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Oracle Corporation: IBM Threat Is Down, Microsoft Threat Is Up

 February 03, 2013 09:13 PM

(By Mani) International Business Machines Corp. (NYSE: IBM) has long been Oracle Corporation's (NASDAQ: ORCL) primary database rival at the high end of the market, for tier-one workloads and for enterprise-wide deployments.

Now, the bigger threat to Oracle's core database business isn't coming from IBM, or SAP HANA or emerging open source alternatives such as MongoDB or Hadoop, but from Microsoft Corporation (NASDAQ: MSFT).

[Related -Microsoft Corporation (MSFT) Earnings Preview: What To Watch In Q2 Results?]

The key Microsoft advantage is its SQL-based servers deliver cost advantages for customers. The trend is evident from the latest second quarter results of Microsoft. Server & Tools revenue rose 9 percent to $5.19 billion, driven by double-digit percentage revenue growth in SQL Server and System Center.

"Countless customers have told us that the cost advantage of SQL Server is so compelling that their deployment of Microsoft SQL Server databases is ramping," BMO Capital Markets analyst Karl Keirstead said in a client note.

However, this trajectory does not appear to be impacting Oracle, and experts are wondering if SQL Server is taking more share from IBM DB2. Oracle's software revenue for the second quarter rose 10 percent while hardware systems revenue fell 16 percent.

[Related -International Business Machines Corp. (IBM): What To Watch In Q3 Results?]

"We've more recently concluded that a larger-than-recognized portion of SQL Server's revenue growth is coming via price increases put in place by Microsoft, not by unit displacements of Oracle databases," Keirstead said.

On the other hand, IBM appears less threatening these days. Constant-currency growth in IBM's big Information Management segment, in which database revenues are the largest segment, fell to 3 percent for the past three quarters, declining from 7-9 percent growth in the second half of 2011, and could have been negative if not for acquisitions.

Very few customers that are ramping their deployments of DB2, but plenty of them are migrating off Cognos, and despite its deep roots in hardware, IBM seems to be playing catch-up against Oracle and to some extent even SAP in the market for engineered systems.

"While Netezza data warehouse appliances continue to generate considerable buzz, IBM's new PureData appliances were launched years after Oracle brought Exadata to the market, and in our view are relatively undifferentiated," Keirstead said.

However, Oracle's database business is likely to experience above-average industry growth over the next few years. The growth is due its leading IT supplier positioning for its customers in two megatrends in the form of data center consolidation, big data, and potential for a refresh of the product suite.

Oracle could add approximately $500 million in total annual revenue with each additional 1 percent share gain in the storage market, which was valued at $13.5 billion in 2011 by market research firm IDC.

As data volumes grow exponentially, new systems and tools are needed to analyze them for better business outcomes and for the regulations that mandate storing them. Oracle's big data storage options provide substantial performance improvements, bottleneck reductions, cost savings, and infrastructure simplicity, which are attractive selling points.



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