At first we viewed the Oracle acquisition of Sun as a purely defensive move with the value being more in IBM not having it than Oracle enjoying it.
However now it appears that Oracle is coming around to addressing the SaaS market more directly (over their own strenuous objections from the recent past.)Â Some elements of Sun could provide Oracle with a “lite” stack that could be used as a full and viable SaaS solution (unlike Netsuite) that *might* not be as much of a threat to the core Oracle software business.
So far SAP has failed miserably in this space thanks to their profound over-engineering of what is supposed to be a lightweight and easy alternative to the “poured concrete” foundation of SAP software.Â This gives Oracle a window of opportunity to at least not be “worst and last” in the space.
We expect Oracle to do far less with the core assets of Sun than Oracle management has promised.Â A reasonable “failure strategy” may end up being to use most of the remaining Sun assets inside a SaaS-focused business entity.
From an investment standpoint the move into SaaS by Oracle is a classic good news/bad news situation.Â While a nice strategic move it will be a difficult transition in terms of revenue growth and margins.Â Although recurring revenues from SaaS models can justify higher valuation multiples, they deliver fewer dollars up-front and lower initial profit margins.Â Any meaningful transition for Oracle would create substantial pressure on revenue growth and margins.Â (This is probably the primary reason Larry Ellison dislikes this model so much.)
Oracle would seem to have little choice.Â Salesforce.com has continued to be successful in creating and growing the market while platform technology providers like Microsoft and IBM are moving (perhaps with a few kicks and screams) to embrace the SaaS/Cloud model.Â Even the mighty Oracle can’t afford to face down all competition. Â These vendors have credible solutions and distribution channels and if they are waving a small monthly fee over a large Oracle proposal, many customers may opt for it.
Thusfar most analysts have cheered the Oracle purchase of Sun and expect it to generate additional earnings for shareholders.Â We think they are at least wrong in magnitude and may even have the direction wrong depending on how things evolve at Sun.Â Secondly the transition to SaaS will be a strategic improvement in Oracle positioning and may threaten other vendors, but it won’t be good news for Oracle shareholders in the short and medium term.
Pressure on revenue growth and declining margins are rarely good for a growth stock, we don’t think they will be good for Oracle.
[Disclosure: Research 2.0 has a short position in Oracle at the time of this writing.]