Oracle Abandons 9i's Controversial Pricing PolicyOracle Abandons 9i's Controversial Pricing Policy

Two blue-clad astronauts in search of better software flashed across a screen at Oracle's headquarters last week as the company prepared to launch its 9i database. Behind the stage, a black banner urged attendees to "Think 9i." Larry Ellison has never been one for subtlety.

Jabs at IBM's marketing campaigns are plentiful at Oracle these days, as the company tries to stave off a challenge from its rival to its market-leading database software. Now Oracle customers have something potentially more valuable: a 30% price cut when upgrading to the 9i database, thanks to the vendor's decision to abandon its 2-year-long experiment with licensing fees based on the speed of system processors. Oracle9i Standard Edition now carries a list price of $15,000 per CPU. Oracle9i Enterprise Edition, used by about 85% of customers, is priced at $40,000 per CPU. Earlier this month, Oracle repriced its 9i Application Server at $10,000 per processor for the Standard Edition and $20,000 for the Enterprise Edition.

"Our software is cheaper, not more expensive, than IBM's," says Ellison, Oracle's chairman and CEO. "We've moved to the same metric they're using to make it easier for customers to compare our pricing to their pricing."

What's less clear is whether Oracle's new pricing plan can stop IBM and Microsoft from gaining ground on fast-growing Windows and Unix platforms, and its effect on Oracle's recently stagnant financial performance. Oracle controlled 33.8% of the $8.8 billion database software market last year, vs. IBM's 30.1% and Microsoft's 14.9%, according to market researcher Gartner Dataquest. But Microsoft's SQL Server is now the best-selling database on Windows, and IBM has nearly doubled its Windows market share during the past two years. IBM also claims rapid growth of its DB2 Universal Database on Unix, and in April struck a deal to acquire Informix Corp., which claims 100,000 Unix and Windows database users.

"People are definitely considering alternatives to Oracle because of the pricing," Gartner analyst Betsy Burton says. IBM has touted the lower cost of its product compared with Oracle's under the latter's old power-unit pricing--DB2 lists at $20,000 per processor. Microsoft SQL Server 2000 Standard Edition and SQL Server Enterprise Edition list for $4,999 and $19,999 per CPU, respectively. According to a survey of 225 CIOs in May by Morgan Stanley Dean Witter, 10% of respondents say IBM's aggressive DB2 pricing caused them to at least consider switching database vendors.

Customers also have complained that Oracle8i's power-unit pricing strained their budgets when IT departments upgraded to computers with faster CPUs. "We all know chip speed doubles every 18 months," says Tony Scott, chief technology officer for IS at General Motors Corp. But doubling chip speed doesn't necessarily result in a doubling of database performance, he says, making it hard to justify licensing costs that rise with processor speed.

Ellison argues that Oracle's database costs less to operate because it requires less hardware, networking infrastructure, and IT-management personnel. This week, he says, Oracle will release a "simple formula" for converting power units into CPUs, for database customers covered by upgrade contracts.

"I'm not losing any sleep" over the pricing change, says Charlie Bell, VP of technology infrastructure at Amazon .com Inc. A bigger concern, he says, will be the hardware and labor costs as Amazon upgrades more than 115 instances of Oracle databases during the next 12 months.

Still causing restless nights for Oracle investors are fourth-quarter sales, which the company says will be flat from a year ago when it releases results on June 18, and earnings, which analysts expect will be 14 cents per share, down from 31 cents (excluding one-time investment gains) last year. Oracle's historically huge fourth quarter--during which it typically books a third of its revenue--arrived smack in the middle of an economic slowdown.

Oracle executive VP Charles Rozwat says the new database pricing will help. "There will be less pressure for us to discount," he says, and that could improve profit margins. "By lowering our prices and simplifying the model, we will win more projects."

Photo of Ellison by Paul Sakuma/AP