Monday, September 12, 2005

Big eyes, big stomach: Oracle buying Siebel

Oracle and Siebel announced the deal this morning, ending months of speculation on the future of Siebel and whether it was next on Oracle's target list. Oracle is paying a net of $3.61B (excluding Siebel's cash on hand), making the deal about a third of what Oracle paid for PeopleSoft last year.

In a conference call this morning, Oracle CEO Larry Ellison indicated that assimilation of Siebel should prove much less daunting than the takeover of PeopleSoft. One reason is that Siebel is welcoming the deal, another is that PeopleSoft had just acquired J.D. Edwards, making the integration more complex. It doesn't hurt either, that Siebel's technology platform is closer to Oracle's.

Interestingly, during the conference call, Ellison gave quite a bit of weight to Siebel's on-demand offering as justification for the deal, even though it represents a fraction of Siebel's business today. He even said that he expects to see all of Siebel's functionality to ultimately be included in the on-demand offerings.

As I've indicated in the past, Oracle's own on-demand offerings are simply a hosted deployment of its licensed software. Each customer still requires its own license and its own installation in Oracle's data center. Siebel's on-demand offering, however, is the so-called "multi-tenant model," which allows a single instance of the system to host multiple customers--a much more cost-effective architecture. Ellison's embrace of Siebel's on-demand offering most likely indicates that Oracle realizes its need to move to the multi-tenant model for its hosted offerings.

The Oracle/Siebel deal ups the ante once again in the battle between Oracle and SAP. The combination of Oracle and Siebel vaults Oracle ahead of SAP in terms of worldwide CRM position and closer to SAP in terms of total application revenue.

"In a single step, Oracle becomes the number one CRM applications company in the world," said CEO Larry Ellison. "Siebel's 4,000 applications customers and 3,400,000 CRM users strengthen our number one position in applications in North America and move us closer to the number one position in applications globally."

The announcement is on the Oracle website. Computerworld has more.

Update, 10:30 a.m.: Several Wall Street analysts, such as Prudential's Brent Thill, are questioning the deal, based on "Siebel's deteriorating fundamentals." I disagree. As I've pointed out in the past, Siebel's main problem is that it is stuck in the middle. At the high end, it faces competition from Oracle and SAP, which offer CRM functionality integrated with their ERP suites. At the low end, it faces competition from on-demand vendors, such as and Rightnow, which offer easy-to-implement CRM functionality at a much lower price point. Siebel's own on-demand offering is as good a solution, but it only represents a fraction of Siebel's revenue. So the Oracle deal, in my opinion, represents the best approach for addressing Siebel's "deteriorating fundamentals," by pairing Siebel's best-of-breed CRM functionality with one of the two leading enterprise suite vendors.

Update, 12:05 p.m.: ComputerWorld’s editor-in-chief, Don Tennant, is quite negative on the deal, questioning whether the deal is really customer-driven, as Oracle's tri-President Charles Phillips claims it is. Tennant writes,
Certainly, Oracle will trot out reference customers who will toe the company line (typically reference customers get some sort of break from vendors when they do that). But I wonder how pervasive that sentiment really is. In the course of our reporting this week we may find that it is, indeed, what those joint customers are saying. But I'd be very surprised.
Stay tuned.

Update, 12:50 p.m.: Well, here's some bad news for current Oracle customers. The Wall Street Journal is reporting that, after the deal closes, Oracle will promote Siebel's CRM system rather than the current CRM offerings of Oracle or PeopleSoft. The language on the Oracle "Welcome Siebel" page says, "we plan to make the features of [Siebel's CRM] products the centerpiece of our Project Fusion CRM products." I interpret that to mean that it's the Oracle and PeopleSoft CRM users that will be the ones facing the greater migration as Oracle executes its Fusion strategy going forward.

Has anyone at Oracle thought about what this means for Oracle CRM deals currently in the pipeline? Not good news for Oracle sales in the short run.

Update 2:50 p.m.: Here's another problem for Oracle: to get Siebel where it wants in terms of profitability, it's going to have to cut very deep. Quoted in the WSJ, Needham analyst Richard Davis says,
Oracle stated on this morning's conference call that it plans to run Siebel at a 40% operating margin. We estimate that Oracle will have to cut 100% of Siebel's G&A [general and administrative] and 80% of Siebel's sales force to get there.
If Davis's arithmetic is right, I wouldn't want to be a member of the Oracle CRM sales staff right now, because if Oracle plans to focus its CRM offerings around Siebel's offerings its more likely to keep the Siebel guys and take it out of the Oracle and PeopleSoft presales staff.

Related posts
Siebel shaken by new shareholders
Siebel swept up in takeover rumors regarding Oracle
Management shakeup at Siebel


Anonymous said...

My opinion is that this sets the end of CRM as a standalone suite.
CRM will be subsumed to an appendix of ERP or SCM solutions.

On-demand CRM will also be confined and commoditized as CRM-for-poors.
Basic SFA and cust care functions will be ok with on-dem CRM.

More specific activities will require a dedicated CRM suite, integrated
with the ERP 'parent'.

Anonymous said...

Great stuff as always. While Larry may see a need to move toward a multi-tenant offering for a hosted delivery - and may be stating that Siebel's capability here is in part the basis for the acquisition; I have to believe that he will scrap Siebel's current On-Demand solution since it runs on DB2 and is deployed in IBM data centers.

Oracle's total hosting revenue is probably less than a rounding error ... so perhaps all these particular comments are just an exercise to get under Benioff's skin with the ole marketing ploy of ..."oh ... we have that too"

Anonymous said...

looks like oracle is trying to fashion a flotation device out of the debris left in the packaged software biz. so what do you all think, 18 months or less before's market cap is greater than oracle?