Oracle Widens Cloud Investments to Battle Bigger Amazon Threatby
Software maker touts computing power of its own data centers
NetSuite deal, sales shift mark push into new cloud businesses
Eduardo Frias, chief information officer at Beachbody LLC, recently traveled to San Francisco to hear a pitch from Oracle Corp.’s top brass.
Beachbody was already a longtime user of Oracle business software for such tasks as finances and supply-chain management. Now Chairman Larry Ellison wanted to sell Frias on a new product: direct access to remote data centers brimming with servers and networking tools -- a package of services that Santa Monica, California-based Beachbody now buys from cloud-computing leader Amazon.com Inc.
Frias was intrigued. Oracle has made a lot of progress developing a product that could compete with Amazon, he said. "They’re doing incredibly, much better" than in the past, he said of Oracle’s pitch at the Oracle OpenWorld conference in September. But Frias, whose company makes the P90X high-intensity home-fitness videos, has yet to take the plunge.
Tens of thousands of businesses are loyal to Amazon Web Services, and it won’t be easy for Oracle to erode Amazon’s lead in the market for public cloud computing. That’s not stopping Oracle Chief Executive Officers Mark Hurd and Safra Catz from pouring billions of dollars into big bets on acquisitions, new hires and fresh products to advance Ellison’s plan to target the industry. On Monday, they landed a cloud leader when Oracle completed its $9.3 billion acquisition of NetSuite Inc., which specializes in financial software. This latest gambit means less competition with older rivals such as SAP -- and more with Amazon, Google and even Microsoft Corp.
“This is part of a bigger strategy,” Hurd said in an interview. “We’re in the middle of a very significant transition in the IT industry.”
Hurd can point to improving numbers. The growth rate for Oracle’s most closely watched cloud businesses -- including applications for finance, human resources and databases -- jumped to 77 percent in the quarter ended Aug. 31, topping 66 percent in the previous period. These gains outpace those of key rivals, though it’s starting from a smaller base.
But the transition is just beginning, and should have started earlier, some analysts said. Cloud revenue has yet to reach 15 percent of overall sales -- not yet enough to prop up results. As traditional products slowed, total company sales missed estimates, climbing 1.7 percent in the quarter that ended in August. It was another reminder that the shift to the cloud has been uneven, and is not a fait accompli.
“Oracle waffled a little; now, they’re done waffling,” said Dave Bartoletti, an analyst at Forrester Research. "There’s no choice for Oracle but to do this. All of the money is going to cloud software and cloud infrastructure for the next 10 years."
Wall Street has mixed opinions about Oracle’s plans, which could take years to prove out. Shares are up 7 percent so far this year, narrowly outpacing some of the major indexes. Analysts have slightly more buy ratings on the stock than they did a year ago, while sells have fallen.
The company has navigated identity changes in the past. It grew from a small database company founded in 1977 to become one of the largest tech companies in the world. It boasts a public market value among the top 50 in the U.S.
Oracle is looking outside itself for help. In fiscal year that wrapped up in May, almost a third of the developer hires in the Oracle Public Cloud group came from competitors, according to a person familiar with the matter.
Acquisitions are also part of the cloud growth strategy. After a lull in large deals, Oracle secured its second-biggest takeover ever with NetSuite, though the deal wasn’t without its critics. T. Rowe Price, one of NetSuite’s largest investors, said the the offer undervalued the target, and asked Oracle to pay $133 per share instead of the agreed-upon $109. NetSuite’s stock fell to less than $90 at one point in October when it looked like the deal was in jeopardy, yet Oracle insisted its price was final. In the end Oracle won approval with holders of 56 percent of eligible shares endorsing it.
NetSuite provides cloud-based software that manages key functions in finance, part of what’s called enterprise resource planning. While the companies have products in the same general areas, there is little direct customer crossover. Almost all of NetSuite’s customers have 700 or fewer employees, while nearly all of Oracle’s comparable clients have about 1,000 or more, according to another person with knowledge of the company.
Oracle is also moving forward with home-grown tools, and in September unveiled a new plan for its own services for infrastructure, the core computing feature that lets developers easily build applications or work with databases. This business has been the laggard at Oracle, at less than a quarter of the size of the other cloud offerings and with slower growth.
Hurd said the latest push -- backed by the company’s own big data centers with more efficient servers -- is something new for the business that can help spur the next chapter of growth. He’s betting customers would rather have more products from fewer providers than a patchwork of tools from a smattering of companies. Oracle will let customers move existing applications to the cloud in areas such as human resources and customer relationship management, while providing developer tools and basic computing gear.
"This is all part of a thoughtful strategy that brings together a holistic cloud suite of services to address the broader market," he said.
The bigger shift into cloud infrastructure follows Amazon’s decision to move more aggressively onto Oracle’s home turf in the database sector, according to Bartoletti. Online retailer Amazon has turned this strategy into a fine art on its traditional commerce side: attracting customers with one product, and then getting them to buy something else.
Given Amazon Web Services’ size and features, it’s still a one-horse race in the broader market for infrastructure services, said Carl Brooks, an analyst at 451 Research. In the third quarter, Amazon had about 45 percent of the market for infrastructure as a service, where companies buy basic computing and storage power from the cloud, according to Synergy Research Group. Amazon’s revenue in this market is more than twice that of the next three players combined, Synergy said.
"It’s helpful from an education standpoint for Oracle to say, ‘Yes, we have AWS-style service capabilities,’" Brooks said in an e-mail. "But they’re not in the same league yet."
Ellison went out of his way to tout the new products during his OpenWorld keynotes in September. He didn’t hold back underscoring Oracle’s plan to take on Amazon, mentioning his Seattle-based rival’s name more than 60 times during one talk.
"Amazon’s lead is over," Ellison said.
Amazon didn’t exactly embrace Ellison’s take. In an interview with Business Insider, AWS CEO Andy Jassy fired back at Ellison, calling the speech a classic "old-guard technology tactic," in which a latecomer with less functionality and fewer customers tries to establish itself by "manipulating" benchmarks. And Amazon has done more to buttress its position, recently unveiling a deal with VMware Inc. to easily manage cloud services.
‘Worth a Look’
Yet Oracle’s new option is catching some attention. EHarmony has been a customer of Oracle products for about a decade, including the database -- and is using the software maker’s cloud-based Service feature, which helps clients better connect with their customers, according to Ninish Ukkan, the online dating service’s senior vice president of technology.
"We are exploring it -- it’s too early to say," he said. "Because we have such a big footprint with Oracle, especially with our databases, it’s definitely worth a look."
Boingo Wireless is another company that likes what it sees as the software provider ramps up sales efforts to better address the cloud. Boingo, which provides technology for wireless access, has been using Oracle’s software for its finances since last year after it outgrew a Microsoft offering, according to Chief Financial Officer Peter Hovenier. Oracle’s sales rep was
key in his decision, he said, as he looked at different options for his department.
"He really impressed upon the fact that this was a growing product for Oracle," he said. "And while it was still early, I was getting good attention."