Oracle: Does the Emperor Have Any Clothes?

News Analysis: A saturated market and questionable organic growth rates could mean trouble for the database king.

Oracle may command 47 percent of the database market, but the company is pushing headlong into a saturated market with little room for growth, according to some analysts.

At first blush, Oracles market position looks unassailable. Oracle has experienced 14.9 percent market growth over the last year, besting the market average of 14.2 percent growth, according to a recent Gartner survey. The company will release its latest db, version 11g, on June 11th. And Oracle holds more market share than its two closest rivals, IBM and Microsoft, combined. Closest competitor IBM has only 21 percent of the market, less than half of what Oracle commands.

Oracle also reported on June 26 that its software revenues for 2007 were up 23 percent to $14.2 billion, with database and middleware sales growing 16 percent. But several analysts are worried, firstly about cheap database alternatives like MySQL, and secondly about Oracles organic growth rates. Minus the companys extensive and on-going acquisitions, Oracles growth is less healthy than generally believed. Oracle, analysts say, is relying on acquisitions to meet its stated goals of 20 percent growth per year.

"Since the beginning of 2006 alone and excluding the pending $459 million acquisition of Agile, Oracle has acquired at least 18 companies for a total of $11.4 billion in net cash," wrote Bernstein Research analyst Charles Di Bona. "We remain concerned that amortization of acquired intangibles will continue explicitly to be excluded [from Oracles earnings] which we believe materially distorts the presentation of the companys true economics."

The "acquired intangibles" Di Bona refers to include companies acquired in CEO Larry Ellisons $20 billion-plus spending spree to enter the business applications market. Since late 2004 Oracle has acquired more than 30 companies. The goal: overtake applications market leader SAP AG and become the worlds largest applications seller, with the middleware and database options to support a massive applications portfolio.

In a nutshell, Oracles strategy is not only to buy rather than build application functionality and customer share (a stark contrast to SAPs strategy to build vs. buy) but to wage bitter attacks against its biggest rival as well.

In March, Oracle launched a legal suit against SAP claiming corporate theft on a grand scale. While the case may or may not go to trial, the public relations fallout alone could be a nightmare for SAP, which finds itself constantly in the position of having to defend against Oracles claims.

And from the acquisition perspective, Oracles not buying just any software company; its picking market leaders including PeopleSoft, Siebel Systems, Hyperion, Agile, Retek and i-flex, to name a few. While Oracles strategy of buy everything and build from there seemed nothing short of crazy at the outset, the companys earnings may point to a different story—if one sticks to the numbers Oracle points to.

/zimages/4/28571.gifSAP admits to claims in Oracle lawsuit. Click here to read more.

In June, Oracle said its 2007 new software license revenues grew at a rate of 32 percent "while SAPs growth slowed to 10 percent in their most recent fiscal year," according to a statement released by Oracle President Charles Phillips. In its first quarter 2007 earnings report filed in September 2006, Oracle said its applications grew 80 percent, while SAPs grew only 8 percent.

At that point in 2006 a number of Wall Street analyst firms began sounding an alarm of caution, pointing to a lack of clarity with Oracles stated apps growth versus actual organic growth—without acquisitions. Analysts warned investors to "back out" Oracles acquisitions to get a clearer picture of organic license revenue growth—a key indicator of how the company is faring in the market and against SAP. Various reports suggested actual applications growth to be anywhere from 15 percent to a decline of 8 percent.

But Oracle remains uncowed. During the companys June earnings call Ellison said he would continue on his buying spree. Whether that strategy will continue to work seems to be anybodys guess.

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