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Larry Ellison is stepping down as Oracle CEO. Here's how he got so rich.

Larry Ellison, who just announced his departure as CEO of Oracle.
Larry Ellison, who just announced his departure as CEO of Oracle.
Justin Sullivan

Billionaire software mogul Larry Ellison announced today that he's stepping down as the CEO of the company he founded and has led for 37 years. If you're like most people, you probably have only the vaguest idea why Oracle is an important company and why Ellison is so rich. Read on for details.

What is Oracle?

Oracle, founded in the late 1970s and based in Silicon Valley, is one of the world's biggest enterprise software companies. It sells a line of software products that help large and medium-sized companies manage their operations.

Oracle is best known for its database product, which it has sold since the late 1970s. Oracle was founded at a time when database products — and, for that matter, software companies — were a relatively new concept. Oracle quickly established itself as one of the world's most popular database products, and as the information technology sector grew, Oracle grew with it.

In the last decade, a series of acquisitions has helped Oracle evolve from a database company to a more general enterprise software company:

  • In 2004, after a brutal takeover battle, Oracle acquired PeopleSoft, which sold a range of enterprise software products — such as software to manage human resources, supply chains, customer support, and other functions.
  • The next year, Oracle acquired Siebel Systems, another company that produces software for big companies.
  • In 2008, Oracle bought yet another enterprise software company, BEA Systems.
  • In 2010, Oracle acquired Sun Microsystems, which is best known as the creator of the Java programming language, but also produced an operating system, database, and other software and hardware products.

The result: Oracle is now a massive conglomerate that sells a broad range of software products and services to large companies. Thanks to the Sun acquisition, the company also produces some computer hardware. In 2013, Oracle had revenues of $37 billion and profits of $11 billion. For comparison, that same year, Google had revenues of $60 billion and profits of $13 billion.

Oracle HQ

Oracle's campus in Silicon Valley. (Håkan Dahlström)

These products sound really boring, and I don't know anyone who uses them. How does Oracle make so much money?

Selling software to big companies is really, really lucrative.

In fact, Oracle isn't even the biggest company in what's called the enterprise IT industry. IBM, the company that basically invented the enterprise IT market in the 1960s, had revenues of almost $100 billion in 2013, though it posted a net loss for the year of $16 billion. HP had revenues of $113 billion and profits of $5 billion. SAP earned about $4 billion in profits on revenues of around $22 billion.

The enterprise software market is a lot different than the market for conventional packaged software products that you might be familiar with. Microsoft can create a single version of Microsoft Office and sell millions of largely identical copies to customers around the world. In contrast, enterprise software tends to be much more customized. Big companies want software that's precisely tailored to their needs. Often this means that a company like Oracle will make extensive modifications to its products to serve the needs of individual customers.

One consequence of this is that there's a tremendous amount of vendor lock-in in the enterprise software market. Once a company has signed up to use IBM, HP, Oracle, or SAP software, they tend to continue using it for years or even decades. Typically, they'll sign long-term service contracts, in which the software vendor provides service and support in exchange for regular payments.

Because they do so much custom software work (and because selling to large companies requires a large sales force), enterprise software companies tend to have large workforces. Oracle employed 122,000 people in 2013. The same year, IBM had 431,000 employees, HP had 317,000, and SAP had 66,000. For comparison, Google, which generates almost twice as much revenue as Oracle, has less than half as many employees: 52,000. Creating web-based consumer software isn't nearly as labor-intensive.

Who is Larry Ellison?

Ellison Yacht

Larry Ellison's yacht in 2010. (DEAN TREML/AFP/Getty Images)

Until this week, Larry Ellison was Oracle's founder and CEO. His management of Oracle has made him one of the richest people on the planet, with an estimated net worth of about $50 billion.

A college dropout, Ellison worked on a variety of software projects in the 1970s. At the time, computer scientists were developing a new concept called a relational database — a separate computer program that would help organize information and respond to queries about it. Recognizing the potential demand for a commercial database product, he founded the company that became Oracle in 1977.

By the 1990s, he was a billionaire, and he became known for his lavish lifestyle. Until he sold it in 2010, he owned one of the ten largest yachts in the world. Ellison leads one of the best sailing teams in the country. He has been married and divorced four times.

Ellison owns 98 percent of the island of Lanai, the sixth-largest of the Hawaiian islands, which he purchased in 2012 for a rumored $300 million.

