The Database Report – October 2005

Hello again, and welcome to the third quarter edition of The Database Report. It was another interesting quarter for the DBMS market place highlighted by several acquisitions, some hirings, a
semi-resolved lawsuit, and, as always, big company financials. So let’s not waste any time digging right in.

Oracle Continues Its Acquisitive Ways

It would seem that the biggest news of the quarter is the lack of news. By that I mean that Oracle continues its acquisition binge in the applications market. It would have been bigger news if
Oracle had changed its ways and stopped acquiring more technology, wouldn’t it?

Starting the new quarter in early July, right where it left off the past quarter, Oracle announced another acquisition. This time the target was a privately held retail software maker named
ProfitLogic. This was a small deal when compared to Oracle’s recent past and upcoming future acquisitions. Since ProfitLogic was a private company the financial terms of the deal were not
disclosed.

Headquartered in Cambridge, Massachusetts, ProfitLogic was a supplier of software that analyzes customer demand patterns to assist retailers in improving the accuracy of their sales forecast and
pricing actions.

But, of course, Oracle was not done – not by a long shot. In early August, Oracle turned its sites to India and bought a controlling stake in i-flex Solutions, an Indian banking software vendor.
I-flex, based in Mumbai, offers a wide range of software for corporate, investment, and retail banking.

Although not a complete acquisition, Oracle agreed to buy Citigroup’s 41% equity interest in i-flex (worth $593 million). Oracle also announced an open offer to purchase up to an additional 20%
ownership interest in i-flex (worth $316 million). Following regulatory clearances, Oracle is expected to become the majority shareholder of i-flex through these transactions.

Oracle indicated that i-flex will continue to operate under current management and remain a publicly traded company, but product development, sales and marketing will be aligned with Oracle. In
early September, Oracle indicated that it could eventually move to gain full control of i-flex. John Wookey, Oracle’s senior vice-president for application development said, “There is always a
possibility that we might go on to acquire total control of i-flex but nothing is slated for now.”

And then, late in the quarter, Oracle pounced again, this time on Siebel Systems. This acquisition is a big one. Announced in mid-September, Oracle agreed to acquire Siebel for approximately $5.85
billion. Speculated about for years, this acquisition, coupled with Oracle’s already strong position in CRM software, will place Oracle firmly in the number one position for CRM applications. Of
course, other competitors remain (e.g. SAP, salesforce.com, and RightNow Technologies), but Oracle appears to be well entrenched at number one, at least for the time being.

The terms of the deal call for Siebel shareholders to receive $10.66 per share either in cash or Oracle stock for each share of Siebel stock held. One stipulation: no more than 30% of Siebel’s
common shares may be exchanged for Oracle stock.

Siebel Systems was founded by Tom Siebel, an ex-Oracle salesman, in 1993. Although Siebel has struggled of late, the company boasts over 4000 customers and more than 3 million users of its
software.

Clearly, Oracle is assembling a juggernaut of packaged application software and they will be a major player rivaling SAP for market dominance. Of course, questions remain. What will be the impact
of these acquisitions (predominantly Siebel) on Project Fusion, Oracle’s on-going project to integrate and assimilate all of the acquire applications into a seamless offering? Oracle claims there
will be no impact, but I fail to see how that could possibly be the case. And Oracle claims that it will continue to support, market and sell Siebel’s CRM applications. But just how many different
CRM packages can Oracle continue to maintain? Oracle now has three different CRM platforms – the original Oracle CRM application, PeopleSoft and Siebel. Each has its own customer base who will
expect to see consistent updates, support and features. Eventually, all of this CRM stuff will have to be weaved into the fusion. And Oracle will have to be careful to analyze and ruthlessly choose
the “best of breed” functionality from its various offerings, even when that functionality comes from Siebel instead of Oracle’s “legacy” offerings.

