Oracle: Why It's Cool Again

Silicon Valley's Bad Boy is having his revenge

For the past decade, Lawrence J. Ellison has been Silicon Valley's Bad Boy. The chairman of No. 2 software maker Oracle Corp. watched with unbridled envy as the PC industry became the most powerful force in the Information Age--and William H. Gates III and his Microsoft Corp. along with it. But Oracle, after its initial success as a flashy Silicon Valley startup, seemed stuck in Dullsville. The company's database software, with its ability to organize reams of information, was a crucial but oh-so-boring adjunct to grey-flannel-suit corporate computing.

So Ellison squawked for attention. He tried to buy a Russian MiG for $20 million--but ran afoul of U.S. Customs. He riled authorities in San Jose by repeatedly landing his executive jet after the 11 p.m. curfew. He was nearly killed winning the Sydney-to-Hobart race in his 78-foot yacht, Sayonara. And he cooked up one Oracle announcement after another that seemed to be aimed at upstaging Gates. Interactive TV would merge Hollywood with Silicon Valley to create Siliwood. Oracle would build a stripped-down "network computer" that would make PCs obsolete. Neither happened. The headlines were entertaining, but few took Ellison seriously.

DATABASE FEVER. Now, as the Information Age gives way to the Internet Age, Silicon Valley's Bad Boy is having his revenge. Suddenly, databases are all the rage, as troves of information--from product catalogs on to the global order stats of GE Medical Systems--are being made instantly available to customers and employees over the Internet. Two-and-a-half years ago, when the Web was still in short pants, Oracle's database sales inched along at 3% and 5% growth per quarter. Last quarter, they surged 32%, to $778 million.

And that could be just a warmup. Envisioning a day when companies would shift their internal operations to the Net, Ellison began creating software programs that hooked into his database to do a host of other big corporate jobs over the Web, such as purchasing and managing inventory. Now that daunting engineering effort looks to be paying off. Since November, Oracle has landed big-name customers such as Ford Motor, Chevron, and Sears. They've signed on for technology that allows them to operate virtual marketplaces on the Web in which anybody who wants to sell them supplies or services places a bid. "I always saw Oracle as a database company," says David J. O'Reilly, CEO of Chevron. "But they've come a long way to transform themselves into an Internet software company."

And Oracle's stock shows it. After puttering along for more than five years, Oracle's shares have joined the superheated elite. Since November, the company's stock has nearly quadrupled, to about 72 a share, giving the world's No. 2 software maker a market cap of $205 billion--surpassing mighty IBM. Though the tech correction brought Oracle's price down from an all-time high of 90, it has weathered the storm far better than the Nasdaq composite, which has dropped 28% from its peak and is down 10% year-to-date. Oracle is up 29% for the year, bolstered most recently by a rave report from Lehman Bros. And Microsoft? Its stock price was hammered down 15.6% on Apr. 24 by the double-whammy of a disappointing third-quarter report and word that the Justice Department might call for a breakup of the company. The capper: To Ellison's delight, on Apr. 25 his stake in Oracle actually surpassed Gates's Microsoft holdings, by $52.1 billion to $51.5 billion.

Ellison revels in Oracle's good fortune. "We're cool again," he says. And aiming to stay that way. With his database business on cruise control, Ellison is about to launch Phase Two of his Net assault. In May, Oracle plans to unveil its most important product update in years. It's a suite of business applications that work seamlessly with one another to handle everything from customer service on one end to relationships with suppliers on the other. And it's all rejiggered to run on the Web.

Ellison's vision for what he calls the first-ever "e-business suite" is to create something as popular as Microsoft's Office desktop suite. Now, Ellison figures, everyone from giant corporations to tiny dot-coms can buy a single package from Oracle to run their e-businesses, rather than buying software from a host of competitors and trying to stitch it all together.

