellers out of the deal.

It’s an analysis Microsoft would dispute, and it remains to be seen how many resellers will switch to Oracle. Mr Giacoletto says that Oracle has attracted 5,000 resellers in Europe, and is hoping for more.

Applications hold the greatest promise for future growth, but Oracle must keep an eye on its present, too – it is still mainly a database company, at least in revenue terms.

That business is coming under pressure from a host of new, small rivals, offering open source databases, led by Sweden’s MySQL, but followed by a host of others, including PostgreSQL, offering database software for free.

Oracle is of course an enthusiastic cheerleader for open source software in other areas, notably Linux operating systems, which don’t compete with any Oracle products.

Databases, by contrast, compete squarely with Oracle’s core business, and it has had to change its pricing structure to compete. “Both the open source and proprietary models have value, and our strategy is to embrace either or both, depending on what makes sense,” says Mr Giacoletto.

It has started giving away low-end databases, and adding free tools to larger systems, to remain competitive on price. It has also set its M&A team loose on the open source world, scooping up two open source database companies, Innobase and SleepyCat Software. More are expected to follow.

By eating away at database revenue, open source poses a greater threat than disgruntled PeopleSoft or Siebel customers jumping ship.

If customers at the recently acquired companies are upset, they aren’t yet leaving in numbers. The costs of changing vendor are enormous, and at least the acquisitions remove a big source of uncertainty. As the industry joke goes, one of the main advantages of being an Oracle customer is that you don’t have to worry about your supplier being taken over by Oracle.

For a customer with, say, a Siebel customer relationship management system and a PeopleSoft enterprise resource planning system, having the two suppliers under the same roof may make life easier.

Some may wait to see the results of the Fusion project before deciding what to do. After 2008, they will be forced to migrate somewhere – Mr Giacoletto and his colleagues will have to persuade them to move to the future Oracle software, not something else.

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