Oracle is used to buying its way into markets, but that won't work in the cloud. Here's why.
The Oracle game plan has worked for decades. In areas where it falls behind competitively, it eventually buys its competition.
Falling behind in applications? Add PeopleSoft, RightNow, NetSuite, Siebel, and others to the shopping cart. Lacking a strong middleware story? Buy BEA Systems. Want to dig deeper into hardware/systems? Acquire Sun. And so on. Oracle hasn't been shy about shelling out billions of dollars to remain competitive.
Unfortunately, the only companies that would leapfrog Oracle into a leading position in 2018 aren't for sale and, even if they were, they'd each cost hundreds of billions of dollars—and even chairman Larry Ellison doesn't have that kind of lunch money.
Game over for Oracle?
I want a trained squirrel!
Of course, foretelling Oracle's demise is usually fruitless. Oracle dominates databases, a category of software that is excruciatingly difficult for an enterprise to change. Information may want to be free, but data does not. Enterprise data simply wants to stick with whichever database that currently stores it.
Given that most of this data is in Oracle's relational databases, Oracle has spent the last few decades building up complementary systems around that data (applications, etc.), with customers finding it easier to keep buying from Oracle than to go elsewhere. As Mesosphere's Chris Gaun has stated,
A big enterprise has thousands of apps. Unfortunately, there doesn't tend to be a lot of budget around transforming those. [To get an enterprise to switch] you need to make argument[s] that [doing so] 1) reduc[es] cost [and is] 2) worth [the] risk of switching. Enterprise[s are] VERY conservative on #2.
All of which is very true. And, unfortunately, all of this is also becoming increasingly irrelevant as enterprises look to the cloud to gain business agility and enable applications simply impossible to achieve in on-premises deployments.
SEE: Research: Cloud vs. data center adoption rates, usage, and migration plans (Tech Pro Research)
For such modern cloud applications, Oracle proves a poor fit. Not only does the company offer a comparatively malnourished catalog of cloud services compared to leading vendors like Amazon Web Services (AWS), Microsoft Azure, and Google Cloud, even its former strengths become weaknesses in the brave new cloud world. For example, one of its best selling points—vertical scale—proves its Achilles Heel in modern application infrastructure, where horizontal scale at levels simply impossible in an Oracle environment becomes the norm.
Oracle's immediate answer seems to be to stick to its old game plan, leveraging its legacy database to broker a role in modern workloads. It's not working. As Rishidot Research's founder and chief research advisor Krishnan Subramanian has called out, "[Oracle] needs to shore up higher order services...to compete effectively with AWS and Azure. They cannot just rely on their database service as the path to cloud success and they need to compete with AWS on the breadth and depth of higher order services."
So what's a rich old enterprise technology company to do?
Name your price, Mr. Wonka
Unfortunately, the answer this time can't be "buy a cloud clue," because those few companies that have a serious cloud clue are neither for sale nor within the scope of Oracle's bank balance. Amazon's market cap is $585 billion at the time of writing. Microsoft? $671 billion. And Google? $762 billion. As for Oracle, it's "just" $197 billion. That's nothing to sniff at, but it's also not even in the same universe as these cloud giants.
Nor would it work for Oracle to pick up a second-rate cloud vendor on the cheap. Even the best of the also rans, whether Rackspace or IBM, is in serious retreat, losing market share year-over-year, according to Gartner. Oracle is used to buying industry leaders, whether they want to be bought or not (e.g., PeopleSoft)—buying the losers is neither in its DNA nor a successful recipe for winning in the cloud. There's simply no one that Oracle can buy to give it a commanding position, or even a not-laughable position, in the cloud.
Yes, Oracle has seen its cloud revenue increase each quarter. But, no, such increases don't put it anywhere near a top-10 market share slot, even as the big-three cloud vendors keep releasing services and acquiring customers at a torrid pace. In this world of public cloud, which is growing dramatically faster than the legacy world of on-premises applications, Oracle's fat wallet can't buy it a clue.
Meanwhile, DB-Engines shows a dramatic increase in popularity for cloud databases, most particularly Microsoft Azure Cosmos DB in the past year. So while Oracle is struggling to limber up for the cloud, the cloud databases are having no trouble finding fans for modern applications. As Rodney Nelson, a senior equity analyst for Morningstar, recently wrote, we do "not suggest customers will migrate away from Oracle across the board, but we do think enterprises will increasingly look to downsize their reliance on Oracle's database technology, particularly for workloads migrating to the cloud and for net new workloads."
Nelson also noted that "Customer switching costs are in fact decreasing for Oracle database customers." Unfortunately for Oracle, cloud acquisition costs are in fact increasing for the legacy vendor, making its cloud future cloudy indeed.
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