The biggest players in a space always set the tone, but they don’t always tell the story. Oracle last week turned in a good quarter, and they’re in many ways an outlier in the public cloud space. They don’t figure in most media cloud discussions as they rank number five in most public cloud reports, but they do represent a fairly unique blend of traditional (IaaS) and SaaS cloud services, and they do better in the latter. They also represent a company that’s made the transition from selling software to selling cloud services pretty well. They’re also the (apparent, but with unspecified terms) winner in the TikTok battle, which I’ll leave out of this blog pending more detail.
Financially speaking, Oracle reported a successful quarter, not only beating estimates but beating versus last year, pre-COVID. They also guided higher for the next quarter. The bad news (at least somewhat bad) is that their latest quarter was below both of the prior quarters, so they did have some exposure to the COVID problem. They may have a better exposure to the recovery, though, and it’s the market factors that create that exposure that make them interesting.
The impact of COVID on enterprise IT is still evolving, but it’s pretty clear that the virus and lockdown have influenced budget planning. Today, over two-thirds of enterprises tell me that they plan to shift more spending to IT-as-an-expense, away from traditional capital-centric IT. They like the idea of being able to grown and shrink spending to match their expected revenues, and they realize that a hit like the one they got from COVID could be weathered more easily were they more agile.
Some software vendors have addressed this trend, visible even before COVID, by shifting more to a license basis for software versus payment-and-maintenance, and licensing based in some way on usage rather than something static like company size. However, the most obvious way to address a need to shift from capital-IT to expense-IT is to use the cloud. But….
…there is a big difference in the agility of cloud services. Traditional cloud services will largely displace data center equipment and/or data center incremental investment. Since cloud hosting tends to consume either newly developed software or software that’s moved from somewhere else, it doesn’t impact software costs (unless you’re unlucky enough to have a strange software license that might actually charge more for cloud hosting). The kind of cloud service that best fits the goal of shifting IT costs from capital to expense is SaaS, which happens to be the big focus of Oracle.
Big, but not exclusive. Oracle also has an IaaS cloud offering, though their market share in IaaS (which I estimate at about 6%) is less than its share of SaaS (which is about 12% if you include Microsoft Office 365 as a SaaS offering, or over 28% if you don’t). This year, I’ve noticed that Oracle is cropping up in comments enterprises make to me about cloud planning, which it didn’t do much in 2019. Companies who were willing to talk about the reason had an interesting tale to tell.
Shifting to a SaaS model isn’t easy for enterprises, for the obvious reason that whatever applications account for the largest part of their IT budgets aren’t provided in SaaS form. They have to change applications to move to SaaS, and that sort of change can create major pushback from line departments whose users see different interfaces and often different process flows. That’s problem enough, but there’s another problem rarely talked about in SaaS transformations.
Moving applications to SaaS form, to save money, has to displace IT resources, which means that the data center is likely to have less overall capacity. Moving applications to SaaS may also have an impact on how the applications integrate with other applications that haven’t been moved, and perhaps can’t be moved yet. Some users are telling me that Oracle’s SaaS/IaaS combination, combined with Oracle’s features and skills at integrating the two inside Oracle’s cloud, facilitates their shift to SaaS. It might then be that Oracle’s approach will gain them not only SaaS market share but IaaS market share as well.
Oracle cited some indication of this on their call. After citing analyst firms’ notice of their SaaS offering, Ellison says that “…what’s interesting is that those same analysts are beginning to take notice of the technical quality and customer satisfaction associated with Oracle’s Cloud infrastructure as a service business.” It’s likely that the analysts, like me, were hearing from users about their strategies for increasing SaaS adoption.
Oracle, of course, had the advantage of having applications they could move to the cloud in SaaS form, and it’s actually fairly easy to spawn a user-specific application instance on top of an IaaS service and frame the offering as SaaS. Over time, you could then redo critical parts of the application to facilitate more efficient use of the compute platform.
The ability to create a symbiosis between a SaaS and IaaS strategy is helpful, but you need SaaS to drive the bus here. The big question in both software applications and cloud computing is whether the COVID challenge will result in a major shift toward SaaS, which would imply a major shift away from enterprise custom development in favor of packaged software. It’s not rational to assume there’s much money in framing an enterprise’s own software as SaaS; it has to be a vertical or horizontal package.
Enterprises don’t write nearly as much of their own software today as they did in the past. I can easily remember a period when the larger enterprises wrote most of their own applications, and when even a “fourth-generation language to facilitate development (what we’d call “low-code” today) was a revolution. A prerequisite for acceptance of SaaS is an acceptance of canned applications to replace self-developed stuff.
That’s not something that develops instantly, and we have to remember that we’ve had SaaS for some time. There have been local successes in SaaS, mostly in the very applications that Oracle and Salesforce compete in, but broader SaaS has to come from broader and more vertically focused applications. That’s something Oracle may be thinking about, but I think that class of SaaS, and the full realization of Oracle’s ambitions in the cloud, may take some time.