After Sun, Oracle’s Acquisition Trail Narrows

BusinessWeek runs a story that practically equates the inimitable Larry Ellison with a mafia capo who shakes down his customers for exorbitant maintenance contracts and jaw-dropping auditing fees the way the mob extracts “protection” money from fearful merchants that operate on its territory.

Doubtless there is a measure of truth to the story. Oracle’s game is to entice and maneuver its customers into proprietary purgatory, all the better to bleed them for rivers of recurring revenue and swollen margins. Oracle isn’t the only one playing that game, but it plays it better and meaner than most vendors.

Still, unlike mob henchman, Oracle’s sales force hasn’t taken to kneecapping recalcitrant customers. Not yet, anyway.

Nonetheless, industry consolidation, which Ellison saw coming before he did his strategic volte-face and began pursuing a predatory and sustained acquisition strategy, has changed the complexion of the industry.

There are fewer vendors, offering bigger pieces of the overall IT solution to enterprise customers, and the options customers had in the past no longer exist. The reason those options don’t exist, of course, is that Oracle and other industry powerhouses have purchased the smaller players that used to offer them.

All industries consolidate. The IT industry is no different that any of predecessors in that respect.

From the perspective of an industry life cycle, what differentiates IT from the automative or aerospace industry? Nothing, really. They all follow the same narrative arc: early ferment, driven by a multiplicity of entrepreneurial startups; followed by intense competition and technological innovation; eventually giving way, after a time, to maturity, slower growth, and steady consolidation.

Many jurisdictions of the IT industry, including enterprise software, have entered the mature, slow-growth stage that is conducive to M&A-driven consolidation. Oracle once derided the growth-by-acquisition strategy, but, then again, converts to a religion tend to practice it most fervently. Since 2003, when it began its hostile assault on PeopleSoft, Oracle has worshipped devoutly in the church of M&A.

Eventually, though, the pickings become slim on the acquisition trail. We’re at that point now, as Cowen and Co. analyst Peter Goldmacher points out:

“When all the companies of size have been bought and the costs wrung out, this group will be very low-growth and boring.”

Indeed. And that’s why the acquisitions were pursued in the first place: to drive growth.

With its Sun acquisition, currently held up in an extended review by the European Commission, Sun might be nearing the end of its extensive trail of acquisitions. Cloud computing is said to be, appropriately enough, on the horizon. That’s a potentially disruptive innovation, one that could present Oracle with business challenges it wasn’t built to address.

For now, though, Oracle will follow its enterprise consolidation strategy as far as it will go.

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