Oracle Fusion in (financial) Context

Posted: October 16, 2009 in CRM, Economics, Technology
Tags: , , ,

With the introduction of Fusion applications Oracle has joined the cloud community.  You might want to argue that the company has been involved in the cloud for many years as one of the key technology underpinnings of many of the biggest SaaS companies.  That was one of Larry Ellison’s big points at the Churchill Club.  Cloud computing still needs a ground station to serve it and Oracle has been at the top of that market for a long time.  For example, salesforce.com uses the Oracle database to support its service and many other companies do too.

Because so many software company founders and executives got their starts at Oracle it was a natural for them to build on what they knew and they knew Oracle.  That may not sound like much if you stop thinking about it at the database but the community of Oracle people present and past gave many a start-up the intangible resources they needed to be successful.  Knowing who a product manager is or what is generally on a product roadmap can be useful information.  I am not saying that any legal lines are ever crossed but having been an insider and understanding the culture as well as the technology can be very helpful.

At any rate Oracle is, or will be with the full release of Fusion Applications, a member of the Cloud Club.  That leaves stragglers like SAP to still deal with the conversion and I have a notion that the pace will only accelerate from here and I expect that if cloud computing is not the dominant paradigm today it will be in the not too distant future.

Unlike salesforce.com and other companies that entered the market and developed their products as native SaaS applications, legacy companies had a great deal of work to do to convert to the new paradigm.  Changing a technology paradigm is never easy or cheap — the last time we did this we went form mainframes to client-server or was it client-server to thin clients?  But changing the technology paradigm is only half the battle.  The other, harder and more intense job is changing the business model.

Companies do not always have to change their business models when they change software paradigms.  As a matter of fact I am not sure if the majority of software companies today ever had to make a business model shift before the advent of cloud computing.  But there’s really no option at this point if a company wants to get to the cloud.

Oracle’s shift to Fusion, like many other vendors’ shifts to the cloud, buffers the business model change by effectively breaking the shift into two hard but more digestible bites.  Oracle is fortunate in that it has a large number of products and it is acquiring more all the time.  As a financial exercise, when Oracle begins selling fusion applications, at least a part of the revenue will come in the form of subscriptions and I expect that subscription revenue will grow at the expense of traditional licensing over time.

Because Oracle offers multiple products including hardware (Exadata storage systems — and servers if the Sun merger is approved) the company’s financial results will be insulated from a big hit — something that pure software companies dread when they change models, especially if they are publicly held.

So, I am not a financial analyst, but my reading of the situation is that Oracle has positioned itself and its business well with Fusion.  When delivered in a service mode, the applications will be competitive with other market leaders.  The applications ought to find a big market in other nations where software might be too expensive for local tastes.  And there at least multi-tenancy should prove to be essential.

Meanwhile, the conventional license business should continue as a viable option for customers who prefer that mode for as long as those customers want it.  Converting from the license paradigm to a more or less pure cloud paradigm will be a business decision and the required development will consist of rewriting contracts, building web sites and adjusting marketing.

This isn’t all guaranteed to happen but it looks like a promising and logical evolution.  Of course, I am reading “The Black Swan” right now and I am wondering about something highly improbable affecting this rosy scenario.

So, what did you think?

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