Oracle: Learning to love the cloud

By that definition, Oracle (ORCL) hasn’t been much of a cloud company so far. The company saw $36 billion in revenue in its last fiscal year, but most of it came from hardware, middleware, storage systems and applications that help companies and governments run their operations online. But these are products that Oracle sells. Oracle has never been a utility-like service that handles customer databases, like Salesforce.com (CRM) or NetSuite (N).

It’s not that Oracle didn’t have the chance to move into the cloud. Both Salesforce and NetSuite are founded by Oracle alumni and former Ellison proteges, Marc Benioff and Evan Goldberg respectively. Ellison even invested in both companies early on, getting in on the ground floor of two companies that would help define the cloud-computing industry. Instead, Oracle ignored the cloud. It stuck to the business of selling and supporting the infrastructure that lets companies do business on the web.

After a few years, it was clear that software as a service wasn’t just a fad, it was a solid business. But three years ago at OpenWorld, Oracle’s annual confab for customers, Larry Ellison dissed the cloud: "The computer industry is the only industry that is more fashion-driven than women’s fashion. Maybe I’m an idiot, but I have no idea what anyone is talking about. What is it? It’s complete gibberish. It’s insane. When is this idiocy going to stop?"

To be fair to Ellison, the words "cloud computing" have been hyped so often in so many different contexts it does have the ephemeral air of a passing fashion. But the cloud, like women’s fashion, is in fact a thriving business. Since Ellison disparaged the cloud, its stock has risen 96%, much better than the S&P 500’s 39% gain. By comparison, NetSuite has surged 354% and Salesforce 389% in the same period.

It took a while, but Oracle’s public comments about the cloud finally softened. Last March, when Oracle announced its quarterly earnings, Ellison said that one reason for its impressive performance in the recent quarter was that Salesforce inked a multi-year contract with Oracle to build most of its vaunted cloud services on the hardware, database and middleware of Oracle itself. "Oracle is the technology that powers the cloud," Ellison boasted at the time.

Which was good for Oracle — except for one thing. When people celebrated the cloud as a hot area of business, it was Salesforce they celebrated, not Oracle. Salesforce was Vera Wang, the stuff of magazine covers. Oracle was the laborer left stitching together her designs in a stuffy factory.

Which was bad enough, except that Benioff, Salesforce’s CEO, began to rub in this uncomfortable truth in his speeches. Take this keynote Benioff delivered in June. It’s pure Benioff: Cocky, charismatic and just this short of crossing the line. He talks about a "false cloud" while the display shows an Exadata machine with the Oracle logo barely disguised by a cloud. Benioff said:

"If it’s about more about hardware, it’s not about the cloud…. If the vendor is selling you more hardware, [if] it’s selling you more software and saying this is a private cloud, these are ghosts… If it’s still only for the elite, it’s not the cloud… We are making this movement to the public cloud, nothing can stop that. As I go around the world, I try to let people know that they should be aware of the false cloud."

Benioff, adhering conservatively to that standard definition of the cloud, was taking some vicious swipes at Oracle. After buying Sun, Oracle’s margins were weighed down by hardware like Sun’s low-margin x86 servers. The "private cloud" was a term Oracle bandied about to let its customers believe they were building their own clouds. But in the end, Oracle blinked: Ellison jettisoned Benioff from the list of speakers at Oracle’s OpenWorld this year.

Instead, Ellison delivered a OpenWorld keynote that many found to be rambling. "The Oracle cloud is a little different," Ellison now said, as if adding his own brand of gibberish to the cloud conversation. Last week, Oracle again shifted its stance on the cloud to show that it is willing to buy its way in: It paid $1.5 billion for RightNow, a cloud-based competitor of Salesforce’s.

Maybe Ellison just wanted to silence Benioff. Or maybe, for all his tough talk, Ellison realizes Oracle’s future isn’t just in supplying the hardware and software that makes the cloud work, it also needs to offer the kind of service.

At Oracle’s recent shareholder meeting, an individual investor asked Ellison why IBM’s (IBM) stock had outperformed Oracle’s. Ellison responded, "Well, IBM is a great company. We have very different strategy. IBM is really becoming more of a service company than a technology company."

It was a tacit admission that Oracle needed to become, in the age of the cloud, a service company just like IBM. In the cloud economy, it’s all about service. Oracle needs to be more than just the pipes of the system. It needs to be the front end of the system as well.

Can Oracle be both? It’s extravagant bet that designing the cloud’s technology is enough has paid off so far. The thing is, companies are weary of technology — or rather, keeping pace with technology. They just want the front end now. They just want a cloud-based utility they can trust. So Oracle innovation in technology that "powers the cloud" simply makes service companies like Salesforce that much more powerful.

In retrospect, Ellison was right that the cloud industry is a fashion industry. Plumbing isn’t fashionable. But the cloud is.