The Five Challenges Facing Oracle

database software

During a conference call with financial analysts, CEO Larry Ellison and other Oracle executives hammered home their argument that Oracle remains in a strong competitive position against rivals IBM and SAP.

There's certainly some truth in that. Sales of applications that compete head-to-head with SAP held up in Q1. And Oracle's infrastructure software product lineup, after the company successfully integrated technology from its BEA Systems acquisition, stands up well against IBM's middleware lineup.

But Oracle faces a number of challenges going forward. Here are what we see as the company's five biggest hurdles:

1. Sun Indigestion

Sponsored post

After winning approval from Sun shareholders and U.S. antitrust regulators this summer, it looked as if Oracle was ready to wrap this up. But the European Commission tossed a monkey wrench into the process by announcing it was investigating whether the acquisition of Sun's MySQL open-source database would reduce competition. The EC might not issue a ruling until January.

Meanwhile, Oracle and Sun customers and channel partners are getting antsy, waiting to hear more about Oracle's plans to integrate Sun's technology with its own and worried about Oracle's commitment to maintaining Sun's hardware products. Some resellers have begun talking with IBM and HP about reselling their servers.

During Wednesday's conference call with analysts, Oracle President Safra Catz said Oracle and Sun would continue to do what integration planning they can "at arm's length" before the acquisition is a done deal. She cited the Exadata database server, which combines Sun hardware with Oracle software, as an example of the synergies between the two companies' products.

That may be true, but businesses hate uncertainty and right now uncertainty reigns in the Oracle and Sun ecosystems.

2. Slow Database Sales

Businesses counting their pennies have slowed purchases of Oracle's application software, including its ERP and CRM products, over the last year or so. But the surprise in the Q1 results was the slowdown in Oracle's core database and middleware products (down 22 percent or 19 percent in constant currencies) that account for a big chunk of the company's revenue.

Catz blamed the dip in database sales on slower sales through OEMs and ISVs that bundle Oracle's database with their own products for resale.

Oracle just began shipping a major upgrade of its database software, Oracle Database 11g Release 2, that the company and its channel partners say could spur sales.

3. Oracle: The High-Priced Vendor?

Last year Oracle increased the prices on many of its core products by 10 to 20 percent -- and in some cases more -- and there are reports Oracle boosted prices on other products, such as administrative tools, in recent months.

Oracle executives like to brag to investors about the hefty profits the company earns on its products: The company's operating profit margin hit 46 percent in the first quarter, a company record for the period. But observers have pointed out that while such profit margins are good for the company and its shareholders, its customers have to pay those high prices.

One reseller of Oracle's Hyperion business intelligence software recently told that Oracle has been increasing the price on its maintenance services, making those services a harder sell.

Certainly Oracle, as a profit-making company, should charge whatever prices the market will bear. But companies have to be careful not to cross the line -- especially in these days of tight budgets -- and push customers to seek less-expensive options.

4. Missing The On-Demand Boat

In the just-completed first quarter, Oracle generated $180 million in revenue from its on-demand software services. That's down from $195 million in last year's first quarter and the smallest amount since the company reported on-demand-related sales of $174 million in the fiscal 2008 third quarter ended Feb. 28, 2008.

Cloud computing, Software-as-a-Service, on-demand -- whatever you want to call it, it's a hot topic today. Businesses are looking for IT alternatives that require less capital expenditure. And yet Oracle doesn't seem to be part of the wave.

Meanwhile, SaaS competitors such as and NetSuite report robust growth: Salesforce recorded 20 percent revenue growth in its second quarter ended July 31, while NetSuite's sales grew 10 percent year over year in its second quarter ended June 30.

Oracle got where it is by being a supplier of enterprise-class, on-premise software. But unless the company makes a push into the cloud, it's missing out on a lot of competitive opportunities.

5. Whither Fusion

After its acquisitions of PeopleSoft, J.D. Edwards, Siebel Systems and other application vendors, Oracle outlined a plan to develop the next generation of its application products -- Fusion -- combining elements of its own E-Business Suite software with those acquired products.

But things have been awfully quiet on the Fusion front lately. CEO Larry Ellison demonstrated some early Fusion sales force automation apps at Oracle OpenWorld in November 2007. At Oracle OpenWorld in September 2008, Chuck Rozwat, executive vice president of product development, seemed to shift the focus somewhat when he said more functionality for the Fusion applications would be built into Oracle's Fusion Middleware products.

In late 2007 John Wookey, who had been overseeing the Fusion project, left for unexplained reasons. Late last year, he surfaced at rival SAP to oversee that company's SaaS efforts.

Not much has been said about Fusion applications in the last 12 months. Granted, the Oracle universe has been focused on the proposed Sun acquisition for much of that time. And current customers seem content with Oracle's promises to maintain the acquired applications as long as customers ask them to.

Still, an update of where the Fusion applications project stands would be in order at the 2009 edition of Oracle OpenWorld next month.