Everything came full circle with NetSuite today, when Oracle announced that it plans to acquire NetSuite for $9.3 billion.
Flashback
In 1998, Evan Goldberg, founder of what was then NetLedger, visited our analyst team at Summit Strategies, where I started my analyst career at back in the day. At the time, traditional software companies were starting to dabble with the application-hosting model. In this model, application service providers (ASPs) hosted software designed for on-premises delivery and delivered it to clients over the Internet. But Goldberg’s NetLedger was the first (to my knowledge) to deliver software designed from the ground up to be delivered over the internet, as a service. It would take a few years for the term “cloud” to be coined, but the seed was planted.
At the time, NetSuite and a handful of other pioneers, most notably Salesforce, were the upstarts of the software industry. They rattled traditional software vendors’ comfortable development, licensing, delivery and service models with multi-tenant architectures, subscription licensing and 24/7 service designed to revolutionize the software industry. They pledged to “democratize” software, and make it easier and more affordable for small businesses to take advantage of solutions that previously had been out of reach.
However, even as NetSuite built its revolutionary persona, it relied on the old guard for money and technology. NetSuite was built on Oracle’s database, and Larry Ellison, Oracle’s founder, provided financial backing for the fledgling company from the start. In 2001, Oracle even briefly tried marketing the Oracle Small Business Suite, powered by NetLedger, as its solution for small businesses. Since Oracle didn’t have an effective small business sales or marketing organization, that offering was quickly scrapped, and in 2003, NetLedger became NetSuite.
Fast Forward
Oracle’s acquisition of NetSuite was pre-ordained since 2008, when the “great recession” hit, and the OPEX cloud model became much more attractive to cash-strapped companies. People tried cloud computing because they had to—and surprise—they liked it. Not just because of the licensing and pricing advantages, but also because of the speed, ease, scalability, accountability and service advantages it provided. They never turned back, and today cloud computing is not only mainstream, but poised to overtake traditional on-premises computing in many solution areas: Gartner projects it will be a $204 billion market in 2016.
Meanwhile, despite the fact that Ellison notoriously derided cloud computing in the past, he continued to invest in NetSuite, and now owns about 40% of the company. Ellison has also changed his cloud rhetoric over the years. In 2015 he said that “We no longer pay any attention” to traditional competitors such as SAP and IBM, and that Oracle would be the “biggest company in the cloud.” Recently, he put a number on that, saying that he would beat Salesforce to become the first $10 billion cloud company.
In reality, however, cloud revenues are still a very small part of Oracle’s business. The company’s fiscal 2016 Q4 results state that Oracle’s total Q4 revenues were $10.6 billion, with cloud plus on-premise software revenues accounting for $8.4 billion of total revenues. While cloud software as a service (SaaS) and platform as a service (PaaS) revenues were up by 66%, they tally up to just $690 million for the quarter. And even as Oracle purports to be growing its cloud business at a brisk pace, a former Oracle finance manager has been accused the company of “cloud washing”—inflating its financial results by re-categorizing existing solutions as to fit in the cloud bucket.
Dealing From a New Deck
Ellison has hedged his bets for a long time. He’s played his traditional hand at Oracle, while also holding a great cloud card with his NetSuite investments. He could use NetSuite to experiment with the cloud, and see how things unfolded, without unnecessarily disrupting business as usual at Oracle.
If nothing else, this deal signals that things have now unfolded. Along with buying market share, Oracle is buying Netsuite’s cloud culture and sensibility—which it needs.NetSuite has paved the way in the cloud, and will add to Oracle’s cloud credibility. Oracle gets a credible cloud offering in NetSuite—no cloud washing required—to compete against the likes of Salesforce, Workday, and a slew of other pure cloud companies. And, the Oracle sales and marketing machine should help push NetSuite into consideration in more and bigger deals.
But, while NetSuite’s growth has been strong, increasing at more than 30% for the last few quarters, the company announced that in Q2 2016, it hit Q2 revenues of $230.8 million. So, NetSuite alone is not going to get Oracle to $10 billion in cloud revenue anytime soon.
Maybe more important, we live in an age where digital disruptors often hold the best cards, customers have more choices, and digital word of mouth supersedes corporate sales and marketing tactics. With this in mind, it will be interesting to see how Oracle will play its new hand out.
Laurie McCabe's Blog 