Phillips Sounds Off On Oracle Midmarket App Offensive

Oracle President Chuck Phillips spoke with Industry Editor Barbara Darrow and Editor/News Steven Burke about Oracle's midmarket application offensive and the launch of its E-Business Suite Special Edition North America, which will be sold exclusively through select partners.

CRN: How will opening up the applications to the channel help, and how are you choosing partners?

Phillips: The channel strategy is broader than just this one announcement, obviously. We are doing lots of things to improve relationships with channel partners. Part of it is putting programs in place so we communicate with them, be clear about the rules of engagement, have escalation procedures, market segmentation ... etc. A lot of the things they need to make decisions, we have put [them] in place now. That is the broader program. This product specifically, however, creates enough opportunity for them where they can say, 'I can see how to make money on this.' This is such a large opportunity because you get the Oracle brand name, the years of functionality we have put into each product, the ease of use we packaged around the products, the lower entry price, the margin on the license. And that is a lot of opportunity that they never had in the U.S. before. I think it will be easy to recruit VARs. There aren't a lot of good choices for midmarket applications, at least from a name-brand company who is going to be around. So if you want to run on Linux, you think that is important, or if you want to have at least the option of running on Linux, that kind of rules out Microsoft. Their product is overdistributed anyway. This is a green-field opportunity for them with a brand-name product, which is kind of what you want.

CRN: This looks like you are going tooth and nail with Microsoft. Isn't this a tough row to hoe?

Phillips: Yes, but they have zero on Linux today. That helps. Secondly, they don't have a lot of vertical market functionality. And if you think some of these midmarket customers have ambitions to be large customers and they have vertical requirements--for instance, they are operating in a complex vertical--we tend to have those functions in our software. Microsoft doesn't. [Also], they won't be forced to migrate to something else. They already know if they select Microsoft, at some point if they are successful they will have to face an expensive migration to some other product. We take that away. You can start as a very small company and use the same product up until you are Coca Cola or Procter and Gamble. And so the growth path from the low end to the high end is something only we can offer. Even [with] SAP there are three products you have to migrate through to get to the high-end product. So, same code base, just packaging, the business flows that we have developed for our applications that tell you how to configure the product for certain business processes--we are giving that away for free as part of the product. Those business flows add a lot of value, customizing it by industry, telling you how to configure the applications depending on what you are trying to do. They are very powerful. That is something you'd have to learn over time with Microsoft's product because they don't have that. So you get best practices out of the box with us.

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CRN: One of the things that Oracle has said is that sales to new Oracle application customers will go through the channel. One of the problems in the past has been that Oracle defines new customers differently than channel partners. If I am a database customer now with no applications, am I a new application customer?

Phillips: In that case you would be. However, think about what we are trying to do here. The people who want this low-end product probably aren't Oracle database customers. So I actually don't think that is going to be a big area of conflict. This is going to reach out to new customers. To the extent you are bringing us a new apps customer who mainly had a low-end database, that's fine, you are still a new customer. That has already been spelled out.

CRN: A lot of partners say in June they heard about rules of engagement and potential threshold deal size and now they haven't heard anything in months.

Phillips: If they are a real partner and have a partner registration number, it is all on their portal. The partners have access to it on our partner Web site and we have sent that out to them. So if they are a valid partner and registered they should have access to it.

CRN: Talk a little bit about the segmentation and the deal size and how partners play in certain deals and not in others.

Phillips: We are publishing that. It is different by region around the world. It depends on what types of customers are in that region. Generally, we limit the product by number of users. That kind of subsegments the market. So it is not an unlimited number of users. That's what kind of makes it a low-end product. But at the same time we cut the price obviously, too. So we target it by segmenting number of users and in some case under a threshold of size of company.

CRN: So the threshold and size of company differs by geography?

Phillips: Yes, because you have different size economies, different size companies. There aren't a lot of large companies in Belgium, for instance. So most of the market is midsize. So we divide it a little bit differently. Their high-end customers would still be considered small here, but those high-end customers expect a direct service because they are large customers there. So you can't take one model generically in every region. So it depends on where you are talking about. Remember, we have been doing this for a year in Asia and Europe and have some experience doing this. So we figured out what works, [then we] customize it for each area and communicate to the VARs in that region what those rules are.

CRN: Specifically to North America, how many North American partners are you shooting for with the new e-business suite?

Phillips: Obviously, we are just starting out. We want a lot more than those 10 that you see. We are going to be recruiting pretty aggressively. There is room here for a lot of them. I don't think we have a specific high-end- number cutoff yet. We'll wait and see how it goes and how productive they are. We are definitely in recruitment mode.

CRN: Not too long ago, an Oracle executive said the channel strategy for midmarket was Dell, which was not endearing himself to the rest of the VARs. How do you get rid of that perception?

Phillips: Well, we have to do stuff with Dell as well, obviously. That is mostly on the database side of it. They are not really that interested in the applications. The larger market for [solution providers] is going to be adding value by their knowledge of customer, knowledge of that industry and knowledge of our applications. There is plenty of room to add value. To me they shouldn't be worried about Dell with respect to this application.

