Big Sam Is Worried About Oracle–And For Good Reason

September 20, 2010 Timothy Prickett Morgan

The rivalry between IBM and Oracle, which could define the way enterprise computing gets done at a lot of IT shops, is shaping up nicely. Last week, at an event hosted by the Wall Street Journal, IBM’s president, chief executive officer, and chairman, Sam Palmisano, spoke for more than an hour, ranging over a number of topics, including its rivalries with Oracle and Hewlett-Packard. Oracle also posted its financials for its first quarter of fiscal 2011 and laid out its goals for creating “engineered systems.”

The entire interview that Palmisano gave at the WSJ event was not Webcast, but you can see two snippets of it here as well as excerpts of the interview in the story.

In the first snippet, Palmisano talked about how he had been initially spending a lot of time down in Washington with the Obama Administration, but that some of the reforms that Big Blue was advocating for were not in alignment with the goals of the President. In that snippet, we learn that Palmisano is a Republican (as if political parties mean that much to transnational corporations that are required by law to do no more than look out for their own best interests). Palmisano said that early last year the Obama Administration was reaching out to the business community on how to do the economic stimulus and how to reform healthcare. “You always have to have a diverse audience, so I was there to represent the minority party,” Palmisano quipped, admitting (as no IBM CEO before him ever did) that he was a Republican. He then went on to say that IBM does not have a political action committee (PAC) that gives donations to politicians because when you operate in 170 different countries, you want to have the same rules of conduct and ethics in all of those countries. Palmisano also said that he did not personally contribute funds to politicians, but this is apparently not true.

Interestingly, as part of the healthcare reform efforts, Palmisano said there was over $200 billion of fraud and that Big Blue offered to implement an anti-fraud system for Medicaid and Medicare for free, and it was turned down. If this is true–and there is no reason to believe it is not, but there are very likely some strings that came with it–then someone in the White House deserves an ass-kicking. Plain and simple.

Talk eventually moved around to Oracle and HP, the former just hiring Mark Hurd, the latter’s former president, CEO, and chairman, to be its co-president under Larry Ellison, Oracle’s CEO and co-founder. Palmisano was asked what kind of threat Oracle was. “They have good margins,” Palmisano said. “I can tell you I have thought a lot about that. I’m worried.”

But, Palmisano added with admitted cynicism, that it was not surprising that Oracle would call out IBM as its main rival at exactly the same time that HP’s board is suing Hurd to stop him from joining Oracle because of competitive issues in his golden parachute that supposedly were designed to prevent Hurd from making such a move. (There is little doubt in anyone’s mind that HP will lose that lawsuit and Hurd will take over sales and support operations at Oracle.)

Palmisano chastised HP under Hurd for cutting back on research and development spending, and said that over the long haul Oracle was the bigger threat to IBM “because they invest” and they understood that “you cannot just resell somebody else’s future creation.” Oracle, said Palmisano, has the cash flows, the gross margins, and the wherewithal to create true systems, not just be a distributor for Intel and Microsoft.

Palmisano also told the Journal that he “was not going anywhere” when asked about retiring next year. As I said when IBM reorganized itself in July, I don’t think Palmisano will retire until 2015, when he is approaching 65, giving Big Blue a chance to develop a younger and deeper bench of executives.

As for Oracle, Larry Ellison continued to wax poetically about the historical strengths of IBM and once again seemed to understand the AS/400 value proposition better than Big Blue itself.

“IBM is a great company and I appreciate the kind words from Sam Palmisano about us as being their number one competitor now–and actually I mean that sincerely,” Ellison said in a conference call with Wall Street analysts discussing Q1 of Oracle’s fiscal 2011, which ended August 31. “I think Oracle is flattered. We have worked very hard. We look at IBM as our number one competitor and we are thrilled that they look at us as their number one competitor now. We know we have to work very hard to be successful in the competition.”

Ellison was asked if Oracle’s move into systems hardware and systems software (as opposed to the database, middleware, and applications where it is already a dominant if not the dominant supplier) meant that Oracle was going to pull an HP and try to expand radically into services. He observed that Global Services was the dominant part of IBM these days, and that products are secondary. “We look at our products being the dominant part of our business,” explained Ellison. “And one of the things we are trying to do with our products is obviate the need for services. So if we do a very good job of integrating our applications together and making them easier to install and easier to upgrade, you don’t need as much services.”

Man, that sure sounds like an AS/400 to me. Maybe we should ask Ellison to buy the Power Systems and IBM i portion of the business from Big Blue?

Oracle’s revenues for the first quarter were propped up considerably by the addition of Sun, as was the case in the last quarter of fiscal 2010, because in the compares to the prior year’s quarters the Sun numbers are not included. Oracle’s revenues shot up by 48 percent, to $7.5 billion, with net income up only 18 percent, to $1.35 billion.

New software license sales at Oracle rocketed up 25 percent in the quarter, and that is truly impressive considering this is still the tail end of the Great Recession and that is a quarter that ends in August, a traditionally weak quarter for Oracle and a weak time for all IT players. Oracle lumps together database and middleware sales so Wall Street cannot pick them apart too much, and in this category, new license revenue hit $937 million, rising 32 percent, with support and updates for these two lines bringing in $2.32 billion, up 12 percent. On the application front, new software licenses sold in the quarter accounted for $349 million in sales, up a more muted 10 percent and showing that it is still tough out there, while support and updates for these products brought in $1.13 billion, increasing only 8 percent compared to the year-ago quarter. Add all the software up, Oracle had $4.74 billion in revenues, up 14 percent, while total software license support and product updates across all software lines accounted for $3.45 billion in sales, rising 11 percent.

On the systems front, Oracle pushed put $1.08 billion in hardware sales with $522 million in gross profit and pulled in $619 million in system support revenues (for Sun Sparc and X64 systems, related storage, the Solaris and Linux operating systems, Oracle VM hypervisors for Sparc and X64, and various add-ons for Solaris and Linux) with $318 million in gross profit. Ellison said that Oracle had an internal goal of 50 percent gross margins on Sun’s products for 2011 when it took over the company in January and that it hit 48.4 percent in the Q1 already. He also said that Oracle believed that it could push gross margins up as high as 60 percent over the longer haul, and that over that same long haul the company could double hardware revenues. That would put Oracle’s hardware systems business at around $8 billion a year, including servers, storage, and networking, and that is about as good as Sun was doing by itself in 1998 ahead of the dot-com boom and in 2005 after the dot-com bubble had burst and Sun recovered somewhat.

New co-president Hurd piped up on the call with Ellison and his peer, co-president Safra Catz, and in a testament to his acting skills or knowledge of Oracle as a major competitor and partner of HP’s, Hurd sounded like he had been working at Oracle all along and not at HP.

“Oracle has amassed the most enviable portfolio of technologies in the industry,” Hurd said in the call. “I don’t believe there is any company that is better positioned than Oracle.”

As many people expected, Ellison is in charge of development of Oracle’s products and the integration of the engineered systems that will bring together hardware, systems software, and applications software into a tightly integrated and, Ellison hopes, high-performance stack. Hurd is going to manage the direct sales force and build it back up to the level that Sun used to have when it was building out the dot-com bubble and tune up Oracle’s support organization to deal with integrated systems. Catz is going to manage costs, acquisitions, and mergers, as she has been doing.

Oracle is expected to announce its new Fusion Java-based applications, as well as what it calls two high-end systems, at its OpenWorld extravaganza this week. We’ll keep you posted on the interesting bits.

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