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Oracle Cloud – A Brief History (and Prediction)

Thought-Leadership by Eric Guyer
on June 30, 2015

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Many industry analysts are suggesting that Oracle is at the beginning of a painful fiscal transition to subscription-based revenue, which is recognized over time. While that could be, Oracle is not late to the cloud game. Not only has it been in the cloud game for nearly 20 years, but its legacy business is actually getting stronger.

Oracle Rebrands Itself to Join the Cloud Revolution

First, those who have been around Oracle long enough may remember deploying Oracle applications to an internet browser back in the mid to late 90s. This technology (e.g., Forms Server) enabled Oracle in 2002 to introduce “Oracle Outsourcing”, an off-premises solution based in Austin, Texas. This was renamed “On Demand” in 2004, from whence Oracle reported its revenue as a separate business unit through 2010. While growth in that business averaged 23% annually, its profitability averaged only 11%, presumably because building and maintaining a data center is expensivei.

It was 2008 when Larry Ellison, Oracle’s CEO for 37 years, bemoaned that “Cloud Computing” was a fashionable name for what Oracle was already doing. Although he was right, it took another two years before Oracle would acquiesce and remarket On Demand as Cloud and commence its usual routine of claiming instant superiority in a new market.

Oracle is Only Getting Stronger

Second, for fiscal years 2012 through 2015, Oracle has reported cloud subscriptions as 5, 9, 11 and 15 percent, respectively, of overall new software revenues. Analysts argue that this slow but steady growth in cloud subscriptions isn’t enough to fill the gap of a stagnating traditional license business, which was down by 9% in FY15.

Safra Catz (co-CEO of Oracle) spun this “subscription versus perpetual license revenue” argument to suggest that a $1M subscription is worth $10M over ten years, whereas a traditional $1M license deal is worth $3M over the same time frame. While there are flaws in her argument, the truth is that Oracle’s grip on legacy support is tightening. Oracle reported software support in FY15 to be up 4% from FY14. Further, software support is now 81% of overall margins, up from 77% in FY14 and 74% in FY13.

In other words, while new license sales are stagnating, the support business continues to pump tens of billions of dollars into Oracle’s research, development, and acquisition activities. If Oracle wants to win in the cloud (however that is defined), then it will. It has the money and the complete portfolio of products from hardware to business applications, whereas Workday, ServiceNow and even Salesforce.com are point solutions in comparison.

How Should You Transition to the Cloud?

The question we seek to answer for our customers is whether cloud deployments and subscriptions can be an optimizing dynamic, rather than additive to existing spend. If you listen far enough into Oracle’s FY15 earnings call, it’s clear that Oracle believes—and most customers are demonstrating—cloud to be an additional expense rather than replacing existing systems in a more cost-effective manner. This should not be the case, especially given that a recent report suggests at least 30% of servers sit idle. This is problematic when you’re paying expensive perpetual support based on the underlying hardware.

Unfortunately, many organizations jump into the cloud expecting that it will replace existing hardware and reduce the bottom line as a result. But without a proper roadmap for transitioning essential IT systems to the cloud, organizations are doomed to spend recklessly in areas they may not even need.

We at SoftwareONE offer a variety of services to help you make the best decisions based on your unique business needs. Click the banner below if you would like to have a conversation with one of our Technical Architects regarding your IT strategy.

iFrom Oracle’s Form 10-K reports: http://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0001341439&type=10-k

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