On the 28th of July it was revealed that Oracle had acquired NetSuite for $9.3bn. While an acquisition isn’t out of the ordinary for Oracle, this buy does hold some significance.
Considered a pioneer of the cloud computing industry, NetSuite was founded in 1998 and for the calendar year 2015 it turned over $741 million, up 33% from the previous year. Although this looks positive, its operating expenses totalled $611.38m leaving an operating loss of $115.6m.
So in contrast to Oracle, which netted $37bn in 2016 with net profit at $8.9bn, NetSuite isn’t a big company, but they might just hold the key to unlocking greater revenue streams in the cloud.
Oracle has made no secret of its transition to becoming a cloud company and its financial results in this area show that it is starting to grow significantly. In 2016 the Oracle cloud grew by 36% to $2.85bn.
Still a distance away from Amazon Web Services, Microsoft Azure, or Google Cloud Platform, Oracle has a lot of ground to make up but it is building a portfolio to do the job.
The public cloud leader has built up its reputation with developers and start-ups a-plenty while Oracle has a track record that is more heavily tied to enterprise adoption of databases and software applications.
Now Oracle needs a way to get smaller companies to hop on board its cloud and NetSuite is the vehicle.
John Abel, UK Head of Technology and Cloud, Oracle, spoke to CBR just before the acquisition was announced and while he kept quiet on the deal he did speak about Oracle’s mindset.
“Our insight into the customer is the mindset of the enterprise not the mindset of the start-up, we love start-ups we’ve got a lot of great relationships with start-ups, but what we do know is that at some point you are going to want to scale it, you will want to get the enterprise look and feel,” Abel told CBR.
Abel’s comments highlight why Oracle may have been in the market for a company that helps it get to customers below the enterprise level.
The fear though is that Big Red is creating a kind of “FrankenCloud” that is difficult to manage and navigate, while also being costly.
Jeremy Roche, CEO of FinancialForce said: “One of the biggest issues plaguing organizations is the FrankenCloud, and today we’ve learned that Oracle’s will grow into an even bigger monster as it gains more bolt on appendages including another cloud technology stack and another set of ERP and CRM apps.
We predict this will create disarray for customers, prospects, and employees at both Oracle and NetSuite and raises a number of questions.”
The CEO raised a number of pertinent questions regarding the Oracle, Netsuite deal – how will customers choose applications? How will various cloud and applications integrate and attempt to mix and match? If a customer bought into NetSuite, will they buy into Oracle?
“NetSuite customers are at risk of being drawn even more deeply into the nightmare of the FrankenCloud. Oracle’s ERP and CRM acquisition track record and string of casualties including of Peoplesoft, JD Edwards, and Siebel applications will only add to customer uncertainty,” said Roche.
Oracle has a history of buying companies and while some have been successful others haven’t been. Abel though was keen was stress that once the company acquires something it makes the products available for sale after 100 days.
“We know what they are, the roadmap, the cloud roadmap, the on-premises roadmap, we know what we need to do, we’re enabled and we sell,” said Abel.
“What it means is that the Oracle culture has changed as well because all of the acquisitions are healthy for culture, it creates a nice tension because new mindsets are coming in so we stay fresh through acquisition and this is lost on a lot of people,” he said.
Coming from a company that is transitioning to being a cloud one that has just bought one labelled the “very first cloud company”, the impact on mindset is significant. While the deal may help Oracle broaden its reach in the mid-market, it will also give Big Red a much greater insight into how to be a cloud company.
NetSuite meanwhile has been steadily expanding in the UK and Europe at over 30% quarter on quarter.
Mark Woodhams, MD, EMEA, NetSuite talked to CBR a couple of days before the acquisition and like Abel didn’t reveal anything to do with the acquisition, but he did have some praise for the Oracle technology and Larry Ellison.
“You can’t deny he (Ellison) has got vision and is prepared to go out and fight and backup what he says,” Woodhams told CBR.
According to Abel, Oracle will already have a plan in place and roadmap set for how it will integrate NetSuite into its current offerings, so the industry won’t have long to wait to find out how everything will take shape in its on-going challenge to AWS.
Big Red is one of the few that plans to take AWS on directly but due to Oracle owning a hardware company it is capable of controlling margins as tightly as the public cloud market leader can.
Neil Sholay, Oracle's head of digital for EMEA, told CBR last year: "For every single layer or component in the stack we've got to be at least as good as the Amazons, the Google’s, the Microsoft the Salesforce's, but in certain areas we want to be exemplarily, particularly around PaaS and the business applications."
This is where the NetSuite acquisition comes in, it gives Oracle a path to the mid-tier market that NetSuite has developed a strong base in.
Both companies provide business applications and the acquisition will give Oracle an added boost against competitors such as SAP.
However, it isn’t really SAP that Oracle is looking at with this acquisition, it is AWS and Oracle will be hoping that the NetSuite acquisition proves a profitable one.