Every time Oracle puts out an earnings release I gasp in amazement. How can a company that is so obviously milking its customers for every maintenance dollar imaginable continue to defy gravity and post increasingly solid results? It doesn't seem possible and yet on they march.
It would be easy to draw upon widely held beliefs about how Oracle locks its customers in. It's not the only one by any stretch but it does seem to have mastered the art of turning lock-in into serfdom. The list of anecdotes gets longer with each passing day but I wonder if those glory days are about to come to an end?
Earlier today, Rob Enderle delivered a withering indictment of Oracle's performance in managing the Sun hardware business. He starts with:
Last week Gartner’s numbers came out and they indicated that Oracle server hardware volume dropped a whopping 40 percent in the 4th quarter and 32 percent for the year – in a market that was increasing at 17 percent. Current hardware market share has dropped below 7 percent and, in most markets, players below 10 percent are considered trivial.
Rob then goes on to set out what he believes is happening:
In short, not only is Oracle losing market share in a growing market, it looks like that loss is accelerating, which points to why the company took a hard shot at HP and Intel’s Itanium processor last month. While Oracle has clearly buried the financial impact of this failure in otherwise strong results, customers are increasingly reporting excessive pricing, which suggests that Oracle may be mining these customers for cash to overcome Sun’s losses. That rarely works for long.
The problem likely comes down to two things: Oracle has lost critical mass in its hardware business and it is no longer viable, and/or Sun customers simply are not willing to ride this out and are running from the platform.
Our own Larry Dignan tried assessing Oracle's management of Sun's hardware last month and in comments said:
I view it as a big incomplete at this point.
During the latest earnings call, Oracle made a big deal about progress with Exalogic/Exadata and margins. Co-president Safra Catz is quoted as saying:
This quarter we delivered 55% gross margins on our hardware business. This is the result of the fact that really under the covers of the hardware number the Sun products are growing and the non-Sun products that are resold — that we resell are shrinking dramatically. In addition, we are selling a lot more of the Exadata/Exalogic line. And remember that these systems are sold at good margins and also pull a lot of software with them, like [racks], partitioning and storage management.
How many companies (other than possibly Apple) can talk to gross margins on a server business in those terms? Check out what Dell says (PDF) albeit the comparisons are not 1:1, you get what I mean. But hang on - Catz is saying: "under the covers of the hardware number the Sun products are growing." How does that stack up with what Gartner and Rob are saying? That depends what those words actually mean. Oracle doesn't make it easy to parse the detail because Catz also says:
As I told you a couple of quarters ago, we are really no longer able to identify the exact contribution Sun has made to our operating profit...
OK - so that's the backdrop. Rob concludes his analysis by suggesting that Sun's hardware business is in terminal decline and that Oracle is scrambling for a plan B. He argues this is the motivation behind its attacks on HP which he believes will backfire. This is where it gets interesting. Rob says:
In short, if customers are avoiding Sun hardware because they don’t trust Oracle or don’t understand or trust Sun’s roadmap, the fix should be on those vectors. By attacking HP in what appears to be a transparent attempt to fix falling sales in a critical area, all it will do is further reduce trust in the company and likely exacerbate its problems.
In other words, Oracle is playing a very dangerous game of chicken with its customers. This won't be the first time we've seen this. There's barely a week goes by that I don't hear about one 'issue' or another around what's happening in Oracle's business. The latest involves allegations (as yet unproven) that Oracle is breaking term maintenance deals Sun struck in order for Oracle to squeeze more out of customers.
But is it as easy for customers to swap out hardware as Rob is suggesting and especially if it is running business critical applications? Yes and no. I know for example that a significant number of financial houses on both Wall Street and in London will be schmoozed when Sybase ports its database to run on SAP back office systems. The idea is to throw the TCO dice and see if customers are prepared to bite. But those same customers will just as likely be locked into Oracle database and applications deals so any thoughts about a mass exodus any time soon are at best wishful thinking.
However, and this is where we might start to see shoes dropping left and right: What if Rob is right and customers defect on the hardware front? Will that embolden them to more broadly re-evaluate their relationship with Oracle?
Oracle is now entering a critical period in its financial year. I would not be surprised to hear tales of fresh license audits where Oracle thinks there is more to be squeezed. If customers who are currently anything but happy with the hardware arrangements find themselves under scrutiny, then license negotiators will be very busy in the coming weeks. I doubt that will particularly impact Oracle in Q4. That's not the point. It's Q1-2-3 2011/12 where we will know more.
Long story short: can Oracle continue to defy gravity and especially in the face of a rejuvenating and more confident SAP? Are we looking at the thin end of a possible decline in the earnings wedge?