Page II: Is Oracle's recent slowdown in the applications business a one-time fluke or just the latest setback in a troublesome area for the software maker?
Software makers are attempting to pump up revenue from maintenance, which includes fees derived from product updates and support. Oracle on Tuesday said maintenance revenue grew by 14 percent in its most recent quarter, compared with the same period last year, and now constitutes 53 percent of the company's total revenue, up from 50 percent of total revenue one year ago.
An industry that thrived on the megadeal during the 1990s, when new, multimillion-dollar contracts were commonplace, is now adjusting to smaller deals. SAP's chief executive, Henning Kagermann, said earlier this year that the size of the average SAP sale has gone down in recent years. "We will see some increase in deal size. But we will not see a return to the old days," he told CNET News.com.
The applications business has been a historical trouble spot for Oracle in particular. Despite the company's clout in the database market, Oracle hasn't always been successful in converting those customers into applications buyers. The thinking is that, since business applications run on top of a database, Oracle -- which leads the market for database software on servers other than mainframes -- should have an inherent advantage over its competitors.
But Oracle trails both SAP and PeopleSoft in the enterprise applications market, and competition will likely intensify if Microsoft -- which clearly has an interest in expanding its applications business -- enters the market in the next few years. The software giant disclosed earlier this year that it had started merger discussions with SAP, but said those talks had ended.
Oracle's claim that the application sales slowdown is simply a one-quarter aberration will soon be put to the test. The company plans to launch Oracle 11.5.10, an update to the company's suite of business applications, in the next few months and Oracle management expects customers to buy in earnest. "We expect the release of 11.5.10 later this year to help drive customer demand," Oracle's You said on Tuesday.
Oracle "can probably get some sales momentum from that," Hamerman said.
In addition, Phillips indicated that Oracle may soon certify its applications to run on top of the popular 10g release of Oracle's database software, which could drive new sales.
Oracle has also revamped its application software sales force. The company claims that greater specialisation among sales personnel will lead to better growth in the long run. And Phillips indicated that he expects a greater volume of new sales in the coming quarter.
But one thing that won't change soon is widespread discounting, which has become the bane of enterprise software makers in recent months. During the Oracle-PeopleSoft antitrust trail, several technology buyers and company executives testified that large-scale discounts on enterprise software license fees -- of up to 90 percent -- are now commonplace. Those big discounts eat into software makers' sales and profits.
The trend started several years ago and isn't expected to stop anytime soon. In a recent Forrester Research survey of 25 IT managers in companies with at least $1 billion in annual revenue, roughly half expect discounting to continue through 2004 and in the foreseeable future.
"Discounting is still fierce," Charles Phillips, Oracle's president, said during a conference call on Tuesday. "We just have to live with that -- that's the way the market is."
News.com's Alorie Gilbert contributed to this story.
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