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7/28/2005
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Oracle Bigwigs: Discounting No Big Deal

Oracle spent more than 10 billion big ones for a hunk of the apps business, but it's unclear whether it will ever be as lucrative as its bread-and-butter databases.

Oracle spent more than 10 billion big ones for a hunk of the apps business, but it's far from clear whether those apps will ever be as lucrative as its bread-and-butter databases.

On Wednesday, two of Oracle's three co-presidents acknowledged that discounting remains a huge factor in enterprise apps where Oracle, now armed with PeopleSoft/J.D. Edwards, is battling market leader SAP.

Citing earlier comments from SAP execs who said they only lose to Oracle when Oracle undercuts them on price, a Cowen & Co. analyst asked two of Oracle's three co-presidents to comment on the trend.

Oracle Co-President Charles Phillips discounted any discussion of discounts as a new phenomenon.

"I don't think I've ever talked to a sales rep who loses a deal who doesn't say the loss is because of price. If you sell to large companies, they'll get a great price out of both of us. Is pricing aggressive? Sure. Discounting has been high, but has been for years."

Oracle competitors, from Microsoft to SAP have long charged that the company slices and dices prices to win deals. Several Oracle partners confirmed that, but said that the company holds firmer on database price points than it does on its applications.

That makes sense, given Oracle's historical strength in databases, and the fact that it's trying to parlay that into a bigger footprint in accounts with middleware, application servers and applications themselves.

In a conference call Wednesday, Stefan Slowinski, head of European Software Research for Cowen, said that Oracle's margin on databases is around 40 percent, while applications margins hover around half that. The bottom line is whether Oracle can bring those margins up in what is a hotly contested battlefield.

SAP margins are in the "high 20s and I think we can do better," said newly installed Oracle Co-President and CFO Greg Maffei.

In-the-field discounts of 40 percent to 50 percent on Oracle applications are common, said one West Coast partner. Others have cited even higher price cuts in accounts that surfaced during a hearing on Oracle's proposed bid to by PeopleSoft last year.

Maffei insisted that such discounting has not hurt the company's bottom line. "We were lucky to have 46 percent gross margins in Q4 and 41 percent for the year. That's the advantage to having a profitable database business," he noted. That strong business will help bolster the apps business, he said.

With PeopleSoft and J.D. Edwards in its portfolio, Oracle became the second largest business apps vendor after SAP, Walldorf, Germany. For its part, SAP is making a bid to come downmarket from enterprises into smaller and medium-size accounts, just as Oracle is. There, both contenders vie with Microsoft Business Solutions and its four product lines.

The PeopleSoft merger put Oracle into an even more "co-opetetive" stance with IBM than it had been before. J.D. Edwards remains a strong presence on IBM AS/400 or iSeries hardware, so although Oracle competes with IBM DB2 on databases, it is now even more an IBM ISV than it was before. Oracle databases already ran on IBM hardware.

Since the PeopleSoft deal, in fact, Oracle CEO Larry Ellison has noticeably soft-pedaled his anti-IBM rhetoric and turned his guns on SAP. For its part, IBM has turned up the charm offensive on SAP, even offering a version of its DB2 database custom-tailored for SAP applications.

"Our relationship with IBM has been a lot better post- acquisition," said Phillips, who runs global field operations and corporate strategy for Redwood Shores, Calif.-based Oracle. "IBM co-sponsored our meeting with JDE resellers last week. We want to do more with them going forward, we want to go to market with them." Phillips said Oracle's relationship with Accenture has also dramatically improved since the PeopleSoft deal.

Both Maffei and Phillips said SAP's decision to charge ISV royalties for linking to SAP's business process platform could only help Oracle.

"The goal is to attract as many ISVs as possible, so charging a royalty is probably a deterrent unless you're in a closed world. …The goal is to make your tools as accessible as possible. Charge a tax? Please do it. "

Phillips concurred: "Having a tax like that on your platform is not realistic. They're not used to being a platform company. We know what works and what doesn’t. We think they're kidding themselves.

As for the company’s planned progression to a fused code base of PeopleSoft, J.D. Edwards and Oracle applications, Phillips outlined an evolution vs. a big bang approach. The road to this converged "Project Fusion" will be incremental, he said. The next step is that the next versions of all the applications will soon share a common XML report writer, Phillips said.

"It takes all the reporting capabilities and puts them in a single repository that can output to print, to fax, to Web site. A single infrastructure for all reporting and the design front end can be Word or Excel if you want. Then put the report into the repository to convert to XML and make available to everyone," he said.

In related news, earlier this month, Oracle made some pricing concessions, modifying its stance on licensing for new multicore microprocessors. Until then, it had said it would count each core of chip as a separate processor. Now it will count each core as three-quarters of a processor.

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