Oracle Cloud Computing and the CFO’s Dilemma

Mary Hayes Weier of InformationWeek poses some great questions about Oracle’s desired switch (according to a recent announcement) to subscription-based pricing, in her article Oracle Mulls Shift To Subscription-Based Pricing. “How is Oracle going to do subscription-based pricing, and is that going to require Oracle to invest heavily in a multi-tenant architecture,” Mary asks.

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Let’s tackle the first part of the question. It is, indeed, a huge shift, moving to a subscription based pricing model. Oracle probably has a twofold objective – to protect the current customer base (probably a bit easier because these customers have already spent millions on software/consultants and are seemingly ‘locked’ in) as well as acquire new midmarket customers that haven’t yet had a taste of Oracle’s software. Can Oracle potentially repackage what customers would have paid into annual license and ongoing maintenance fees into a monthly subscription fee spread over the life of the contract, and protect current revenues as well as get new customers?

I don’t think so. When it comes to midmarket, vendors more grounded in the SaaS world (or the multi-tenancy experts) will surely come with lower priced options and Oracle will have a tough time competing. The answer would have to be lower revenue per customer. Which means that just to produce the same revenue numbers, Oracle will need to acquire more customers. More customers implies more salespeople, more infrastructure, more support, more (you fill in the blanks). In summary, that means incurring higher costs but getting the same revenue. Safra Catz will not like that.

Which brings me to the second part of Mary’s question will Oracle need to invest heavily in a multi-tenant architecture to solve this? Absolutely. Multi-tenancy will be necessary to deliver cloud services and shift to subscription-based pricing, while protecting the bottom line at the same time. Yes, building and delivering that kind of architecture isn’t Oracle’s forte. But their industry and financial stature gives them so many interesting choices that it shouldn’t be that hard for them either. They could go and buy a company (and a platform) tomorrow. They could sell more database licenses to salesforce.com and then use Force.com as the platform to build and deliver multi-tenant versions of Oracle apps (Peter Coffee points out in his blog entry What the Cloud Entails? how increasingly complex multi-tenant apps are being built in a faster timeframe on Force.com). Or they could hire the best cloud talent and build the multi-tenancy infrastructure themselves.

Did I miss any other options that Safra has? I’d love to hear your comments. Oh, and of course, here’s a (free) whitepaper (from yours truly) that may have a useful point or two about the pitfalls and benefits of the subscription-based pricing world:

Whitepaper: The Dos and Don?ts of the transition to Cloud Computing

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31 Responses to Oracle Cloud Computing and the CFO’s Dilemma

  1. Fawaz Hashmi September 30, 2009 at 4:15 AM #

    Great analysis The only question I have is how do we know that Oracle has not already invested in multi-tenant architecture?
    Many thanks

  2. Kate Johnson September 30, 2009 at 9:34 PM #

    Alok,

    Interesting questions. Oracle isn’t really known for low pricing. Hard to believe they will provide lower cost subscription based alternatives.

  3. Alok Misra October 3, 2009 at 12:56 AM #

    Fawaz,

    Good question and I have no idea. I’m sure they have invested and I would assume it will be a massive (and messy) undertaking.

    Alok Misra

  4. Rob Brown October 5, 2009 at 12:02 PM #

    One way to look at it is that Oracle is just covering its flank. They have certainly already made a lot of revenue for 10 years on Cloud Computing. To Olak’s point, reference SFDC, Netsuite, Google, etc, all built on Oracle technologies to one degree or another. I have heard SFDC referred to as Oracle’s largest reseller more than once. If you think about it, it makes sense.

    In the last three SaaS offerings in which I have been involved, Oracle was a critical (as a database) was a critical component. I actually think that it is what separates the men from the boys in the marketplace; companies built on a LAMP stack aren’t taken as seriously. Oracle already offers the Oracle SaaS Platform and will discount heavily or offer financing (the equivalent of monthly pricing) to those fledgling companies who can’t ante up for big Cap-ex licensees early on. Subscription base is just a logical next step.

    I have looked into this option a number of times and at this juncture it is effectively a teaser. There are strict qualification guidelines and an expectation of a traditional license commitment in short order. My feeling is that this is an interim step toward a real subscription pricing model. Safra knows its coming, but its baby steps first.

    In terms of offering their own multi-tenant environment, there is ample evidence to believe that it already exists at Oracle.com as an option to those who would prefer a Cloud delivery over onPremise.