It seems to be clear that there is a shift in the industry away from “best of breed” applications toward super-vendors that can supply all (or most) of your packaged application needs. Of course,
even with SAP and Oracle as the two ton gorillas of this market, it is still dominated by many, many smaller companies offering targeted application solutions. But this too may change. However,
Larry Ellison, Oracle’s flashy CEO, has indicated that it would be unlikely for Oracle to do another major acquisition for some time. Of course, this does not rule out several little ones!

But what of possible anti-trust problems for Oracle as it attempts to swallow Siebel? I doubt we’ll see any. It seems unlikely that the United States Department of Justice would want to slog back
into this argument after losing quite dramatically when it tried to stop Oracle from acquiring Peoplesoft. So this acquisition will almost certainly occur.

A bigger concern for Oracle’s customer base is what will happen to innovation. How can Oracle devote time to integrating and fusing its many disparate offerings into a set of cohesive
applications, while at the same time delivering new and useful functionality. This is always the challenge of integrating acquired technology. I experienced many of these frustrations first-hand
when I worked at Platinum Technology during its acquisition binge in the 1990s.

Finally, there is the issue of Tom Siebel. The word on the street is that Oracle (well, more accurately, Larry Ellison) is not necessarily thrilled with executives who bolt the company. But all
indications from both sides are that Mr. Siebel will stay on with Oracle, at least for some time. It will be interesting to see how that works out. Ellison and Siebel have verbally sparred over the
years and Siebel’s personality as an entrepreneur is similar to that of Ellison’s. Actually, this situation most closely resembles the issues that Ellison had with Peoplesoft’s former CEO, Craig
Conway. But Conway was shown the door long before Oracle gobbled up Peoplesoft. At least Tom Siebel gave in to reality and buddied up to Oracle during the acquisition of his company. But still, I
wonder, “How long will Tom last in Larryland?” I guess if he waits long enough he could become the heir apparent when (if) Larry ever finally decides to retire…

On the competitive front, SAP is not sitting quietly on the sidelines. Oh, it might seem that way with all the noise Oracle is making, but SAP has Oracle squarely in its sights. Early in the
quarter SAP enhanced its Safe Passage offering targeting small to midsize companies. The goal of the program is to attract Peoplesoft and J.D. Edwards customers away from Oracle. The program offers
partner support and conversion credits for the original licensing fees paid by the customer for Peoplesoft and J.D. Edwards software.

Of course, the big question looming over this market continues to be “what is Microsoft’s long-term strategy for business applications?” At any rate, one thing remains certain – the applications
war continues on!

A Tale of Two Quarters – The News in Oracle’s Numbers

Oracle’s financial results for both its fiscal fourth quarter (which ended May 31st) and the first quarter of its fiscal new year indicate that the Oracle applications acquisition strategy appears
to be paying off.

First of all, Oracle’s fiscal 2005 fourth quarter revenue came in at $3.88 billion, a jump of 26 percent over the same quarter of the previous year. These results seem to have been driven by its
Peoplesoft acquisition because sales of new applications licenses were particularly robust, growing 52 percent to $350 million. Of course, Oracle would not break out its application revenue so it
is not possible to say which applications (Peoplesoft applications or “legacy” Oracle applications) were driving the growth.

Total software revenue increased by 24 percent over the same quarter a year ago (to $3.1 billion). New license revenue grew 23 percent to $1.6 billion and license updates and product support
revenue grew 26 percent to $1.5 billion. Revenue from services revenue grew 35 percent to $755 million.

Focusing in on the database, new license revenue for database and middleware increased by 16 percent. Oracle indicated that its database business was driven by optional add-ons such as RAC (Real
Application Clusters), which grew 27 percent from a year ago.

Oracle also modified its guidance for the upcoming quarter, indicating that it expects total revenues to grow in the range of 32 percent to 34 percent to $2.9 billion. Furthermore, Oracle was
aiming for 20 percent earnings increases over the next 5 years.

