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ANALYSIS

Oracle, NetLedger Execute Textbook Deal
Loosely CoupledPhil Wainewright


July 2, 2001: In this week's commentary on ASP industry news: Ellison keeps Oracle ahead of Microsoft and others by teaming with small-business ASP NetLedger.

The Web-native ASP model came of age this week when Oracle adopted NetLedger 1 System as its online offering for small businesses — see NetLedger to Power Oracle Small Business.

Talk Back
"The new NetLedger-powered offering for small businesses completes Oracle's online range and puts it miles ahead of any of its traditional competitors. Microsoft's small business equivalent is primitive by comparison."

Offer your thoughts on the NetLedger-Oracle relationship in the ASPnews Discussion Forum
For NetLedger, the deal brings the credibility and clout of the Oracle brand to its service, at a stroke sweeping away the main objection cited by prospective small business subscribers to all ASP startups — "How do I know you'll be here a year from now?".

For Oracle, the deal brings much-needed experience and understanding of the small business market. NetLedger has climbed a steep learning curve the past two years as a pioneering provider of online accounting and e-business functionality for small businesses. In the process, it has discovered that many of the original received wisdoms about selling online applications to the small business market were just plain wrong. As a result it has significantly modified both its offering and its selling strategies — as discussed in more detail in an article in June's ASP News Review, available by subscription.

A Case History in Adapting to Technologies
The NetLedger-Oracle story would make an ideal case history for any future edition of The Innovator's Dilemma, Clayton Christensen's landmark study of how market-leading companies fail to adapt to the advent of disruptive technologies. Gartner analyst Ben Pring first highlighted the relevance of Christensen's writings to the ASP wave in a column on this site more than a year ago — see Exploiting An Age of Disruption.

Oracle's chairman, CEO and 24-percent owner Larry Ellison personally put up the financing to found NetLedger in early 1999, and still owns close to half the company. With Oracle itself struggling at the time to interest mid-sized companies in hosted cookie-cutter versions of its mainstream e-business suite, operating NetLedger as a separate venture followed to the letter Christiansen's recommendations for successfully reacting to disruptive technologies.

If NetLedger had been formed as an internal division of Oracle, it would never have operated with the live-or-die entrepreneurial instincts of a startup, and would have ended up smothered by the parent corporation's prevailing values. As a separate startup, it was free to do what it had to do to survive in its chosen market. Two years later, it is market-proven and can defend its product and business strategies against the criticisms of those in the larger organisation who assume they know better.

But that's not to say that the new deal means that Oracle has now entirely absorbed NetLedger into its bosom. Oracle has merely become one of NetLedger's OEM customers — a virtual ASP, delivering the NetLedger service under its own brand. In theory, it is open to other software companies to sign similar deals with NetLedger. Although in practice, it seems somehow unlikely that there could ever be NetLedger-powered offerings from the likes of Peoplesoft, Siebel and Broadvision. What is more likely — and indeed in the pipeline, according to NetLedger — are several deals with banks, telcos and other large enterprises that are eager to deliver a credible online suite to their small business constituencies. The Oracle connection confers the credibility these organisatios have been waiting for.

Independent by Necessity and Strategy
Meanwhile, NetLedger's independence is assured by the litigious mood of common stockholders that currently prevails in the U.S financial markets. Acquiring NetLedger while Larry Ellison still holds a large chunk of its stock would be to transfer a huge pile of Oracle shareholders' funds directly into Ellison's pockets. No matter that Ellison himself is Oracle's largest shareholder; while he is also chairman and CEO of the company, such an act would lay him open to a mass of stockholder suits as soon as there was an unexpected drop in Oracle's stock price.

Much more likely, then, is a NetLedger IPO to publicly establish fair market value for the company before Oracle makes any moves to acquire it. Though come to think of it, Ellison will probably get sued eventually either way, so long as Oracle and NetLedger's fortunes remain so closely linked. Fortunately, he didn't stop to take legal advice before getting into this in the first place.

The other reason for keeping NetLedger strategically separate from Oracle is the simple Christensen principle that established corporations are incapable of innovating disruptive technologies. There's still some way to go before NetLedger's variety of business service delivery becomes mainstream practice. In the meantime it needs to retain its freedom so that it can continue to evolve as the technology and its markets demand.

By encouraging and nurturing NetLedger as a separate venture, Ellison has cleverly supplemented the actions he has been taking within Oracle to transition it to the ASP model for delivery of software-as-a-service (for a complete analysis of Oracle's ASP strategy, see February's ASP News Review).

The addition of the new NetLedger-powered offering for small businesses completes Oracle's online range in a way that puts it miles ahead of any of its traditional competitors. Microsoft's small business equivalent is primitive by comparison, while its recent acquisition of Great Plains brings it into the midrange but still doesn't compete in the top-tier enterprise market. JD Edwards and Peoplesoft are still in the throes of transitioning their products to a net-centric architecture and have no small business offering of any kind. SAP still hasn't even got as far as realizing that Web-native software-as-a-service actually is a disruptive technology.

We may only be at the beginning of the S-curve, but Ellison's decision to back NetLedger at the same time as driving Oracle along the same path looks to have been an early winning move. Whether it is enough to win the race remains to be seen. When powerful disruptive technologies emerge, it is tricky enough for established market leaders to even assure their futures at all.

This review of the week's news highlights is by ASPnews.com founder and consulting analyst Phil Wainewright. A comprehensive news digest is published every month in the ASP News Review newsletter, available exclusively to subscribers.


Phil Wainewright founded ASPnews.com in 1998 and is the publisher of Loosely Coupled. He can be contacted at

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