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June 15, 2015

Oracle Sales Erode as Startups Embrace Souped-Up Free Software

Dan Wagner, the chief executive officer of U.K.-based mobile payments company Powa Technologies Ltd., poses a challenge for database giant Oracle Corp.

Wagner’s company last year began shifting away from pricey products from Oracle and International Business Machines Corp., replacing them with open-source software, which is freely available and can be modified. Now, Wagner said the closely held company is converting virtually all of its operations to free database software.

“They scale and operate extremely well and they don’t cost anything,” Wagner said.

Other companies share Wagner’s view and are shifting to software whose code is public. While the threat to Oracle has been around for years, it’s becoming more intense with recent improvements that make open-source technology more reliable — and appealing to a new generation of multibillion-dollar startups, said Terilyn Palanca, an analyst at Gartner Inc.

“There was pessimism for a decade on whether those things could stand up. The question is largely resolved,” she said. “This open source, this open core model, is something we’re going to see growing and growing through the years.”

Sales Decline

The impact shows up in Oracle’s sales of new software licenses, which have declined for seven straight quarters compared with the period a year earlier. New licenses made up 25 percent of total revenue in fiscal 2014, down from 28 percent a year earlier — a sign the company is becoming increasingly dependent on revenue from supporting and maintaining products at existing customers and having a harder time finding new business. Oracle reports fiscal fourth-quarter earnings next week.

To blunt this, the Redwood City, California-based company is expanding efforts in cloud computing, which will let it sell packaged high-margin services to customers. That may help balance the slowdown in the basic business. It also operates an open-source database called MySQL.

“Does the cloud-related business grow quickly enough to offset any long-term weakness in new software licenses? To us the answer is yes,” said Bill Kreher, an analyst at Edward Jones & Co., who has a buy rating on Oracle. “I would expect to see Oracle continue to gain market share within the cloud.”

Deborah Hellinger, a spokeswoman for Oracle, declined to comment.

Companies contemplating a move away from traditional database sellers such as Oracle have essentially two options: hire internal engineers to corral various free open-source databases, or pay the startups behind the free technologies for some must-have features. Licensing Oracle’s database can cost hundreds of thousands of dollars, depending on which of its numerous features customers choose to use.

Free Programs

One of the open-source technologies is the Cassandra database, which was created last decade and has been widely used by companies such as Apple Inc. and Netflix Inc. Though some companies develop and run Cassandra themselves, others go to the main backer, the startup DataStax Inc., for technical features they may not have the expertise to develop themselves.

DataStax, for example, has a customer that paid about $500,000 in Oracle software licenses and now spends $90,000 with DataStax for a similar project, said Matt Pfeil, DataStax’s co-founder. That price difference has started to have a major effect in the industry.

“I think I’ve been in this industry too long to use Oracle,” says Kellan Elliott-McCrea, chief technology officer of Etsy Inc. “I saw so many of my peers in the late ’90s crashing and burning and spending all of their money on Oracle.” Instead, Etsy, an online marketplace for hand-crafted goods, runs on a hodge-podge of open-source databases, primarily MySQL.

‘Sweet Spot’

Not all applications are well-suited to open source, as the systems made by Oracle and others still have capabilities far in excess of the free systems, Palanca said.

“You’re still going to have a class of applications for which these open-source solutions are not yet ready, and that is the continued sweet spot for Oracle,” she said.

Even some really big customers are finding ways to increase their reliance on upstarts. Open source is changing the type of technologies Goldman Sachs Group Inc. deploys in systems relating to messaging and databases, said Don Duet, the co-head of technology at Goldman Sachs. Many of these technologies became “standard parts” of Goldman’s computing infrastructure in the last two years, he said.

“It’s hard not to go into our datacenter and see a tremendous amount of open source running our applications and middleware,” he said. Goldman Sachs recently invested in a funding round for MongoDB Inc., another open source database provider.

Startups’ Shift

A Bloomberg survey of 20 startups valued at more than $1 billion supports the trend. The survey, which included companies such as Cloudflare Inc. and Pinterest Inc., found they placed open-source technologies at the heart of their businesses, with the exception of DocuSign, which had built around Microsoft’s SQL Server.

None of the companies surveyed indicated they had a large Oracle database deployment for their main services, though many used bits of Oracle software to run aspects of their organizations. Uber Technologies Inc., the car service, has committed heavily to Oracle via a worldwide rollout of the company’s E-Business Suite software, but job listings and presentations by Uber employees indicate it relies on a customized version of the free MySQL for its software.

“A lot of the startups now go with MySQL or less expensive options,” said David Wolff, the CEO of Database Specialists, a database consultancy. “The only thing that people complain about with Oracle is how much it costs.”

Extra Features

Companies can pay Oracle to get extra features of MySQL for $2,000 to $10,000 per computer it runs on, but none of the companies indicated this was the case. Others including Alibaba Group Holding Ltd., Facebook Inc., and Google Inc. have even built on MySQL to create their own free variant called WebScaleSQL.

Still, Oracle has its fans. Zach Nelson, the CEO of NetSuite Inc., a cloud enterprise resource planning company, described Oracle’s software as “the best transaction database,” and said it made sense to use it.

“It only costs us 6 percent of revenue, and that’s nothing,” Nelson said.

As open-source databases continue to improve, there may be less reason to pay for Oracle’s products.

“I think more and more organizations are starting to realize the reason Oracle is charging that much is because there’s incredibly sophisticated technology in Oracle,” Palanca said. “Organizations are realizing they don’t need that for everything anymore.”Dreambox DM7080 HD PVR
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