Oracle (NYSE:ORCL) has often been thought of as having one of the wider economic moats in tech. An economic moat is a competitive advantage that shuts out competition and can lead to high profits. In Oracle's case, these are its databases, the software-server combination where companies store their most crucial data. Databases are thought to be "sticky" products, which means that it's hard for customers to leave. This is because they are crucial to business operations, and have traditionally been both difficult and risky to swap out.
Oracle doesn't break out database revenue specifically, but databases are estimated to make up about half of Oracle's $39 billion in revenue. That dominates the industry, with over 40% market share as of 2016. But could Oracle's dominance now be under threat?
As technology has improved and cloud computing has taken over, large cloud companies have been looking for ways to breach Oracle's extremely profitable database castle. These aren't small, scrappy upstarts either -- although there are those as well.
Amazon Web Services already offers competing database products, one of them called Redshift -- already a veiled reference to "shifting" away from "big red," or Oracle. However, Amazon was founded in the 90's, well before AWS existed, so there are likely many legacy Oracle databases still in use at Amazon.
Salesforce not only wants a less expensive database itself, but also competes with Oracle in the CRM software space. So, by using Oracle, it's also partly funding its competitor. The Information thus reported that Salesforce is working on an internal database product called Sayonara which the company is just starting to deploy.
Therefore, not only could Oracle be losing two of its biggest customers, but Amazon and Salesforce could also potentially market their solutions to Oracle's current customers -- something Amazon is actually already doing.
Add in Microsoft (NASDAQ:MSFT) making rapid progress on its Dynamos database product for Azure cloud, and the recent IPO of open-source database disruptor MongoDB (NASDAQ:MDB), and Oracle investors should be concerned. The news sent shares down about 2% the day it came out.
The sky isn't falling, but cloudy
It should be noted that even with large, technologically advanced companies trying to wean themselves off Oracle, the process is long and difficult. Amazon not only has its own database-migration product, but has also been exploring alternatives to Oracle since the early 2000s, according to the report, and it's still not completely off Oracle. Salesforce, with its newly implemented Sayonara product, hopes to be completely off Oracle by 2023. That shows just how difficult it is to change your database if you are a large company with tons of historical data that needs to be secured and tracked.
And even with all these looming threats, Oracle's stock is up strongly over the past year, in line with the overall market, so it appears as though the investing community isn't panicking -- at least not yet.
Can Oracle pivot?
Oracle, for its part, is trying to pivot to the new cloud era in two ways. Firstly, by playing down competitor databases as "inferior" and building out its own cloud data centers "optimized" to run Oracle. And, secondly, by acquiring small companies in non-database businesses, such as its recent acquisition of Aconex, an Australian software maker for the construction industry.
On the first point, playing down competition, Oracle co-founder and Chairman Larry Ellison even recently said most of its customers will likely migrate databases to Oracle's cloud infrastructure, which he claims has a "huge technology lead" over Amazon and others.
I find that hard to believe, since Amazon's infrastructure-as-a-service posted over $4.5 billion in sales last quarter, up 42%, whereas Oracle's infrastructure- and platform-as-a-service combined totaled less than $400 million, up only 21%.
Of course, Oracle's "cloud" software-as-a-service was 1.12 billion, up 55%, but much of that is just Oracle database software moved over to the cloud, not true infrastructure growth like at Amazon.
The bottom line for Oracle investors is, can the company maintain its database cash cow, or at least do so long enough for its growth seeds like cloud and software to flourish? The jury is still out, but with all kinds of well-heeled companies trying to cross its moat and breach its castle, Oracle investors should be wary.