Oracle's Open-Source Shopping Spree
The open-source community may be in for a jolt. Oracle (ORCL) is plotting what could be the biggest endorsement yet by a mainstream software company for a movement that involves legions of developers across the globe who publish "open" software distributed freely over the Net, making money instead from support and maintenance. It's a bold bet for a company that gets a healthy chunk of its $16 billion in annual sales from multimillion-dollar software packages deals, but Oracle is ready to spend big on open source.
Oracle is in talks to buy at least three open-source software companies in deals that could be valued at more than $600 million, BusinessWeek Online has learned. The transactions would extend the 18-month, $18 billion spending spree by Oracle Chief Executive Larry Ellison that has engulfed PeopleSoft and Siebel Systems. They would also put Oracle in control of some of the most sought-after open-source projects. Overnight, Redwood Shores (Calif.)-based Oracle would rival IBM (IBM) as the prime evangelist of a movement that's revolutionizing how software is developed and distributed (see BW Online, 2/6/06, "Open Source's New Frontiers").
The largest of the three targets is Atlanta-based JBoss, which specializes in so-called middleware, the software that serves as a connection between disparate programs. JBoss competes with traditional software companies like BEA Systems (BEAS), IBM, and, to some degree, Oracle.
Its software has been downloaded from the Internet about 16 million times, and its application server -- the software behind Web sites -- is tied with IBM's comparable product as the most widely used, according to a study by BZ Media. JBoss could fetch as much as $400 million, although there's disagreement over price, and discussions could still unravel, according to people familiar with the discussions.
Also in Oracle's crosshairs: closely held Zend, based in Cupertino, Calif. Zend's PHP software language is one of the most prevalent on the Web, present in more than 18 million Web sites. The company, which snared headlines last year when Netscape co-founder Marc Andreessen joined its board, has been trying to extend its success with the Web into business applications. Zend could sell for $200 million, according to one source.
The third is Emeryville (Calif.)-based Sleepycat Software, which makes technology used in many of the open-source databases that handle reams of digital data. The Sleepycat deal, likely to be the smallest of the three, is expected to be announced as soon as Feb. 13. It's not clear how soon the others will be announced, and they're unlikely to be unveiled in conjunction. However, talks with all three are advanced, say some of the people involved, who asked not to be identified.
Spokespeople for Oracle, JBoss, Zend, and Sleepycat all declined to comment.
"ALL YOU CAN EAT."
Oracle's Ellison girded investors for an open-source push at a Feb. 8 conference in Santa Monica, Calif., saying, "We are moving aggressively into open source. We are embracing it. We are not going to fight this trend. We think if we're clever, we can make it work to our advantage."
Ellison wants to become businesses' most important software provider and turn customers into one-stop-shop subscribers. Subscriptions are a huge shift from a model where the name of the game is getting huge upfront payments from corporate customers. In the case of open-source and on-demand software, companies pay little to nothing upfront, instead paying a monthly fee for hosting, support, or maintenance.
While some traditional software companies fret that such deals will cannibalize their multimillion-dollar up-front fees, Oracle is embracing them. It plans to do $7 billion in sales this year from subscriptions. Of that, about $6.5 billion, or more than 90%, is profit, Ellison said in Santa Monica. With new business, that margin is more like 50%. "More and more what we're trying to do is turn our largest customers into all-you-can-eat customers," Ellison said. "That's a wholly different model."
Another of Oracle's aims: getting stronger in middleware, the programming that mediates between existing programs, ensuring for example, that applications can interact across hardware and network environments. "If we're playing in middleware, we feel we have to be the No. 1 player, so you'll see us doing a variety of things to get us into that No. 1 position, including acquisitions," Ellison said on Feb. 8.
JBoss would take Oracle a long way toward that goal. JBoss' market share is difficult to nail down because only a small percentage of customers pay for support, and the vast majority download the software for free. Analysts estimate it does only between $20 million and $50 million in annual sales, but its market penetration is much deeper, rivaling leaders IBM and BEA in several categories.
The sense is a company with Oracle's sales and global support staff could do a much better job turning those users into paying customers. Consider a Feb. 6 Merrill Lynch survey of tech-spending decision-makers: Six percent said they were planning to purchase more of JBoss' software going forward -- the same percentage that reported they would buy more of Oracle's competing middleware.
One source close to the talks says these deals may be just the beginning. "Larry and [Oracle Co-President and CFO] Safra Catz have a clear plan to control the entire open-source [software] stack," the person says.
BUILDING MARKET SHARE.
Clearly, they'll face hurdles. Sources say Oracle and JBoss are haggling over price. Oracle opened negotiations at $200 million, while feisty JBoss Founder and Chief Executive Marc Fleury, who has insisted in the past that his company isn't for sale, is said to be asking a minimum of $400 million.
That may sound small compared to the $10 billion Oracle paid for PeopleSoft, but Wall Street could balk at the price tags, particularly for JBoss, which remains unprofitable. However, when it comes to evaluating young open-source outfits, there's more to consider than top-line growth. These companies largely rely on the Web and a loose community of developers and evangelists to do their marketing for them. That keeps costs to a minimum.
Developers within companies download JBoss for free, use it, then contact the company if they need support. Ellison noted the skepticism over the model at the Feb. 8 event, saying, "On-demand and open source drives the analysts crazy because there's no new license revenue."
JBoss has had a hard time turning its broad usage into revenue, but the number of companies using JBoss is nothing to sneeze at: One analyst estimates that it has effectively garnered as much as $300 million in market value from the likes of BEA, IBM, and Oracle. Oracle was in talks to buy BEA several years ago in a deal likely worth billions. The JBoss purchase, even at a premium, is a way to build market share in middleware at a much lower price.
CLOSING THE DEALS.
But the deals could prove savvy defensive moves too. Right now, Oracle is the only company selling databases, a full line of applications, and middleware for large corporations. Microsoft (MSFT) does the same with midsize companies, while IBM doesn't do applications, and SAP doesn't sell databases. As open-source versions of all of these technologies gain steam, the last thing Ellison & Co. want is another major software vendor to cobble together comparable depth.
Still, it's a gutsy strategy. Open-source alternatives can be up to 90% cheaper than other software, and that could feel threatening to Oracle employees peddling databases and middleware in the traditional manner. Oracle could be setting up a culture clash the likes of which it has never seen. And as always, a software company's biggest assets are typically its engineers. If they head for the door, Oracle is just buying code and -- in the case of JBoss -- a customer base that's largely getting a free ride.
Another unknown is how the deals will sit with the vast open-source community. Technologies like PHP and JBoss are key ingredients in the bulk of open-source deployments, and if these deals go through they'll be in the hands of a large traditional software player. Selling the open-source community on Ellison's plan might prove just as hard as selling it to Wall Street.