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Sunday, October 02, 2005

Larry Ellison As The J.P. Morgan of Silicon Valley

Daniel Gross writes, Ellison is becoming the J.P. Morgan of Silicon Valley. Excerpts with edits and comments added:

Morgan helped rationalize the chaos of early 20th-century capitalism. At the beginning of the last century, the United States emerged from a boom-and-bust cycle. Urbanization, the rise of immigration, and the advent of new technologies spurred businesses to create a great deal of excess capacity: in railroads, telegraphs, steel, cars, shoes, you name it. The result was a slew of bankruptcies and profit-killing competition. Morgan used his capital to merge competitors into giant unitary entities like AT&T and U.S. Steel. Less ruinous competition, more profits.
In the last few years, Larry Ellison has emerged as a slightly grizzled survivor, the rational, cool-thinking consolidator who arrives after the storm to buy out the victims.Ellison is now performing a similar function for the highly fragmented software industry. Fueled by venture capital, public investors, and insatiable demand for information technology, thousands of software companies rushed into the market in the 1990s. Then came the meltdown, and the enterprise software business—applications like databases and inventory-management software that help companies run their businesses more effectively—shifted into lower gear. Hundreds of companies, many of them well-capitalized, were left to fight bitterly over a market that was smaller than anticipated. Ellison saw more clearly than other CEOs that software wasn't so different from railroads or automobiles before it. Software may have seemed the ultimate New Economy business—clean, with low distribution and manufacturing costs, and infinitely scalable—but it behaved like an Old Economy one. For Ellison, No industry remains in this fragmented form. The railroad industry didn't, the automobile industry didn't, nor will the computer industry. There'll be far fewer companies. For example, there aren't that many auto companies in the world. There doesn't need to be, nor will there be thousands of software companies. To Ellison, the solution was obvious. Make like Morgan. Remove or eliminate some of the competition by consolidating. After all, it's tough to win customers away from rivals, because companies despise switching software. So, why not just buy the competition? Oracle, with its cash hoard and relatively strong stock, was a natural consolidator.
Every reader of Soft War knows how inscrutable Larry's mind is and I still beleive that he would be judged more sharply ten years from now on - the sharper definition that emerges then would characterise him a lot better. One CIO told me that he is ever worried as to which side of the bed he would get up that morning as it may influence the day - I have also heard some a top business guy saying that he need not be worried so long as he is invested in oracle products and he is insulated from external developments in the marketplace. I have some views about the bruteforce acquisitons that he is announcing here and here, here, but there is no denying the fact that no boby could move in as swiftly, boldly and make clean sweep of acquisitions - after all siebel when acquired had more than two billion dollars in cash and thousand of customers to count but could not gather the courage to make bold sweeping moves like what Larry and co could do.

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"All views expressed are my personal views are not related in any way to my employer"