The Internet Thunderball
Oracle is the largest database and software company in the universe, but superfluous titles aren't why I'm bullish on this company. This company's a bull because it's never caught watching the paint dry.
Several years ago Oracle database and enterprise resource management (ERP) application sales were slowing. Ellison identified the Internet, not the PC, as the single greatest investment opportunity the technology industry had ever seen.
He responded by reinventing all of his existing products and developing a full suite of software applications that allows businesses to run all of their operations, internally and externally, over the Web. These new lines of products would enable companies to become e-businesses under one umbrella.
He took further action recognizing the unbelievable opportunities in B2B e-commerce. The brick and mortar database software market was still lucrative, but growth opportunities in the B2B market were just too good to pass up.
In a Silicon Valley second, Ellison had put Oracle through the spin cycle. The client/server application days were done and the Internet was driving its products.
11i: A License To Kill
Ellison is holding his 11i-gauge shotgun to the heads of competition. Unveiled earlier this year, Oracle 11i is a fully integrated Web-enabled e-suite of software applications. The applications work seamlessly together and handle everything from customer service and marketing to human resource management and procurement. (Do I need to mention again that it all runs over the Web?)
The e-suite seems prime to succeed for a number of reasons. First, it's the only full suite of applications on the market. Everyone from Fortune 500 companies to Internet start-ups can purchase a unified package of software that meets all their needs. One-stop shopping, if you will. Companies are saved the time and energy of buying different applications from a host of competitors and spending countless hours and dollars integrating them.
Oracle's solid reputation in the database industry should also provide additional sales for its e-business software. The company has a 60-70% market share in the database industry, which should allow it to leverage existing relationships toward the applications. Bears counter that Oracle's products are inferior to niche providers specializing in specific applications. That argument is erroneous. Oracle doesn't need to have the best technology to be a market leader; it just has to market it effectively. If you don't believe that, ask Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %>.
B2B: The Golden Gun
The Oracle B2B platform is also a loaded weapon for Ellison because it allows buyers, suppliers, and employees a unified stage to realize e-commerce opportunities through the Internet. Users gain significant cost reduction through economies of scale and improved efficiencies in inventory management and information flow.
The company has gained real momentum in this segment through a number of larger partnerships. The "Big Three" auto manufacturer exchange is likely to have over $1 trillion in transactions each year with Oracle earning volume-based commissions. To date, there have been over 80 deals signed and 200 more in the works, not to mention eight industry exchanges.
Buster might make the argument that B2B is still a phenomenon and it's impossible to gauge the widespread acceptance or demand for Oracle's products. He might even go further and say Oracle chances to win the B2B war are slim.
A Bull's response would be, "Who cares?" Even if that were true, Oracle still has a significant stake in B2B through its database business. Every company wishing to engage in e-commerce needs to digitize its information and Oracle's databases do that. That competitive edge should drive the rest of its B2B business. If I'm wrong, the company will still be in the game and as the segment grows companies will start lining up for Oracle databases like college freshman at a beer kegger.
The Hair Club for Men
Oracle's biggest marketing tool is itself. Last year Ellison predicted Oracle could wipe out over $1 billion in expenses. I perceived this statement as Ellison hyperbole geared to grab attention. More than anything, I hoped the idea didn't spill into his personal life because I had so much fun reading about his discretionary spending.
Fortunately for Oracle, Ellison is quite the penny pincher when it comes to business. Ellison has already reached that goal and restored operating margins above 40%. The cost savings were achieved by Web-enabling operations. Oracle used the Internet to market and sell to customers, as well as consolidating hundreds of computer systems into a few. Like the Hair Club for Men, Oracle was now a provider of technology and a client.
Riding a new revenue stream
The transition from a traditional database company to Web-based applications has additional effects to its revenue stream.
In the past, the majority of Oracle's revenue came from licensing fees. The result was large chunks of revenue up front, while the customers endured significant costs implementing and managing the applications. If the quarter was ending and Oracle had not met earnings expectations, it was forced to slash prices and license the software at rock bottom prices.
Now Oracle has embraced the applications service provider (ASP) model, which rents the software to customers and provides the expertise in managing it. The software is accessed through the Web and offers small businesses and Internet start-ups a more reasonable avenue to attain the Oracle technology.
However, Oracle customers aren't the only ones that benefit. By making the transition to an ASP Oracle's revenue stream becomes stabilized and potentially larger. As startups and small businesses grow they become more familiar with and require additional Oracle applications.
Looking forward
Looking forward, the future looks bright for Oracle. The 10 largest Internet sites and 93% of public Internet companies use Oracle products.
Engineering applications toward the Internet will continue to drive growth in the sale of applications. Its core products are established businesses and will provide needed leverage as it continues in B2B e-commerce.
Ellison has called for the reduction of an additional $1 billion in expenses making Oracle one of the most efficient technology companies on the globe. Entering into the ASP market will provide a more annuity-like revenue stream allowing greater insight into future cash flows.
And finally, the James Bond of Silicon Valley has this company headed in the right direction. As long as he doesn't kill himself in his spare time, there isn't any reason this company won't keep going. Moving Oracle products to the Internet could be the most brilliant maneuver since Lee sent Jackson on his long march at Chancellorville, but rest assured Ellison isn't satisfied yet.
This Week's Duel
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