Richard Waters of the Financial Times interviewed Larry Ellison, the chief executive officer of Oracle. The following are excerpts from the interview:

FT: In an interview with the FT four years ago, you predicted an end to the period of disruptive innovation from small technology companies and said that, in a maturing industry, there would be slower growth and a consolidation of power in the hands of the market leaders. However, the software world seems to be awash with disruptive innovation again, in the form of open source software, software-as-a-service, and the Web 2.0 movement. What has changed?

LE: I still think that to tackle the big jobs, the consolidation will continue. Take software-as-a-service. [The stand-alone software-as-a-service ventures] are tiny companies. I do believe in it, Oracle has offered software-as-a-service for some time. I own 5 per cent of, I was a founding investor. It’s a delivery mechanism for software. I believe, over time, more and more software will be delivered as a service – I totally believe that. I would argue I started the first big software-as-a-service company, [Netsuite]. I think you’ll see SAP and Oracle simply adapting to that.

FT: Mark Benioff of would say, though, that the multi-tenanted architecture of a true software-as-a-service company is a very different business to the kind of hosted software Oracle sells.

LE: It wasn’t his idea. And it’s sheer nonsense: most companies don’t want multi-tenant. It’s a convenience for a supplier. Most companies don’t want their data co-mingled with other customers. Small companies will tolerate it.

We make more money selling software-as-a-service than we make just selling software. I’d much rather be in the monthly service charge business, I’ve said this repeatedly. [At present] a huge percentage of our sales are done in the last week of the quarter: all of that goes away, it’s a much better business model.

FT: But would Wall Street appreciate it? The stock market doesn’t seem to value Oracle’s recurring maintenance revenues as highly as your new licence sales.

LE: I guess they don’t think recurring revenue at 90 per cent margins is very valuable. But then, Wall Street thought that Ariba was worth more than Daimler Benz [during the dotcom bubble.] All I can say is, our profit margins are now north of 40 per cent and will continue to grow past 50 [per cent] because more and more of our business will be in this recurring form, the form of subscription renewals rather than software sales.

FT: But won’t your profit margins fall?

LE: We make more margin dollars. In the end, the only thing that really matters is how many billions we make this year. I’d much rather make $10bn at 40 per cent margins than $8bn at 50 per cent margins. I want to make $10bn. Our margin dollars will increase at a higher rate with software-as-a-service. Plus there’s no piracy, and no need to maintain old versions. There are huge advantages to the model.

FT: Will there be a difficult transition from new licence sales to regular recurring subscriptions?

LE: If all people measure is our licence sales, they’re going to be really disappointed in our open source acquisitions, because I can tell them exactly what the open source new licence sales will be next year - it will be zero. On the one hand, people say open source and software-as-a-service are really hot – on the other hand, all they look at is our new licence sales. It’s the kind of absurdity that you find in the world at times.

All I care about is that we keep growing our profits every year. We have a five-year plan to grow our profits at 20 per cent a year. Last year we overshot, we grew at 28 per cent. This year we will grow at 20. We’re growing our profits very, very rapidly.

FT: Is open source going to be disruptive to Oracle?

LE: No. If an open source product gets good enough, we’ll simply take it. Take [the web server software] Apache: once Apache got better than our own web server, we threw it away and took Apache. So the great thing about open source is nobody owns it – a company like Oracle is free to take it for nothing, include it in our products and charge for support, and that’s what we’ll do. So it is not disruptive at all – you have to find places to add value. Once open source gets good enough, competing with it would be insane. Keep in mind it’s not that good in most places yet. We’re a big supporter of Linux. At some point we may embed Linux in all of our products and provide support.

Just like software-as-a-service, we have to be good at it. We don’t have to fight open source, we have to exploit open source. At some point we could very well choose to have Linux as part of the Oracle database server. We certify it, we test it. We could have JBoss as part of our middleware. It costs us nothing. We can do that, IBM can do that, HP can do that – anyone with a large support organisation is free to take that intellectual property and embed it in their own products.

I’ve had this discussion with the CEOs of open source companies. We’ve looked at buying some, some with very high price tags – but since we already have access to all the intellectual property, why wouldn’t we just embed this technology in our technology and provide support.

FT: Yet you have bought an open source database company – what did you buy it for?

LE: The people. If the price is reasonable, and you’re getting a high quality development team – we love the Berkeley DB guys. It’s a great team.

The way open source companies are valued now is interesting. Wall Street looks back at the historic growth rate and extrapolates it out forever, that’s the way it works. It’s kind of funny.

What if IBM were to decide to support Red Hat Linux – what does that do to Red Hat? One of the big problems we have with Red Hat today is, they’re not very good at supporting the customers, so we help them a lot – we want them to be successful, because Red Hat is to some degree our way of competing with Microsoft down at the core level. But they’re a small company and they’re not supporting the customers very well.

FT: What are the arguments against Oracle distributing its own Linux version?

LE: They’re not very strong – now that Red Hat has bought JBoss and competes with us in middleware, we have to relook at the relationship – so does IBM. If Oracle were to have its own Linux distribution, or just provide paid support for Red Hat, that’s one thing – if Oracle and IBM both did it, it’s a whole new world. I don’t think Oracle and IBM want to create a second Microsoft in Red Hat. But you can’t – because Red Hat doesn’t own anything, they own nothing. They couldn’t [become the next Microsoft], they own nothing.

FT: How well has Novell done in becoming a viable competitor to Red Hat? [Encouraged by large technology companies like Oracle and IBM, Novell bought German Linux company SuSe two years ago.]

LE:I would say, not very well. Several of our big customers have switched to Novell because they get better service from Novell. But still, Red Hat competing with a Novell is one thing – Red Hat competing with IBM or Oracle is quite different.

FT: Why didn’t you buy JBoss?

LE: JBoss wanted to sell the company to us. Clearly if we wanted to buy JBoss we’d have bought JBoss. Why didn’t we buy JBoss? Because we don’t have to – if it ever got good enough we’d just take the intellectual property – just like Apache – embed it in our fusion middleware suite, and we’re done. We always have that option available to us – IBM always has that option available to them.

The reason I have a hard time writing checks for billions or hundreds of millions of dollars for things that are open source is that if we could do this, other people could do this too. I don’t see how we could possibly buy Red Hat – IBM would just say, Larry, congratulations, we’re going our own way. They could hire Red Hat people and they’d be in business straight away. So I don’t see how anyone can buy Red Hat, not at anything near these prices, because anyone who feels like taking the code – they have no intellectual property.

We see in China and India, all that stuff is freely available and Red Hat is just cut completely out of the market. I’m not gong to spend $5bn, or $6bn, for something that can just be so completely wiped off the map. They take all the Red Hat code, have their own equivalent of the Red Hat network, and Red Hat gets zero.

So its all very interesting. You can build a sustainable business [in open source], you just can’t charge a lot for it. There’s brand value – there’s real brand – there’s people, and that’s it.

[Click here for part two of the transcript]

Copyright The Financial Times Limited 2022. All rights reserved.
Reuse this content (opens in new window) CommentsJump to comments section

Follow the topics in this article


Comments have not been enabled for this article.