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Software Hardball: By David Bank 07/24/1998 And this time, Microsoft Corp. may get to play the good guy. The brash billionaire is Larry Ellison, chairman of Oracle Corp., which dominates the market for the database software that serves as the foundation for most modern business processes. Last year, he told Wall Street analysts that his company would stay on top "because everybody hates Microsoft." But as Mr. Ellison is finding out, Oracle has plenty of its own enemies. It has sparked hostility by competing for business with its own software and distribution partners. Microsoft has steered clear of such conflicts and aggressively cut prices and doled out freebies to win over converts. That strategy worked before, in Microsoft's battle for hegemony over the PC desktop. And it is having some success again as the software giant dips into its $14 billion cash hoard to upset Oracle's dominance over database-management systems. Microsoft is giving away $600 million this year in the form of free training, technical support and marketing for its database, e-mail and other business systems. Meanwhile, it is playing the role of merciless price-buster, turning once expensive software into a mass-market commodity and enabling its new partners to offer packages that can cost about a fifth as much as Oracle's. "Doing business with Microsoft is frankly more pleasant" than working with Oracle, says Len Silverston, a former Oracle sales executive and now president of Quest Data Solutions LLC, a technology-consulting firm in Greenwood Village, Colo. Microsoft "wooed us. They promote business for us. It only makes business sense." Oracle clearly is getting frustrated. It is pushing the image of Microsoft the monopolist -- that is, of a company that uses its Windows dominance to stifle competition elsewhere. That image is at the core of the Justice Department's antitrust suit, which accuses Microsoft of acting like a classic monopoly in blunting the threat posed by Internet browsers from Netscape Communications Corp. On Thursday, Mr. Ellison testified before the Senate Judiciary Committee that Microsoft is seeking to extend its dominance. Microsoft CEO Bill Gates "wants to add everything to Windows -- everything," said Mr. Ellison. "We are now seeing Microsoft leverage its monopoly into other markets." (Mr. Gates declined to attend the hearing, but a company spokesman said, "It's unfortunate that our competitors use the government as a weapon.") For all its sway, Microsoft has been the upstart in database software, unseating entrenched incumbents, sending prices into free fall and setting off new rounds of innovation. Microsoft also enlists legions of partners among hardware manufacturers, distributors -- even other software companies. It all adds up to a "good-twin, bad-twin" image for Microsoft, says Timothy Bresnahan, a Stanford University economics professor who has been tapped as a top Justice Department antitrust official. "They seem to be really good at the `good-twin' stuff," he says. "The alternative that Microsoft proposes to offer to Oracle's customers is different enough, and stands a good chance of getting real enough, to give those customers a real choice." Oracle's strategy, he says, is driving customers "into Microsoft's arms." The customers range from small medical practices to major airlines and banks. The database software can store and process appointments, credit-card transactions and ticket reservations. Global corporations use databases to manage inventory and track sales leads, but now, even managers of fast-food restaurants use the technology to analyze sales patterns of burgers and fries. "If you're pressuring the restaurant manager, you have to give them the tools to do the job," says David Berry, chief information officer at Burger King Corp., which is putting Microsoft's systems in its 500 company-owned restaurants to manage everything from order entry to shift scheduling. Oracle is still dominant, with about 28% of the $6.6 billion world-wide database market, according to Dataquest, a market-research group. Its top-of-the-line Oracle8 Enterprise system is far faster than Microsoft's best offering. And Oracle's software is more versatile; it can be used on computers running on almost any type of operating system, whereas Microsoft's database software is geared just to Windows NT. But with most large customers already supplied, Oracle's database revenue is expected to grow just 11% this year to $2.26 billion. Microsoft's revenue from SQL Server and the BackOffice suite (of which SQL is a part) is expected to reach $642 million, up 69% from 1997. To spur growth, Oracle is moving into software tailored to specific industries, such as health care and telecommunications. This week, Oracle said it planned to double its staff of sales representatives, to 2,000, to push such applications. Microsoft has a far different approach. The company didn't even have a business-database product until several years ago. Yet it has quickly gained about 15% of the market by selling low-cost, mass-market systems, mostly to small businesses and individual corporate departments. And with this fall's release of a new version of its SQL Server database system, Microsoft is targeting Oracle's biggest customers. Burger King's Mr. Berry is one convert. The fast-food giant, a unit of London-based Diageo PLC, had long used Oracle's software to manage its central inventory, real-estate and financial information. Now, Mr. Berry is installing Microsoft's SQL systems at company-owned stores. "We have jumped ship a bit," he says. "When you look at SQL Server vs. Oracle, there's a big price difference." Price is Microsoft's biggest advantage. "They are saying, `Look at the high prices Oracle is charging. We are going to turn that into a commodity business,'" says Duncan James, vice president of marketing for Atlanta-based HBO & Co., the largest seller of health-care-management software. In February, HBOC chose Microsoft as the basis for its new products for health-maintenance organizations and doctors' offices. Microsoft's prices are often 25% to 50% lower than its competitors', Mr. James says, leaving customers more to spend on HBOC's own products. Microsoft gains another advantage by bundling its database system