Then, late in September of this quarter Oracle unveiled its 2006 first quarter financial results. Earnings for the quarter were 10 cents per share, or $519 million, on revenues of $2.77 billion.
These results were 25 percent better than the $2.22 billion posted a year earlier for the same quarter (clearly not within the 32 to 34 percent). Oracle’s sales of business application licenses
totaled $127 million, an 84 percent increase from the same time last year (again, a nice, big jump).

Indeed, all was not rosy in these numbers. Database revenue was somewhat stagnant coming in at $502 million, not even 2 percent higher than last year’s $494 million. Of course, Oracle downplayed
the impact of these numbers indicating that last year sales of new Oracle database licenses grew 19 percent, so the number it was trying to beat was uncharacteristically high.

It is also important to note that the upgrade business was healthy for Oracle – and that is important because Oracle makes more money on upgrades these days than on new license sales. Upgrades for
database software were up 13 percent over last year at $1.06 billion, and applications upgrades more than doubled from $238 million last year to $580 million this year.

So, applications are growing – predominantly, it would seem, by acquisition. And database sales are slowing, at least somewhat. It will be interesting to see how this balancing act plays out over
the next couple of quarters as Oracle continues to focus more on applications and its fusion project. Will it neglect its core database business?

Salaries, Bonuses, and Stock Options, Oh My… Anti-Trust and Lawsuits?

It is always fun to examine the amount of money paid out to software moguls and millionaires – so let’s take a quick peek at the salaries of Oracle’s executives. For the fiscal year ended May
31st, Larry Ellison was paid $7.5 million US in salary and bonus; and that is just about double the $3.9 million he was paid the previous year. In addition, Ellison also received 2.5 million stock
options for the fiscal year (compared with 900,000 in the previous year). And Oracle also paid $922,845 for Ellison’s “required” home security (compared with $531,000 for home security in the
previous year).

Of course, Ellison was not the only Oracle executive to be handsomely paid. Safra Catz, received a fiscal 2005 salary and bonus of $5.7 million ($2.7 million the previous year). Catz also was given
options on 750,000 shares (compared to 700,000 in the previous year). And Oracle’s chairman, Jeff Henley was paid $3.7 million in salary and bonus in fiscal 2005, up from $1.6 million the previous
year. He also was rewarded 750,000 options, up from 700,000.

Clearly, it is good to be an executive at Oracle these days! But not everything was clear skies and happiness at Redwood Shores. In early September the Fair Trade Commission launched an
investigation into Oracle, for a possible breach of antitrust regulations. The FTC is checking into accounts that Oracle bundled database management software with other products, unfairly
inhibiting its competitors.

Larry Ellison also reached an agreement to settle a lawsuit that charged he was engaging in insider trading in 2001. The lawsuit charged that Ellison sold nearly $900 million shares ahead of news
that Oracle would announce earnings that would not meet expectations.

Ellison agreed to pay $100 million to charity over the course of five years to resolve the lawsuit that had been pending for almost five years. The settlement is rather unusual and will require the
approval of Oracle’s board. Usually in these types of lawsuits, damages are paid directly to the company. If this agreement is approved, it will be one of the largest payments ever made to resolve
such a shareholder suit. But at least it would be resolved.

More Oracle News

And in the on-going executive turnstiles at Oracle, Greg Maffei was appointed as CFO, and one of three co-presidents. Maffei was CFO at Microsoft from 1997 to 2000, and recently had served as the
chairman and CEO of 360networks, a provider of broadband communications services.

The other co-presidents at Oracle are Safra Catz and Charles Phillips. Catz, who had been serving as interim CFO since the departure of Harry You, relinquished CFO responsibilities after Oracle
announced its fiscal fourth quarter earnings.

Speculation ran rampant in the press that the hiring of Maffei was a reaction to Oracle losing ground to Microsoft on the Windows platform for its database. I doubt that there was any real
connection between the two, though. Maffei is simply a good choice for CFO with a solid resume and background in technology and finance.

