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Oracle preps for cloud ‘fiscal cliff’

Oracle preps for cloud ‘fiscal cliff’
| On May 20, 2013

Mark Hurd- CloudWorld 2013Financial analysts have long predicted that the transition to a cloud revenue model for many traditional software companies is likely to be a messy affair. Moving from a license-based revenue model, where customers pay upfront and then a percentage of that as annual maintenance, to a subscription model based on steady monthly payments, inevitably involves something of a fall off a ‘fiscal cliff’ – unless, of course, there’s a formula in place to offset the more painful aspects of that transition.

It looks like Oracle – never a company short on nerve or self-confidence – feels ready to start riding that license-to-cloud curve. In an interview last week with Diginomica at the company’s CloudWorld event in London, Oracle president Mark Hurd emphasized the company was no longer favoring license sales over cloud sales, suggesting it is becoming comfortable with how to deal with the revenue impact of a large-scale customer migration to cloud.

“We are agnostic toward the two [models]: we look at it as one ecosystem of intellectual property. Whether [a customer engagement] turns into a license piece of revenue or a cloud subscription piece of revenue is not really something that we are very concerned about.

While Hurd was not willing to expand on the thinking that is keeping the company so sanguine about the potential impact of the cloud model on the top-line, he does argue that Oracle’s approach will allow it to stand apart. “We’re are not prognosticating on any issue from that perspective. But that said, we think it [the equal billing of cloud and license software] is the right think to do in driving the market forward. And I think we can be a real catalyst here,” he said. “These are big changes coming in the industry.”

Although cloud sales (at $231 million in the quarter to 28 February) still only represent around 10% of Oracle’s new software revenues, that is up from 5% a year ago. Indeed, its year-to-date figures show cloud subscription revenues are growing at around 130%. And what will accelerate that even further is Oracle’s bullish commitment that it will offer its complete software product line in the cloud. “There’s nothing we won’t do in opex that you can’t do in capex,” said Hurd.

Message from on high 

Questioned about the cloud revenue transition, Hurd suggested the message to bite the bullet is coming down from the top. “One of the great things about Oracle,” he said, “is that our founder [Larry Ellison] is still at the core of driving the company from a product perspective. We think about what’s best in the long run for the company.”

At the center of Oracle’s approach is choice, he said, something that he claims is missing from many of its rivals’ propositions. “The strategy is to give customers ultimate flexibility, so they can decide: Oracle cloud, private cloud, on-premise; they can pay for it in capex or opex, they can buy by the module and mix and match, they can integrate [cloud and license] over time. We are not saying, like those one-dimensional companies: ‘It’s [got to be] SaaS or cloud, cause that’s all I got.’”

Such breadth, Hurd argues, is only possible because Oracle has spent the best part of a decade building its core applications on a common base. “Because we build the IP in a certain way [it will allow] you to decide,” he said. But, for Oracle, offering that much choice won’t come cheap. “This is an expensive strategy from an execution perspective,” Hurd conceded.

Given that the bulk of Oracle’s cloud subscriptions revenue today comes as a result of acquisitions made in recent years, such as RightNow and Taleo, it’s still an open question as to whether the company’s numbers are already showing any major transition to its cloud offerings by existing customers.

In its most recent quarter, Oracle’s overall software sales fell by 2% – the first decline since the summer of 2009. While the cloud subscriptions element of that surged by 111%, there was a 7% drop in new license sales. Hurd warns not to read too much into that contrast, or, indeed, that Oracle’s new software revenue growth has fluctuated over the past three quarters from 5% to 17% to -2%. At this point, he does not think this is evidence of a new set of dynamics being induced by cloud decisions – or indecision. But what it does point to is that the balancing act Oracle and others are about to attempt during the cloud-migration years is not going to be without the occasional wobble.

 

Kenny MacIver

Kenny MacIver

Kenny MacIver has been the editor-in-chief of highly influential and successful business technology magazines and digital media platforms, spanning global, US and UK-focused titles, including I: Global Intelligence for the CIO, Information Age, Computer Business Review and Global Technology Business. A former correspondent for The Times in Silicon Valley, Kenny previously built expertise as a software analyst at IDC and a developer at PwC.
Kenny MacIver

@kennymaciver

Editor - I: Global Intelligence for the CIO | Co-founder of @Diginomica
Kenny MacIver
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