New Software LandscapeNew Software Landscape

Just days after Oracle's successful $10.3 billion bid to acquire PeopleSoft Inc. last week, Microsoft sent letters to PeopleSoft customers urging them to migrate their PeopleSoft applications running on Unix systems, mainframes, or AS/400s to Windows servers. Or, hey, why not consider shifting to Microsoft's own enterprise-resource-planning apps?

Oracle's acquisition of PeopleSoft, and Microsoft's quick-draw marketing effort, show how the software industry is shaping up for a handful of giants--Oracle, Microsoft, and SAP--that can jockey for strategic advantage by leveraging their middleware technology combined with their application portfolios. The acquisition is likely to accelerate changes that have been sweeping the software industry, as enterprise applications become the staging platform for automating business processes and getting work done over the Web. "Oracle is saying it's the center of an applications platform," says Sharyn Leaver, a Forrester Research analyst. "PeopleSoft strengthens them further."

It's a heady strategy, but business-technology buyers are looking for answers to some very tactical questions before embracing the merged vision. "We're going to be very conservative on the product expansion while [they] figure out what the product road map will look like," says Marc West, CIO of tax preparer H&R Block Inc., which runs PeopleSoft's ERP, human-resource, and financial applications on Oracle's database.

Nearly two-thirds of 310 PeopleSoft customers surveyed last week by information Research say they're not at all confident that Oracle will integrate PeopleSoft's products successfully into its own. Thirty percent are somewhat confident, and only 5% are highly confident.

CEO Larry Ellison didn't help his cause when, early in the quest, he said his plan was to kill off PeopleSoft's applications and migrate customers to Oracle apps. "We remember what he was saying a year and a half ago, and it's made us very uncomfortable," says Robert Robinson, business-systems supervisor at Durr Industries Inc., a manufacturing equipment maker that uses applications from J.D. Edwards, which PeopleSoft acquired in July 2003.

Ellison has backed off that stance and now says Oracle will continue enhancing current versions of PeopleSoft and J.D. Edwards applications and finish developing new releases of each application set, PeopleSoft Enterprise 9 and EnterpriseOne 6. Beyond that, Oracle will develop successor products using its own apps as the foundation and incorporate features from PeopleSoft's products.

Forty-six percent of business-technology professionals who own Oracle or PeopleSoft applications say service and support is the one thing that Oracle must get right in order to make the acquisition a success from a PeopleSoft customer standpoint, according to information Research, which surveyed 455 business-technology managers. Oracle president Charles Phillips promises that Oracle will provide technical support for PeopleSoft products for the next 10 years, even running on platforms other than Oracle's. For example, Oracle vows to support J.D. Edwards apps on IBM's iSeries servers, hardware Oracle's software doesn't support.

Other issues Oracle faces include merging the two companies' sales forces and reconciling how they price their software: PeopleSoft charges a single fee based on a company's annual sales, while Oracle prices its software according to the number of users or servers. PeopleSoft customers will be able to exchange PeopleSoft software licenses for equivalent Oracle successor application licenses at no cost, according to Oracle.

Among Ellison's many famous predictions is that IBM, Microsoft, Oracle, and SAP will dominate the software industry, and the PeopleSoft acquisition is a step toward that vision. While Oracle always has been a market leader with its platform and middleware software--led by its relational database--it has lagged SAP and PeopleSoft in application sales. Even with 12.4% of the ERP application market, the combined companies will fall a distant second to SAP, which recorded application sales of $7 billion in fiscal 2003 and holds 20% of the market, according to research firm IDC.

SAP, meanwhile, is challenging Oracle in the middleware realm with its NetWeaver application-integration platform. NetWeaver makes it easier to modify or cobble together parts of SAP's applications or build a composite app with new code and parts of old applications. Still, NetWeaver is just now being picked up by early adopters. "Even in SAP shops, they haven't banked everything on NetWeaver," Forrester's Leaver says.

The successful software company of the future, both SAP and Oracle seem to be saying, will be focused on supplying application components on a network. And those components need to be marshaled as Web services using the application supplier's tools.

Microsoft, whose database, application server, and other platform software compete with Oracle, has spent $2.4 billion acquiring vendors such as Great Plains Software to build up an application portfolio. IBM, which doesn't sell enterprise applications, vies with Oracle with its WebSphere application server, Rational development tools, and DB2 database products.

Oracle has been strengthening its development and middleware offerings as well. It has renewed an emphasis on Oracle Application Server and has added ease-of-use features to its development tool, JDeveloper. Ellison has even mentioned middleware maker BEA Systems Inc. as an acquisition possibility.

Yet there are many challenges to making an acquisition the size of Oracle-PeopleSoft work. PeopleSoft has 11,500 employees, and keeping the most talented is rated as the most-critical post-merger task by 23% of survey respondents. With vastly different cultures, Oracle could lose key pieces of the PeopleSoft development team, which Ellison has said is one of the prizes of the acquisition.

The PeopleSoft HR applications that Royal Caribbean Cruises Ltd. uses won't wither in the background of the combined companies, says Richard Shapiro, manager of IT program administration at the cruise company. He's confident Oracle will maintain the apps, in part because customers have so much invested in them that they'll keep them around and continue paying to support them. "The PeopleSoft product isn't going away," Shapiro predicts.

Berlin Packaging CIO Steve Canter uses PeopleSoft financial, manufacturing, and supply-chain software to run the more than $200 million-a-year business, and he isn't worried short term. Canter is upgrading all those applications in February to version 8.8, so he won't need any major upgrade for several years. Yet he'd like information about the support organization and fees, as well as Ellison's long-range strategic plan. Canter prefers a few close partnerships with IT vendors, and he isn't sure whether Oracle will be that. "Logically and rationally, my brain says we should be able to form that kind of partnership, because the customer base is what they bought PeopleSoft for," he says. "On the other hand, I have reservations because the messages from Oracle have been somewhat contradictory."

Many PeopleSoft customers seem willing to give Oracle a chance. Sixty-one percent of the PeopleSoft users surveyed say they'll listen to Oracle's upgrade plan before shopping around for another vendor, while only 11% say they won't wait. Says Robinson, of PeopleSoft customer Durr Industries, "There is a chance this can work."
--with Tony Kontzer