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Is Oracle Finally Poised to Catch up in the Cloud?
Oracle Corporation is undeniably one of the most important enterprise software vendors in the world. The one area that Oracle has seemingly neglected over the past decade is the explosive emergence of the cloud and the dizzying array of XaaS offerings from the leading vendors in this market. Neglected until now.
With annual revenues of close to $40B, with a clear leadership position in the commercial database segment as well as healthy market share in the ERP application market, it is safe to say that Oracle is a cornerstone component for many businesses and their IT departments. Yet Oracle barely merits its own breakout of cloud market share as evidenced by Synergy Research Group’s Q3 2017 cloud market share report:
But to hear Larry speak about cloud at OpenWorld, and specifically targeting AWS, you wouldn’t know that Oracle is but one of many cloud service providers lumped into the “other” category! However, a direct comparison between the current cloud leaders and Oracle may obfuscate the underlying strategy that Oracle is systematically bringing to bear on the marketplace.
One must deconstruct the cloud businesses of Amazon.com and Microsoft to break through the high-level market share numbers and truly understand the focus of these companies. AWS is the clear juggernaut in the IaaS space, for example, yet is not a meaningful player at all in the SaaS segment where a “born in the cloud” company like Salesforce.com (CRM) is the clear leader. Microsoft, on the other hand, is tearing it up in both the SaaS space with O365 and Dynamics as well as the IaaS segment with Azure. So where does this leave Oracle?
Oracle’s Acquisitive Past
I don’t buy the line that Oracle missed the cloud boat. In fact, the business practices that have propelled Oracle to be one of the most successful and profitable companies in tech may have served to hold it back and impede its desire to move to the cloud more quickly than it has to date.
As a point of reference, Oracle has made over 120 acquisitions across all manner of technology and industry verticals. And while Oracle moves at lightning speed to incorporate these companies into the Oracle business model and licensing schema, it is not nearly as nimble when it comes to integrating the acquired technology into the Oracle tech stack – to the chagrin of many of the acquired companies’ customer bases.
While the pathway to the IaaS space is a greenfield endeavor for Oracle – requiring significant data center, R&D, and operational investment – the path to SaaS and PaaS requires the porting of legacy solutions to a cloud architecture, along with net-new functionality to attract customers to the more expensive, recurring revenue consumption model. Oracle claims to have been working for years on rationalizing its legacy ERP applications to be cloud ready under the Oracle Fusion product line, along with re-writing the Oracle database software to be optimized for cloud environments.
This technical debt has caused Oracle to lag behind its peers in the cloud revolution that is engulfing IT shops globally. In fact, many clients have expressed their frustration with being sandwiched between Oracle’s hyper-aggressive sales tactics pushing them to adopt cloud solutions, yet their inability to demonstrate feature/functionality parity with legacy Oracle on-premises solutions. This tide may finally be starting to turn in Oracle’s favor, at least as it applies to Oracle’s core database technology and its ERP SaaS offerings. In fact, Oracle has landed a mega-fish in its recent cloud deal with AT&T.
Oracle’s Cloudy Future
Oracle has clearly bought in to the cloud eco-system as being the future for the company, but it will not move haphazardly to the cloud at the expense of current revenue streams and its profitable support and maintenance business. To this end, Oracle is seeking to preserve the license support model while simultaneously coupling sales of new cloud services alongside perpetual license agreements.
Oracle’s recent sales tactics also indicate that the overarching goal is to ensure that Oracle can own, as much as possible, its customers’ operating environments on premises as well as in the private, hybrid, and public cloud environments.
One tool Oracle has employed to help drive cloud adoption is its bring-your-own-license (BYOL) program whereby Oracle customers can re-assign existing perpetual licenses to the Oracle PaaS cloud. While the details on this program are still sparse, one component that has emerged is that customers must maintain an active Oracle support agreement in order to maintain the “cloud eligibility” for these perpetual licenses to be used in the cloud.
Oracle has also announced the release of “Universal Credits” whereby customers can define a payment threshold or capacity and allocate the universal credits against any of Oracle’s cloud services, an effort to simplify the ease of transacting on the Oracle Cloud.
To provide some financial perspective, Oracle’s cloud revenues are becoming quite a significant portion of the business overall. Based on Oracle’s fiscal Q2 FY2018 earnings report:
- SaaS revenue for the quarter came in at $1.1B (47% increase YoY).