CRN: So Dell won't be selling the 11i Special Edition in North America?

Phillips: If they wanted to, obviously we'd talk about that. But as of today, we'll see. They typically haven't sold applications. It has been technology and infrastructure.

CRN: In terms of the enterprise, a lot of the channel conflict is among partners who service enterprise accounts. Are you doing anything specific to these guys? Some partners are afraid to register leads. They say the best way to lose the lead is to register it.

Phillips: Obviously, we are aware of that. We put some internal policies in place to deal with that. We monitor the deal registrations and make sure that we have someone validate that registration right up front, and once it is validated it belongs to the partner. And we have put in escalation procedures, so if you think something went wrong you can go directly up through the field, even to me, if need be. I get calls like that and we resolve them as they happen. So once people know there is an escalation capability, they have more confidence. The other thing we are doing is rolling out a better aerial system. We have our 11i 10 applications center coming out in November. We should be rolling out internally, say, by January and it has a more robust registration system so we can send them leads as well.

CRN: What is your message to Oracle sales force members that go off the reservation and don't really respect the channel when they are in an account?

Phillips: The message has been we are going to play by the rules. If we have accepted the deal as registered and belonging to the partner and give them some fair time to close it, we will abide by that and there will be, let's say, penalties for not doing that. That is why we have the escalation procedures. We will keep people in line if that happens. The sales force has changed. A lot of what you are hearing is left over from years ago. Things have changed. We have new people running the sales force that came out of consulting, a much different approach. They realize the value of channel partners. It takes awhile for the recognition to catch up. But I would hear about it if it was happening a lot because people call me when there is an issue, especially when it is a large deal. And it has changed a lot just over the last year, but it is going to take time for the partners to figure that out. We've got to just keep proving it every day and earn their trust over time.

CRN: So you have seen an increase in escalations up to your desk in the last six months?

Phillips: I am seeing just the opposite since we put the escalation procedures in place. Originally, that was happening. It is actually going down now. People know the escalation procedures are there. The sales force knows that I might find out about it and that it can get escalated, and it changed their behavior.

CRN: Some partners have gone into large companies and see it as net new business to Oracle and yet because Oracle exists somewhere else distantly in the company the deal gets taken direct because the sales guy says it was an existing business deal.

Phillips: We decide all of that up front. There are always going to be gray areas like that and so we have people who will look at it, and hear everything out and then make a decision. So if we accept the registration, then it is decided. We can't come up with a perfect rule for every conceivable circumstance because there are always going to be things that happen we didn't anticipate, but we have people who will look at it and make a decision objectively. And then if we accept the partner can have confidence.

CRN: Partners say they are seeing some traction against [Microsoft] SQL Server. But they are also seeing traction against Oracle Enterprise. Are you worried about cannabilization of your own pricier database with the less pricey versions?

Phillips: Well, we'd rather cannabilize ourselves than have someone else do it. So if that happens, so be it. We are trying to get to more of a volume business. There is always going to be some of that. But the sum of it is still added value and incremental positive.

CRN: Talk a little bit about discounting [of the database software]. There is still a lot of discounting out there. Is there anything else you can do to stem that?

Phillips: On the high-end products and the high-end deals, you are still going to have discounting because people want better prices with that kind of volume. On the low-end products like [Standard Edition] One, the product price is just so much lower people don't bother with it and it tends not to get discounted as much. The entry- level price, the absolute number, is attractive enough that no one is going to sit there and bicker over a $129 per user. So we have seen less of it actually on the low-end products. The discounting is on the high-end products and for the large deals. That is always going to be there.

CRN: The application business was off significantly last quarter. This is one response to that. Is there anything else you can do?

Phillips: On the applications business it is a different type of sales cycle. It is longer, less predictable and tends to be lumpier business. So any given quarter can be up or down. It swings more than the database [business]. It is a smaller business, too. In the scheme of things, if you look at it on a 12-month rolling basis, which is probably the way to look at it given how lumpy it is naturally, we are still growing the business. I think we are gaining market share, especially if you add in the support revenue, which the other guys discount. We don't. You have to look at them both because people play games between applications and support. If you look at it on that basis, it has been a lot more consistent over a 12-month period. But any given quarter it is just the license piece of it can't move around. We had a tough comparison. We had a huge deal in the year-ago quarter which we knew about it. So we knew it wasn't going to be the strongest quarter for applications. Having said that, we expect it to be up nicely in the current quarter and people will probably look at that and extrapolate too much too positive. We are saying it is somewhere in between. We will have a good quarter this quarter, we believe. We have already had some good business close at the beginning of this quarter right after it started.

CRN: Do you think the PeopleSoft deal has hurt the app business at all?

Phillips: It is definitely hard to sort out all the impact from that announcement and if it has hurt or helped the apps business. I think everyone would just be speculating. The bottom line is if we get the acquisition done that would put us in a pretty good position to sell more Oracle applications to a broader set of customers. And it is still something we think would work quite nicely for customers and for us.

CRN: Why haven't you been more aggressive in this hostile takeover battle, including hiring a proxy firm to push this to the wall?

