uploads///Cloud Economics

Oracle’s Cloud Offerings Cannibalizing Its Software Business

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Jul. 2 2015, Published 3:00 p.m. ET

The growth in Oracle’s cloud offerings also has costs

As we discussed in Part 1, Oracle (ORCL) blamed strong currency fluctuations for its dwindling performance in fiscal 2015 and 4Q15. In fiscal 4Q15, sales of Oracle’s new on-premise software license shrank by 9% on a year-over-year basis to $8.54 billion. It was the only operating segment of the company to register a decline in constant currency terms.

The chart below shows how the economics of cloud adoption differ for on-premise versus SaaS (software-as-a-service) customers. For more detail about cloud business models, please read Why cloud business models differ from on-premise software.

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Cloud comprises the majority of Oracle’s R&D expenditures

On June 23, 2015, Oracle announced more than 24 new cloud offerings for its Oracle Cloud platform. It appears that Oracle is allocating a majority of its R&D to the cloud space. In its fiscal 4Q15 earnings call, Oracle stated that it will continue to push its cloud products over its legacy on-premise software.

On March 26, 2015, Oracle announced the addition of 300 executives to its sales team to cater to the expanding market of cloud services in the Asia-Pacific region. According to Loïc Le Guisquet, Oracle President of EMEA (Europe, the Middle East, and Africa) and Asia-Pacific, “Strong economic growth and infinite possibilities that cloud technologies offer has created an unprecedented opportunity in Asia Pacific.” For this particular recruitment, Oracle is focused on Australia, China (MCHI), India (EPI), Korea, and the ASEAN (Association of Southeast Asian Nations) countries.

However, as the company’s cloud subscription revenues continue to increase, they could push Oracle’s legacy on-premise software business to fall. In January 2015, SAP (SAP) also forecasted that its cloud subscription revenue will exceed on-premise software licenses sales in 2018. So, it doesn’t come as a surprise that Oracle is consolidating all its resources to match its peer Salesforce.com (CRM) in the cloud space.

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