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Ask Oracle Corp. (ORCL
) CEO Lawrence J. Ellison what keeps him up at night, and the answer might surprise you. It's not his longtime nemesis, Microsoft Corp. (MSFT
) It's not up-and-comer Siebel Systems Inc. (SEBL
) It's IBM (IBM
), the awakening tech giant that is vying for the No. 1 spot in the corporate-software world. "He has stopped with that `Microsoft is the devil' stuff," says Steve Mills, IBM's software head. "He has moved on to us."
With good reason. Whoever wins in this face-off will grab the lion's share of the $50 billion corporate-software market for years. For every Oracle product, IBM has a counterpunch: Databases, applications, and e-business foundation software. At the same time, the companies' philosophies are strikingly different. Oracle's strategy is to offer customers a complete and tightly integrated package of software--everything a company needs to manage its financials, manufacturing, sales force, logistics, e-commerce, and suppliers. In contrast, IBM Chairman and CEO Louis V. Gerstner Jr. is backing a "best-of-breed" approach in which it stitches together a quilt of business software from various companies, including itself.
The outcome of this battle has huge implications for the software industry. If IBM's partnering strategy carries the day, it means there will be plenty of breathing room for major application makers such as SAP (SAP
), Siebel, and PeopleSoft (PSFT
), and for countless upstarts that are bringing Internet programs to market. If Oracle gains the upper hand, it will be pushing its own applications, leaving less room for other players.
To get ahead, IBM is targeting what it sees as Oracle's chief vulnerability: The Silicon Valley company competes in the applications market with the same software makers it relies on to help sell its databases. IBM has an advantage because it doesn't sell applications of its own. So, by setting itself up as a neutral party, IBM is able to gain those companies as allies. That boosts its database sales, since application companies often recommend to customers which database they think should be used with their software. IBM's consultants then sew the software together.
Analysts are split on whether Oracle's or IBM's strategy will succeed long-term. They expect both companies to remain among the strongest players in the market. But competitive juices are flowing. Ellison has only disdain for the idea of corporations buying major software components from different suppliers and then hooking them together. "You would never buy a car that way," he says.
Yet IBM's momentum is undeniable. Take Oracle's flagship database business. Sure, Oracle is still in the lead in the non-mainframe piece of the market, with a 50% share, according to AMR Research. But Oracle's database sales have stagnated over the past two quarters, while IBM's are surging. In the most recent quarter, IBM's sales on high-end computers running the Unix operating system jumped 36%, while Oracle's grew just 6%. And thanks in part to the $1 billion acquisition of Informix Corp. (IFMX
) on Apr. 24, IBM is now the second-largest maker of non-mainframe database software, with a 25% share.
Ellison, however, is worried about more than databases. Consider the e-business software dubbed "application servers"--a foundation of e-commerce software that processes transactions and connects to back-end programs such as databases. As a result of an early jump in the business, IBM owns 30% of the market--three times Oracle's share--according to Giga Information Group Inc. "The problem is that we didn't have a very good product until recently," concedes Oracle Chief Financial Officer Jeffrey O. Henley.WAY BACK. There's a lot of history between Oracle and IBM. In 1970, IBM researchers wrote the first paper on so-called relational databases, creating a programming language, called SQL, that for the first time allowed people to analyze, rather than just store, computer information. IBM applied this research to its then-thriving mainframe-database business. That allowed Ellison, then a young mainframe programmer, to exploit its potential in the emerging market for Unix systems.
In the late 1980s, a new wave of business software companies, led by SAP, helped boost Oracle's fortunes. They built their software to run on Oracle databases even though Oracle sold its own competing applications software. In the mid-1990s, analysts estimate that those software companies helped drive at least 25% of Oracle's database sales.
IBM's key move was getting out of the application business in late 1999. That freed Big Blue to focus on providing infrastructure technologies, such as databases, and to partner with companies that were leading players in various application markets, such as sales-force automation or supply-chain management.
The new partnership strategy is like a pincer movement against Oracle. In the past 18 months, IBM has signed 59 alliances with application makers such as Siebel Systems, Ariba (ARBA
), and PeopleSoft--all Oracle rivals. Many of them, long under Oracle's thumb, are happy to align with a company they don't compete with. "I will not help Oracle make a single dime that I don't have to," says Rick Berquist, a senior vice-president at PeopleSoft.
To be sure, Oracle remains an important partner. PeopleSoft and companies like it still sell a majority of their software to run on Oracle's databases. But IBM is catching up. In 2000, the percentage of Siebel projects that included IBM's database jumped from 2% to 30%, while Oracle's share dropped from 81% to 60%, according to Siebel.
And IBM is just getting started. On May 14, the company announced that its Internet-infrastructure software will soon support Net standards that make it easier to connect disparate computing systems. That means customers won't have to rip out old systems to do e-commerce. "IBM is jumping on this growing business early," says Peter Urban, a senior analyst at AMR Research. And don't forget those partnerships. In a few years, IBM expects to sign up hundreds more Net-infrastructure software partners, many of which will compete against Ellison & Co.
The tech titans have even taken their fight to the streets. Three months ago, IBM rented a billboard near Oracle's Silicon Valley headquarters declaring a "search for intelligent software," only to find, a few days later, that an Oracle billboard retorting "Then you've come to the right place. Oracle," had been put up.WHO'S CHEAPER? The latest fracas is over pricing. Ellison derides IBM software as nothing more than a come-on to sell "services, services, services." While IBM typically sells its database software at nearly a fifth the price of Oracle's, Ellison says the consulting work to get it up and running makes IBM products pricier. Some customers beg to differ. Recently, the Toronto Police Service switched from Oracle to IBM database software. Chris Pentletown, a longtime consultant to the police service who recommended the switch, says Oracle's database was three to five times as expensive as IBM's, including IBM's service fees. "We could not afford to run Oracle anymore," says Pentletown.
To forestall more damage, next month Ellison plans to introduce the new version of his database, and analysts say the easier-to-use update should cut maintenance costs. Don't bet against IBM, though. It is, after all, the world's second-largest software company. And its new partnering strategy looks like the beginning of a long nightmare for Ellison. By Jim Kerstetter in Redwood Shores, Calif., and Spencer E. Ante in New York