Oracle: When Strong-Arm Tactics Backfire

When a California state auditor alleged in an Apr. 16 report that Oracle Corp. (ORCL ) had talked the state into spending $41 million more than it needed to on software, it looked like the latest in a string of complaints, from strong-arm sales tactics and buggy software to poor service. But despite the political storm caused by the contract and the pile-up of problems facing Oracle, CEO Lawrence J. Ellison hardly seems down. Indeed, when he announced on June 5 that the company should meet analysts' profit estimates for the fiscal fourth quarter closing May 31, investors promptly bumped Oracle shares up 11%.

Does this mean Oracle, after its worst fiscal year in a decade, is turning a corner? Not quite. Investors, who had worried that it wouldn't meet much-reduced estimates, were relieved, but Oracle still faces a wicked combination of lousy demand and saturation in its core market, not to mention a host of customers who aren't sure whether they can trust this famously aggressive company. And Oracle's strategy for getting out of this mess, giving discounts that analysts say reach 70% to get customers to ante up for more, may just be robbing Peter to pay Paul.

The turmoil shows in the numbers. Fiscal 2002 operating income is expected to fall to $2.1 billion, down 44.7% from last year. Meanwhile, Oracle's database market share fell 4.9% last year, according to researcher Gartner Inc., as Microsoft and IBM invaded its turf.

Oracle's biggest problem may be customer reaction to its tough tactics. When the Redwood Shores (Calif). company told Kevin Carracher, director of IT infrastructure management at RoadwayExpress Inc., that his company owed $2 million for software he thought he had paid for, he laughed in disbelief. "Oracle really needs to consider the market these days," he says. "There are alternatives."

Oracle says it's doing its best to respond to criticism. In March, it named Senior Vice-President Mark Barrenechea to head a group to trouble-shoot customer complaints. And an Oracle spokesman says Carracher's gripe is a misunderstanding. "He doesn't have to pay that bill," says Jim Finn.

But Carracher isn't the only one complaining. Market researcher META Group Inc. says it has heard from 39 Oracle customers that had similar bill disputes. And it's not just corporate customers. Government agencies, which account for 20% of Oracle's revenue, are also up in arms. The state of Ohio and the city of Toronto complain that they, like California, bought more than they needed.

Yet Oracle's practice of luring customers with steep discounts may not be the answer. For starters, it could encourage happy customers to put pressure on it. "[Oracle's trouble] does make us a little more aggressive," says Tony Herbert, head of the Montana Information Services Div.

Analysts also worry that while the price breaks get Oracle closer to its short-term revenue targets, they're likely to hurt down the road if customers buy software now and salt it away rather than pay full price later. A May survey of large Oracle customers by Morgan Stanley Dean Witter & Co. found one-third believe they have more licenses than they need. It will take 18 to 24 months to work that off, says Morgan Stanley analyst Charles Phillips.

Granted, it's not Oracle's job to dissuade customers from buying too much software. But given its faltering credibility, Oracle must be careful. Carracher, for one, is still angry. "It's still going to cost me more than I want to spend," he says. "A dollar is more than I want to spend." Unless Oracle fixes what ails it, that may be all Carracher spends on it for some time to come.

By Jim Kerstetter in San Mateo, Calif.

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