The cloud may rapidly be moving into serverless computing, but winning the cloud competition requires lots (and lots) of servers. Indeed, if you want to see who is winning biggest in IaaS, you simply need to follow the money to Amazon Web Services, Google Cloud Platform, and Microsoft Azure.
By contrast, IBM and Oracle have brought an Ebeneezer Scrooge mentality to cloud capex, with serious consequences, as Platformonomics managing director Charles Fitzgerald has highlighted: “the big clouds [AWS, Microsoft, and Google] will leverage their platforms and move up from the infrastructure layer to take an ever larger bite out of overall IT spend, i.e. IBM and Oracle’s customer bases.”
According to Gartner’s most recent Magic Quadrant, the infrastructure-as-a-service (IaaS) market has separated into big winners and big losers. AWS and Microsoft occupy the former camp while Alibaba (big in China but nonexistent everywhere else), Oracle, and IBM compete for last place. Google, for its part, straddles the middle ground: lacking the breadth of services that AWS and Microsoft Azure have but, Gartner says, it is “most differentiated on the forward edge of IT, with deep investments in analytics and [machine learning],” with customers building “applications that are anchored by BigQuery.”
This gets Google a pass into the Leaders quadrant at Gartner. IBM and Oracle, however, don’t get the same treatment, because they don’t offer the same hope for the future.
But not everyone agrees with this assessment. Amalgam Insights analyst Hyoun Park, for example, acknowledges Google’s lead over the “niche player” stragglers, but believes “eventually Oracle will pass Google simply because Oracle is an enterprise tech company and Google isn’t.” With a small fraction of IT workloads having moved to public clouds, in theory there’s much for Oracle (and IBM) to play for.
If only they’d “play.”
It costs money to make money
While Oracle, in particular, has proved adept at selling into its base (often with new products it has acquired), the cloud poses a new threat to Oracle. This isn’t a matter of losing a few dollars in cloud but making up for it in its established businesses. The cloud is eating those legacy businesses, as Fitzgerald has described:
Maybe [IBM and Oracle] are reconciled to sitting at the children’s table of cloud, but the problem for both IBM and Oracle is cloud is eating their existing businesses. It has eaten the server business and now starting to feast in earnest on software infrastructure, including the database, which is the profitable heart of these companies. IBM’s revenue implosion has been on display quarterly for years. Oracle likes to point out Amazon runs its e-commerce business on Oracle database, and there are a lot of other legacy Oracle customers out there. But there just aren’t very many new customers for Oracle’s database.
That new license revenue is now down to 14 percent of total revenue and keeps going down. It will never, ever come back.
The antidote is for IBM and Oracle to dramatically increase product and capex investments to be able to offer would-be defecting customers a viable path forward. They have not—and that’s bizarre, given the stakes.
As cloud pundit Bernard Golden has highlighted: “The tech industry has never seen this level of investment. Mix web-scale and network effects, and companies that want to be winners need to spend, spend, spend. [AWS, Microsoft, and Google] recognize this fact and are shoveling money into their facilities to ensure sufficient capacity and necessary geographic coverage.” The question is why Oracle and IBM aren’t matching this investment. As Golden says, “If you truly believe there is a market that will become that gargantuan, of course you will be willing to invest as much as is needed to participate.”
And yet, as Fitzgerald points out, “Both IBM and Oracle are tens of billions of dollars in cloud infrastructure capex behind Amazon, Google, and Microsoft. For IBM, as Thomas Dinsmore observes, “In 2017, IBM spent more on stock repurchases than on capex. Which tells you how much confidence IBM’s leadership has in the company’s future.”
Oracle’s spending has at least ticked up, but its spending is not enough to keep pace, much less to have any hope of catching up to the infrastructure of the Big Three.” Oracle spent all of last year what any of the Big Three spends every single quarter. This is not a recipe for being competitive, no matter the inertia in its installed base.
Oracle and IBM have a right to play for the workloads of their most committed customers, but so far they have not. AWS, Microsoft, and Google all have much bigger cloud businesses than either IBM or Oracle, and yet they are growing dramatically faster. At this point IBM and Oracle’s parsimonious approach to cloud investments is saving their way to retirement.