If it works, Ellison's dream of knocking Gates down a peg might actually come to pass. As computing moves from desktop PCs to huge Internet servers that run everything from Web sites to complex corporate networks, Oracle's skills and technologies are taking center stage. Ellison gloats that Microsoft's tangle with Netscape Communications Corp. over Web browsers, which landed it in hot water with the Justice Department, didn't get it ahead in the Net-server realm. "They robbed the wrong bank," Ellison says. Now, if Microsoft is actually broken up, the ensuing confusion would help Oracle, though long term, it might make Microsoft's database program a stronger competitor if it is adapted to run on other operating systems besides Microsoft's Windows. For now, Oracle has a shot at becoming the biggest supplier of crucial software that extends beyond the PC, out onto the Web, and into the heart of a company. "We have a chance to pass Microsoft and become the No. 1 software company," Ellison says. "If I said that two years ago, I would have been sedated and locked up. But now we're the Internet and they're not."

Such braggadocio frosts Oracle's competitors. They would all love to burst what they see as its stock-price bubble. They erupt at the mere mention of Ellison's name. When it comes to electronic marketplace software, "Oracle has nothing to offer. They have no position," says Steven A. Ballmer, Microsoft's CEO. Steven A. Mills, general manager of software strategy at IBM, charges that Oracle's hyperaggressive sales force will promise anything to make a deal. "They take the P.T. Barnum approach to business: There's a sucker born every minute," he says. And Thomas Siebel, chairman of customer-management software leader Siebel Systems Inc., calls Oracle's e-business suite "vacuous." Claims Siebel: "After all their chest-beating, they're basically failing in applications."

BEHIND SCHEDULE. Clearly, the long knives are out. With Oracle's stock runup and early successes with e-business, it's a target for some of the most powerful companies in software. Oracle faces Microsoft and its allies such as corporate software kingpin SAP on one side and IBM and its cronies such as Siebel Systems on the other. IBM, for instance, has agreed that its 163,000-person consulting and sales team will hawk Siebel's customer-management software--a daunting prospect for Oracle, given the size of its 30,000-person consulting and sales force.

And it's no cinch that Oracle's e-business suite will be a runaway hit. The broad package of programs will go head to head with products by the biggies and by dozens of smaller companies that have a one- or two-year lead and are focused on doing one thing really well. Already, Oracle's e-business suite is a year late. David Yockelson, director of e-business strategies at Meta Group Inc., believes there's no way Oracle can build all of this technology itself and match the capabilities of its rivals. "Oracle has a not-invented-here philosophy," he says. "And building it all themselves is going to be too slow." Even after the suite ships, consultants such as Gartner Group Inc. warn corporate customers that it probably won't be stable enough to handle the most crucial jobs until the end of the year.

If Ellison is worried, he isn't showing it. Sitting in his four-story Pacific Heights home in front of a breathtaking panorama of the Golden Gate Bridge, he concedes that development of the e-business suite has been devilish. "It's a huge job," he says. "But it's the right strategy for Oracle." Indeed, he insists that the suite, called Oracle Release 11i, is on track for a May launch and will catapult the company to dizzying heights. It offers customers a simpler approach: one software product from one company--no more lavish consulting fees for making disparate products work together. "You ain't seen nothin' yet," he vows. "If this e-business-suite plan works, we're going to be an extraordinary company."

Not that Oracle is a slouch now. The company's core business looks rock-solid. It leads in the fastest-growing piece of the database market with a 40% market share to IBM's 18%, according to International Data Corp. And with its critical application-suite upgrade on the way, Oracle seems poised for a new burst of growth. Oracle's third-quarter revenues for the period ended Feb. 29 grew 18%, to $2.4 billion. And profits? They shot up 80%, to $498 million. Oracle's application-software business also saw a healthy rise--35% growth, to $199 million. Next fiscal year looks like another winner, with applications revenue forecasted to grow 35%, according to Goldman, Sachs & Co. "They've gone from out of the game to the front of the pack," says analyst Robert Austrian of Banc of America Securities.