- Fusion Cloud revenue was up 56% for the quarter (no breakout provided).
- Cloud PaaS and IaaS revenue was $398M (20% increase YoY).
- Cloud gross margins grew from 59% to 66% in the current quarter, as Oracle targets gross margins of 80% by FY 2018!
In terms of growth, Oracle is projecting total revenues to grow between 2-4% with cloud revenues growing between 21-25% for Q3 FY18, ending in February 2018. While a fraction of AWS’s $4.5B Q3 FY17 revenue and Microsoft’s $5B Q1 FY18 in commercial cloud revenue, it is the fastest growing cloud company according to Apps Run The World data (albeit starting from a smaller base).
Oracle Cloud Developments
Oracle has made significant headway in finally bringing the Oracle SaaS applications and Oracle database offerings to an equal footing with its legacy, on-premises predecessors. Towards that end, I have itemized some of the promising takeaways that Oracle has recently announced.
- Autonomous Database
While Oracle continues to taunt Amazon Web Services (AWS) by telling anyone willing to listen that Oracle’s public cloud will be cheaper and perform better than AWS, the real blockbuster potential comes in the form of Oracle’s announcement of the autonomous database coming in release 18c. The future of the mainstay Oracle database promises to be an AI-powered, self-tuning, self-provisioning, fully automated (patches, upgrades), and even self-repairing database with a guaranteed availability of 99.995%. The lure of huge productivity and efficiency increases if Oracle can succeed at removing a significant level of database management overhead will be attractive both to the legions of Oracle DBAs currently caught in upgrade/patch purgatory and their bosses looking for an excuse to justify the migration of workloads to the Oracle Cloud.
- Cloud-First Enterprise Applications at Last
Oracle has been a laggard in transitioning its portfolio of enterprise applications for the cloud. In fairness, this was a complicated process, to a large degree, because of a legacy of acquisitions which injected complexity due to all of the code bases, different applications and data models to contend with, along with a circuitous and problem-ridden route in the development of its Fusion cloud applications platform. In the end, Oracle has had to build a completely new set of cloud applications and the journey is pretty much complete now in the latest release 13 of the suite. This journey has been lengthy and technically challenging for Oracle, but has enabled the convergence of Oracle’s litany of underlying technologies to converge around a platform that can share the benefit of collective innovations and ongoing, multiple releases annually. This product can now start to evolve at “cloudspeed” and keep pace with customer expectations. This can most clearly be seen in the Oracle Cloud HCM space, as Oracle’s new recruitment solution adds the final missing piece that was previously dependent on the separately acquired Taleo product. Oracle Cloud HCM now offers a comprehensive range of capabilities along with a modern user experience within this suite and across other Oracle Cloud applications. Similar stories are emerging with Oracle’s ERP, SCM, and CX offerings as well.
- Hitting Stride in the PaaS Space
CTO Larry Ellison said during a recent earnings call that Oracle’s PaaS and IaaS could become even bigger than its Cloud applications business because of the massive database migration to the cloud currently underway (reference AT&T) and the synergy between Oracle Cloud and the technology Red Stack that its customers will adopt eventually. Oracle just recently broke out results for its PaaS business after reclassifying it along with IaaS, a move that makes it possible to identify Oracle’s growth in each product category. Since the release of Oracle 12c in 2013, adoption of 12c has been a mystery for most industry observers. Unveiling the growth history of Oracle PaaS suggests that 12c may have finally passed the tipping point with a critical mass of early adopters as well as those that are seeking to migrate their on-premises database workloads to the cloud.
- SaaS Acceleration Closing in on Peers
Over a year since its announcement to buy NetSuite for $9.3 billion, Oracle is closing in on its biggest competitors in SaaS delivery. According to an Apps Run The World 2017 annual survey of more than 1,000 leading cloud computing vendors, Oracle posted the fastest growth among the top five SaaS vendors in 2016. During its Q4 FY17 earnings call, Oracle disclosed that it has nearly 14,000 active SaaS customers, many running both ERP and HCM application suites.
- What About IaaS and Oracle?
