Oracle goes into its annual customer conference, Oracle OpenWorld, flying high according to the news from its earnings call on September 15. It’s clear that the company has succeeded in pivoting from on premise to cloud software offerings and while the vendor will continue servicing its on-premise customers, the revenue acceleration from cloud products and services suggest that Oracle will derive an increasing share of its revenues from cloud solutions in the future.
Co-CEO Safra Catz told the earnings call that combined revenue from cloud, SaaS, and PaaS for the quarter was up 82 percent from the prior year and above 80 percent of her guidance to analysts at $816 million. According to the company, organic growth in SaaS and PaaS has now accelerated for seven straight quarters. It was a very good quarter for Oracle.
CTO and founder Larry Ellison said that the growth was primarily from new business and not from converting a large number of Oracle’s customer base to cloud solutions. This is significant because the customer base is seen as a huge reservoir of future business. However, it must be noted that in another part of the presentation Catz said that license revenues were down, a natural consequence of the shift to cloud computing but one that nevertheless must be stated.
While Oracle’s cloud revenue growth was significant and overall revenues were substantial, at $8.7 billion, the company still has some distance to travel to reach the performance of some competitors like Salesforce.com. Salesforce’s annual revenues are roughly on a par with Oracle’s quarterly revenues, but Salesforce captures all of its revenues—north of $2 billion in a quarter—from cloud operations.
Additionally, although Oracle’s cloud revenues are significant, executives are careful to point out that they come from infrastructure services as well as software as a service. Oracle competes with companies like Amazon whose AWS services deliver running computer hardware with operating systems and databases pre-installed so that customers can install and run their software without the effort expended in installing and managing this infrastructure.
So while Oracle’s cloud revenues are impressive they also are not a direct comparison with pure cloud companies but that’s to be expected given its position and large legacy base. But success is success and Oracle has now established the momentum and a credible claim to being a major player in the new world of cloud computing at a time when much of its installed customer base must be wondering about what comes next and how to reduce the costs associated with running a modern IT department.
Cloud solutions are clearly a part of any long term corporate technology direction and the news shared by Oracle this week will help the company’s cause next week as it makes its annual pitch to customers to further invest in its products and services.
For once, Oracle OpenWorld went long on substance. That’s hard to do when you have so many products to discuss and Larry Ellison pontificating but Larry was both under control and substantive though he couldn’t resist taking a few shots at competitors. So he announced that his team hardly ever sees SAP and IBM in deals these days and gave due praise to cloud pioneers NetSuite and Salesforce.
Interestingly, he always mentioned NetSuite, which he owns a considerable share of, before Salesforce, which he invested in back in the day, despite the fact that Salesforce is six times larger than NetSuite by revenues. Both companies are doing just fine thank you veddy much.
Beyond the product revisions and enhancements I saw two real news items: Oracle is now (at last) a cloud company and the company put an important marker down on improving IT security—first things first.
Oracle has always been in a different business than the cloud pioneers in that Oracle has a huge customer base (420,000 customers on one sign) to bring along to the promised land compared to the pioneers who more or less invited customers to start over, in many cases, in the cloud.
That reality permeated the keynotes and discussions led by Ellison, in a Sunday keynote, CEO Mark Hurd, on Monday, Thomas Kurian, President of Product Development, Tuesday, and Ellison in another keynote on Tuesday. Each man offered the view that for the next one to two decades, enterprises would operate in a hybrid—on-premise and cloud model—transition state. Further, each was careful to articulate that Oracle would continue to develop, maintain, and enhance on-premise applications during that time. No hard date for the end of the transition was offered.
It was a delicate balancing act trying to assure big enterprises considering the cloud because their deployments represent a large mass of computing that won’t easily unravel over night. Still, my thinking is that while there might be traces of on-premise applications 15 years from now, most of the transference will happen quicker for two reasons. First, cloud apps will make their users more competitive and second, security improvements will make cloud increasingly attractive.
By itself, cloud is just a delivery mechanism and there’s little about it to recommend it for pure delivery. But layered on top, as most people know, there’s a total cost of ownership advantage to cloud systems. Even more than this, however, is the reality that when businesses transfer to new platforms, most take the time to reimagine the business and the apps. Consequently, the great cloud migration of the rest of this decade will be a moment when businesses ditch some spreadsheet apps that never worked very well so that they can achieve long desired end-to-end process support for their businesses. This migration from transaction systems or systems of record to process oriented systems is where the real payback for moving to the cloud will be found. It is also a real source of competitive differentiation for most companies, which will drive rapid adoption so hang on, it should be an interesting ride.
At the same time, we need to acknowledge that when those businesses start to reimagine their business processes, it will open up many to competitive bidding for those new apps. That’s no surprise and one big reason that Oracle is making a conscious effort to court customers by being with them in their moments of truth as they contemplate their next moves. In my opinion that’s smart, let’s watch how it plays out.
