Last week at OpenWorld, Oracle (ORCL) CEO Mark Hurd and Executive Chairman of the Board and Chief Technology Officer Larry Ellison made some bold predictions about where the cloud is headed, and also who Oracle’s competitors are in the cloud.
ORCL did this just prior to unveiling a slew of new infrastructure as a service (IaaS) products aimed to steal market share from and compete with Amazon.com’s (AMZN) Amazon Web Services.
While that’s very ambitious of Hurd, Ellison and the rest of the crew at ORCL, someone should probably tell them that dethroning AWS is a lot easier said than done.
What’s ORCL Doing?
Ellison thinks that 80% of all production apps will be on the cloud in the next 10 years, implying that nearly all businesses will quickly move their operations to the cloud in the decade ahead.
Over the last year, Oracle has performed very well in software as a service and platform as a service (SaaS/PaaS) as billings grew 70% to nearly $600 million in its last quarter.
ORCL has achieved this rapid growth by offering nearly all of its products and services on the cloud, and by sacrificing traditional licensing revenue in exchange for a subscription model that will yield higher returns long-term. However, IaaS is a business that Oracle has yet to really embrace and penetrate, with its revenue growing an unimpressive 16% to $160 million during its last quarter.
Due to where Hurd and Ellison see IaaS going, ORCL released many new products aimed at storage, sharing and data-center communication in recent weeks. And surprisingly, Ellison doesn’t really see IBM (IBM) or SAP (SAP) as top competitors, but has its eyes set on AWS.
Why ORCL Wants a Piece of AWS
Just so you know, Amazon Web Services dominates the IaaS industry, growing revenue 78% during its last quarter and creating revenue of more than $2 billion. That’s far faster growth and many times larger than Oracle’s existing IaaS business.
Not to mention, AWS’s database business is on a $1 billion revenue run rate for the next 12 months with 125%-plus usage growth.
This business is directly aimed at Oracle’s mainstay database business, and includes storage products to help businesses transfer their workloads to AWS. Notably, the difficulty to transfer workloads is one thing mentioned by Ellison as a reason to be optimistic for its cloud and IaaS offerings long-term.
With that said, ORCL has a long road ahead if it wants to become a legitimate competitor to AWS, but the reasons for wanting to do so could not be more obvious. Oracle’s licensing business is cannibalized by the cloud, which is one reason it has been so quick to adopt a cloud strategy.
Not to mention, due to the growth in the cloud, these leading businesses are very valuable. AWS was valued at $50 billion early last year, and I recently made the argument that AWS could be worth upwards of $85 billion in a free market as an individual entity.
Therefore, if Oracle could replicate the performance of AWS, growing its combined cloud offerings just as large with near equal growth, it could theoretically drive ORCL stock higher by 50% if awarded the same $85 billion valuation.
Here’s The Problem
Unlike Oracle, which acquired many of the essential parts to its cloud offerings, AWS was built entirely from the ground up. It was built so that every application or process worked seamlessly together, and business workloads and infrastructure could be accessed and stored easily.
Microsoft (MSFT) did the same thing with Azure, and that’s why the two companies combined hold nearly 40% of the cloud infrastructure services market (AWS 29%, Microsoft 12%).
Furthermore, AWS is simply better than everything else. According to Gartner, AWS has 10 times more cloud server capacity than the next 14 largest public cloud service providers combined! AWS has five times the storage capacity of those same 14 competitors combined.
Therefore, its lead is unprecedented, and given the resources that ORCL has invested to boost its cloud offerings, I am not sure how it could possibly catch up. Because let’s not forget, AWS is not simply standing still and waiting for competitors to catch up.
All things considered, Oracle may continue to grow its IaaS business, but it is not going to gain share on AWS. If anything, AWS will steal share of Oracle’s business outside of IaaS, and possibly SaaS/PaaS as AWS makes more obvious moves into those two businesses.
Hurd and Ellison may talk a big game, but don’t expect ORCL to ever become a real threat to AWS.
As of this writing, Brian Nichols did not own stock in any of the companies mentioned.
