web analytics

Oracle

Oracle posted a fourth quarter result which missed market expectations on Thursday. Investors dumped the tech giant’s stock on the news with the share price falling almost nine percent.

Net income for the quarter was US$3.65 billion, down four percent on US$3.8 billion in the same quarter a year ago.

While Oracle didn’t drop the ball in any department, the result shows younger, nimbler competitors are squeezing the company on several fronts.

Keep calm statement from the bosses

Management moved to calm investors with a prepared statement talking of the company’s relatively successful move to subscription-based sales. It mentioned strong growth in software-as-a-service which is up 25 percent and growth in infrastructure-as-a-service.

The statement quotes CEO Larry Ellison saying: “Oracle is now the second largest SaaS company in the world. In SaaS, we’re in front of everybody but salesforce.com. In IaaS we’re larger and more profitable than Rackspace.”

While the company is doing fine in these new business areas, they are small compared to Oracle’s core business which appears stagnant. Like other old school technology companies, Oracle‘s challenge is that the new growth areas have margins far lower than in its traditional business. The company has yet to refine its business model to cope with that shift.

wellington cloud

Gartner reports global software market grew 4.8 percent in 2013.

“The software market has been changing shape over the past five years, and the cloud is driving the bulk of this change as software vendors acquire and provide applications and infrastructure technology to support the cloud and the Internet of Things (IoT) movement,” said Joanne Correia, research vice president at Gartner. “A clear indicator of this is that for the first time we have a pure cloud vendor in the top 10.”

As you’d expect Microsoft remains top dog in the software business. The company’s software revenues were up six percent beating the rest of the market. This success underlines Microsoft’s need to stay focused on software while Gartner’s comments about the shift to cloud computing suggest recent moves such as delivering Office for the iPad are all part of keeping that momentum going.

After spending years running neck and neck with IBM, Oracle is now clearly in second place. Big data, the interest in anything cloud-related and booming database sales mean it is likely to stay there. Oracle’s growth isn’t spectacular, but IBM appears to be slowing.

Salesforce – the only cloud pure-play on the list – has moved into the tenth position. It is the fastest growing software company putting on 33 percent last year.

What do IBM, Dell, HP, Oracle and SAP have in common? All are mature technology companies – the youngest is Dell formed in 1984 – and they all bank on cloud computing getting them out of the doldrums.

There are a few things wrong with that idea.

First, it was cloud computing that got them into trouble in the first place. Hardware sales, particularly servers, fell as companies switched applications and processing to the cloud.

Cloud-hosted applications disrupt high-end software. It challenges high-margins, undermines the need for infrastructure and support that allows software giants to get away with huge costs.

Oracle, originally a software company but since buying Sun Microsystems with a large hardware business, is in a more nuanced position. It lost server sales to cloud computing while its software business is challenged by nimble, commoditised cloud-based apps. SAP faces just the app challenge.

Second, the old school companies have enjoyed relatively high margins in at least parts of their businesses. Even Dell’s commodity hardware margins were higher than the wafer-thin margins Amazon squeezes from its IaaS – infrastructure as a service – business.

Cloud needs scale

Amazon makes money because of scale. Huge scale. According to Gartner, the company has five times the IaaS capacity of the next 14 competitors added together.

The economics of scale mean each additional customer is cheaper to serve and sheer market size cuts the cost of acquiring customers.

Amazon’s scale means it sits bestride the cloud market like a colossus.

Third, Amazon has a huge first-mover advantage. That’s always a problem when any new technology comes along. It’s a bigger problem than usual with the cloud where being first means being ready to meet demand while others are still building capacity.

It means learning how to make savings – Amazon has dropped cloud prices 40-odd times in eight years of operation.  Do IBM, Oracle and SAP want to follow Amazon down that path?

Legacy

It also scores because it doesn’t have any legacy. There are no existing business or customer contracts to protect. Apart from anything else, this means Amazon is quick to innovate, there’s nothing to lose from moving fast. And that’s scary for competitors.

None of the would-be cloud giants can move without pain. In many cases, the pain involves converting high-value, high-margin products and services into commodities. There’s no path around this, but it will make it harder for them to bite the bullet.

Fourth, Cloud computing leaves little room for differentiation.  IBM, Oracle, HP and SAP all think they can add value, perhaps they can do a little around the edges, but on the whole, customers aren’t willing to pay for it when the alternatives are almost as sophisticated, but an order of magnitude cheaper.

To sum up: The big IT companies have little alternative to head to the cloud, their customers are going there with or without them.

Whether they can maintain customer relationships, add value and continue to prosper is far from given. You’d have to pick that one or more of the brands, IBM, Dell, Oracle, HP and SAP, isn’t going to make the transition.

Oracle

Oracle’s run of bad financial results ended today as revenue and earnings beat market expectations. The headline news is the company managed to cut the losses in its hardware division.

Best known for software, the company acquired Sun Microsystems four years ago. Ever since the business has been in free fall.

Oracle often tells journalists it remains happy with the hardware business and there’s a bigger picture that’s yet to emerge. Officially it repeats the message that it makes good profits from shifting kit even though its market share continues to decline at an alarming rate.

Oracle’s second-quarter results shed more light on this. During the quarter Oracle’s total revenue climbed 2 percent to US$9.3 billion. That’s better than the market expected and by any standards a good result.

The company reports hardware systems product revenue fell 3 percent to US$713 million. Meanwhile, overall hardware systems sales, a figure that also includes support, was static at US$1.3 billion.

Compared with recent reporting periods which saw large drops, it looks as if the hardware business stabilised during the quarter. On paper that’s a good result – the first good result in many quarters for Oracle’s hardware business.

During the results announcement, the company said it expects to record the first hardware sales growth since this acquisition during the current quarter.

Oracle aims to move from general purpose hardware towards more profitable, but highly engineered, systems integrated with the company’s software.  It’s a plan and a bold one, the rest of the systems market seems to be moving towards increased commoditisation.

Oracle

Oracle announces its fourth-quarter revenue on June 20. One thing I’ll be looking out for is the company’s performance in hardware sales.

Four years have passed since Oracle paid US$7.4 billion to buy Sun Microsystems. The goal was to become a leader in the high-end server business – the company calls them “Engineered Systems”. That’s code for an expensive box loaded with Oracle database and applications.

To date. the strategy hasn’t worked. Sales have not been strong.

The company’s hardware revenue dropped 18 percent in 2012. Market share fell from just over five percent to a whisker over four percent.

Perhaps the biggest admission of defeat – although no-one in the company would dare admit it – is the worldwide server alliance formed with Dell.

Company boss Larry Ellison continues to tell the world the Sun Microsystems acquisition was strategic and profitable. Maybe there are people who believe that. The simple truth is the world is moving to new computing models built around the cloud and those clouds don’t run on Sun kit.