SAMURAI WARRIOR. Product sales don't deserve all the glory. Surprisingly, Ellison has turned Oracle into a tightly run company. Gone are the days when a "let's-make-a-deal" negotiating philosophy ruled the sales force and feudal country managers ran their businesses as they saw fit. A year ago, Ellison kicked off a massive belt-tightening blitz that has curbed the company's free-spending ways. The workforce has been pared by 2,000 in the past two quarters. Routine sales are being shifted to the Web and away from high-paid reps. And hundreds of computing systems are being consolidated into a handful.

The result: Oracle has trimmed $500 million from expenses and boosted operating margins from 19.4% to 31.4% over the past nine months. Ellison promises he can wipe out another $1.5 billion in costs and push the margin to 40% or more in the next year, which would make Oracle one of the most efficient software outfits on the planet--though still less so than Microsoft with its 50%-plus margin.

Ellison, a penny-pinching model of efficiency? Hard to believe, but true. This is the guy, after all, who spent $3 million for Sayonara, his carbon-hull sailing yacht--the fastest craft under sail in its class. He owns a Japanese-style home in tony Atherton, Calif., where his graceful gardens and koi ponds are overshadowed only by the suits of samurai armor on display inside. Along with his glass, steel, and stone home overlooking the Golden Gate Bridge, construction is under way on a $40 million estate in the Santa Cruz foothills that's modeled on a medieval Japanese palace and will be built around a man-made lake. But all this has come from his personal fortune.

When it's Oracle's money, Ellison is downright parsimonious. But he's not tightfisted just for the sake of goosing margins. The millions that Oracle has saved so far serves as a bold advertisement for what Oracle's technologies can do for its customers. Ellison had watched other companies such as Dell Computer Corp. harness the Web to make themselves more efficient, which attracted new customers. "Why not us?" he recalls asking. So Ellison, who had long kept to product development and marketing, grabbed hold of operations with a vengeance. "Larry has got Buddhas all over his house, but he's not a Buddha. He's a samurai warrior. He's the destroyer, the transformer. It's what he does best," says Marc Benioff, a former Oracle executive who is now chairman of Web startup, in which Ellison has invested $2 million.

Everywhere that Ellison looked, he saw something that needed fixing. Each of Oracle's 70 country operations had its own computing systems and ways of tracking sales, revenues, and profits. Not for long. By the end of this year, the company will eliminate 2,000 server computers scattered around the world and consolidate on 158 machines at its Redwood Shores (Calif.) headquarters. All the company's data will be stored on one central database accessible via the Web. That makes it easy for executives to get a comprehensive view of operations and spot trouble before it gets out of hand. "Larry has the people in this company screwed down tight," says Chief Financial Officer Jeffrey O. Henley.

The Oracle boss has been just as aggressive about establishing new business practices. Ellison personally rewrote sales contracts and established standard pricing to cut down on dickering by field salespeople. He changed the compensation system to prevent more than one salesperson from getting a full commission on a sale. And he compensated country managers for meeting ambitious profit-margin targets--not meeting sales goals at any cost.

It's all about centralized control--with Ellison in charge. The way he sees it, he's creating a management style for the Internet Age. "When you're an e-business, everything is mediated by computers," says Ellison. "All the individuality is bled out of the system and replaced by standards. People don't run their own show anymore."

That has been tough on some of Ellison's sidekicks. Oracle President Raymond J. Lane remembers getting the phone call from Ellison in December, 1998, when the boss decided to insert himself into every corner of the company's business, including Lane's sales and consulting operations. "My mouth just hit the table," he recalls. Since then, everything has changed. "All of a sudden, Larry is in your mess kit drilling down for four hours. Some days, I'll walk out of a meeting saying, `I don't need this.' But then you look at the stock price. What Larry's doing is working. There's not a hotter company around."

