- Oracle founder Larry Ellison announced two key cloud infra services at OpenWorld.
- The company has also openly challenged Amazon’s supremacy in cloud.
- How hard is the battle going to be, how long will it take, and can Oracle win?.
Oracle (NYSE:ORCL) Executive Chairman and Chief Technology Officer Larry Ellison made it clear during the company’s OpenWorld 2016 conference that the gloves are off when it comes to its cloud business. Larry Ellison’s transformation from a cloud hater to a cloud lover is now complete as he told the world that Amazon.com's (NASDAQ:AMZN) lead is over.
“Amazon’s lead is over. Amazon is going to have serious competition going forward,” Mr. Ellison said during his Sunday night keynote speech at Oracle OpenWorld, the company’s annual conference for developers, partners and customers in San Francisco. “We now have a tech advantage over Amazon in infrastructure as a service.” - WSJ
The Current State of Cloud Infrastructure
Amazon is so far the undisputed leader in the cloud infrastructure market with sales consistently expanding over the 50% level in the last two years. Though Microsoft (NASDAQ:MSFT), International Business Machines (NYSE:IBM) and Alphabet Inc (NASDAQ:GOOG) are also huge competitors in the market, the fact that Amazon has somehow kept its growth intact despite growing competition, while also enjoying more than 25% operating margins, stands testimony to the company’s prowess when it comes to cloud computing.
There are three critical segments when its comes to the cloud business, Cloud Infrastructure-as-a-Service (IaaS), Software-as-a-Service (SaaS) and Platform-as-a-Service (PaaS). Amazon is firmly in control of the first, where it has painstakingly built its expertise in offering infrastructure for companies to manage their IT needs. The company has created its product portfolio in such a way that for a company to move and manage its IT infrastructure on Amazon’s public cloud is as simple as the swipe of a credit card and the click of a button.
Also Read: AWS Can Do Wonders For Amazon.com Inc. Stock
From Oracle’s perspective, the cloud infrastructure business is the one that has been hurting the company the most. For years Oracle has built its business by selling hardware and software to companies so they can host and manage their own infrastructure. But companies like Amazon, Microsoft and IBM are now approaching these same companies with an easy alternative to running their own high-cost IT operations. They’re marketing their offerings as simple, easy to deploy and scalable, with the huge added benefit that the client only pays for what they use.
After resisting the cloud for so many years, Oracle had no choice but to enter this segment or risk losing the bulk of their business to the cloud industry. They initially started with their strengths in software, creating a SaaS division based on their expertise in Cloud ERP. Their recent deal to acquire NetSuite is part of that push to further strengthen their SaaS business, and Ellison openly claimed that his company could well be the first SaaS company to hit $10 billion per annum in sales. They also introduced the Oracle Cloud Platform as their PaaS offering to companies that wanted a development platform without the high investment required.
Oracle’s Sub-dominant Position in Cloud Infrastructure
But the basis of Oracle’s cloud business is their Cloud IaaS offering. Although SaaS/PaaS revenues for the last quarter came in at $798 million and the company only made $171 million from Cloud IaaS, Ellison is now looking to take on the Goliath of public cloud infrastructure, Amazon. With an annual cloud run rate of less than $4 billion, Oracle is still far away from reaching Amazon’s run rate of over $10 billion. We do not yet know the net impact of the NetSuite acquisition on Oracle’s cloud revenues, but we do know that the company is ready to take a deep dive into the infrastructure segment with two key offerings that Ellison spoke about during the keynote speech yesterday at OpenWorld.
Oracle’s biggest advantage is its expertise in databases. It is not without reason that the company is widely considered to be the ‘database king.’ Several companies have tried their hand at this market but failed to close the gap on Oracle’s lead. Amazon is pushing its own database engine Amazon Aurora to clients, and has even gained the moniker “the Oracle Killer”; But it is still too early to snatch the crown from Oracle’s head and place it on Amazon’s.
Ironically, Oracle’s advantage has also been its worst curse because databases and other legacy business units still account for 88% of Oracle’s sales. The company’s objective now is to replace those income streams with cloud revenues - something that could take years to come into effect. However, the new Cloud IaaS offerings from Oracle could tip things in their favor and help grow their infrastructure business at a rapid pace moving forward. This, in turn, will give them additional revenues in SaaS and PaaS as well.
The Battle between Oracle and Amazon’s AWS
There will be short-term pain as Oracle struggles to replace older revenue streams with newer ones, but by accepting the pain Oracle can reinvent itself into a stronger IaaS player. The move requires speed and agility - the exact things that Amazon is good at - but if Oracle can consistently deliver new products and services around their core IaaS business, it can eventually become a serious contender in the cloud space.
It will take Oracle at least a few years before they can claim cloud revenues anywhere near Amazon’s - or even Microsoft’s or IBM’s for that matter - but a focused approach on growing support services around the infrastructure business is absolutely critical. Oracle also does not have the luxury of high margins that AWS currently enjoys, and it will be a tough and long drawn out fight to the finish.
So should you invest in Oracle stock? As I've said before, we need to see Oracle achieve at least two consecutive quarters of "zero to positive" growth before we can say that it is firmly on its new growth path, but these recent developments could hasten that. We will have to watch and see.