Oracle Has Customers Over a Barrel

As CEO Ellison tries to extend the company's reach into hardware, more corporate clients fret about its high prices and tough tactics

Illustration by Jack Unruh, based on a photograph by Joe Pugliese/Corbisoutline

By Steve Hamm and Aaron Ricadela

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Ellison with Sun Chairman Scott McNealy shortly after they struck the deal Paul Sakuma/AP Photo

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Over the past four years, Oracle (ORCL) Chief Executive Lawrence J. Ellison has been on an acquisition binge that has brought all sorts of benefits to the company. After spending $30 billion to buy 56 companies, he has doubled the software giant's revenues to an estimated $24 billion this fiscal year and sent Oracle's stock surging. Ellison's latest deal is one of his most ambitious to date. His $7.4 billion offer for Sun Microsystems (JAVA), which still needs approval from European regulators, would move Oracle into the hardware business for the first time and greatly expand Ellison's empire.

But the company's growing power, coupled with a surge in consolidation by other major players in the technology industry, has frustrated some corporate customers. They're concerned that Oracle's strategy is helping to stifle innovation and lock them into high prices. "Once you've made a deal with the devil, it's hard to get away," says James Sims, chief information officer of California grocer Save Mart Supermarkets, who says he's stuck with some Oracle products because it's too expensive to switch to alternatives. "They're extorting us. I'm very unhappy with them." Oracle declined to comment for this article.

It's not just Oracle that faces such customer conflicts. The wave of mergers and acquisitions in corporate computing over the past half-decade has been massive, with 79 purchases by Microsoft (MSFT), 60 by IBM (IBM), 40 by EMC (EMC), and 34 by Hewlett-Packard (HPQ). The $1 trillion business has come to be ruled by a dozen behemoths, and the software market is dominated by just four: Oracle, Microsoft, SAP (SAP), and IBM. Customers like the simplicity of buying technology from fewer suppliers, but they have also become more dependent on those companies. It's increasingly difficult to negotiate over price or shift to alternative technologies.

That dependence was one concern raised by European Union antitrust regulators on Sept. 3 when they launched a probe of the Sun deal. The issue: Sun owns MySQL, the leading open-source database software program, which is emerging as a competitor to Oracle's world-leading database. If Oracle buys Sun, it could cripple or kill the rival product. "The Commission has an obligation to ensure that customers would not face reduced choice or higher prices as a result of this takeover," Competition Commissioner Neelie Kroes said in a statement.

The inquiry increases the uncertainty around the deal, leading some analysts to speculate that Oracle could pull out of the agreement. Still, the probe is unlikely to stop the transaction. If pressured, Oracle could sell MySQL or spin it out as an independent company.

The 65-year-old Ellison already wields enormous clout in the technology world, and that will only grow with the assets of Sun. If the deal goes through, he'll possess one of the widest ranges of products for corporations in the industry. Oracle will sell everything from server computers and data storage devices to operating systems, databases, and software for running accounting, sales, and supply-chain management. Ellison has hinted he may even develop applications for mobile phones and ultraportable netbooks. "The whole landscape of the industry could change," says Eric Openshaw, vice-chairman and U.S. technology leader for Deloitte Consulting.

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