Why is Ellison stepping down as CEO?

Ellison recently turned 70 years old, and he says the change is part of Oracle's succession planning process. He's going to become Oracle's chairman and will continue to work on Oracle's technology.

Who is replacing him?

Oracle has chosen an unorthodox arrangement to replace Ellison. The company will have two people who will both carry the title of CEO.

Mark Hurd

Mark Hurd (Justin Sullivan/Getty Images)

Mark Hurd, 57, was the CEO of HP from 2005 to 2010. He resigned from that job after a woman accused him of sexual harassment. HP's board concluded that the sexual harassment charges were unsubstantiated, but they found evidence that he had misreported expenses related to the woman, a misuse of company funds. Hurd was hired by Oracle a few weeks later. Hurd will run Oracle's service and sales divisions.

Safra Catz

Safra Catz (KIMIHIRO HOSHINO/AFP/Getty Images)

Safra Catz, 52, has been at Oracle since 1999. She was previously in banking. She will oversee Oracle's manufacturing, finance, and legal divisions.

Ellison will continue leading Oracle's engineering team.

What was Oracle's biggest claim to fame?

Oracle was an early pioneer in the market for a technology called relational databases.

A database is software that manages large amounts of data and facilitates efficient queries. It's not something ordinary users interact with, but it's an important part of almost every large software project. Most complex websites are based on databases, as are the computer systems of banks, insurance companies, airlines, and other companies.

A relational database is a database that organizes data into tables with well-defined columns. The predictable structure of a relational database allows users to perform queries using something called the structured query language (SQL — both "S-Q-L" and "sequel" are acceptable pronunciations). Here is an example SQL query:

select name from customers where zip_code = '55121'

This SQL query tells a relational database to open the "customers" table and return a list of all the names of customers who live in zip code 55121. More complex SQL queries can perform complex comparisons and can combine data from multiple tables.

In addition to the value of being able to perform complex queries, relational databases are also used because they are engineered to be highly reliable. When programs try to organize large amounts of information themselves, they're more likely to make mistakes that lead to data loss, which a database where data is already organized can avoid.

Demand for relational database software surged in the 1980s and 1990s, and Oracle grew into a large and profitable company.

Are there alternatives to Oracle's database?

Yes, a number of other companies and organizations create competing databases. IBM's DB2 database has been a major Oracle competitor since the 1980s. Microsoft sells a database called SQL Server.

There are also a number of open source database products. Until recently, one of the most popular was called MySQL. The company behind MySQL was acquired by Sun in 2008, which in turn was acquired by Oracle in 2010. Still, because MySQL is open source, users can use the product without paying Oracle for it. In recent years, the open-source PostgreSQL database has been growing in popularity.

In the last five years, there's been a trend away from relational databases. As websites have gotten larger, programmers have found that traditional SQL database become a bottleneck — it's just not possible to organize data from hundreds of thousands of users into a single table.

To solve this problem, a new generation of database products don't organize data into regular tables at all. They use simpler storage techniques that make it easier to distribute data storage across thousands of servers. One downside of this technique is that the these programs don't support all the functions of SQL — for this reason, they're sometimes called "NoSQL databases" — but they allow websites like Facebook, Google, and Twitter to handling trillions of data points from hundreds of millions of users.

One of the most popular NoSQL databases is MongoDB.

What challenges will Hurd and Catz face?

In the long run, the constantly-falling cost of computer software may prove to be a challenge for Oracle. The company made its fortune by selling its proprietary database product for thousands of dollars per customer. Many companies continue to do that — and will likely continue to do so for many years to come. But the increasing sophistication of free alternatives, not to mention the shift to non-SQL alternative models, is going to make it difficult to attract new customers.

Other parts of Oracle's business face similar challenges. A growing number of companies may choose to rent computing power from cloud computing services offered by Amazon or Microsoft instead of buying dedicated servers manufactured by Oracle's hardware division. The open source software company Red Hat offers a free operating system and other free software that serve the same purpose as many Oracle products.

Still, the stickiness of the corporate IT market means that Oracle is likely to enjoy healthy revenues for many years to come. Large companies need a ton of custom work done on their software, and they tend to turn to established brands like Oracle to do it. That will provide plenty of work for Oracle even if some of its product lines are commoditized.