Please ensure Javascript is enabled for purposes of website accessibility

Could Oracle Solve Zoom Video Communications’ Biggest Problem?

By Leo Sun - May 3, 2020 at 8:16AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The underdog cloud provider could help Zoom support more users and reduce its dependence on AWS and Azure.

Zoom Video Communications (ZM -2.79%) recently announced it would tap Oracle's (ORCL -0.46%) cloud infrastructure platform to support its video conferencing service. Zoom's service previously ran on its own data centers, Amazon (AMZN 0.73%) Web Services (AWS), and Microsoft's (MSFT 1.28%) Azure. Zoom will continue to use AWS and Azure after adding Oracle to the mix.

Zoom's daily meeting participants surged from 10 million to 300 million in the first four months of 2020 as the pandemic forced more people to stay at home, so it wasn't surprising for Zoom scale up its infrastructure. However, it was surprising for Zoom to choose Oracle, a distant underdog in the cloud platform market, instead of simply renting more computing power from Amazon and Microsoft. Let's see how this deal could benefit both companies.

Zoom's video conferencing software.

Image source: Zoom.

Why does Zoom need more computing power?

Zoom's growth spurt caused growing pains, including security and privacy issues and an insatiable appetite for more computing power.

Zoom recently set a 90-day plan for rectifying its security issues with the help of cybersecurity firms Crowdstrike and DarkTower, as well as former security experts from Facebook, Microsoft, and Alphabet's (GOOG 1.17%) (GOOGL 1.16%) Google.

Zoom didn't disclose the size of its deal with Oracle, but Oracle noted it was routing traffic for "millions" of Zoom's meeting participants and pushing up to seven petabytes of data -- equivalent to 93 years of HD video -- through its cloud servers every day. That increased computing power could help Zoom compete more effectively against a growing list of rivals, including Cisco's Webex, Facebook's Messenger Rooms, Tencent's VooV Meeting, Amazon's Chime, Microsoft's Skype, and Google Meet. Those platforms are all extensions of larger ecosystems -- and Zoom could struggle to keep pace as the video conferencing war heats up.

Zoom CEO Eric Yuan said the company "explored multiple platforms, and Oracle Cloud Infrastructure was instrumental in helping us quickly scale our capacity and meet the needs of our new users." Yuan also praised Oracle Cloud's "industry-leading security, outstanding performance, and unmatched level of support."

Why does Oracle need Zoom?

Over the past few years, Oracle attempted to offset the sluggish growth of its legacy on-premise database, business software, and hardware businesses by expanding its public cloud services.

Servers in a data center.

Image source: Getty Images.

That transition was difficult, due to tough competition from AWS and Azure. Oracle stopped disclosing its public cloud service revenue separately after several quarters of slowing growth in mid-2018, and a series of unfortunate events followed.

Amazon's consumer business gradually replaced Oracle's databases with its own AWS databases. Co-CEO Mark Hurd, who led Oracle's transition into the cloud, passed away last October. That same month, Microsoft won the Pentagon's coveted $10 billion JEDI cloud contract after outbidding Oracle, Amazon, and IBM.

Oracle clearly failed to keep pace with the cloud leaders. The four largest cloud infrastructure platform providers in the world -- Amazon, Microsoft, Alibaba, and Google -- controlled 61.5% of the market in the fourth quarter of 2019, according to Canalys, up from 57.6% a year earlier. All the other underdogs, including Oracle, are fighting over low single-digit scraps.

Despite those challenges, Oracle's business showed signs of improvement in March, when it posted a second straight quarter of accelerating revenue growth as its Fusion and NetSuite apps lifted its cloud services and license support revenue.

CEO Safra Catz anticipated a "minimal impact" from the COVID-19 crisis, and expected Oracle's revenue growth to accelerate in fiscal 2021. Therefore, Oracle's cloud business isn't growing as quickly as AWS or Azure, but it's still expanding and helping customers like Zoom scale up their businesses.

A win-win deal for both companies

Oracle could be offering Zoom lower prices, or Zoom might be spreading out its infrastructure to reduce its dependence on Amazon and Microsoft -- which could gradually evolve into competitors in the video conferencing market. But whatever the motivations are, it's a win-win deal for both companies: Zoom gains more computing power to serve its growing audience and Oracle gains a lot more credibility in the crowded cloud platform market.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Oracle Corporation Stock Quote
Oracle Corporation
$71.66 (-0.46%) $0.33
Zoom Video Communications Stock Quote
Zoom Video Communications
$117.06 (-2.79%) $-3.36
Microsoft Corporation Stock Quote
Microsoft Corporation
$266.21 (1.28%) $3.36
Alphabet Inc. Stock Quote
Alphabet Inc.
$2,291.44 (1.16%) $26.18, Inc. Stock Quote, Inc.
$114.33 (0.73%) $0.83
Alphabet Inc. Stock Quote
Alphabet Inc.
$2,304.27 (1.17%) $26.53

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/06/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.