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Oracle's quarter exceeds expectations; CEO downgrades SaaS and open source

Oracle is kicking tail, but how long can it sell to the same customers?

Could the two possibly go together? Oracle rocked another quarter: this is a behemoth that clearly knows how to execute.

At the same time, Oracle's Larry Ellison has nixed the idea that software as a service is worth getting out of bed for. Instead, Oracle believes selling more (and different) widgets to the same customers it already has is a winning strategy:

What I'd like to highlight here is the radically different strategies of the two companies (SAP and Oracle) for growth. Our strategy for growth is to find a way to add more value to the same customers we already serve, which are the large end of the mid-market and large companies. What we're doing here is moving beyond ERP to industry specific software....That's our focus, and that allows us to leverage the existing relationships that we have because we already sell databases to these companies, we sell middleware to these companies. We sell ERP and CRM to these companies, and now we want to sell this industry-specific software.

It's very different than SAP's strategy which is to go after small companies; small companies with their new Business ByDesign, formerly known as A1S product. Now, we see the problem in that because we've looked at going down market. We've looked very closely at it, and we think it's very hard to make money because there is no synergy. To go down market you need a new product and new product development teams. You spend a lot of money developing a whole new product for the low end. But you also need an all new sales force because we don't call on those customers. We don't call on small businesses, and it's very expensive to call on small businesses. It's very expensive to do ERP implementations in small businesses. The cost of sales is high. The cost of implementation is high. There are virtually no synergies in sales, marketing, and product development and support.

Well, actually, all of Ellison's comments on the SME market are somewhat tempered if we insert open source into the picture. The cost of sale for traditional software models is very high for large or small enterprises. I know from Oracle's own sales team that it routinely spends upward of $1 million to close a $1 million sale. Oracle wastes its license fees on the cost of sale. Its real money is in maintenance contracts.

So, if SAP wants to truly disrupt at a lower cost of sale, it just needs to explore open source.

Back to Larry. He later says there's no money in SaaS which, as Larry Dignan of ZDNet points out (in the link above), is highly disingenuous given Ellison's own investment in NetSuite. Dignan suggests that NetSuite is a hedge for Ellison on the market: if SAP does well in SaaS, Ellison buys NetSuite. If it doesn't, well, Ellison can laugh all the way to the bank.

Oracle is very shrewd. But at some point, won't Oracle run out of customers? Sure, it's not going to happen for a very long time, but if the strategy is just to consolidate the industry and sell others' widgets to the same company, doesn't that run out at some point? Meaning, shouldn't Oracle also be thinking about how to grow and expand markets? Something that open source does very well, despite Ellison's pejorative comments on open source.

Maybe. Oracle's numbers suggest the company knows what it is doing. How long this will seem like genius is a different question, though.