3 Reasons Why Oracle's Cloud Business Will Boom (And 3 Reasons It Might Not)

Cloud Claims

Oracle's fiscal fourth quarter report last week wasn't great, but as co-CEO Safra Catz said on the vendor's earnings call, the software giant "dramatically overachieved in the cloud" and is well-positioned to keep growing this business.

Catz and co-CEO Mark Hurd had plenty of data to back up their claims, and Chief Technology Officer Larry Ellison came right out and said that Oracle "will be the world’s largest enterprise cloud company" at some point in the not-too-distant future.

Oracle has one of the most powerful sales forces in the enterprise market, and it's pumping up their commissions big time to get them selling cloud. At the same time, Oracle is very new to the cloud and to competing in the highly commoditized Infrastructure-as-as-Service market segment.

Following are three reasons why Oracle will be able to follow through on its pledge to dominate the cloud, and three reasons why it might not.

Boom: Cloud Revenue Is Growing, And So Are Bookings

Oracle's overall cloud revenue was $579 million in its fourth quarter. Software-as-a-Service (SaaS) and Platform-as-a-Service (PaaS) revenue was $419 million, up 34 percent from last year's quarter, and Infrastructure-as-a-Service sales grew 31 percent, to $160 million.

Co-CEO Safra Catz said Oracle's PaaS and SaaS bookings grew more than 200 percent during the quarter, which bodes well for the future. "As our cloud bookings growth continues to accelerate, so too will our cloud revenue growth," she said on the earnings call.

Won't Boom: Oracle's Licensing Enforcement Tactics Might Backfire In Cloud

Oracle is well-known for aggressively auditing its customers to ensure they're paying for all the Oracle software they're using as part of licensing agreements. In fact, Oracle has a whole team of people that perform these audits, called license management services (LMS).

But in the cloud, licensing is supposed to be much clearer. Many customers see this particular aspect -- being able to control software costs and pay only for what they use -- as one of the biggest advantages to moving to the cloud.

Oracle says its biggest cloud competition in Amazon Web Services, but if it tries to strong-arm cloud customers, they might just decide to go with AWS or other cloud vendors instead. There's certainly no shortage of options.

Boom: Oracle Doesn't Use Other Vendors' Tech In Its Cloud

As Larry Ellison often points out on Oracle earnings calls, Salesforce.com pays Oracle to use its database in its SaaS products. "They buy Exadata from us to run their data center. They buy the Oracle database. They paid a lot of money for the Oracle database," Ellison said in last week's earnings call.

SAP, which has its own in-memory database called HANA, doesn't use it to run its cloud services, preferring instead to use Oracle's, Ellison said on the call.

Oracle, on the other hand, uses its own hardware to run its cloud, which means lower capital expenditure. "Our cloud data centers are built using our own engineered systems," co-CEO Catz said on the call.

Won't Boom: Cloud Sales Figures May Not Tell Real Story

Oracle is paying its salespeople up to five times their normal commission to sell cloud, and that's causing some to find creative ways of adding cloud to deals, sources told CRN.

Oracle sales reps have been known to discount the price of on-premise software purchases if customers agree to buy cloud credits, which also reduces the customer's ongoing support costs, sources said. In other cases, Oracle is auditing customers and letting customers buy cloud credits as part of their "true-up," said the sources.

While these aren't illegal tactics, and could help build a base of Oracle cloud customers, they could paint a picture of cloud adoption that isn't in line with reality, the sources said.

Boom: New Customers Are Buying Oracle SaaS Apps

Oracle co-CEO Mark Hurd pointed out on the call that it's not just existing customers that are buying Oracle's SaaS apps. In the fourth quarter, 60 percent of Oracle's cloud SaaS deals were new customers that hadn't previously bought those apps. The quarter before, this number was 82 percent, Hurd said.

His point: Oracle isn't pushing its existing customers into the cloud, they're going willingly because the products are great. "This is not just the conversion of Oracle customers," he said on the call. "This is a lot of greenfield new market share for Oracle as well."

Won't Boom: Oracle's Complicated Relationship With Open Source

Open source is the lingua franca of cloud software development, because it's the best way for customers to avoid getting locked into any single vendor's cloud.

Oracle has a complicated relationship with the open source community. On one hand, it owns Java and also invests in open source technologies like MySQL, GlassFish, Linux, PHP, Apache, Eclipse, Berkeley DB, NetBeans, VirtualBox and Xen.

However, Oracle wants to copyright Java application programming interfaces (APIs) and has waged a 5-year legal battle against Google over its use of Java in Android. And NoSQL databases like Cassandra and MongoDB are gaining momentum, which could take a bite out of Oracle's cloud database business over time.