Oracle aims for $1 bn software 'hosting' business

Siobhan Kennedy

NEW YORK: Oracle Corp. on Thursday tried to breathe new life into its

strategy of renting software to customers over the Web, hoping the business can

help lift its flagging revenues by $1 billion annually.

The No. 2 US software giant hopes to build annual revenue from its so-called

software "hosting" business from about $50 million a year now to $1

billion a year in five years, Chief Financial Officer Jeff Henley said. This

would augment its roughly $10 billion in annual software and database sales.

The service, which manages customers' business applications from Oracle sites

rather than companies doing it themselves, "is relatively modest right now,

but we think it can be a multibillion revenue leg over the next couple of

years," Henley told analysts at a presentation in New York.

Oracle made its first foray into hosted software when it launched its

Business Online division at the end of 1998. The unit was renamed Oracle.com and

reemerged on Thursday under yet another new name, Oracle E-Business Outsourcing.

So far, Oracle has 200 companies renting its software over the Web. The aim is

to convert 25 per cent of its 12,000 applications customers over to the service

in the next 5 years, Henley said.

In April, the company will also announce plans to offer its database software

over the Web in the same way, Henley said. Oracle, which now owns a

20,000-square-foot hosting facility, plans to quadruple the size of such

holdings with a $60 million real estate purchase this spring.

Oracle, No.1 in the market for database software that manages huge amounts of

information, is seeking ways to boost its now-withering revenues from

applications -- software that automates such things as accounting and

purchasing. When Oracle reported its fiscal third-quarter results last week, it

said new applications sales had fallen more than 40 percent from the prior year.

By offering to eliminate the headache of installing and managing its

business-management software, Oracle is hoping to increase its sales and take

market share away from rivals SAP AG., PeopleSoft Inc. and Siebel Systems Inc.

Comfort level



Analysts said Oracle has a good chance of persuading customers to make the
switch. "I think there's a better comfort level when you're working with

the software vendor," said Amy Mizoras, an analyst with industry research

firm International Data Corp.

Mizoras noted that other software hosting companies, such as Corio Inc.,

haven't done as well because customers have been reluctant to cede control of

their applications to outside firms that know very little about the software.

"With Oracle, you're working with a company that does everything," she

added.

Other analysts cautioned that Oracle's success depended on its ability to

deliver one-size-fits-all software applications, much like Microsoft Corp.'s

Windows software can be used by just about anyone straight out of the box.

"Has Oracle advanced the software to a point where it truly accommodates

disparate users with a single, easy-to-manage version?" asked Bob Austrian,

an analyst with Banc of America.

Austrian said he could see users adopting Oracle's service to run

nonessential operations containing less sensitive data such as personnel records

and purchasing orders. Yet he did not entirely rule out a more widespread

uptake. "It's still early on the ladder," he said.

Not new



The notion of so-called "outsourced" or "hosted" services is
not new. Companies such as International Business Machines Corp. and Electronic

Data Systems Corp. have been remotely managing companies' hardware and software

systems for decades.

Only in recent years, however, have software companies like Oracle, SAP and

PeopleSoft started to offer the service. Software vendors charge an ongoing fee

for managing the software, on top of the upfront license fee that grants user

rights.

Oracle's monthly fee for providing hosting at its facility is equal to 5

percent of a customer's software license. The software maker charges somewhat

less -- 3 percent of the license fee -- to host the software in a non-Oracle

site. Oracle says customers are also better off outsourcing because the

arrangement typically saves them 50 percent of what they would have spent over

the total life of the software.

"We think it's the future for the software industry, let alone

Oracle," Henley said. "The bulk of customers are going to run their

software this way." "I'm excited to see that our competitor feels that

the market is growing," said Deepak Gupta, general manager of PeopleSoft

eCenter, that software maker's hosting division.

That's about where the similarities end. PeopleSoft recently signed a deal in

which Hewlett-Packard Co. will provide data centers and technical expertise for

its software users that choose the hosted route. "We don't think PeopleSoft

adds value by owning hosting centers. Our specialty is software," Gupta

said.