Oracle's in a lot of sectors selling to many different kinds of buyers. Any review of Oracle needs to take a portfolio view that also looks at the relative growth and contraction of the component market segments served.
Oracle is huge. No single assessment does this complex IT provisioner justice. While many of my peers speak of some tech companies in single-word assessments, I struggle with Oracle. And let me get this out of the way right now, I actually like some of the stuff they’re doing, I question some others, and am concerned about another group of activities.
To get your head around the thousands of products Oracle has is probably beyond the grasp of any one individual. Suffice to say, the big issues for Oracle investors, executives, and customers aren't necessarily going to be buried in the minutia of individual products, releases, features, and performance gains. No, the questions are at a macro level, and they parallel massive shifts in the world of IT.
Oracle has broadly spread their considerable research and development (R&D) budget across a number of very traditional IT technologies, new-ish IT technologies, and some newer still technologies. In their marketing-speak, they say they offer customers "choice" and aren’t dictating terms or forcing upgrades on customers. It's that thinking that's been behind their Applications Unlimited program for many years.
But what Oracle really does is use their considerable R&D budget to stay in many distinct IT markets simultaneously. Oracle does this because it can, and almost no other competitor has the economic muscle to match them. The hard reality is that they spend billions (USD) each year on R&D. Most of their competitors can't even scrape together a few percentage points of Oracle's R&D spend.
Oracle is like the old General Motors. GM had entry-level, mid-level, and premium car lines to offer different car-buying customer segments. In my opinion, Oracle segments the market thusly:
Old school IT buyers — These buyers are very committed to on-premise solutions. Their fear of cloud computing may be rooted in overly heightened security concerns, IT power/job protection concerns, or just old-fashioned technology fuddy-duddy-ness. But it doesn’t matter if these buyers are paranoids, afraid of change, or conservative, Oracle is still cranking out newer SPARC chips, faster servers, lots of performance improvements, machines tuned for specific tasks, upgrades to on-premises applications, and more. If these buyers want to stay on-premises, Oracle wants the opportunity to gain/retain wallet share with them. This buyer will likely be a CIO or IT director, and will listen to many of the technical people Oracle can field on a sales call.
Bespoke IT shops — This is that IT group that never met a package it liked. Why license software when you can write something custom? This buyer loves Oracle's continued enhancement of middleware, development platforms, app stores, etc. But this world is one that is shrinking. Where new application development is burgeoning though is in the development of mobile, social, and big data/analytic applications. Yes, Oracle has stuff here, too. This buyer is still an IT executive — one that Oracle knows how to sell to well.
Cautious migrator — This is the company that is buying cloud solutions on the periphery. They now use cloud for HR, CRM, and other non-core ERP applications. This buyer has probably done some cloud experimentation (eg, office automation software in the cloud) and is tepidly expanding their cloud footprint. For now, this buyer may be considering a lateral ERP move by having Oracle help them create a private cloud computing environment (on-premises) or with a hosted Oracle suite (single-tenant). This buyer might entertain a few of the new standalone Fusion cloud applications if they are in low-risk functional areas. This buyer may be an IT executive, but don't discount the role that functional leaders will have here, too.
Active migrator — This buyer is no longer interested in re-creating their datacenter with newer gear. Instead, as equipment and applications age and must be replenished, this buyer is moving to cloud solutions. While they may accept some single-tenant, hosted solutions, this buyer understands the value and lower TCO that is possible via multi-tenant applications. This buyer is more often a functional executive (not IT). They're ready for a change, and they like the speed of cloud installations, the continuous and rapid updates these products have, etc.
Cloud convert — This firm has seen the future, and it is a future where data, apps, computing power, etc, are powered via public clouds. This is a different kind of buyer altogether. This buyer may well be a CEO, non-IT top executive, etc. These buyers are very focused on re-deploying IT personnel and budget to more strategic roles. They want IT working on mobile, social, and analytic applications. They want, to paraphrase an Oracle executive, to invert the current IT Pareto rule where 75 percent of the IT budget is spent keeping the lights on, and 25 percent on innovation initiatives.
Beyond the clouds — These firms are some of the most intriguing customers out there. They "got" the cloud a few years ago. They do things with in-memory analytics that are already propelling them past their competitors. They're not using a BI tool to simply compare data in one ERP application with data in another ERP application. No, these firms have already been monitoring social sentiments; comparing big weather forecasts to labor scheduling; and examining the point-of-sale data of customers to create new marketing and product insights for their customers and customers' customers. These buyers aren't smug, but they do find the laggardly, slow ways of their competition to be more than mildly amusing. Sometimes, they see this old behavior as just pathetic.
So if these market segments have some relevance, then we must map Oracle's R&D efforts against them. As it turns out, they do have something in play in every segment. But I do not believe that this is the real issue on the table.
Shareholders and Oracle executives should ask themselves, frequently, these questions:
What's the current and future distribution of our customer and prospect pools across these (and other segments)? How different are the existing customer and prospective buyer preferences/wants?
