Oracle CTO Ellison fixated on AWS, infrastructure as a service but why?

Oracle has a strong game in software- and platform-as-a-service, yet CTO Larry Ellison said infrastructure as a service will be the company's biggest cloud business. Is this marketing or more?

Oracle CTO Larry Ellison is beginning to sound a bit obsessive about Amazon Web Services and his love affair with infrastructure-as-a-service may not be all that strategically sound.

The enterprise software giant delivered a solid third quarter as its growth in the cloud continues to outpace declines in software licensing. Software- and platform-as-a-service continues to fare well for Oracle. These results got an assist from the NetSuite purchase, but it's clear that Oracle is a significant cloud services player.

But in a time when Workday and Salesforce are strengthening ties with Amazon Web Services and SAP is partnering with the likes of AWS, Google Cloud Platform and Microsoft Azure you have to wonder about Oracle's infrastructure-as-a-service fascination. Clearly, IaaS is a scale game and the value beyond AWS, Microsoft, Google and IBM is going to be in SaaS and PaaS.

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Ellison, however, is betting IaaS will be Oracle's biggest cloud business. He said on a conference call Wednesday:

Generation 2 of Oracle's infrastructure-as-a-service cloud now has the ability to run our customers' largest databases, something that is impossible to do using Amazon Web Services. Amazon can only run relatively small Oracle databases in their cloud.

Gen2 of Oracle IaaS also delivers ultra-high database performance, and solve tolerant reliability in the cloud. Many Oracle workloads now run 10 times faster in the Oracle cloud versus the Amazon cloud. It also costs less to run Oracle workloads in the Oracle cloud than the Amazon cloud. As a result, some of our largest customers are negotiating huge infrastructure-as-a-service contracts to move all their databases to the Oracle cloud. You can expect some of those big deals to be announced in the coming weeks.

SaaS growth in the infrastructure-as-a-service business is new for us. We've done well in SaaS and in PaaS over the past few years. This is the first time we've ever had a technology lead in infrastructure as a service. We are now in position to help our hundreds of thousands of database customers move millions of Oracle databases to our infrastructure-as-a-service cloud. SaaS and PaaS are large, rapidly growing businesses for us. Together SaaS and PaaS grew 85% this past quarter, but soon infrastructure as a service will be growing even faster, and before long infrastructure as a service will become Oracle's largest cloud business.

And to drive the point home. Oracle executives mentioned AWS or Amazon more than any other rival such as SAP or Workday on the conference call.

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Ellison's plan for Oracle is to first convince customers to move their Oracle workloads to its IaaS platform. That effort alone could justify a good business, but Oracle is also pitching its IaaS as a general purpose platform too.

Stifel analyst Brad Reback argued that Oracle's IaaS bluster may be more about marketing and promoting the idea of a lift-and-shift concept for customers. Reback said:

We agree with Oracle's strategy and believe its important for the company to promote this vision (e.g., providing customers with the ability to lift and shift on-premise workloads), especially given the tectonic shifts impacting the IT landscape. That said, we think some of this is marketing bluster (especially around Oracle IaaS being utilized as general purpose platform -- it will likely remain Oracle workload-centric), and we remain a bit more cautious on this front, as AWS and Azure have an incredibly large head start along with a more proven and global hyperscale footprint today. Recall Oracle's second-gen IaaS footprint is quite small, although there are plans to further expand it out over the course of the year. Adding to this is our belief that building out a second-gen IaaS footprint will result in a non-trivial increase in cap-ex and in turn potentially depress free cash flow growth.

This IaaS growth isn't dazzling Wall Street yet. Oracle projected fourth quarter SaaS/PaaS revenue non-GAAP revenue growth of 69 percent to 73 percent in constant currency with gross margins at about 65 percent. IaaS will grow 25 percent to 29 percent with declining gross margins to about 20 percent.

So far, the burden of IaaS proof is on Oracle. For the nine months ending Feb. 28, Oracle's IaaS revenue was $525 million, up 10 percent from the same period a year ago. Cloud software and platform as a service revenue was $2.69 billion for the nine months ending Feb. 28.

Bottom line: IaaS sounds nice in theory and may even be good marketing for Oracle, but it's a rough business.

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