In a defensive move designed to shield itself from new competition from IBM, Microsoft and others, Oracle slashed prices on
its database software by some 50 percent. Oracle's current pricing structure is based on a formula that increases the monthly fee it charges its customers, as they enhance the performance of their hardware systems by adding more processors in complex multi-node CPUs. Customers that currently pay $ 3.25 lakh a month will see their monthly bill cut to just $ 1.6 lakh.
Oracle has seen IBM and Microsoft compete more effectively recently by offering lower prices than it is for similar database services. Many
companies with budget under pressure from the economic downturn, are looking for less costly alternatives.
"This is the right thing for Oracle to do. It moves Oracle into a better position with its customers," said industry analyst Betsy Burton of the
Gartner Group's Dataquest unit. She added that Oracle holds a 33.8 percent share of the database market, followed by IBM at 30.8 percent and Microsoft
at 14.9 percent.
In justifying the price cuts, Larry Ellison Chief, Oracle said that because Oracle offers better technology, its databases would run more
efficiently, and thus less expensive than competing solution. "We think IBM
and Microsoft will cease to be important components in the marketplace." Ellison added that a typical IBM's database would cost 65 percent more than
Oracle's competing product under the new pricing formula.
IBM quickly responded saying Ellison's math is incorrect. Instead Oracle's database is three to five times more expensive than the IBM counter part. "This stuff about having lower prices is all wishful thinking on Larry's part," said Jeff Jones, Director (Marketing- Database Division), IBM. Oracle customers will pay $ 40,000 per processor to license the company's latest '9I' database system, compared to $ 22,500 per processor for the IBM product.
Industry analysts said that while Oracle probably did not have much choice but to cut prices, the move does present a new concerns over the firm's future revenues and earnings. About 70 percent of Oracle's sales are generated by database software. Ellison countered that the lower prices will stimulate sales and make up the difference. The price cut comes as Oracle announced that fiscal fourth-quarter profits fell eight percent along with a 3.2 percent drop in sales to $ 3.26 billion from $ 3.37 billion a year ago.
But to Jeff Henley, CFO, Oracle, sales appeared to be recovering after sluggish
performance in the past six months. "We think and we hope that the worst is
over, but we can not be certain yet. In the US, people do feel like things are going to be better."
A trouble spot in Oracle's most recent quarter is sales of application software where Oracle competes directly with PeopleSoft, Siebel Systems and SAP. The company continued to cut costs-as it has in the past several quarters-and managed to put up flat per-share earnings. Ellison said he is optimistic that the new 9i database and application server products and 11i e-business software suite will pick up steam this year. "Our technical accomplishments this year position us for accelerating sales next year," concluded Ellison.