Oracle shifts focus to Big Blue

The Captain Ahab of the computer industry has a new whale to chase, this time a Big Blue one.

For years, Larry Ellison, chief executive officer of software supplier Oracle Corp. (Nasdaq:ORCL), has been fixated on Microsoft Corp. (Nasdaq:MSFT) and its chairman, Bill Gates. Rarely would Ellison, himself a billionaire, lose an opportunity to make some snide remark about his much wealthier rival. And many of Ellison's technology initiatives, such as his ill-fated attempt to popularize new appliances called network computers, were thinly disguised attacks on Microsoft and its strong market position.

Now, though, the shifting dynamics of the corporate software market are forcing Oracle to start paying less attention to Microsoft and much more heed to another competitor, International Business Machines Corp. (NYSE:IBM). That's because the huge computer company has been coming on strong in Oracle's core business of database software.

"We are now much more focused on IBM than we are on Microsoft," said Mark Jarvis, Oracle's senior vice president in charge of world-wide marketing. "That has become very clear in Larry's mind in the last few months."

Jousting with IBM
Indeed, IBM's total database revenue last year surpassed Oracle's, though the two mainly supply different segments of the market. Now, however, a more direct conflict is brewing, in large part because of IBM's high-profile television commercials touting its electronic-commerce products.

Jarvis and other executives insist that Oracle is the rightful e-commerce king, with a dominant position at big companies and big Internet sites. But they concede they must quickly react to IBM's marketing push. They plan to triple Oracle's annual advertising budget next year, from $50 million to $150 million, including both TV and newspaper ads that will stress Oracle's strong market position. Jousting with IBM may be more difficult than with Microsoft, a relative newcomer to the corporate database market. By contrast, IBM researchers invented modern database software in the 1970s and have continued to advance the state of the art in high-volume business transactions.

Until recently, IBM sold its flagship product, called DB2, for use only on its own mainframes and minicomputers. In the past few years, though, IBM has started to push the software for use on hardware using the Unix operating system or Microsoft's Windows NT -- both key markets for Oracle. IBM still has a small part of those latter two markets, but its share is growing fast. Market researcher Dataquest, for example, says IBM now has nearly 10% of the Windows NT market, compared with 4% two years ago.

"Customers now have a clear alternative to Oracle from a company with established database leadership," crowed Janet Perna, general manager for data management at IBM.

Slowing demand hurts stock
Though Oracle still regards IBM as a minor player, the need to spend millions of dollars to remind people that it is the industry top dog is just one of several surprising indignities it has been forced to suffer recently. After all, the Internet helps to recentralize computing, theoretically driving demand for the company's technology. Ellison repeatedly brags about how Oracle has become a "nothing but 'Net' " technology supplier.

Yet the recent results at Oracle hardly are those of a company in the middle of an epic boom. In the fiscal third quarter ended Feb. 28, Oracle reported slowing demand for its key products, sending its stock plummeting roughly 25%. Its shares Wednesday rose 6.3%, or $1.5625, to $26.375 in Nasdaq Stock Market trading but were still 36% below their 52-week high.

The stock has also been hit by rumors that Oracle's current quarter-ordinarily its biggest of the fiscal year-could be a tight one. (Oracle says it is in a quiet period before the announcement and can't discuss the issue.)

One of Oracle's biggest problems is that for all of Ellison's invoking of the Internet, the company is closely tied to a much more prosaic market, that of enterprise resource planning software, which is used by big companies to manage their businesses. Oracle sells ERP programs of its own against rivals such as SAP AG, PeopleSoft Inc. and Baan Co.; these products also require database programs, so ERP sales also affect Oracle's database revenues. While ERP suppliers had huge spurts of growth in the past few years because of preparations for expected year 2000 computer problems, spending on those products has recently dried up.

Nipping at its heels
Jarvis says Oracle is being unfairly "tarred with the ERP brush," because investors don't yet understand that Oracle, unlike its competitors, has reworked all of its software to be compatible with the Internet. Not all analysts buy that view, though. For example, James M. Pickrel, with Hambrecht & Quist, says that Oracle's technology lead over SAP and the others isn't as great as it lets on.

While Jarvis says Microsoft has faded as a competitor lately, Pickrel argues that Oracle is understating the threat. Microsoft's new database product, says Pickrel, "may not have exploded out of the starting blocks to the degree Microsoft might have wanted, but it's very credible, and a lot of companies are building products around it."

Also bedeviling Oracle is the fact that younger, nimbler companies like Seibel Systems Inc. and i2 Technologies Inc. are nipping at its heels in specialized parts of the corporate market. Seibel Systems, for example, sells tools used to automate sales and customer-service functions and has become enough of an irritant to Oracle that the company is being forced to respond to it. Jarvis, however, dismisses those companies as niche suppliers and promises that Oracle will eclipse Seibel "in a couple of years."

While Wall Street is currently cool to Oracle, most analysts expect the company to rebound. But new challenges lie ahead. For example, in the market for Internet software, prices tend to be much more fickle than Oracle is used to facing in the pre-Web corporate market. That's one reason many people are suggesting a wait-and-see attitude on the stock. Says Robert Austrian, an analyst with NationsBanc Montgomery Securities, "the company is in a great position, but the transition may well be quite painful."