My position in Oracle (NASDAQ:ORCL), king of database software, constitutes roughly 9% of my portfolio. Some might think I'm crazy. I get that. But there's a reason for my so-called madness. To get at it, we'll need to debunk the three so-called threats to Oracle that have pervaded the market's consciousness. Let's begin with acquisition risk.
Threat 1: Acquisition risk is too great
Oracle has spent roughly $19 billion over the past year and a half to acquire several companies, including PeopleSoft, Retek, and, most recently, Siebel Systems. But these are only the most well-known deals. Others of note, although widely ignored in most press reports, are open-source firms Sleepycat and Innobase.
The conventional wisdom says that Oracle can't possibly integrate all of these firms into a coherent whole. That could be true, but history says otherwise. The database king has bought untold numbers of software companies and successfully integrated them into its business. Older purchases include Datalogix for manufacturing software and Treasury Services for risk-management software, for example.
Of course, the greatest risk in such circumstances is that customers will abandon the platform, but the truth is that database and application platforms don't go away easily. Once customers come to depend on them for essential business functions -- from accounting to marketing to inventory management -- letting go becomes, well, difficult. That's why customers demand heightened levels of support to stay with acquiring firms. Oracle has already proven that it's capable of such a feat. Take Rdb, for example. This database was produced and managed by Digital Equipment Corp. for years, before Oracle bought it in 1994. Today, there's still a support page at oracle.com and whitepapers for how to use Rdb with Oracle's latest platform, 10g. Is it really any wonder that nearly all of Oracle's customers renew their support contracts, including those inherited from acquired companies? (See page 23 of the latest 10-Q filing for more.)
Threat 2: Database sales are slowing
In the most recent quarter, Oracle's core database license revenue only grew 4%, or 9% in constant currency. That fell below expectations for double-digit gains. Well, so what? I'm not surprised, nor should you be. The truth is that Oracle's database business is changing for the better.
Let me explain. Although databases continue to be sold in multimillion-dollar deals and installed as client/server applications-- that is, installed on many servers and accessed by a bunch of network-connected computers -- more and more firms are turning to more lightweight options, including open-source alternatives such as MySQL. Oracle knows this and is trying to take advantage of it. Take the Innobase acquisition. Its InnoDB engine has long provided efficient storage and retrieval for the MySQL open-source database. Guess what that means? The minute you start looking at open-source options, Oracle is there waiting.
Of course, this pervasiveness comes with a price, since open source confers far less pricing power. But again, that's not what matters here -- account control does. And diving headfirst into the open-source world is exactly what Oracle needs to do to wrest that control from combatants like SAP (NYSE:SAP).
Why, you ask? SAP is heavily dependent on Oracle. Indeed, a thorough search of available data on the Web suggests that Oracle is used by anywhere between 10,000 (link downloads a presentation) and 16,000 SAP customers worldwide. Open source was implemented to help SAP marginalize the Oracle's influence over its 32,000 global customers.
Am I worried about slowing growth in the database business? Yes. But total dollar volume isn't yet the proper measure of success. Customer count is. And with its recent acquisitions, Oracle has grown its customer count substantially.
Threat 3: Oracle has too many tough rivals
In this section, I'm going to focus on SAP, because right now, Microsoft (NASDAQ:MSFT) is struggling. IBM (NYSE:IBM), although formidable with DB2, is no longer an applications company. And open source may be as much of an advantage as a disadvantage for the database king. That leaves SAP, bit player Lawson (NASDAQ:LWSN), and online customer-relationship software purveyor Salesforce.com (NYSE:CRM), a longtime peer of the recently acquired Siebel.
SAP is by far the biggest threat of the three. It leads in global applications software. It's offering incentives to users to switch as Oracle builds its Fusion suite of applications, which isn't due before 2008. Plus, the German company says it's gaining momentum: It claimed 200 customer wins from Oracle-acquired firms.
Yet SAP is also vulnerable. It has no database, and it has switched database partners more often than Colin Farrell at a celebrity speed-dating contest. In 1999, for example, it was IBM's DB2. Today, Oracle is the world record holder for pulling data from, and publishing to, SAP's Business Information Warehouse. Technically, that may not mean much, but in terms of business, it means that SAP is going to have a heck of a time extracting Oracle from its user base. SAP's pesky acquisition of a PeopleSoft tech support firm isn't even in the same ballpark.
And then there are the company's documented problems with idle installations of its customer-relationship management software. That's yet another area where Oracle can attack with its newly acquired Siebel products. Pugnacious Salesforce.com won't help, either.
A competitive strategy revealed
Here's the bottom line: Besides Microsoft, Oracle is the only firm on the planet that can offer a business every kind of software it needs to run a business. Microsoft's legacy, however, is in small-business software, and it has plenty else to worry about right now. That leaves our cash-generating giant locked in a head-to-head battle with SAP, but with a CEO whose penchant for winning is best described as admirable.
Am I worried about the declining database revenue? Yes. Do I think SAP could harm Oracle? No question. But do I think Oracle has the wrong strategy? No, it most definitely does not. Lower revenues may result in the short term, to be sure. But long-term, Oracle is as sturdy a business as there is in tech. And I'm still willing to bet my portfolio on it.
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Fool contributor Tim Beyers has never seen Colin Farrell at a celebrity speed-dating contest, but he thinks it might be fun. Tim owns shares of Oracle. You can find out what else is in his portfolio by checking his Fool profile . The Motley Fool has an ironclad disclosure policy .
