Oracle had its earnings report this week, and it appears the cloud was growing like gangbusters while its bread-and-butter on-prem database software, not so much. The organization seems to be facing a classic "Innovator's Dilemma."
Harvard business professor Clayton Christenson defined this phenomenon, where a company needs to switch its business model but is inextricably linked to the old model, as the "Innovator's Dilemma" in his famous book by the same name. While his theories have come under attack of late, the basics still hold. It's hard to be what you were while trying to become something else. There are inherent conflicts in the transition.
Let's start by looking at some of the numbers. Oracle's total revenue was $9 billion, which sounds like a pretty big number but was actually down 3 percent. Of that, cloud SaaS revenue was the big winner up 57 percent to $583 million, but all was not rosy in the cloud. Infrastructure revenue was down 2 percent at $152 million. Overall cloud revenue was $735 million, up 40 percent. (All of these figures are in U.S. dollars.)
Then came the on-premises revenue Oracle has been feasting on lo these many years. Total on-prem revenue was $6.3 billion, down 4 percent. In spite of the gain in overall cloud revenue, profit was down 14 percent to $2.1 billion.
It's actually hard to know what this means because there is no uniform way to report cloud revenue and each company defines it in its own way. Om Malik complained in a blog post recently that the industry needs better cloud metrics so that customers and investors (and journalists for that matter) can make reasonable comparisons between reports.
As Malik wrote:
"I think it is time for the industry to come up with a standardized set of growth and usage metrics from those who say they offer cloud services. In order to qualify as a public cloud service provider, the company should offer compute, storage, networking, and memory in a flexible, on-demand basis and allow for fractional payment. At present, I believe that AWS, Azure, and Google Cloud are three public cloud companies that offer those at scale," Malik wrote.
A difficult transition
One thing we can determine is that as Oracle's SaaS revenue is going up, the on-premises revenue is going down. That suggest that customers are choosing cloud over on-prem, which is perfectly fine and probably the business goal, but there is a price to pay while the company and its customers make that transition.
That's not to say that a company with the means of Oracle cannot survive the transition, even if it takes several years to happen. It has over $50 billion cash on hand. That kind of money buys you time.
At some point that number will probably tip in favor of the cloud, but how long that takes and if Oracle can continue to make the same kind of profits remains to be seen. IBM, which is going through a similar transition, has had declining revenue for 14 straight quarters.
Making this kind of change is hard, so when Oracle trumpets those big numbers, take all of this into consideration. Becoming a cloud company from a traditional hardware and software company is no simple matter, a lesson Oracle may be learning, whether it wants to admit it or not.
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