Gadfly

Oracle Shows Tech Middle Age Can Be Beautiful

It's never too late for some reinvention.
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Photographer: Justin Sullivan/Getty Images

The technology industry is unkind to companies on the wrong side of middle age. But some veterans that once looked well past their primes have found fountains of youth. 

One of the best examples is Oracle Corp., the 40-year-old database software company founded by 73-year-old Larry Ellison. The company for decades was assured a big slice of corporations' $2 trillion annual spending on technology. Many of the world's biggest companies found Oracle's products essential for tasks such as keeping tabs on inventory, balancing the books and analyzing retail sales trends. But when Ellison stepped down as chief executive three years ago, Oracle looked as if it was in crisis.  

Crisis looks different at Oracle than it does, say, at MySpace. Companies that sell technology to businesses don't tend to die quickly as internet companies do. Instead, they slowly wither and fade into irrelevancy.

Business customers that rely on technology from Oracle, Microsoft or IBM can't ditch it immediately. Instead, they might start dabbling with newer technologies for high-priority growth projects and resign the dinosaur technologies to less important parts of their budgets. Over years, those budgets might shrink or disappear. Oracle looked for a while as if it might be stuck in that camp. 

And then a technology revival Ellison had been talking up for years seemed to take hold. He had been boasting about refashioning Oracle's technology for the epoch of cloud computing, in which companies shift from pricey, hard-to-update software bought on long-term contracts to pay-on-demand technology that is refreshed frequently because information is stored and processed on remote computers, just like internet services such as Facebook.

Oracle's cloud revolution seemed like Ellison bluster, but it turned out to be real. In Oracle's quarter ended in August, revenue rose 6.9 percent from a year earlier, the company's best growth rate since 2011, according to Bloomberg data. What Oracle defines as sales of cloud technology accounted for 16 percent of Oracle's total revenue, up from 5.5 percent when Ellison gave up the CEO post but remained chief technology officer. The Oracle founder, who once mocked cloud computing as "complete gibberish," now can't stop talking about it.

Oracle's growing sales of cloud computing don't guarantee the company relevance for the next 40 years. As it and other companies transition from selling upfront software contracts to pay-as-you-go cloud technology, revenue can nose-dive for a while, and the shift pinches profits. Some people in the technology industry are skeptical about whether what is sold as cloud software is truly being used by the customers.   

Companies also have more technology options than ever, including free or low-cost alternatives, and it seems unlikely a handful of titanic empires such as Oracle can retain an iron grip on corporate technology spending. It will also be tough for Oracle to retain its market share in the $31 billion database market. When a company has a commanding position, there may not be anywhere to go but down. 

There's also a poor track record of pioneers in one period of technology maintaining their dominance after seismic industry shifts. Just try to remember the last time you saw a Nokia mobile phone.

But it is possible for technology titans to find new life. Adobe took the remarkable step of changing its business model overnight from selling software such as Photoshop to essentially renting its most important products as Netflix-like subscriptions. It was painful, but Adobe and its stock price have thrived since the 2012 reboot. Like Oracle, Microsoft has found cloud-computing religion, although investors' enthusiasm for that company's cloud shift is ahead of reality.

The same is true at Oracle. Investors now believe the cloud transition has taken hold, but they could lose confidence if Oracle has a rocky quarter or two. Oracle did get a big vote on confidence in May when AT&T Inc. -- one of the world's biggest spenders on technology equipment and software -- said it would move a significant portion of its databases to Oracle's cloud.

Oracle has said it thinks selling cloud software gives it a shot at landing many more customers, and at higher profit margins, than it ever could in the days when it sold only big-ticket software contracts to giant corporations.

Oracle, Microsoft and Adobe are giving hope to all technology companies with more than a few wrinkles. Those software pioneers are showing that there's a place in the tech industry for middle-aged reinvention. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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