Who is afraid of the new IBM? Oracle is - IBM and Oracle are set on a collision course in the enterprise software market

A long time ago a whale lived in the IT sea called Big Blue. But Big Blue was no ordinary whale, it was the biggest killer whale ever. As the biggest creature in the IT sea (with 80%+ market share), all the other creatures relied on Big Blue to set the rules, which were its proprietary interfaces. If Big Blue changed its interfaces so a little fish (vendor) couldn’t interface with its mainframes, the little fish died, and Big Blue ate up its customers, thus becoming even bigger.

Eventually the sea god Neptune (the US government) lost its patience with Big Blue and threatened to break up its monopoly so the rules of normal competition could be observed. Then the IT sea began to grow healthily again, like other seas (markets). A long and expensive court case ensued and Big Blue was never quite the same again. Until now.

Today, IBM is no longer an aggressive tin-shifter nor the services company envisaged by Lou Gerstner, but a dynamic software vendor. In the last decade IBM has acquired 100+ software companies and has software revenues of c. $23Bn and 70,000 employees in its Software Group (it is almost exactly the same size as Oracle).

Just a few years ago Oracle boasted of being the biggest venture capitalist in Silicon Valley. Not anymore. In a thinly disguised reference to Oracle, IBM’s annual report says: “Today, many of our competitors are emulating our moves. For instance, several have gone on an acquisition binge to get into new spaces . . . largely to compensate for rapidly commoditizing business models”.

So why software? The 86% margin IBM gets on software is double what they achieve elsewhere. In addition, as McKinsey points out: “By pushing their products through a global sales force, IBM estimates it increased their revenues by almost 50% in the first two years after each acquisition and an average of more than 10% in the next three years”.

Analytics is the main thrust. In four years IBM has invested $12Bn in 23 analytics-related acquisitions including Cognos, Netezza, SPSS, and OpenPages. IBM’s resulting Business Analytics and Optimization (BAO) practice has 6,000 consultants and “enables clients to get far more value from their information . . . advanced analytics allow clients to see patterns in data they could not see before, understand their exposure to risk and predict the outcomes of business decisions with greater certainty”. IBM plans to grow its BAO business by $7Bn to $16Bn by 2015. These are big numbers.

Customers should consider IBM for their acquired analytics competencies, depth and breadth of product set, and services capabilities. However, customers should be mindful that IBM (as is Microsoft) is a product-centric organisation. IBM sees its differentials and value as being its size and power, and a $6Bn annual investment in R&D. Customer-centricity and market orientation do not appear central. Hence ‘customer delight’, ‘customer intimacy’, and ‘customer satisfaction and loyalty’ are likely to result from paid-for consulting rather than a deliberate strategy.

Oracle describes itself as: “the world’s biggest business software company … and seeks to be an industry leader in each of the specific product categories in which it competes and to expand into new and emerging markets”. This is a virtually identical strategy to IBM’s. And IBM also has a database (DB2) to counter Oracle’s strong position in the enterprise RDBMS market.

So an almighty clash of the titans is developing. IBM is saying to Oracle: “I’ll huff and I’ll puff and I’ll blow your house down!” Is Oracle made of straw, of wood, or of stone? Larry Ellison might have something to say about that. Let battle commence.