Is Cisco Beating Oracle Where it Counts?

Software giant Oracle surprised the Street with a pretty major miss on their top line, sending their stock tumbling in the after-market yesterday and pre-market today.  The truth is that the Street may be underestimating the questions here, because all of the indicators for the tech space says that Oracle should be doing better.  Software has a more direct connection to productivity gains and thus can drive benefits and projects better than hardware.  Hardware is nearly impossible to differentiate, and software is all about differentiation.  So what the heck happened to these guys?

Market shifts, for one.  Business confidence suffered in the last quarter for sure, and that may have had an impact on projects.  The problem is that it didn’t stall Oracle’s rivals as much as Oracle, and our indicators tell me that the real problem has to be something beyond simple macro conditions.

One issue is clearly the hardware.  Oracle’s hardware numbers slipped again, and it’s pretty obvious at this point that they will never make a go of general-purpose servers.  Yes, there’s a product transition, but why has it been so dramatic?  Companies have these all the time.  What’s disappointing is that they can’t make up for that server shortfall by creating explosive database appliance sales (30% growth here simply isn’t enough; they should have been able to double that), which means that if they don’t fix their problems their whole hardware strategy and the Sun acquisition is toast.

The bigger second issue is Cisco.  Our surveys tell us that Oracle is getting hurt by Cisco more than IBM or HP, because Oracle’s hardware business has traditionally focused on the communications applications that Cisco has gone after.  UCS has been a big success, perhaps the most significant success in all of networking even though it’s not a network product.  Furthermore, with operators talking about SDN and NFV, servers could be the mainstay of carrier deployments and infrastructure in the future.  Oracle needed to hit the ground running in all of these areas, and it’s just not moving the ball at all.  I’ve never seen them out-marketed as thoroughly as they have been in the comm-server area.

But all of this pales in insignificance compared to Oracle’s problem with the cloud.  The company’s anti-cloud stance in the early days, stated with Ellison’s usual forceful style, has made it very hard for Oracle to create an effective cloud position.  They’ve failed most particularly in generating a strong architecture for a “Java cloud” and for PaaS, even though it’s obvious that these two areas could be highly differentiating for what’s after all a software company.  A good cloud strategy with a strong articulation of database appliance relationships to cloud services could have helped the appliances but also showcased the servers.  Solaris is the best commercial real-time OS on the market, and it’s amazing that Oracle hasn’t been able to leverage that truth.

The most alarming thing is that cloud strategy is darn sure where Cisco is taking the game in the network-server world, and nobody has to ask why.  Cisco is naturally good at IT/network fusion, and in any case what the heck is a cloud if it’s not network and IT?  Oracle seems to have missed this obvious point, not perhaps completely in its marketing but at least in an effective sense.  They need leadership in the cloud.

Ironically, this quarter might drive Oracle to do something truly, fatally, stupid while trying to do something smart.  There are already insiders there who tell me that one camp of executives believes that Oracle’s problem is that it needs network equipment like Cisco has, that they should buy Juniper or Brocade.  I think that’s the wrong approach.  You don’t win a puzzle-solving race by buying more pieces to make the puzzle bigger.  The fusion of IT and networking that forms “the cloud”, that’s driving SDN and NFV, is a boundary function.  You don’t have to be in the network to own the stuff that network technology initiatives are working to move out of the network.  If you’re in the IT space with the right boundary position, you just open your arms and gather them in.

At this point, it would seem that it’s too late for Oracle, but I don’t believe that either.  Cisco could have shut them down this quarter, eradicated Oracle’s own hopes of becoming a full-spectrum IT giant and thus killed off a formidable risk for Cisco, but Cisco is still being too conservative at that network/IT boundary.  Falling prey, as vendors nearly always do, to the obsession with defending current markets and products (which, in the long term, will decline in TAM) has kept Cisco from taking the steps that would have set up a conclusive Cisco victory by about 2016.  And that means that Oracle could still, if they were smart and aggressive enough at just the right place in the network/IT picture, pull off a comeback.  But make no mistake, this quarter was a big mistake and it’s going to take something big to really fix it.  Otherwise Cisco has stepped over its first IT victim on its road to being the self-described IT leader.

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