Oracle: A Tenuous Top Dog

Last week, IDC and Gartner released their 2005 reports on the state of the database market. While both have different figures -- total revenues from $13.8 billion to $14.6 billion -- they nonetheless show that the overall market is growing at somewhere between 8.3% and 9.4%. Still, there are storm clouds on the horizon for the major players in the industry.

Oracle (Nasdaq: ORCL) remains the indisputable leader, with a nearly 50% market share. Other major players include IBM (NYSE: IBM) at 22% and Microsoft (Nasdaq: MSFT) at 15%.

Major trends are driving demand for databases, including the increased use of Web-based applications like online video, social networking, and on-demand business products. In addition, corporations are starting to replace old versions of their databases, and the regulatory climate created by Sarbanes-Oxley is requiring more intensive databases.

Yet according to IDC and Gartner, the major database players should be concerned: They face increasing competition from open-source technologies such as MySQL and Postgres. These essentially free programs let anyone download a few files from a website and set up a database with relative ease.

Major database players have long questioned open source's security, support, and scalability. However, over the past few years, venture capital has flowed into open-source companies, resulting in considerably improved software. Google (Nasdaq: GOOG), Yahoo! (Nasdaq: YHOO), and Amazon.com (Nasdaq: AMZN) are heavy users of open-source software, including databases.

"To assess the potential threat of open source," Ilan Sehayek, co-founder of open-source enterprise software company Jitterbit, told me, "a different measure must also be considered - installed base. If you measure the rate of growth of developers and business users downloading MySQL or Postgres and using it as a free alternative, it's easy to see why companies like Oracle have had to introduce [free] products such as Oracle Express."

Competition is a good thing for customers. Open source should help increase the quality of software while driving down down prices. But open-source software may also erode the profitability of the core businesses of Oracle and other database companies. That's why Oracle has been moving into other software segments, such as enterprise resource planning (ERP), which manages payroll, purchasing, inventory, and order tracking.

It'll have to keep moving, however: Open source is entering those segments as well.

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Fool contributor Tom Taulli does not own shares mentioned in this article.