The IaaS space is undoubtedly where Oracle finds itself trailing its competitors by the largest margin. It is also this space whereby Oracle may find the largest scale of opportunity as it has been able to architect its IaaS, called the Oracle Bare Metal cloud, from the ground up and with a clean slate. Oracle reportedly has over 20,000 people working on its cloud, with many being hired from AWS and Microsoft’s Azure teams. Key focus areas include:
- Flat Network Buildout – provision of a low-latency and high-bandwidth interconnectivity between availability domains, encrypted over fiber.
- Cloud regions, each of which is comprised of three fault-independent availability domains connected by different power grids.
- Elimination of the network port bottleneck to reduce latency to less than 100 microseconds across nodes within a region.
- Running of the network on a private network layer as opposed to the current approach of running a software-defined network via a virtualized network via hypervisor.
- Simplified configuration via Bare Metal options or running on VMs where high performance is the default (lower admin overhead).
While these options definitely will lead to a top-notch and advanced public cloud option, it will likely be expensive at scale. Organizations will have to apply due diligence when comparing cloud workloads, cost, and performance requirements when choosing an IaaS option.
- Embedded Security (and inducing FUD)
Not a company that avoids capitalizing on its customers’ emotions and fears, Oracle has recently announced its Cyber Defense System. There is nothing as powerful as the FUD that stems from IT security vulnerabilities these days and Oracle’s moniker here certainly builds on these areas of concern in an effort to spur sales. The actual name of this product is the Oracle Management Cloud (so boring by comparison), and it works with the Oracle Identity Security Operations Center (SOC). These solutions are applying machine learning in real time to detect anomalies within system logs, which has the potential to meet both security as well as performance monitoring health checks. Yes, other vendors have been doing this for a while now, but not easily or in an integrated manner within the Red Stack eco-system.
- Going Serverless Big Time
Oracle has introduced a container orchestration service and a serverless function platform to its cloud. This is notable because it gives Oracle capabilities that are already present on AWS and Azure and, more importantly, it will grab the attention of developers. The container service works with technology Oracle acquired when it bought Wercker earlier this year and The Next Platform’s verdict is: “With the combination of Kubernetes, Wercker, and Docker Registry, the Oracle Cloud has a next-gen application development and deployment platform akin to Red Hat OpenShift or VMware Cloud Foundry.” The Oracle serverless platform, called Fn, will be open sourced via Apache and is compatible with Amazon’s own serverless platform, AWS Lambda.
- Blockchain With a Purpose
Not much different than Salesforce.com’s approach to implementing AI as an embedded capability with a dedicated purpose, Oracle seeks to do the same with blockchain. This one is bleeding-edge early, however, the potential is massive. Oracle unveiled at OOW17 the Oracle Blockchain Cloud Service, which it says will allow Oracle customers to link existing inventory and supply chain software to a secure, distributed transaction system. Additionally, Oracle has recently joined Hyperledger, which is hosted by the Linux Foundation and is an open-source collaboration, with the aim of advancing industry-oriented blockchain technologies. Consider this a “big bet” by Oracle, as the firm MarketsandMarkets estimates the blockchain market will grow from ~$411M in 2017 to $7.6B by 2022.
While extensive, the list above really is the tip of the proverbial iceberg when it comes to a seemingly resurgent Oracle. While more than a little overdue, Oracle seems to be using its late start to its advantage. Oracle has the benefit of taking a “clean slate” approach, which has enabled the development of a fresh and current cloud architecture that takes advantage of all its strengths (e.g. Exadata hardware, recruiting from a robust competitor talent pool, best-in-class database and incorporation of the newest trends in serverless and AI).
- Research your options: It is time to include Oracle’s cloud solutions into the pool of viable cloud alternatives across the IaaS, PaaS, and SaaS product verticals.
- Dive deep into the details: With the multitude of cloud options flooding the market, build in time for a proper due diligence that includes detailed modeling of the costs vs. functionality for each option.
- Test the waters: IT leaders should lean in or “ooch” into testing Oracle’s various technology solutions now available on the market. A small investment in the solution shortlist will provide an unparalleled first-hand opportunity to test the performance aspects and installation process and assess the amount of required training to successfully deploy and manage a new technology solution.
The reality is that most Oracle shops don’t really have the option of moving off Oracle and the current options for running Oracle applications and database instances in either a private cloud or via an AWS or Azure public cloud are ripe with both technical and licensing-related challenges. Oracle’s surge in the cloud space will be reassuring to this massive customer base that a path forward into the cloud may be a reality with Oracle.
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