Phillips: Most people think we have been pretty aggressive. Right now it makes no sense. You can't have a proxy fight until we get the poison pill removed and antitrust and all of that. So we had to do some things around that. So the antitrust requirement was fundamental. They can't really send in their shares if we can't buy the company legally. There has been no reason to have a proxy fight until we took care of the antitrust. And then we will go after the poison pill and all of that.

CRN: So what is the next step?

Phillips: The European Commission has to approve it. We are working on that right now. We are still waiting to see if the [Department of Justice] is going to appeal that judgement, which they might. They have the right to. And we have to get past those two things and then on to the poison pill.

CRN: What kind of investment is Oracle making in this midmarket apps segment?

Phillips: It's a big investment. We are leveraging some investments we have already made on the regular e-business suite. In terms of incremental growth and where we see opportunity, it is going to be critical. Like I said earlier this morning in a speech I gave, I think a lot of the high-end customers have this stuff already. In terms of finding new customers, getting a new footprint, the growth is in the midmarket. And we have products both on the database and the applications side that we have invested in. We are ready to go for it.

CRN: Talk about the pricing. How does this stack up against Microsoft, SAP and even PeopleSoft? Are you going to be the price leader?

Phillips: We think we are the price leader, not just the acquisition price but the total cost of ownership as well. You have to look at that and the fact that we can run on Linux, which Microsoft can't. [And] that we have engineered the entire stack, including the database, app server, and that helps us precertify configurations, making it easier to manage and upgrade. We give you the business flows. You don't have to figure that out. We can help configure it up front. All of those things make the product easier to use and lower the cost of ownership and give you the benefit of the power of the same applications large companies [have] but packaged in a much easier way. And, remember, the whole cost of upgrading to a second product once you grow larger is removed.

CRN: What is the total percentage of sales going through partners now, and what do you expect it to be in 2005?

Phillips: I think we have been saying 47 [percent] or 46 percent. It is the high 40s. It has been stuck there a couple of years and we are hoping to push it up a little bit with this product, obviously. We will wait and see. I think if you look at units it is increasing faster in the partner channel.

CRN: What are you seeing in terms of average solution selling price, and how is that going to affect the channel strategy?

Phillips: We will see how this product plays out. It is hard to say exactly how street prices will play out. Our main goal was to be competitive with a great product and make sure that the channel has enough margin on the product and there is enough opportunity. We think there is so much opportunity here and so much green-field new capability here partners won't have a problem making money with this. We did the analysis and looked at what investment the partner would have to make, what the mortgage would look like, how many people they would have to hire for training. We want to make sure that these guys make money.

CRN: Right now you have Standard Edition One on the database side, you've got SMB versions of apps and app server. Is there anything left that hasn't been relabeled and repackaged for the midmarket?

Phillips: That is a lot. Productwise, we have nailed it. Now the hard part is getting the message out. Obviously, that is why we are talking to you guys. But we think we have a lot more product than the market and the VARs know about. And if they just knew what we had and took the time to dig in they are going to see a lot of opportunity. That is why when we present it--and we have been doing partner forums around the world--once they see it, they say, 'I didn't know about that. This is great.' So we don't have an issue of winning them over once they have a chance to look at it. It is just reaching them.

CRN: The direct-sales force will not be able to sell this, right?

Phillips: Our field direct-sales force will not be able to sell this product. That is correct.

CRN: So telesales will?

Phillips: Telesales may do some add-on to help some of the partners if we figure that out later. Sometimes partners, when they are in an account, the customer will say, 'Is Oracle really behind you? Are you really a partner of Oracle's?' And they will want someone from Oracle to call and say, 'Yes, we know this guy, he is fine, and we are working with him. He is an Oracle partner.' So they need some endorsement from us sometimes to look legitimate. And we are going to do that by phone.

CRN: If customers can choose service from either Oracle or the partner, how are you going to prevent channel conflict with Oracle consulting and even Oracle telesales? Will the telesales get a higher commission if they make the sale vs. the partner, or will Oracle consulting get a higher commission if they do it vs. a partner?

Phillips: Oracle consulting likes to work on large transactions. They don't want to spend a lot of time for 20 users. They want to be in some relationship that has 10,000 users. This is not of interest to them. They are going to let partners do that. And the Oracle [telesales] direct won't be able to close these deals on their own. They aren't that type of people. They haven't been selling applications before. They can assist, but they need the expertise of the partner to take the lead and they can provide the endorsement that Oracle is behind the partner.

CRN: What is your message to solution providers who are looking at this midmarket at Microsoft, SAP, PeopleSoft?

Phillips: It's a huge opportunity for them. A key message is: You can implement it once with Oracle. There is no transition to three or four products over time.

CRN: How big an impact do you think this is going to have on Oracle's midmarket share?

Phillips: Well, it is already going up because of [Standard Edition] One. We have a lot of midmarket interest. We are doing lots of these sorts of meetings with midmarket customers and VARs around the world. It is already our fastest -rowing segment of the market. We see that in our numbers already. We just hope it continues for a long time.