Reading Oracle’s Results

Tech giant Oracle reported, and it wasn’t pretty.  For the first time in a very long time, Oracle disappointed in both performance and guidance.  Pretty much every aspect of its business was weaker than the Street expected, but the hardware guidance (off next year 4% to 14%) was considered dreadful by many.  This is one of the hottest players in tech, so the question that everyone is asking is “Is this a sign?”  Yes, obviously; but of what?  In my view all of this is due to the deadly combination of “structuralism” as a driver and uncertain economic conditions.

Hardware sales were the problem; in guidance as I’ve already noted but also in current-quarter performance.  Software was not stellar but certainly in range.  The thing about hardware is that it’s  just something you run stuff on.  There’s no “benefit” in a business sense; only the ability to realize a benefit created by something else.  So in times when economic conditions are uncertain, hardware is the deal that gets put off or called off.  Even “consolidation” projects spend cash in the present to get overall reductions in future cost.  Right now, pushing off realization of value doesn’t look like a prudent step.  And it’s all because we can’t create PRESENT value.

I’ve noted before that tech is evolving without any significant increase in total benefits.  It’s like we’ve wrung what we can in the way of productivity enhancement and this is where we’re at forever.  Under those conditions, only changes in tech that lower the cost line can be promoted, and of course the problem with cost-based change justification is that buying lower-cost stuff always looks more expensive than staying with the stuff you have.  Structural change demands more stability on the business side, in other words.  We don’t have that these days, so Oracle and other tech players face the challenge of justifying change when staying the course looks safer.  It looks safer because there’s no upside; the best you can hope for is that the future costs are no higher than the present.  Benefits are off the table.

The other challenge that Oracle has is that in a structurally driven market under economic pressure, the broader you are the harder you fall.  It’s impossible to shield the broad market from broad impact.  Think about it; replacing one specialized product in bad times can be justified more easily than replacing everything.  If you’re Oracle and make everything, you’re going to get wet when the negative economic tide comes in no matter how artfully you try to dodge.

If this is all true (and I’m convinced that it is) then there’s a collateral issue everyone faces, which is market share.  Obviously in a market under pressure to stay the course there’s no meaningful market-share gain; you make less even if you gain something in a market that’s contracting.  However, it’s also true that without benefits to increase overall spending it’s hard to have structural expansion of tech without favoring incumbents.  The guy who needs benefits the most is the guy who wants to gain share on competitors.  It follows that if you are incumbent who wants to put away your opponent forever, then figuring out new benefits to drive spending is the way to do it.  They’re locked out of their best chances…forever.


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