The media headline was something like “Oracle rains on the cloud.” Catchy, but is it true? Oracle turned in some worse-than-expected results despite a fairly aggressive stance on cloud computing. Is there an Oracle execution problem, a cloud computing problem, or just a company missing its numbers? We’ll have to dig a bit to see.
First, Oracle beat on EPS and barely missed on earnings, but their position came from a combination of weaker-than-expected cloud and stronger-than-expected legacy. They had the misfortune to be announcing during a period when tech stocks were under pressure because of tariffs and Facebook privacy fears. Their cloud revenues were up significantly if below expectations, but this is the third time in a row they’ve undershot earnings. That’s why the question is whether Oracle is misjudging cloud potential, missing opportunities, or whether the cloud itself is perhaps a bit of a risk.
To add some color to this, Dell’s CTO has been making a number of statements that aim to discredit the popular notion that all IT is shifting to the cloud, so enterprise server sales are doomed. Obviously, Dell has its own reasons to want to discredit a mass shift to the cloud, but it’s interesting that these comments are coming just as Oracle is missing on revenue (again).
The reality of the cloud situation, and Oracle’s place in it, is complicated. The biggest problem we have with cloud computing is the stubborn belief, in defiance of actual industry data, that legacy applications are “moving to the cloud.” There is some limited server consolidation shifting going on, but in the main the business-critical stuff isn’t moving and won’t be moving any time soon. Dell’s CTO is absolutely right saying that enterprises are adopting virtualization and abstraction and that these will pay most of the benefits of the cloud. He’s also right when he suggests that enterprises can have hyperscale server farms efficient enough to beat the public cloud on pricing. All this shows why Oracle actually outperformed with legacy stuff.
The truth about the cloud is that most of its potential lies not in “moving stuff to it” but in “writing stuff for it.” The big cloud providers know this well, and it’s why they’re focusing so much on web services that provide new development models. All three cloud giants (Amazon, Google, and Microsoft) offer several dozen such packaged middleware-like toolkits, and all of these are designed not to facilitate moving something but rather to facilitate developing something.
My model says that about 20% of public cloud opportunity comes from “moving” to the cloud. About 30% comes from using cloud tools to build or rebuild mobile and web front-end processes to legacy applications. Another 20% comes from rebuilding other deeper applications around cloud capability, and the remainder from totally new cloud-specific development. That means that 80% of the cloud opportunity is about development, and that of course is why the cloud providers are pushing development-level web services.
Besides aligning with the real-world opportunity, web services also earn cloud providers better margins than IaaS hosting. The additional capabilities they offer displace costs beyond servers, which makes it possible to sell cloud services more easily by boosting the business case. Those who have read my blog over time know I’ve always said that IaaS was a false opportunity.
Oracle seems to know this at one level, yet not at another. On the one hand, the transcript of their earnings call is replete with references to “autonomous” services of one sort or another, and Oracle’s long-term commitment to them. Oracle uses the term to reference an implementation of PaaS or web-service elements that are self-provisioning, self-sustaining, self-managing. Think of an autonomous service as an intent-model implementation of a feature set. Conceptually this isn’t a huge shift from the web service offering of others, but it’s a positioning shift and a potential advantage. On the other hand, Mark Hurd has this to say: “Let me talk to you a little bit about our ecosystems. Our app ecosystem year-to-date is up 12% and we continue to grow faster than the market. Less than 15% of our apps customers have started to move their core apps to the cloud. Between customers that have partially moved and those not started yet, we have an enormous opportunity in front of us.” This sure sounds like the old “Love is just around the corner” theme to me.
Mark, those core apps are not going, and strategies aimed at exploiting that inevitable end up inevitably failing. Ellison and Hurd need to get their thinking aligned here, and it’s Larry and not Mark that’s right. However, the problem with the truth here is that it generates a complicated cloud value proposition, particularly to Wall Street, who wants if not instant gratification, at least next-quarter gratification.
The truth about the cloud is that it really is different, it really does change everything. Why then would we think we could simply move something to it? This is now, and has always been in the long-term sense, a development-driven migration. That takes time, which is why it’s not easy to accept. However, success in that long-term cloud depends on doing the right thing, and it’s hard to see how that happens without accepting the truth.
Even Ellison may not have the vision down pat. The Oracle concept of “autonomous” bends quite a bit toward an SaaS model, whatever Oracle calls it. Oracle does have strong support for middleware tools (Java is Oracle’s, after all) but they also have a tendency to play to the crowd in positioning pieces of their approach as “new” even if it disconnects the elements from a common theme, and each other. That’s not the best way to create a competitor to popular cloud web service suites, all of which are presented as an inventory from which developers can draw.
Where does this leave Oracle? Their understanding of the market challenges may be strong, but they seem to be limiting their ability to move forward by refusing to accept where “forward” really is. “Play to the Street” is fine as long as you realize you still have to sell to the market. Oracle needs better positioning, and a stronger set of developer tools for its cloud, to encourage the real opportunity in the cloud.
Where does it leave the cloud? Nowhere it hasn’t been all along. Anyone who thought, as Hurd said, that all the legacy stuff is moving relentlessly and automatically toward the cloud is dreaming. Drawing cloud disappointment from Oracle’s results is easy if you don’t mind overlooking your own ridiculous expectations. The cloud will move forward, as all technologies do, based on exploiting its benefits. Eventually even the Street will see that.