Oracle’s business consists of three basic elements. At the heart is database software, which accounts for 80% of its software-licensing revenue. The enterprise-software business is smaller, but crucial to Oracle’s growth. Two-thirds of Oracle’s revenue actually comes from services, primarily annual fees for technical support and software upgrades, which run customers about 22% a year of what they originally pay for their software.
Oracle faces two key challenges for its core database operations. The first is the maturity of its market. Some analysts doubt growth in database demand can now exceed single-digit rates. Oracle also faces competition from two formidable rivals: IBM and Microsoft. The strength of IBM remains the mainframe. Microsoft, meanwhile, is the leader in simpler departmental databases.
An update on Oracle’s Collaboration Suite…
It has long been Ellison’s mantra that 95% of all data don’t yet find their way into databases. That’s precisely the story behind Oracle’s Collaboration Suite, software introduced last summer. Aimed squarely at e-mail server software such as Microsoft Exchange and IBM’s Lotus Notes, Collaboration Suite takes e-mail, voice mail, calendars, Word documents, Excel files and PowerPoint presentations, and stores them all in an Oracle database. Oracle thinks this approach can greatly pare administrative costs and provide new functions such as voice mail in users in-boxes while allowing them to stick with their Microsoft Outlook desktop software.
While the product has been slowly gaining traction, it’s hard to predict whether it can eat into the installed base of Exchange users. Ellison says he could get 10% of the market — or 50%. “The interesting thing about Exchange is that it was a little departmental system, never intended to be an enterprise-wide mission-critical system. It doesn’t have the security, it doesn’t have the reliability, and it’s very labor-intensive to operate. We think we can cut your labor costs by 90%.”
..and on its applications software business:
Oracle thinks it can rev up applications sales by offering them to customers as a service, via its nascent outsourcing division. It’s the return of an idea that popped up in the bubble days — the application-service provider. But this time, it makes sense. Buying, administering and maintaining enterprise applications and the associated hardware and storage costs a fortune. So rather than handle it in-house, why not outsource to Oracle? The company now offers customers the option of handing over administration of their applications, whether at a customer site, at Oracle or at a third-party location. So far, about 500 Oracle customers have signed on; the company says outsourcing grew more than 50% in the latest quarter, though from a small base.
The idea, says Oracle’s outsourcing president, Tim Chou, is simply to reduce the administrative costs of running software, which by some estimates runs as much as four times the original cost of the application every year. In other words, Chou says, pay $1 million for a software license, and you’ll shell out about $20 million to support it over five years.
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