Oracle in the cloud: The analyst conversation

Three top industry analysts examine Oracle, its position in the market, and relationship to competitors such as Workday and SAP.
Written by Michael Krigsman, Contributor
Wavebreak Media LTD

Last month, Oracle presented OpenWorld, its annual confab of enterprise software, in San Francisco. OpenWorld gives Oracle the opportunity to showcase the latest technology, products, and future directions of this huge company. It also creates a nexus of customers, prospects, press, and analysts who converge to study the company and its plans.

As part of the CXOTALK series of interviews with leaders, I invited three important analysts to examine Oracle and read between the lines of what the company said. Part of this mandate included looking at Oracle's position in the market relative to important competitors.

The three analysts who participated in this session are:

All three are known as astute and trustworthy observers of the enterprise software market.

The analyst conversation converged on the idea that Oracle is all-in on the cloud as a technology, product, and service platform. For this transition, the question is not Oracle's engineering ability, but whether they have a business model to compete with native IaaS and PaaS players, in particular, Amazon Web Services. For example, can Oracle match Amazon's cadence of price cuts to remain competitive with AWS?

We also discussed why Larry Ellison, Oracle's founder and CTO, pushed so hard on Workday yet hardly mentioned historical competitor SAP. Louis Columbus hypothesizes it is because Workday's potential addressable market is extremely large and Ellison wants to draw attention to growth in the cloud opportunity rather than to the large, existing on-premise business, which will inevitably decline over time.

It's worth noting here that Oracle's overall 2016 revenue was $37 billion while its SaaS and PaaS revenue rose 82% in Q1 to a run rate of almost $4 billion. Although cloud remains a small part of Oracle's current revenue, it is clearly the future. [Source: Mark Hurd discussion at OpenWorld.]

At the conclusion, the analysts offer specific advice to CIOs and Oracle customers.

To summarize the in-depth conversation, we created a special short video and transcript, which are embedded above. You can also watch the entire episode and read a complete transcript.

Michael Krigsman: One of the interesting things at OpenWorld, they really leaned heavily on their competition with Workday, and pretty much just dismissed SAP as a contender at all. So what's that about?

Louis Columbus:

I think it's a total available market issue. I mean, to your point earlier, these are very, very sharp people and of course, Larry knows exactly what he's doing. The total available market of Workday is 10x what our salesforce is right now. So, it's a very attractive target, and positioning against them relative to SAP is completely understandable. I mean, SAP clearly has a strong ERP base, has done fine with a variety of its acquisitions, however, it's not nearly as attractive as a cloud-based company making headway in a market with a 10x market-sized multiple than other competitors that have gone down the path. So really, he's signaling, "There's a total available market pool, this is a great profit pool and I want a part of it." I think that's what he's really saying.

Michael Krigsman: They're saying that the Workday-addressable market is better than the SAP-addressable market? I mean, is that the point or am I missing something?

Louis Columbus:

It shows potential for growth, whereas the SAP market doesn't. I don't think that Larry wants to take a high profile event and go into the trenches of how they win and lose deals every day against SAP on their core business, core functionality around ERP. I mean, that's probably where they face a majority of competition. SAP's efforts into the cloud had been sometimes strong, sometimes weak. They're not a poster child of exceptional cloud competitiveness and strength. He's further ahead, looking at Workday and saying, "How do I position against HCM there?" That's a growing market. The total available market is much larger; the compound annual growth rate is greater. They're dealing with customers who believe in the cloud at the enterprise level, to Larry's point that the CIO believes that. And, I think, to Larry's point, the heterogeneity of technology stacks is driven by the decision-makers: CMO, Chief of Marketing, is going to go, "That is a great analytical tool, I'm going to need that to be able to manage my pipeline or to quantify my value as a business unit," relative to the CIO saying, "I need a business consistency."

Yeah, and back to your point: I think that that's what's going on. I think that's just a prime base. It's an enterprise that believes in the cloud, it can go to hundreds and thousands of seeds easily, plays exactly to where he wants to go with his revenue model.

Larry Dignan:

Don't forget the narrative, right? These conferences are about a narrative. They always are. So, you know, the narrative for Oracle, "It's cloud," they're innovating. Two words, that's what they're tryin g to project. So, if you come out and you start yappin' about SAP, well, it's like reading a sports story from ten years ago. We've all heard it over and over again, right? You know how it's turned out, how it will turn out, whatever. But it's an old story. And that's why you see Larry Ellison going off about AWS, right? Because Workday arguments get a little tired, right? I mean, I see Workday, Oracle, I'm thinking apples and oranges. I mean, they compete in the same space in HCM, and ultimately financials, but it's a different kind of company that they go after.