To get staffers to bend to his will, Ellison uses the carrot first--and then the stick. When European country managers were slow to give up their computing systems, he offered them an option: If they kept control of their computers, they had to pay the cost out of their own budgets. Otherwise, they got their computing for free. That ended the holdout. Canada was another story. The subsidiary dragged its feet even after Ellison dispatched Gary Roberts, senior vice-president of global information technology, to Canada last August to deliver an ultimatum. "We had to send a Navy SEAL team to blow up our Canadian data center," quips Ellison. What really happened was just as effective: He shuffled management responsibilities and the problem melted away.

One of the cornerstone's of Ellison's e-engineering is the Oracle Business Online Web site. Launched last October, it targets small and midsize businesses, selling them programs for accounting and planning. What's unusual about it is that Oracle then runs the software for them as a service, charging a monthly fee. This saves small fry the cost of buying their own computers. For Inc., a company in American Fork, Utah, that offers product purchase-incentive programs on the Web, Oracle Business Online provided an accounting system for $5,000 a month. And Pointclick got going in just two weeks.

CALLING ALL NEWBIES. In the past, dot-coms simply couldn't afford Oracle software. They often bought Microsoft's then-less-expensive database and made do with accounting software designed for small businesses. But Oracle has made a concerted effort to turn itself into an easy choice for newbies. For starters, it gives away versions of its database software for free on its Web site to software developers. Later, when they are ready to go into business, they pay their license fees. But Oracle makes that affordable, too. Last October, it began selling a starter kit of all the basic software a "garage" startup needs to establish a Web site for just $6,750. In the first month, 150 companies signed on. And, Oracle knocked about 40% off its standard database prices in December, making them competitive with Microsoft's.

The strategy is to win over dot-coms when they're in the cradle and keep them when they grow up to be adult businesses. It's already starting to work. now plans on buying several million dollars' worth of Oracle database and accounting software. "We're going to be spending so much money with Oracle, it's not even funny," says Craig Brown, the company's chief technology officer. Partly to stimulate the dot-com business, Oracle has set aside $500 million in an Oracle Venture Fund to invest in promising startups. One condition: They've got to buy Oracle software.

Thanks to these ventures--and the fact that high-flying dot-coms like eBay Inc. use its stuff--Oracle has become a favorite for Net companies. These startups often buy high-octane technology right on the starting line, figuring they won't have to switch later when they're in fast-growth mode. "You talk about the four horsemen of the Internet--it's Sun Microsystems, Cisco, EMC, and Oracle," says James Schanzenbach, chief technology officer for Drug Emporium Inc., a Columbus (Ohio) company that launched an online drugstore in September using Oracle software.

To reinforce that image, Oracle has forged tight partnerships with other horsemen. For example, Oracle and EMC Corp., the leading maker of data storage computers, tune their technologies to run together well and avoid downtime--which is death to e-commerce Web sites. "Oracle has been right on track riding the dot-com wave," says EMC CEO Michael C. Ruettgers.

That partnership is a far cry from the gut-it-out-alone approach Oracle used when it nabbed e-marketplace customers like Ford, Chevron, and Sears. Late last year, e-marketplaces--which connect buyers and sellers of products in specific industries such as chemicals or cars--were starting to explode on the Web. Stocks of B2B companies have declined of late, but the long-term software market opportunity seems strong: Online business-to-business transactions are pegged to climb to $1.4 trillion by 2004.

B2B EDGE. Oracle wanted a piece of the action. Oracle's Lane learned that both Ford Motor Co. and General Motors Corp. wanted to tap the Internet to overhaul the way they buy $160 billion a year in parts and supplies and were looking for a software partner to help out. Lane hoped he could pull off a coup by making deals with each of them. So he ping-ponged between meetings in Detroit. But on Oct. 28, talks with GM broke down because Oracle wouldn't surrender a chunk of its stock to GM as part of the deal, say sources close to the discussions.

