Infrastructure as an anchor
Oracle’s race to the cloud has offered multiple successes to its investors and some disappointment as well. No transition of this magnitude can be expected to run like clockwork but the difference between revenues for Oracle’s SaaS apps for last quarter, $1.1 billion, and those for its cloud infrastructure, IaaS, at $396 million, should at least get you thinking.
There’s a good explanation for this and it’s surprising that the company hasn’t done more to provide guidance to its financial analysts but then again, the purpose of reporting your finances is just that. There’s no room for anything that can look like an excuse. That’s too bad because it can lead people to wrong conclusions.
I spent a day at Oracle last week receiving a briefing on the company’s roadmap for the year ahead. While some of the information was presented under nondisclosure, I can say that the briefing ran the gamut and went into areas that I am not expert at such as serverless apps, bare metal servers, and the new autonomous database. But I am coming up to speed as fast as I can.
The company’s cloud architecture and IaaS offering gave me one surprise. Oracle intends to roll out 13 distinct regions for IaaS connected by a very high-speed backbone. Each region is highly modularized with triple redundancy and can easily scale as demand increases. All of this is very important because, I believe, this is not simply about cloud computing but about another disruptive innovation we will all face in the next few years.
The disruption is the formation of an information utility and it’s all but certain that no single corporate entity will own all of it. As big as Oracle’s plans are, Salesforce has similar ideas and while we’re at it so do Microsoft, IBM, SAP, Amazon, and a number of hosting services too numerous to mention. Yes, there will be consolidation and those too numerous vendors will likely be scooped up first.
But back to Oracle—$396 million is a lot of money but small change compared to its SaaS number and small compared with the company’s aspirations. The logical conclusion that many finance people drew from that number is that Oracle has a “problem” or that it’s not executing well in PaaS and IaaS, but really? Not exactly.
According to Oracle President of Product Development, Thomas Kurian, who led off the analyst briefing, only 3 of the 13 regions have been deployed so far. More will hit their markets this year but the rollout takes time and we’ll still be talking about it next year.
Not having the regions up and running means that in some strategic places, the company doesn’t have IaaS to sell. So the $396 million is a look into a still very much expanding world. Just for fun you could say that 3 of 13 is just under a quarter of the deployment. If the other regions were running as well as the three in place the IaaS and PaaS numbers might easily be four times the reported revenue number. It’s unclear if that’s good or not since we don’t know a lot such as capacity and utilization of the existing regions, but still…
So for now, the revenue picture remains lumpy but now we have more explanation and color for the results. Hopefully this also gives financial analysts something to consider as they try to figure out what the numbers mean to investors. The rest of the market seems to expect a bright future for Oracle as its stock continues to do well despite the lumpy earnings.
There’s also discussion about renewed competition in the database market circulating after a story in The Information suggested that companies like Amazon and Salesforce were building competitive database products and would depart Oracle in the near future. I don’t agree. If for nothing else, building a database is a big effort and one that detracts mightily from a company’s primary business interests. It is dilutive of effort and cannibalistic of resources. For these reasons it should only be taken on as a last resort. That’s the way any business should look at any effort to self-source rather than go to the marketplace for needed resources.
On top of that I spoke with Parker Harris CTO and co-founder of Salesforce recently and when asked about the story he said, “We have a good relationship with Oracle and we use a ton of it. We are not getting rid of the Oracle database. We are working on technologies that add capabilities around the edges, like sandboxes. We will have SQL Server and Oracle for a long time.”
No surprises there. It’s been true for a long time that in these big markets sometimes we compete and sometimes we cooperate. In the era of the Information Utility I expect a lot more co-opetition.
Mud season
It’s mud season here in New England that time of year when everything merges into an amorphous mess. The grey sky merges with a grey landscape made into slop by continual rains and dirty grey melting snow. It’s hard to tell where one thing ends and another begins but eventually the sun comes out and dries everything, the sky becomes distinct from the horizon, plants bloom from the firming ground and order is restored. What better time for Amazon and Salesforce to announce another partnership?
I have to say I read the press release and articles from Tech Crunch and ZDnet several times in order to separate things because I was confused. The announcement from Salesforce and Amazon today said that Amazon Connect and Salesforce Einstein would work together to provide an intelligent service offering to Amazon’s service customers. Ok, I get it, but why?
Amazon has been climbing the value chain in cloud computing for some time. Initially its AWS service provided infrastructure as a service that enabled legions of businesses to ditch the computer room and run their operations in the cloud. Additionally, the company ate its own dog food by building a customer service cloud offering that not only supports its internal needs but increasingly supports third party customers, the most recognizable among them include, GE Appliances, communications company Bandwidth, and AnswerConnect.
Amazon has other CRM components as well and relationships with Zoho, Zendesk, Freshdesk, and others. Today’s announcement pairs Salesforce’s Einstein AI tool with AWS Connect to produce a savvier version of Connect. There are and will be more integrations of multiple solutions across product lines, for example both Salesforce and Amazon have IoT offerings and we can expect more news on them in the near future, I think. But there’s a part that I still don’t get, a part that makes me think of mud season.
Historically, Amazon has pushed into new industries and markets with economies of scale, its ability to deliver something at lower cost than others in the space and consolidate market power. AWS was and is a great case in point. Unfortunately, the strategy is also one of accelerating commoditization in which only a few survive and the trend is to make a living on razor thin margins and, once the market is consolidated, reduce innovation. I understand commoditization, it’s a facet of capitalism but innovation has to have a place too.
