Sunday, July 13, 2014

Oracle will take three years to become a cloud company

Traditional software vendors who have been relying on a steady income of license revenue are forced to ether change the standing business model radically or been overrun by new and upcoming companies. The change that cloud computing is bringing is by some industry analysts compared to the introduction of the Internet. The introduction and the rapid growth of the internet did start a complete new sub-industry in the IT industry and has created the IT-bubble which made numerous companies bankrupt when it did burst.

As the current standing companies see the thread and possibilities of cloud computing rising they are trying to change direction to ensure survival. Oracle, being one of the biggest enterprise oriented software vendors at this moment is currently changing direction and stepping into cloud computing full swing. This by extending on the more traditional way of doing business by providing tools to create private cloud solutions for customer and also by becoming the new cloud vendor in the form of IaaS, SaaS, DBaaS and some other forms of cloud computing.

According to a recent article from Investor Business Daily the transition for Oracle will take around three years to complete. Based upon Susan Anthony, an analyst for Mirabaud Securities, it will take around five years until cloud based solutions will contribute significantly more then the current license sales model;

"As the shift takes place, the software vendors' new license revenues will ... be replaced to some extent by the cloud-subscription model, which within three years will match the revenues that would have been generated by the equivalent perpetual license and, over five years, contribute significantly more"

The key to success for Oracle and for other companies will be to attract different minded people then they are currently have. The traditional way of thinking is so deeply embedded in the companies that a more cloud minded generation will be needed to help turn the cloud transformation for traditional companies into a success. Michael Turits, an analyst for Raymond James & Associates states the following on this critical success factor:

"It takes a lot to turn the battleship and transition a legacy (software) company into a cloud company, We believe they are hiring people to focus on cloud sales and that the incentive structure is being altered to speed the transition."

Analysts are united in the believe that this is a needed transition for Oracle to survive however that it will, on the short term will hurt the revenue stream of the company and by doing so it will negatively influence the stock price for the upcoming years. Rick Sherlund, a Nomura Securities analyst, wrote in a June 25 research note:

"Oracle, like other traditional, on-premise software vendors, will be financially disadvantaged over the short term as its upfront on-premise license revenues are cannibalized by the recurring cloud-based revenues, therefore, we model expected license revenues to be flat to down for the next two years (during) the transition."

Currently we can see the transition taking place, June 25, 2014, Mark Hurd presented the Oracle Cloud Strategy for the upcoming years. Not only the expansion in global datacenters for hosting the new business model however also the growth predictions for the upcoming years. As we look at the growth in datacenters you will be able to see that Oracle is serious about the cloud strategy and transformation.

The full presentation deck can be found embedded below:

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