Security—What’s old is new
Many people shook their heads when Oracle bought Sun Microsystems because they saw Sun as playing in a space that was rapidly commoditizing. Some thought it as big a folly as Carly and HP buying Compaq but almost instantly Ellison began inventing differentiated hardware that set new standards for in-memory operations that vastly accelerated business processing. Devices like Xadata, a storage device that leverages flash memory so that storage operations could happen at memory speeds rather than much slower disk speeds led the parade.
At OpenWorld, Ellison announced that the new security direction of IT based on Oracle products is to encrypt all data. He introduced several vaults, like a password vault that stores unique encryption/de-encryption codes that users could keep on their own machines (hopefully a machine not connected to the Internet) or on-line in an Oracle cloud. But that was nothing, the bigger news was a new M7 CPU chip that offers security at the silicon level. This was instantly controversial in my circle and needs some explaining.
Security in silicon
Oracle’s approach to security with the M7 chip will be hotly debated with some people thinking it’s just a speed bump for dedicated hackers while others might see more promise. I think I am in the latter camp though there’s a huge caveat.
Oracle/Ellison discusses the security debate this way. Securing IT should happen at the lowest possible level in the stack, so for instance securing applications and data should happen at the operating system level which is also a logical place for hackers to do their worst. So to secure everything we need to find ways to bring security into silicon a place where hackers can’t make changes because hackers can’t alter chips. The M7 imposes what’s basically a check-in, check-out scheme for memory. It allocates a given amount of memory to tasks and if some piece of malware tries to occupy the memory space, overflowing the set parameters, the system can easily detect the intrusion and alert operators. Software bugs might operate the same way so there might be a few false positives as this paradigm gets going. So what? This is a crude description and for a more detailed explanation check out Oracle’s video cache from the show to see Larry explain it all.
As good as this sounds, and also incorporating M7’s very fast decompression algorithms, this security only operates on servers, it does nothing to protect desktops or handhelds. The advent of the M7 could be an incentive to hackers to turn their attention to smaller machines, which could be infected to do things on behalf of bad guys. If so, M7 technology could be coming to a future PC, laptop or smartphone
On the other hand
While OpenWorld was a good show, it could have been better in some details. Some of the discussions of platform and infrastructure could have been helped along by video animation of some arcane points. I found myself watching demos that went on too long only to show a static screen with one thing changing in a window to indicate an infrastructure accomplishment. Oracle is long overdue for investing in more video for these events and judging by his comments at one point, I think Ellison took undue and perverse pride in his “graphically challenged” slides as one Tweet put it.
A couple of years ago, Oracle shrewdly ditched the CRM badge and called itself a CX or customer experience company and there were enough CX announcements to make front office people happy. However, it should be noted that the Oracle CX event will happen in April in Las Vegas so stay tuned for that. Another post will dive deeper into CX at OpenWorld.
The critique I’d offer on CX is the same I’d give to any CRM vendor today. There’s a big discussion of products but too often it revolves around point solutions for marketing automation, sales enablement, mobile computing or whatever. This represents a transaction mindset and the front office needs to move aggressively to full end-to-end process support because that’s an important marker of the cloud.
My impression of all CRM vendors today is that they’re selling to the lowest common denominator, i.e. aiming for the user that just wants to use CRM as a glorified rolodex. That user represents about half of the market so the orientation is understandable but I wonder how it sits with the more advanced users.
At some point we need to flip a bit and concentrate more on processes that the first half of the market can best use. That’s why I am eager to see what happens in Las Vegas in April and at other CRM vendor events next year.
I’ll close now
Oracle has become a real cloud company with offerings at the software, platform, and infrastructure levels. But it still takes a data center-centric approach to the business especially when trying to reassure existing customers that there’s time for an orderly migration. It is a “new” cloud company in that it has thousands of successful and very reference-able customers and not tens or hundreds of thousands. Nonetheless, it is making strides and forecasts more than a billion dollars of new cloud business in the year ahead.
The company’s ace in the hole as it continues moving to the cloud may be its security through silicon approach, which must still be vetted. I might be in the minority about the security announcements but it strikes me that locking down memory and CPU and encrypting data will enable users to starve any malware that tries to gain a foothold.
Since many cloud and subscription vendors as well as enterprise customers already use Oracle DB and many are buying Xadata devices, we could see a dramatic decline in intrusions and data thefts. But that won’t end the problem; it might simply make the hackers focus more intently on the desktops and smart devices. I don’t think the IoT will take off until security is well in hand and that will ensure the security discussion continues.
A little while ago I got a nice comment from buddy and guru Mark Tamis. He wrote, “I was thinking, it may be a good thing for Oracle to use its cash and buy up Salesforce, and then stick Benioff at the helm. What do you think?”
I have to say it was and is an interesting idea because Larry is 70 and just stepped up to Executive Chairman, leaving the CEO duties to Mark Hurd and Safra Catz. This idea has been surfaced before too. About a year ago it came up and died a gentle death when few outlets picked up on it.