Oracle also added Tod Nielsen to its marketing group. Nielsen formerly worked at BEA Systems, CrossGain, and Microsoft, as well. Maybe Oracle is targeting former Microsoft execs after all?

Oracle also hired Omar Tazi into a position called Chief Open Source Evangelist. Oracle hired Tazi away from Orbeon, and XML infrastructure company, where he was CEO. This hiring raises the
question of just what, exactly, and open source evangelist will do – and what impact the position might have on the bottom line of Oracle. At any rate, it clearly indicates Oracle’s intent to
participate very actively in the open source world – hopefully it means Oracle will contribute more to the open source community.

On the technology side of things, Oracle released R2 of its database 10g software into general availability. As discussed last quarter, most of the new features of this release involve providing
better management capabilities. But there are some performance goodies (better sorting techniques and the Automatic Workload Repository for performance troubleshooting), security improvements (new
types of data encryption), features to ease development on the Windows platform, and improved XML support.

Also on the technology front, in early August Oracle bought the rights to Context Media, Inc., a content integration provider. This acquisition can help Oracle to catch up in the content management
space that IBM currently leads (at least in terms of DBMS providers).

On the pricing front, Oracle succumbed to industry pressure on multicore licensing. According to terms on the Oracle Store web site, for the purposes of counting how many processors need to be
licensed, a multicore chip with “n” cores will be multiplied by 0.75. Oracle will then round up fractions to the next whole number. Basically, Oracle is giving in a bit and not forcing a
one-to-one relationship and forcing you to pay full price for each core. So, a multicore chip with 14 cores would be priced as if it were 11 processors (14 x 0.75 = 10.5, round up to 11). The
revised wording seems to be a response to competitors that had previously explicitly clarified their position on the matter (e.g. Microsoft and IBM).

IBM Creates a New Data Governance Council

Turning our attention away from Oracle, IBM, along with several other companies and organizations, created a new Data Governance Council. The goal of the council is to help corporate technology
users look into methods of better protecting their data against hacker attacks and other breaches.

Data governance is the practice of examining the ways that companies manage appropriate access to their critical data by measuring operational risk and mitigating security exposures associated with
access to data. The group will look to redefine the management of data governance policy, the impact of policy on business processes and practices, and the enforcement of policy in IT
infrastructure, content and organizational behavior.

Such a council is needed in this day and age of increased government regulations such as Sarbanes-Oxley and HIPAA. The council will research and explore numerous areas that impact data management
and governance including security, privacy, compliance and risk. Members of the council include ABN Amro, American Express, Bank of Montreal, Bell Canada International, Corticon Technologies,
Danske Bank, Deutsche Bank, Fidelis Security Systems, Great American Insurance, Huntington Bank, KeyBank, Merrill Lynch & Co., Novartis, Nassau County NY government, North Carolina State
University, Northwestern Mutual Life Insurance, Nova Southeastern University, United Nations Development Program and the World Bank.

The Big News at IBM

But the big news at IBM this quarter was the retirement of Janet Perna after more than three decades at IBM. During her tenure as general manager of data management solutions for the IBM Software
Group, Perna raised the visibility of DB2 and the competitiveness of IBM as a supplier of DBMS and related software. In August, after Perna retired, Ambuj Goyal was named to replace her. Goyal was
previously the general manager of Workplace, Portal and Collaboration for IBM’s Software Group.

Keep in mind that the data management solutions group is not just IBM’s DBMS software (DB2, Informix, IMS, U2), but also the content management solutions, the information integration products, the
recently acquired Ascential products, AlphaBlox, Entity Analytic Solutions and all of IBM’s other business intelligence and data warehousing solutions and products.

