Oracle’s numbers came out, and they were good after a run of misses. One of the obvious questions raised by Oracle’s success is whether it’s Oracle’s success or a sign of secular recovery in software or in tech. Let’s look at some of the signals to find out.
This tends to be Oracle’s best quarter; they did well at this point last year as well. Our surveys and model say that companies are tending to push tech spending to the second half to counter economic uncertainties, and also that they want to get any upgrades done before the holiday season. Software sales were up 5%, new software licenses up 1%, and the company reported very strong growth in their cloud portfolio and in “engineered systems”, the appliance space. Hardware, meaning servers, continued to be a disappointment.
One thing I think comes out of the Oracle call loud and clear is that systems/servers are a very tough business to be in. If you think about the notion of network functions virtualization, which is to shift features from network appliances to commercial-off-the-shelf servers (COTS), you realize that the notion of COTS is what’s fundamental here. COTS could as easily stand for “Commodity off-the-shelf”. Software, particularly open-source Linux, has tended to commoditize server platforms because it limits differentiation in everything but price. This puts companies like HP and IBM, who have large hardware exposure, in a tight position. They need to have strong software stories, but the promotion of software could arguably be driving a nail in the hardware coffin.
One solution to this, the one Oracle is promoting, is the “engineered system” or appliance. By sticking software and hardware into a single package you create something that’s feature-differentiable. Clearly this is working for Oracle at this point, and I think that’s largely because the transition to virtualization at the hardware level (including the cloud) demands thinking of database as a service, which promotes the notion of an appliance as the source. We’re only at the beginning of the cloud revolution (we’ve addressed less than 10% of the near-term market potential) so Oracle can ride this horse for some time yet.
In the longer run, though, you have to look at networking and NFV/SDN for inspiration. If operators are trying to convert network appliances into combinations of software and COTS, then database or transaction appliances are just circling the drain a bit higher in the bowl. Probably by 2018 it will be difficult to promote “cloud appliances” and that’s largely because network operators are creating the framework to couple software features to hardware in a more automated, elastic, and manageable way with NFV. It’s not going to happen quickly (certainly not in the next year, probably not the next two) but it will happen. When it does, it will gradually percolate out of operator infrastructure and into the cloud and the enterprise.
A second point from the Oracle call is the supremacy of “intrinsic margins”. The market that you need to own is the one with the highest profits. In the cloud, that’s the top of the service food chain—SaaS. Oracle has always liked the SaaS space because SaaS displaces the most cost and because Oracle thought (correctly, I think) that they could gain market share on competitors like SAP who were reluctant to go all-in on a hosted-software model. If you can offer your software as a service, buyers don’t care about the underlying platform and hardware at all, which means that you can use your own stuff there to augment your profits and that you tend to commoditize PaaS and IaaS offerings of others.
Oracle’s weakness in the cloud, potentially speaking, is that the real future of the cloud isn’t even SaaS as much as it is cloud-specific applications based on platform services. Amazon has the right idea in cloud evolution from the IaaS model. You augment basic cloud with all kinds of neat web-service additions that create in effect a cloud-resident virtual OS. People write to that to get the special cloud features you’ve included, and the next thing you know we don’t write apps for hardware any more—but for the cloud. If Amazon continues this push and Oracle doesn’t counter it, they risk having software developers rush to Amazon and create SaaS offerings there that transcend anything that Oracle or anyone else could create using traditional IT elements.
Oracle has a combined point of weakness in the network. It’s a weakness in appliances because NFV is an anti-appliance move and Oracle’s not particularly an NFV player despite the hype that Tekelec and Acme make it one. Having virtual functions is having software components; what makes NFV is the orchestration and management. Networking is also a weakness because arch-rival Cisco is a network giant and a competitor to Oracle in the cloud, and both IBM and HP have either their own network products or OEM products there. The cloud is as much networking as it is IT, so if Oracle wants a secure bastion there they have to create a position in the space, preferably one that denigrates competitive incumbencies. Both SDN and NFV would do that, and so Oracle needs to do a lot in those spaces.
Insiders at Oracle tell me the company really seems clueless to exploit their Acme and Tekelec acquisitions. Some say that they need to focus them on cloud UC. Some say they need to get a broader NFV and SDN story, but that latter group (likely the ones who have the right answer) really has no easy strategic path forward because nobody in Oracle seems to be thinking much about either topic beyond slideware.
So here’s my net. Oracle can’t be said to be signaling a general shift in IT. We need more and broader data points and the others in the space did not provide them. Oracle can be said to be signaling that a differentiable, margin-generating, story is better than one that presents commodity hardware and hopes for the best. You can augment your sales effort (as Oracle has done) if you have something to say besides “we’re cheaper”. But Oracle is still captive to broad commoditization trends, and it has to address them now while its margins will still support the investment.