  5. Ravichandran October 10, 2009 at 3:58 AM #

    Let us look at each of the issues.
    Oracle Technology as the under pinning of the cloud. Well, it is a established fact that Oracle Database powers the NetSuite and Salesforce.com. Now we don’t know the licensing model for that. Does every multi-tenant user pays for Oracle database license or every database connection gets charged. Whichever you look at it the pricing will be very different from the single tenant model (where Oracle pegs the license to the end user/device–(aside they had been charging for connection based pricing and got taken to cleaners by SAP).

    Now the question is how long IBM is going be sitting on the sidelines with their DB2 and watching Oracle database as the defacto data store. My guess is not long!.

    Coming over to the Oracle Application side of business (E-Business Suite) becoming multi-tenant. Not going to happen any time soon. Just look at the disaster they have on their hands with R12 upgrade (change of Set of Books to Org centric architecture).

  6. Alok Misra October 11, 2009 at 8:14 PM #

    Ravichandran,

    To answer your question, multi-tenant vendors don’t charge for each Oracle database license or connection. Everything from Oracle is at the backend and completely invisible to the end customer/user. It’s similar to eating at a restaurant, where one doesn’t pay for each ingredient that goes into the dish, but rather for the entire dish.

    It seems from your comments and well as Rob’s, that the reseller channel has worked well for Oracle. salesforce.com, Netsuite and SAP, all powered by Oracle, are key industry players. It also seems that Larry Ellison is becoming more amenable to resellers (which is a new, but welcome development) – as a matter of fact, Marc Benioff, salesforce.com Chairman, is now scheduled to be the keynote speaker at Oracle OpenWorld next week.

    I do think that this can be a winning strategy. It allows Oracle to stay away from doing things they’re not good at, while tapping their resellers for expansion in that area. Thoughts?

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  10. Bruce May 19, 2010 at 12:25 PM #

    One way to look at it is that Oracle is just covering its flank. They have certainly already made a lot of revenue for 10 years on Cloud Computing. To Olak’s point, reference SFDC, Netsuite, Google, etc, all built on Oracle technologies to one degree or another. I have heard SFDC referred to as Oracle’s largest reseller more than once. If you think about it, it makes sense.

    In the last three SaaS offerings in which I have been involved, Oracle was a critical (as a database) was a critical component. I actually think that it is what separates the men from the boys in the marketplace; companies built on a LAMP stack aren’t taken as seriously. Oracle already offers the Oracle SaaS Platform and will discount heavily or offer financing (the equivalent of monthly pricing) to those fledgling companies who can’t ante up for big Cap-ex licensees early on. Subscription base is just a logical next step.

    I have looked into this option a number of times and at this juncture it is effectively a teaser. There are strict qualification guidelines and an expectation of a traditional license commitment in short order. My feeling is that this is an interim step toward a real subscription pricing model. Safra knows its coming, but its baby steps first.

    In terms of offering their own multi-tenant environment, there is ample evidence to believe that it already exists at Oracle.com as an option to those who would prefer a Cloud delivery over onPremise.

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    “Salesforce uses multi-tenancy and a lot of people say that’s what makes it a SaaS or cloud system,” said Ellison. “It’s a horrible idea. Multi-tenancy means every customer is in the same database — …”

    Couple of comments:

    (1) The statement above narrowly defines multi-tenancy (which is about technical architecture and operational model) to sharing databases between customers. Multi-tenancy transcends that, but I understand his target/context is Salesforce.

    In the case of Salesforce.com, their secret sauce is their multi-tenant database and the programming model on top of it. I don’t know of any vendor offering similiar both CRM vertical and horizontal capabilities (yet).

    (2) From Larry Ellison’s perspective, virtualization is the right way to deliver multi-tenant solutions. It really depends on the solution (i.e. level of abstraction and multi-tenancy layer, and compliance & operational requirements…). However, it would be challenging to find many cloud providers or SaaS services that aren’t powered by some virtualization layer, and can offer sustainable / price competitive services.

    (3) Finally, not every solution is suited for “multi-tenant database”. This has to do more with business requirements such as compliance. Even in the case of on-premise solutions, there are situations where an enterprise can’t have two business units share the same database.

    Larry’s position is understandable. Over the last two years, Oracle has invested a lot in their cloud stack. Oracle VM and its management framework powers it. They have integrated machines or appliances such as Exadata or Exalogic to enable either enterprises build private clouds or service providers to enable service providers & ISVs offer cloud services…

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