Perna’s legacy is the redemption of DB2 with it firmly ensconced in either the number one or number two position in the market (depending on which analyst group you believe). Not a bad job given
her competition: the Oracle database goliath and the monster Microsoft. The looming question is, of course, can Mr. Goyal continue the growth of IBM’s data management business?

And What of IBM’s Financial Performance?

After a disastrous first quarter, IBM announced its second quarter financial results in mid July. Even though overall revenue at $22.3 billion was down slightly over last year, both revenue and
earnings exceeded Wall Street expectations.

Earnings per share were $1.14, where analysts had been expecting adjusted earnings of approximately $1.03. Revenues from software were $3.8 billion, an increase of 10 per cent.

IBM Makes an Acquisition This Quarter, Too

In early August, IBM announced the acquisition of DWL Inc., a privately-held supplier of customer data integration software. Terms of the transaction were not disclosed.

Although the acquisition of DWL does not look like a big deal, it is a core component of IBM’s long-term master data management plans. The software helps organizations stitch together customer
information that is stored in disparate silos throughout their company. DWL further improves IBM’s capabilities for resolving and clarifying data that is used and referenced in multiple – and
perhaps confusing – ways.

This functionality is particularly useful when companies merge and need to pull together a common view of data. Of course, as most data professionals know, it doesn’t take a merger for a company
to use the “same” data in many different ways and in many different formats. DWL helps to resolve such issues. And DWL is just the latest in a line of acquisitions (Venetica, Trigo, Ascential)
that attacks the data integration problem.

Indeed, IBM is assembling a great lineup of data and content management and integration products.

And IBM Fixes a Flaw

Early in the quarter IBM corrected a security flaw in DB2 UDB for Linux, Unix, and Windows platforms. The exposure enabled users who already had access to the database to elevate their privileges.
It was found in versions 8.1.4 through 8.2.2.

The vulnerability was in DB2 UDB Enterprise Server Edition, DB2 UDB Workgroup Server (all Editions), DB2 UDB Express Server (all Editions) and DB2 UDB Personal Edition.

The Sun Shines on the Database

Early this quarter Sun Microsystems, a vendor not often mentioned in this quarterly report, announced its intention to seek an open-source DBMS solution for its Java Enterprise System and
OpenSolaris offerings. Basically, Sun indicated that it will look to incorporate open source DBMS technology into these offerings.

This is yet another feather in the on-going open source crusade that has exploded in the DBMS market. Of course, John Loiacono, Sun Microsystems Inc.’s executive vice president for software, did
not rule out the possibility that Sun could develop its own open-source database solution at some future point-in-time. However, he also noted that Sun is not going to create a large-scale
transactional DBMS to compete against IBM, Microsoft and Oracle.

In Other Open Source Database News

In early August at the Linux World conference, Novell and Dell announced plans to resell MySQL services. These are two of the higher profile companies that have signed on to sell subscription based
services for MySQL. Basically, the services amount to certified software updates, technical support and indemnification for enterprise customers using the MySQL database. Three three levels of
service (silver, gold and platinum) are available with costs ranging from $595 to $5,000 per year.

Sybase Upgrades its DBMS

Finally, Sybase released an upgrade of its Adaptive Server Enterprise (ASE) DBMS in mid September. Although it has lagged the big three (Oracle, IBM, and Microsoft) in market share, Sybase still
maintains the number four position in the market. The new version of ASE, version 15, adds features to support encryption and improved XML support data, as well as performance improvements.

Summary

And so ends another quarterly examination of the database management market. Thanks for reading… and be sure to tune in again next quarter when we look at the fourth and final quarter of 2005.

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About Craig Mullins

Craig S. Mullins is a data management strategist and principal consultant for Mullins Consulting, Inc. He has three decades of experience in the field of database management, including working with DB2 for z/OS since Version 1. Craig is also an IBM Information Champion and is the author of two books: DB2 Developer’s Guide and Database Administration:The Complete Guide to Practices and Procedures. You can contact Craig via his website.

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