July 22, 2005 8:43 AM PDT

Oracle eyes industry-based structure, new pricing

Oracle will gradually reorganize itself around specific industries and seek alternative pricing models that are tied to how customers use its software, according to company President Charles Phillips.

The software giant intends to acquire application providers that specialize in particular industries as a way to expand its market share, Phillips said in an interview with CNET News.com.

Oracle has identified about eight industries where it has a large number of customers. Through acquisitions, it will bulk up its sales skills in those market segments and look to create separate business units. Phillips did not specify which industries Oracle plans to target.

"As we build out products in verticals and make acquisitions, we create organizations around them," Phillips said. "We'll do more of that but build it incrementally over time. It doesn't make sense to do that until you have more content in a particular industry."

The template for an industry-based structure comes from Oracle's acquisition in April of retail application specialist Retek, which forms the basis for Oracle's retail business unit.

Buying application companies focused in particular industries will provide Oracle with that industry "content" in the form of software and people with the appropriate skills, he said.

"The general strategy is to go deep where we're already strong," he said. "We own their back office; now we want to extend to the front office...If we get those eight right, there's plenty of opportunity and growth."

IBM reorganized its software sales structure in late 2003 to build and sell software tailored to specific industries. Microsoft is doing the same and, like IBM, is seeking out application partners with expertise in particular industries.

Phillips also said that Oracle is experimenting with pricing plans that represent a break from traditional methods, such as charging per server processor.

The company has already done some deals where customers pay for software on a per-employee basis or per store in the retail industry. The pricing mechanisms will vary with different industries, he said.

"We'd love to get to a mode where we're looking at the number of employees served, the number of checks processed--you name it, some business metric--and take it out of the technology realm and tie our success to their success in terms of business," Phillips said.

Separately, Phillips said that in September current customers of J.D. Edwards and PeopleSoft applications will have the option to purchase Oracle's Fusion Middleware with upgrades.

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Conventional wisdom says big tech acquisitions don't work. Well, Oracle (ORCL ) Chief Executive Lawrence Ellison says nuts to that. When the world's No. 2 software maker reported fourth-quarter earnings on June 29 -- the first to completely incorporate results from Oracle's $10.3 billion acquisition of rival PeopleSoft -- combined sales of their corporate application products were up 52%. That means Oracle pulled off quite a smooth merger in short order.

It also clears the decks for more of the same. Ellison downplayed acquisitions after the earnings report, telling BusinessWeek, "We have no plans to buy anything that doesn't contribute to our five-year plan to grow profitability by at least 20% per year." (See BW Online, 6/30/05, "Oracle's Squeeze Play for Profits".)

Yet, in practically the next breath, he laid out his strategy for buying software companies with narrow profit margins but rich maintenance-revenue streams, adding them to Oracle's portfolio, and stripping out costs. "We can run the same business at a 40% margin. That's why we buy them."

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