Oracle's Plan To Beat Amazon, Microsoft On Cloud

Database management software giant Oracle Corp. (ORCL) is locked in an epic struggle with the leading providers of cloud computing services, most notably Inc. (AMZN), Microsoft Corp. (MSFT), and Google parent Alphabet Inc. (GOOGL). The problem is that growing numbers of Oracle's clients are scaling back on their own expensive data center operations, and migrating to lower-cost cloud computing services, The Wall Street Journal reports.

To remain relevant, Oracle plans to become a major player in cloud computing, quadrupling the number of its own massive data centers during the next two years, a project that will come at enormous cost, the Journal adds.

Playing Catch-Up

Technology research firm Gartner Inc. calculated that Oracle held a microscopic 0.3% share in the cloud infrastructure market in 2016, the Journal notes, far behind market leader Amazon Web Services at 44.2%, number two Microsoft Azure at 7.1%, and Google at 2.3%. Cloud infrastructure is the leasing of raw computing capacity, with all software applications to be supplied by the user. 

The good news for Oracle, per the same sources, is that the company remains a leader in the more value-added sectors of the cloud computing market, called Software as a Service (SaaS) and Platform as a Service (PaaS), which offer the client applications software and/or development tools in addition to computing power.

Oracle also has been behind its cloud computing rivals in recent stock price performance. From the open on February 14, 2017 through the open on February 14, 2018, Oracle was up 17.8%, while Amazon gained 68.0%, Microsoft rose 37.4%, and Alphabet was up 25.5%. During the same period, the S&P 500 Index (SPX) gained 14.0%.

During the recent market selloff from the close on January 26 through the close on February 8, the S&P 500 lost 10.2% of its value. Oracle fell by 11.2%, Amazon retreated by 3.7%, Microsoft was off by 9.6%, and Alphabet dropped 15.1%. (See also: The Investopedia Anxiety Index Explained.)

Costly Strategy

To quadruple its cloud infrastructure capacity, Oracle plans to add 12 new data center "regions" around the world, including two in the U.S. and two in Canada, the Journal says, but the company has not released cost estimates. However, analysts consulted by the Journal indicate that a single region operating at full capacity can cost several hundred million dollars. To put that in perspective, Oracle's total annual capital spending is just over $2 billion, per the Journal, which adds that Amazon, Microsoft, and Google spent a combined $41.6 billion last year, up 33% from the prior year.

Lucrative Market

The worldwide market for cloud services was $260.2 billion in 2017, up by 19% from the prior year, and projected to reach $411.4 billion by 2020, Gartner estimates, as reported by the Journal. The lure of big revenues in a fast-growing market has Oracle, and others, eager to invest. Indeed, Oracle may be making its move at an opportune time, since companies that currently run critical Oracle applications in their own data centers are just now starting to move towards the cloud computing model, according to Roy Illsley, lead cloud analyst at London-based business intelligence firm Ovum, as reported by the Journal.

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