Oracle Has Grand Plans For Cloud Computing – But Is It Too Late To The Party?

Leading database software vendor Oracle Corp. (NYSE:ORCL) unveiled an ambitious program for cloud computing in the Oracle OpenWorld 2015 event last month. The company announced plans to expand its portfolio in Infrastructure-as-a-Cloud (IaaS), analytical cloud services, cloud applications, and cloud integration services. A major portion of the announcement was devoted to propounding the new Oracle’s new IaaS service, which pitches Oracle capabilities head to head against Amazon’s (NYSE:AMZN) cloud arm, Amazon Web Services (AWS). In every market Oracle addresses, aims for the top.  AWS is the de facto leader in public cloud computing and its dominance in IaaS is undisputed. Oracle also faces heavy competition from Microsoft’s (NYSE:MSFT) Azure and Google (NYSE:GOOG), both of which are already heavily entrenched in the cloud industry as basic service providers. Thus, Oracle faces an uphill battle in carving out a market share for itself in what is arguably the most competitive segment in the software world.

Our price estimate of $39 for Oracle Corp. is slightly higher than its current market price.

See our complete analysis for Oracle Corp. here

A Case of Too Little Too Late?

Oracle’s fledgling cloud business has been growing reasonably well since inception, but still remains far behind Amazon, Google and Microsoft in terms of size. To illustrate, based upon Oracle’s fiscal 2016 first quarter revenues (the company follows June-May fiscal year), its cloud revenues are on a run rate of around $2.5 billion in the current fiscal year. In comparison, AWS’s is on a revenue run rate of over $7 billion based on its fiscal 2015 third quarter performance. Oracle’s cloud revenues have grown at a respectable clip of nearly 30% in recent quarters, while AWS’ revenues have jumped leaps and bounds at growth rates of over 70%. This underscores just how far behind the curve Oracle really is in cloud computing. Bear in mind, however, that however grand its aims, its offering is targeted with greatest focus on users of its database and applications

So far, then, Oracle largely competed in markets where it traditionally held a position of strength – such as the database software business. Now, Oracle plans to also target the hotly contested markets like IaaS and cloud analytics. The IaaS market is already seeing heavy competition among global behemoths like Amazon, Google and Microsoft. On the other hand, smaller companies like Tableau (NYSE:DATA) and Qlik (NYSE:QLIK) have the upper hand in the cloud analytics market, although AWS, Salesforce.com (NYSE:CRM) and even SAP SE (NYSE:SAP) have the market set in their crosshairs. In fact, AWS and Tableau have nearly unassailable leads in the IaaS ^[1] and cloud analytics ^[2] markets, respectively as per Gartner’s magic quadrant. Therefore, Oracle will have its work cut out for itself if it hopes to gain meaningful market share amid such heavy competition.

The silver lining for Oracle is that its stronghold in the legacy on-premise database software market could prove advantageous in the transition to cloud. Firstly, most companies are unlikely to shift mission-critical data and computing activities to the cloud no matter how popular cloud computing gets. This implies that there will always be buyers for Oracle’s on-premise database management infrastructure and software. Secondly, companies using Oracle’s database software are likely to prefer using the same provider for moving non-critical data and operations to the cloud. This is because using a different provider for the cloud could be difficult to integrate and would undoubtedly create unnecessary complications. Therefore, Oracle does have a set of customers it can tap into for proliferating its new cloud products. Nonetheless, the company still faces an uphill task in acquiring net new customers.

New Plans Still a Long Way From Fruition

What makes matters worse for Oracle is that allegedly most of its newly announced products could be as much as six months away from commercial availability. ^[3] The company remained vague about potential launch dates, although it stated that the new Elastic Compute Cloud will be available in early 2016. ^[4]

Whether Oracle even has the requisite computing capacity to compete at scale with Amazon is unclear. It currently has “close to 20” data centers around the world, but a senior Oracle executive admits that they were originally meant for Oracle’s Software-as-a-Service (SaaS) and Platform-as-a-Service (PaaS) products. ^[4] CEO Larry Ellison stated in the OpenWorld conference that the company is already building its second generation of data centers, but no further details on the computing capacity are available. It is worth noting that this is in stark contrast to Oracle’s statement in the fiscal 2016 first quarter earnings call, ^[5] wherein the company stated that the bulk of its data center investments are largely complete. (Read: Oracle Earnings: Rapid Growth In Cloud Offset By Weak On-Premise Business) To be fair, Oracle’s earlier statement may have been in context of data centers for SaaS and PaaS services and not IaaS.

As we have previously explained, building data centers takes a toll on not just a company’s cash flow, but also its gross margin. This is because the depreciation resulting from new data centers is included in the cost of providing cloud services. Therefore, if Oracle plans to add the computing capacity required to compete with AWS at scale, its cash flow and margins could come under pressure in the near to medium term.

In summary, we believe that while Oracle’s expansion in the cloud should not be taken lightly, the odds are certainly stacked against it. The company faces heavy competition from software behemoths as well as smaller competitors. It will be hard-pushed to establish its presence in extremely competitive markets like IaaS and cloud analytics. Oracle’s cash flow and margins will almost certainly suffer a blow in the near to medium term, making matters even tougher for the company.

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More Trefis Research

1. Magic Quadrant for Cloud Infrastructure as a Service, Worldwide, Gartner, May 18, 2015 [↩]
2. Magic Quadrant for Business Intelligence and Analytics Platforms, Gartner, February 23, 2015 [↩]
3. Oracle insider: We’re not walking the cloud talk, Info World, November 9, 2015 [↩]
4. Yes, Oracle is finally serious about the cloud, Info World, November 4, 2015 [↩] [↩]
5. Oracle Fiscal 2016 First Quarter Earnings Call Transcript, Seeking Alpha, September 16, 2015 [↩]