Oracle forgoes profit to hit Microsoft's SME plans

Oracle is giving away modules of its ERP software to smaller companies in the hope of tying them in for the long term and cutting out a challenge from Microsoft

Oracle is hoping to ruin Microsoft's plans to dominate the small and medium-sized enterprise (SME) ERP market by sacrificing short-term profits in favour of market share.

Oracle on Thursday announced it would offer the manufacturing, sales and service management modules for free to new customers investing in its E-Business Suite of applications. Analysts believe the tactic is required if Oracle hopes to fight off Microsoft in the highly competitive small business ERP market.

This could kick off a major price-cutting push from the big vendors, according to James Governor, principal analyst at RedMonk, who expects Microsoft to pressurise the competition in segment of the market over the next year. "Competition in the European SME application market is brutal at the moment and it is going to get even more so. We are going to see a lot more of this from SAP, Microsoft and Oracle in the next couple of years," he said.

Earlier this year, Orlando Ayala, chief of Microsoft's division for small and medium-sized businesses, admitted that when it came to companies with around 5,000 employees, Microsoft saw Oracle to be a head-on competitor. Ayala's mission is to turn Microsoft's Business Solutions group, which sells products including Great Plains, Navision and Microsoft CRM, into a $10bn business by 2010, which is a huge leap from the $550m it generated in the 12 months to June 2003.

At the time, Ayala said: "Financing and licensing are very important. I think the industry has been very fragmented around how this value is delivered. Microsoft wants to create a real value proposition for customers that involves all of these pieces."

Last month, research company AMR predicted that spending on ERP applications, which already makes up the largest share of companies' software budgets, will increase to 27.2 percent in 2004. David Bradshaw, principal analyst at Ovum, said that although Microsoft does have products in this area, its combined suite of products will not be ready until Longhorn is released, which is not expected for another two years. "Microsoft has existing products but Microsoft CRM is effectively the first product in the new suite; but it is obviously not made for Longhorn because Longhorn isn't here yet," he said.

However, Bradshaw said he does not believe that Oracle's move is a "big deal" because unlike the large enterprise market, SME customers are more open to changing their software: "There is a lot more change [in the SME market] than the large enterprise market because companies tend to come and go, so it will probably always be a relatively good market," he said.

But Governor expects that by taking market share early, Oracle is more likely to tie in those companies that are tempted by Oracle's offer: "People do want integrated suites of functionality and that is what Oracle is trying to deliver. This is not going to help Oracle's revenue in the short term, but it could in the long term," he said.