Michael Fauscette:

But I think that supports the idea of its position as much as it is anything else. It is in fact the right opponent at the right time, and the story against SAP, you're right. It's over. So I want to tell an exciting new story that sets me in the markets, in the focus, in the way I want to be seen. And that perception shapes a lot of people's reality.

Michael Krigsman: So the narrative, as Larry Dignan was saying.

Louis, do you want to share some thoughts on this infrastructure strategy, which was so prevalent, so powerful at OpenWorld?

Louis Columbus:

I think there's two really critical pivot points for them on this whole infrastructure strategy. First of all, can they innovate at the speed of Amazon? Arguably, yes. Oracle is a powerhouse Silicon engineering center company. So yeah, could they match them on pure patent production? Sure. And there are plenty of engineers there who would love to rack up a hundred patents in their career by going after Amazon. So that's a pretty compelling value proposition.

The issue is, can the culture of Oracle engineering sustain the kind of culture that Amazon has right now in terms of a market leadership position and the way that engineers get their work at Amazon. So, can they pace on innovation? Sure. I mean, they've got to win a patent war somewhere, they've got to rack up a couple hundred patents really fast, and Oracle has the ability to do that.

Can they match the cadence of price cuts of Amazon? That's a completely different story because while they do have that great revenue stream coming off their database business, matching the cadence of the price cuts of Amazon? Really hard to do, and stay profitable and still grow; and balance that, balance that with building apps that make money. So you've got this triad of factors that they have to keep in balance: drive a profitable applications business as they transition to cloud, be able to deal with the cadence of innovation of a competitor that has attracted world class engineers daily, and then third, being able to deal with the touring pace of price reduction. So yeah, it can be done. But will it be done in the short term? Probably not.

Michael Krigsman: Larry Dignan, what about the question that Louis raised of the ability of Oracle to keep undercutting Amazon? They're both very large companies, so what about that?

Larry Dignan:

There are some things with Oracle's AWS fascination that kind of boggle the mind a bit. A. just on margin, that Infrastructure as a Service business? It's challenging, right? So my guess is, you know if you read Clay Christensen, you kind of see that slide where Toyota started down here, and the established players, in this case Detroit, kept moving up and up the stack, and then eventually the players at the bottom were also there too. I think that's what this is about, because the biggest takeaway I had watching Ellison's keynote is that yes, AWS must be taking database workloads from Oracle, otherwise Oracle will not be trying to punch them in the face. So, when they talk about their databases, their AWS databases not being as open, AWS being harder to move from, there may be some element of truth in that, but the bottom line is AWS made that stuff very easy to consume. And, that's a hurdle.

So, I think from Oracle's strategic point of view, they need the infrastructure piece because they need to sell you on the platforms and ultimately the applications, because that's where the money is.

Michael Krigsman: So it's the fuller scope, so it's the infrastructure that's the fuller scope of the suite.

Larry Dignan:

Right. And Oracle can't lose infrastructure because once you're in AWS, you're probably going to buy higher level services. And, there's not question that AWS is moving up that stack, they're moving up that value prop, and that's showing up in database workloads. So, if all these databases run around and they have this server-less infrastructure, and all that, then ... So the real race is, you're going to be buying business functions in the future.

Mike Fauscette:

But, we're not moving to a world where one vendor's going to own everything. It's a world in the cloud where you're going to have to see a lot of peaceful coexistence, you're going to see a lot of openness. And it's something they're not quite... and no vendor from the old world to the new wants to accept that, but that's just the world that the cloud is leading to.

Michael Krigsman: And, Larry Dignan, your final thoughts and advice for CIOs.

Larry Dignan:

I mean, I think any tech buyer is going to play ball with Oracle. And if you're an existing customer, trading up in the cloud might totally work well for you. You're going to get bundled deals, and yeah, a CIOs got to look at Oracle just as they would any other vendor.

Michael Krigsman: And Louis Columbus, you're going to get the final word here.

Louis Columbus:

Ok, well I appreciate it. Well, my advice to CIOs is: use this ambition from Oracle to your advantage and push them to bundle in everything you possibly can. If you're looking at a suite refresh, push for that. If you're in an audit, threaten to leave and move your database loads to AWS and watch the audit probably drop. But you know, play hardball, because the ball's in your court as a buyer now. Competition's a beautiful thing, and competition brings out the best there is to offer, I think, from all these people. And I think you can look at beginning to reduce even maintenance fees, if you're a CIO. And, in other words, Oracle's hungry to build out this stack on the cloud, and use AWS pricing as a barometer in your negotiations with them. So, you're in a buyer's market. You're in a great position, so make the most of it. And go cut a great deal with them.

Oracle is a client and paid my expenses to attend OpenWorld. Thank you to my CXOTALK colleague, Lisbeth Shaw, for assistance with this post.

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