How will Oracle know that more buyers are moving from one segment to another? How will it know how big these shifts will be? How well can Oracle move to match these market shifts?
How long before an additional market change occurs that triggers a wide swing or change in customer buying habits and tastes?
How much of what Oracle is hearing from existing customers represents a self-selection bias of current customers? In other words, is a JD Edwards World customer that is still running an old version of the product on an AS/400 ever going to be a cloud adopter? What makes a Workday customer so different than an Oracle or SAP customer? Bias around the existing customer base can trigger massive misunderstandings of where the real market is headed/moving. Smart technology companies build first for the customers to come, not the customers they already have.
Are the allocations of R&D and Marketing budgets appropriate against the current segments? For example, is Oracle spending too much or too little on computing hardware?
My personal take
Oracle is definitely innovating.
Oracle's distribution of its R&D budget is unknown to me. I'd be happier if I knew they were spending more of their investments on the left side of the TALC (technology adoption lifecycle curve) — see first graphic.
Dell, HP, BMC, and even parts of IBM seem to be having trouble competing in a technology world where the buyers have been shifting. Whether it's the move away from desktop and laptop computers to smart mobile devices (eg, phones and tablets); the move away from datacenters; or the move away from mainframe, bespoke systems — buyers are changing. One memorable remark from an Oracle executive underscored this point. He offhandedly said that almost no one has their own datacenter anymore. They either outsource this or get it via a cloud provisioner.
Many of Oracle's hardware and systems software product lines may be in danger of being made less market relevant as customers prefer to get more of their computing power in the cloud. Relevance is the key word here. For Oracle, their continued advancements in performance improvements appear to be keeping their products technically relevant, but how important is it to be relevant in declining markets? While I don't know what percent of Oracle's R&D is going to these hardware and systems software product lines, I'd like to see them start weaning this downward soon.
By the way, I had two sidebar conversations with other analysts at this week's Oracle Analyst event. Each of us had a different metaphor in mind, but we were all thinking the same thing. That is, is all of this focus on speeds and feeds really relevant? It's like a conference on the latest improvements in horse-drawn carriage manufacturing when the market is moving to automobiles. Several of Oracle's customer segments are in long-tail market scenarios. Growing market share in declining markets is a delicate act to get really right.
While I get it that Oracle has the R&D money to continue to pour money into older on-premises product lines (acquired or otherwise), I'm really starting to see the need to put a plan in place to unify code lines and move more of the product line to a more streamlined offering. Yes, it's great that Oracle has PeopleSoft and Oracle EBS HR products on-premises and hosted, and they have Taleo and Fusion Human Capital apps in multi-tenant cloud versions. But these products, while capable of integrating with one another are available in on-premises, hosted, private cloud, single-tenant hosted/cloud, multi-tenant cloud, etc, formats. The amount of code to support these is significant and only grows when one adds in code for Oracle's mobile HR applications and their TAB tablet solution. If the application market makes another significant move technically, the time it could take Oracle to adjust would be significant (and the cost quite high). It's time to rationalize the product line some.
The next 3-5 years may remain a muddled time as buyers near the end of life for older servers and applications. Tech providers and integrators need to find out what the buying intentions of companies will be for servers and applications in 2016. At that time, these buyers will have accumulated a lot more experience with cloud applications. They will have moved more spot-computing needs to cloud service providers. And they will need to either replace or forgo new server and other hardware. When IT, in 2016, has to go to the Executive Committee, they will likely meet a skeptical group should they try to maintain more traditional hardware and software expenditure patterns. I'll bet the Executive Committees of 2016 will require future spend go almost exclusively to cloud unless IT can put forth a most compelling rationale the other way.
Now if my 2016 hunch is right, then that would suggest that we'll start seeing a more pronounced uptake of cloud application software and a corresponding falloff of sales of anything, hardware or software, that is intended to support local, on-premises solutions. Oracle should be researching the timetable that these shifts will occur.
Cloud applications are going to be the future. Oracle's got a lot going for it here, but the messaging is really muddled right now. For example, take Oracle's cloud HR products. Now marketed as Oracle Cloud Human Capital (HC) Solutions, this "offering" includes cloud products from Taleo (a recent Oracle acquisition that brings a lot of recruiting and learning functionality) and several Fusion HC applications. Oracle has also created some standalone HC applications that also carry the Fusion moniker. When Oracle executives shared their product roadmap for these applications though, the distinction between core Fusion, Fusion extensions, and Taleo disappeared. Now it's one product roadmap for a single business process.
I actually support that thinking, especially if it means that the company ceases to market products under older product family names, and gets to selling process-specific solutions. However, other process areas are still not so clean, with some functionality from acquired products being redundant with functionality from native Oracle solutions or prior acquired solutions. Simply stated, Oracle still has too many general ledgers, accounts payable products, CRM product lines, etc. Moreover, some processes require on-premises customers to get some advanced functionality via cloud service applications. When you add mobile and social to the mix, the combinations get even crazier.
The product lines must get rationalized.
Disclosure: Oracle covered Brian Sommer's travel expenses for its analyst event.