Also, it might be human nature to think like this — to look for a single strong leader to take us to the promised land (whatever that is) — but real life experience seems to run in the opposite direction. Rather than seeking the uber boss, societies, at least the successful ones, instead split the organization whenever it gets too big.
There is a lot of historical precedence for the split over the big boss approach and it has changed over time in a predictable way. To understand the predictability you need a little math in the form of the Dunbar Number.
The Dunbar Number is actually a very elastic thing and could more easily be described as a concept or even a law of sociology (I dunno, I ain’t a sociologist). It says that the average human can keep track of about 150 or maybe 220 people and after that not so good results. This seems like a big number to me but I am an introvert, not shy, just not into maintaining lots of relationships and I am quite comfortable with ideas.
If you look at human organizations, pre-social media, the Dunbar concept applies remarkably well. Of course, CEOs are always trying to limit their direct reports but go up or down a level and you see interesting things. For example, in the Middle Ages, monasteries were working communities of about the Dunbar number. When one got too big, the abbot split off a unit and told one of the members to go elsewhere, build a new monastery, and keep up the tradition. That’s actually how the monastic tradition spread and if you read “How the Irish Saved Civilization” by Thomas Cahill you’ll see the story played out.
Now, social media has turned the Dunbar Number on its head but even with that assist there is a practical limit to the number of friends you can have even online. Perhaps that number varies by individual but the point is that it’s finite and probably not as big as the number of followers many of us have.
There are other examples too such as the military company, the atomic unit of military effectiveness. Corps, divisions, regiments, and battalions are all different aggregations of companies. But what’s this have to do with Oracle? Well it’s indirect. A story in today’s New York Times announces that HP’s CEO, Meg Whitman, wants to split the company into a PC unit and an Enterprise one.
My analysis is that HP is too big to be effective at pursuing a strategy even with all of the computers and communication infrastructure the company has so it’s a natural to seek a way to group similar products and skills into separate companies. Refer to the monastery idea and consider Dunbar and ask yourself if this makes sense.
So, all this is to say that my response to Mark Tamis and his idea is to think small-er. Rather than trying to find the uber boss, if that person even exists, it might be time for Oracle to consider cleaving itself into logical units that have more autonomy than they currently do but that still tree up to a single entity. This might be a worthwhile trend for a lot of first generation Silicon Valley companies.
Oracle is currently made up of a Byzantine assortment of in-house developed technologies and bought companies. It is also a player in almost every part of the tech sector from hardware to apps. The company’s current tag line, “hardware and software engineered to work together” is well chosen to give an impression that is no longer needed. The goods might be engineered together but that’s not the same as being designed and built for the purpose from whole cloth. In fact, Oracle reflects the marketplace it tries to serve which is sophisticated, complex, and aggressively heterogeneous, whatever the marketing lingo says.
Certainly Meg Whitman is rolling the dice with this split but from my perspective it is a logical and appropriate thing to do, and one that has historically delivered results. Would Oracle ever consider splitting into a hardware enterprise, a legacy software company, and a third dedicated to more modern web/social/mobile technologies? Never say never out in the valley, except maybe to the idea of Benioff taking over Oracle.
At Oracle Spring Analyst day last week, Mark Hurd spoke about simplification and about how the industry needs to reduce complexity, a good message. But he equates simplicity with reducing the number of vendors that a corporation works with — at least in IT. However, history shows this is not the path to simplicity. It’s just a route to profits once a vendor becomes the only incumbent.
Complexity is often the signal that an old paradigm is reaching its asymptote. Simplicity, its opposite, often ensues but at the cost of exploding the old order. Mainframes didn’t get simpler, mini-computers became common and the number of vendors didn’t decline, it rose thanks to the standards that new vendors brought. Standards made it possible for lots of competitors to play and the competition made better products and services.
This paradigm busting continued when PCs and networks replaced both minis and mainframes and it continues as cloud computing replaces the data center and its ossifying stack. Standards for cloud computing, social interaction and communication, mobility and analytics all contribute to the new paradigm, which Hurd seemed to see as a glass half empty.
Standards make it possible for many vendors to compete without increasing complexity. In fact, without the standards brought by a new paradigm, the old paradigm simply collapses due to its increasing internal complexity. So, Hurd was right to offer simplicity as a goal but I think he was off point in suggesting that the current paradigm could or should be simplified.
Oracle is initiating a new paradigm that simplifies the old order albeit with its own standards which I hope will remain non-proprietary. I think in its messaging the company would be better served if it acknowledged that the road ahead is a new, and for a time, simplified paradigm. Then the massive influx of social and services providers makes sense and ceases to threaten the IT hierarchy.
Simplicity is a good idea. It often means a new paradigm is forming and those who initiate the change are usually the winners. Oracle is both instigator and guardian of the status quo. It must engage in its own creative destruction. So far the company has walked a fine line of defender of the faith and iconoclast. The challenge ahead is for the company to stay on course and not to believe all of its marketing messaging.