Oracle’s (ORCL) software business has been facing year-on-year declines for several quarters now as businesses continue to shun the perpetual licensing model in favor of a cloud-based subscription model. But that’s old news.
The real news this time around is that Oracle’s biggest threat aren’t the usual cloud suspects such as Salesforce (CRM) and Workday (WDAY). Instead, it’s online giant Amazon (AMZN) and its cloud business, Amazon Web Services.
Oracle investors were rattled when JMP Securities’ Patrick Walravens dished out a downgrade on Oracle shares citing, among other things, the rapid growth of Amazon’s database business, Amazon Aurora.
According to Walravens, Aurora had managed to hit the magical $1 billion annual revenue run rate with usage growth, clocking in at an impressive 127% year-on-year. Amazon’s database business was growing so impressively that Gartner ranked it as a market leader in its 2015 Magic Quadrant for Operational Databases.
Perhaps it’s no wonder that Amazon stock is up 16% in the past month.
This is certainly unsettling news for Oracle, the global leader in database management software, a company whose database business contributes roughly half of its software sales according to estimates by Trefis Analysts. Amazon is on record saying that 1,000 users had taken up Aurora within the first week of its launch, making it Amazon Web Services’ fastest growing product in its history.
So what exactly is Oracle doing wrong, and why is Amazon stock reaping the benefits?
Amazon Stock Is Winning the Price War
Although no hard figures are available yet, there is a strong possibility that Amazon could be heavily undercutting Oracle in pricing, as is the usual practice with the giant online retailer. Amazon long established a reputation as a suicide bomber in the retail world due to its habit of cutting prices to the bone and in the process putting competitors out of business (and itself remaining unprofitable).
Amazon extended this practice with Amazon Web Services and was usually the first to pull the trigger in the (in)famous cloud pricing wars of a couple of years ago. It’s therefore entirely conceivable that Amazon could be doing the same with Aurora. If so, expect Amazon stock to continue its recent gains.
But Oracle is no slouch either in this regard, as evidenced by its recent willingness to cut prices to compete with cloud companies. According to Jeffries’ John DiFucci, Oracle and SAP (SAP) have been aggressively pricing their HR/HCM offerings in an attempt to steal some market share from market leader, Workday. The analyst suggested this move was one of the reasons Oracle’s gross margins had been shrinking.
But watch out Amazon stock — Oracle isn’t afraid to take on the cloud leader. The company recently went on record saying its archive cloud storage has been competing head-on with Amazon Glacier at just one-tenth the price. Talk about learning from the best.
Is Oracle Playing Too Dirty?
They say it’s never easy to teach an old dog new tricks, and this couldn’t be more true as far as Oracle and its cloud ambitions go. Even though Oracle has rightly earned its stripes as a giant in the world of enterprise software, earning that title hasn’t been a walk in the park.
The company has had to compete fiercely for business, and in the process frequently used some rather underhand tactics to upsell its more expensive software to companies using a maze of complex legal conditions in its contracts. Breach any of those conditions and you find yourself at Oracle’s mercy.
And now Oracle is reportedly using the same strategy to win more cloud business. Craig Guarente, chief executive of Oracle asset-management consultant arm, told Business Insider in July that Oracle is using the same hardball tactics to force companies to sign up to one of its numerous cloud products.
Of course companies resent it when Oracle behaves like a villain, and this could explain why Amazon is having a field day in Oracle’s home turf, or why Amazon stock is riding high. It will hardly come as surprise if it later emerges that Aurora has been gaining database business at Oracle’s expense.
Bottom Line
While Amazon’s database business is certainly growing at an admirable clip, it will take a few years at the very least to cause a visible dent on Oracle’s $16 billion-a-year database business.
However, that doesn’t mean that Oracle is safe. The biggest worry right now is that Aurora could be busy stealing Oracle’s traditional database customers. For a long time, Oracle has been the de facto leader in database management software, but businesses now have a viable option in Aurora.
Investors should keep a close eye on Oracle’s software trends to see whether ORCL has been bumped down to second-best.
As of this writing, Brian Wu did not own any of the aforementioned securities.