That’s why I see mud everywhere. Can a company that started as a retailer spin off so many tangential businesses and continue to dominate all of them? Can CRM dissolve into a Salesforce-Oracle-Microsoft-SAP-Zoho and now Amazon soup of similar offerings and still offer differentiation?
My cautious answer is yes and not because of anything that Amazon is doing but because Salesforce is in the mix. Salesforce has a smart and notoriously short attention span with which it innovates a new idea and just as the rest of the market picks up on it, moves on to another object that it shines up and spotlights. Salesforce did this with social, mobile, IoT, analytics, and now its artificial intelligence offering, Einstein. With this strategy Einstein could end up powering a lot of customer facing solutions in service, sales and marketing.
This approach seems to be what Salesforce needs right now. As it is approaching $10 billion in revenues, it is, I think, also reaching a ceiling on what it can sell by itself and truth be told, it has been in this spot for some time. Selling through partners does two important things. It greatly enlarges the number and quality of its revenue streams but it also leaves Salesforce more or less free to do what it does best.
Salesforce has rapidly become the innovation engine of the industry. Its ideas drive markets and its technology is in many cases first among equals (check out the Magic Quadrants, I am not making this up). As long as it can maintain this position as the high value innovator through core technologies like its Salesforce1 Platform, Salesforce can be the exact opposite of Amazon. Where Amazon goes for the low cost commodity position, Salesforce captures the high-margin ground of innovation.
Is that a sustainable business model? Ask Thomas Edison.
Amazon Drops Its Fees
In a move that surprised me, at least, last week Amazon announced that it was lowering its fees for on-demand infrastructure by as much as eighty percent. Should we be rejoicing or is this a sign that something is amiss?
Back around the turn of the century something similar happened in at least two situations. The first was that telecommunications companies and cable companies buried enough fiber optic cable to satisfy demand for a long time. It became known as dark cable because there was no light going through it implying there was no demand either. That was right. It took years for the marketplace to absorb all that fiber and in the mean time some companies that bet large on fiber anticipating immediate returns, crashed and burned. Their dark fiber became a shrewd investment at bankruptcy for others with deep pockets and a long time horizon.
Around the same time there was also the ASP boomlet that fizzled like a wet firecracker. Much like todays’ infrastructure-as-a-service (IaaS) vendors, these guys tried to sell computing capacity with or without conventional applications delivered over a VPN. It was a Rube Goldberg-like device, in retrospect a lead balloon, and the idea suffered an ignominious demise.
Fast forward to more recent times. Infrastructure providers told us this time would be different. Advances in server capacity, dirt cheap storage capacity, and applications that no longer ran in the client-server paradigm but instead used HTML and REST computing would make the idea viable. Then last week happened.
So the question is which is Amazon’s announcement more like — over abundant dark fiber or a lead balloon? If the latter, can we expect that this idea of IaaS will ever fly?
I really dislike it when a discussion comes down to splitting the difference — it’s both! A floor wax and a dessert topping, as the old SNL skit has it. Tastes great and less filling! Please spare me that. To me splitting the difference is too often the product of fuzzy logic or lack of creative understanding. That’s why I reluctantly come to this conclusion based on my analysis of the announcement.
First, the eighty percent reduction was for something called dedicated instances within the same region, which is equivalent to the old ASP model. One customer, many seats, and dedicated computing power for all of them, I get it. However, and this is where it gets more interesting, the discount was only thirty-seven percent for dedicated on-demand instances, which I think means shared resources. Maybe not multi-tenant databases but a big compute-storage farm that serves customers and keeps the data separate like not letting the peas touch the potatoes on the plate. I get that too. So what’s going on?
Perhaps, and I don’t have enough data to say definitively, the demand for old style ASP is just not there. That would be a good thing because it would indicate that companies realizing that they need to go to the cloud also believe that moving the data center without doing anything else to their computing architecture is a non-starter. If so, good.
The dedicated on-demand instance discount tells me a different story. It says there isn’t even enough demand for moving legacy applications to a shared environment and that included buying net new legacy apps and just putting them in the cloud. It tells me that if a company seriously contemplates moving to the cloud, it is also re-examining its approach and opting to use more modern technology that is cloud native. This means scrapping the old premise-based ERP and CRM and taking a fresh look at companies like NetSuite and Salesforce. Both companies do seem to be adding customers and they have to come from somewhere after all.
Moreover, companies making these switches are likely being persuaded in part by the ecosystems surrounding successful cloud companies. Since they have the hood open they’re not content to just change the oil and check the fluids. They’re doing a tune-up, which requires new parts — social, analytic, and mobile — that come from the ecosystems. This should all be good news because it says that companies are investing (and lowering their costs at the same time) anticipating further economic expansion.
Of course, I can be wrong. There’s only so much you can conclude from a simple announcement, though a price cut, especially a significant one, tends to indicate a vendor is going in a new direction, in part because the old direction may not be working out. Microsoft has also been cutting prices on some Dynamics products, the Surface tablet, and the Surface operating system for instance. In that situation, though, I suspect the company is trying to find its level and not having a fire sale because those products are all the latest and greatest from the company and software inventory is a bit of an oxymoron.
Time’s up for theorizing, we’ll have to wait for the next quarterly reports to understand how these adjustments are working out.