with its BackOffice suite, which also includes the NT Server operating system, e-mail software and other products. For customers who want at least two of the programs, the BackOffice suite is a good deal, for the rest of the products are, in effect, free. Ray Lane, Oracle's president, says he has nothing against lower prices. "In theory, anybody should be able to go into a market with a low price and hope to make it up on volume," he says. Mr. Lane also doesn't object to Microsoft's bundling practices. "I can compete with that," he says. Mr. Lane tells his sales representatives to match Microsoft's bids by cutting prices at the low end of the product line. "If Microsoft gives it away, give it away. Don't lose to Microsoft," he tells them. But he has given his troops strict orders to maintain profit margins for Oracle's more sophisticated products, which are still more powerful than Microsoft's offerings. Oracle must contend with Microsoft's willingness to subsidize its customers. Just last May, Microsoft agreed to spend $20 million this year to train 50,000 database administrators for corporate clients. Oracle also must deal with the consequences of its own aggressive approach. The company has a legion of consultants who rack up billable hours helping customers install and customize Oracle software. It's a lucrative business; services and consulting now make up nearly half of the company's revenues. But it also puts Oracle into competition with the very consultants and partners who advise businesses on which software to buy. Microsoft goes out of its way to wine and dine those consulting partners. Last November, Microsoft paid the plane fare for two representatives each from 65 midsize consulting firms to come to Seattle for a "Database Solutions Summit." Most were longtime Oracle partners who had done little or no work with Microsoft. Microsoft treated the recruits to a weekend of sightseeing, including a reception at the nearby Chateau Ste. Michelle winery. At the end of the meeting, 60 of the 65 firms had signed up with Microsoft, though many will continue to do business with Oracle as well. In May, Microsoft hosted a similar event for 80 European consulting firms in Brussels and got similar results. "They have a well-oiled machine there," says Leonard Selvaggio, a spokesman for Wang Global, a technology-consulting unit of Wang Laboratories Inc. Microsoft provides Wang with technical support and sales leads, and recently picked up the tab and advance work for a five-city marketing tour. "Who paid for the coffee and cookies? They did," Mr. Selvaggio says. The partnerships work both ways. Colorado's community-college system asked Quest, the consulting firm, to recommend software to put budgeting, supplies and faculty data into a Web-style intranet accessible to 2,000 staffers on 13 campuses. Quest's Mr. Silverston recommended Microsoft. "SQL Server can handle it at a fraction of the cost of what Oracle can, probably like one-fifth the price," he told college administrators. For Quest, the partnership brings a shower of freebies. To help Quest install the community college's system, Microsoft assigned one of its own consultants and paid his salary and expenses. "They basically gave us a person for free," Mr. Silverston says. Quest also saved tens of thousands of dollars when Microsoft picked up the tab for training dozens of its database consultants. A daylong course in a Microsoft-certified program costs up to $400; Microsoft pays the fees. For training on Oracle's products, in contrast, Quest must pay its own way. Microsoft also helps Quest find customers. Last spring, Microsoft organized and paid for a promotional seminar in Denver that drew 350 prospective customers, and advertised it as a joint effort with Quest. "All I had to do was show up," says Mr. Silverston. Oracle can't and won't match Microsoft's spending, Mr. Lane says. "They have more cash than God," he grumbles. "We are not going to get into a cash bidding war with Microsoft." Instead, he is hoping for government relief. "They're generating cash from a monopoly and using that to compete in new markets. I think it's illegal." Jeff Raikes, Microsoft's vice president for sales and support, disputes the charge. "We offer more value at a lower price," he says. "That's attractive to customers." As for HBOC, the medical-software firm, Oracle executives never made a serious effort to persuade the company to stick with them, Mr. James says. Microsoft, on the other hand, committed to a joint-marketing plan, provided the company with free software and gave HBOC weeks of free access to its development labs, where the two companies simulated a supply system for a 500-bed hospital to test the software. One of Microsoft's biggest coups came last spring, when it struck a deal with Germany's SAP AG, the leading vendor of software that runs entire businesses. SAP agreed to bundle Microsoft's SQL Server with its own software to offer a less expensive product for smaller customers. SAP still does more business with Oracle, but Microsoft's share will become larger over time, says Allen Brault, director of business development for SAP America. "SAP and Microsoft are complementary." There are limits to how far Microsoft can go. Many companies are loath to change their database systems once they finally get them working. And Microsoft's software can't always handle the big jobs. Some frustrated customers have switched back to Oracle. "After trying unsuccessfully to manage our workload with SQL Server, we finally switched to Oracle8 -- and the performance gains have been phenomenal," says Glenn Grimes, president of Data Management Services, a unit of Downey Cos. in Bethesda, Md. Oracle also is working with Internet-service providers to offer busi ness services over the Internet, with Oracle's software running on large computers maintained by the network provider. Businesses could use a simple Web browser to manage their accounts. Mr. Lane estimates that approach could cut businesses' software costs by more than half. Such moves could lead to a near-perfect situation for consumers. With Microsoft an aggressive challenger, competition on price and innovation is likely to remain intense. Copyright © 1999 Dow Jones & Company, Inc. All Rights Reserved |
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