Oracle’s boss resigns: Transition, not succession

Larry has not left the building

NOTHING has changed, except for the titles. That was the word from Oracle after Larry Ellison said on September 18th that he was resigning as chief executive. The firm he founded in 1977 is now the world’s biggest maker of business software, with annual sales of $38 billion. Mr Ellison will stay on as executive chairman and focus on his main interest—technology. His old job will be split between Safra Catz and Mark Hurd, who already run the firm’s operations.

Though there may be little immediate effect, the title-shuffling may one day be seen as the start of an upheaval like the one IBM had to go through when smaller computers dethroned the mainframe in the 1980s and early 1990s. Big Blue almost went under in the process. Big Red—the colour of Oracle’s logo—is unlikely to run such a risk, but the shift will not be easy.

Waiting in the wings

  • Transition, not succession
  • A hard rain
  • Not so funny
  • The default choice
  • Priceless pills
  • Balls in the air
  • The look of a leader

Other than when Oracle’s sponsored boat won the America’s Cup last year, the company has not been in the headlines much since it bought a bunch of other business-software firms in the mid-2000s. It seems to be doing a decent job of integrating those acquisitions. But they are less important than its core database business. Most of the world’s big companies keep their sales data and other crucial information in Oracle’s digital stores. Rare is the firm that switches provider. That gives Oracle huge pricing power and a steady revenue stream from upgrades and support services. Its operating margin is 47%.

But the beauty of technological progress is that it tends to undermine such dominance. One trend is open-source software: free programs written by communities of developers. This has been around for some time, but is getting increasingly sophisticated. A more recent development is the cloud: computing services that are delivered over the internet. And then there is “big data”: the amount of information companies collect is exploding, as more and more data are gleaned from observing and interacting with consumers.

Oracle has answers to these shifts. The firm distributes its own open-source database, MySQL. It was also one of the first to offer “software as a service”, as cloud computing used to be called; 4% of its revenues now come from cloud services. And its database software is quite capable of dealing with huge amounts of data.

The problem is Oracle’s business model. Selling old-style corporate software is not quite like sausage-making, but it is equally unappealing: a pushy salesforce persuades firms to pay a fat licence fee and then charges for maintenance (more than 20% of the list price per year). In the case of Oracle databases, most fees are high and per processor, which means things get expensive quickly, eating up IT budgets. So clients clamour for usage-based pricing, which rivals, such as MongoDB, offer.

Oracle has a good chance of keeping most existing contracts. But for many new online applications, firms will opt for alternatives, says George Gilbert of TechAlpha Partners, a consulting firm. This puts Oracle in a quandary similar to one IBM once faced. IBM pioneered Oracle-type databases, but it hesitated to sell the low-price servers needed to run them, to protect its mainframe franchise. That created space for disruptive newcomers—like Oracle.

Oracle has no intention of starring in a remake of IBM’s film (possible title: “The Innovator’s Dilemma”). Brent Thill of UBS, a bank, says that “It took them some time, but they now seem to know what they need to do.” Oracle’s sales force now focuses on consulting, rather than commissions. On September 28th, at its annual customer shindig in San Francisco, it will launch a new cloud-database service. But that still leaves Oracle’s pricing problem: how to maintain prices for its old customers, but be competitive for new applications.

All of which leaves the question of why Mr Ellison, who still owns 25% of Oracle, decided to step sideways now. Perhaps he just wanted to mark his 70th birthday—and the beginning of a slow separation. At any rate, the new job titles say little about who will run Oracle when he really does go. In the past he has suggested this might be Thomas Kurian, now the head of product development. Mr Kurian is still the man to watch when Mr Ellison retires, perhaps to the Hawaiian island he bought in 2012.

Article source: http://www.economist.com/news/business/21620196-larry-ellisons-job-swap-only-start-big-transition-firm-he-founded-transition?fsrc=rss

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