Lane was more determined than ever to win over Ford. He raced across town with a proposal to set up an independent company co-owned by Ford and Oracle that would let Ford get bids from suppliers via a Web site. Lane had no time to waste. He knew GM was negotiating a similar agreement with Oracle rival Commerce One Inc., and he didn't want to leave empty-handed. Even though Lane had to fly to a wedding in Los Angeles that Saturday, he kept up the pressure through the weekend--clinching the deal by promising to spend whatever it took to get the e-marketplace up and running quickly. He nailed down the final agreement in face-to-face talks with Ford CEO Jacques A. Nasser in Las Vegas on the following Monday, Nov. 1. A day later, both GM and Ford announced their exchanges, and Oracle's stock took off. "These were the first major exchange announcements ever," says Lane. "We had to be in the game." The two e-marketplaces later merged.

Now Ellison is hoping he can build on these early e-marketplace successes with his e-business suite. And customers are starting to buy in. Take GE Medical Systems, a $7.4 billion operation that sells in more than 100 countries and has dozens of factories in places like China, Hungary, France, and the U.S. In December, the GE subsidiary agreed to buy Oracle's entire 11i suite and install it worldwide. The plan is to operate one database accessible to both customers and employees--rather than scattering information across a handful of computing systems. "We're creating a global e-business," says Joseph F. Eckroth, the subsidiary's CIO. "With Oracle, it's integrated. I don't have to make connections between a lot of different pieces of software." Eckroth, who has dealt with Oracle for more than seven years, says the company has become much easier to work with. Because of Oracle's new sales and pricing policies, it took only two days to negotiate a deal. In the past, it might have taken weeks.

Other large organizations will be a tougher sell. Many companies choose the software that they feel is best for each task--whether it's running a Web site, managing a field sales force, or coordinating relationships with suppliers. Siebel Systems, for instance, specializes in sales-force software. Broadvision Inc. focuses on personalizing Web sites. And i2 Technologies is the leader in supply-chain software. Each is considered the best in its category. Even some major Oracle database customers, such as BellSouth Corp., prefer to mix and match so-called best-of-breed programs. BellSouth is considering other suppliers in addition to Oracle for its customer-management software. "Yes, it's important for applications to be integrated, but we can pick what we think is best and do some of the integration ourselves," says Francis A. Dramis, chief information and e-commerce officer for BellSouth.

There's another negative to selling a soup-to-nuts suite. By trying to do so much itself, Oracle misses out on benefits it could get from partnerships with other software makers. While it's going it alone in the exchange business, i2, procurement-software maker Ariba, and IBM announced late last month that they will pool their resources to create e-marketplaces. Former Oracle executive Barry M. Ariko, now CEO of supply-chain specialist Extricity Software Inc., believes Ellison is making a serious mistake. "The notion that you can do everything flies in the face of what the Net is all about," he says. "A lot of the new technology comes from the smallest companies. You can work with them--or you can try to do everything yourself and be 18 months behind."

Ellison admits he's playing catch-up. But he's betting that his 7,000 software programmers can deliver a package whose pieces are in some cases every bit as good as software from the specialists. He has 800 programmers focusing on customer-management software alone. Oracle still has more to do to make its e-marketplace software robust enough for the most demanding jobs. Even Oracle Business Online has run into glitches. "It was harder to get going than we expected," admits Oracle Executive Vice-President Gary L. Bloom. The service's first 50 customers had to put up with frequent service interruptions. Now, Oracle is forging alliances with telecoms to obtain more trustworthy network connections.

Oracle had better get this right. Ellison believes that over the next few years, the company will stop being a traditional software company and deliver most of its technology to customers the way its Oracle Business Online operation does--as an online service for a monthly fee. Already, about 70% of the software in the new e-business suite is designed to be dished up that way.

That means Ellison's troops are in for several more years of roiling change. "Life is like a shark," he says. "You have to continue to move forward and do things better every day, or you die." And Ellison is enjoying being cool too much to slow down now.

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