Oracle’s Cloud Infrastructure: A Win-Win for NetSuite

In recent years, Oracle has been intensely focused on its cloud strategy as the key to its growth. At Oracle Open World 2016, with the announcement of Oracle’s second-generation cloud infrastructure, Larry Ellison said, “Amazon’s lead is over.” It was an ambitious goal: At the time, Oracle’s cloud infrastructure business was bringing in less than $200M per quarter.

But what evidence is there that Oracle Cloud Infrastructure (OCI) is winning hearts and minds over Amazon AWS, or Microsoft Azure for that matter? Oracle reports strong uptake of its cloud applications, whether CRM, HCM, or ERP. It also reports success in moving Oracle database license holders to its cloud database services. Still, Oracle lags far behind Amazon, which just reported first quarter cloud revenue of nearly $5.5 billion and 49% growth. Although Microsoft does not split out its Azure revenue, it reported a 93% growth in that unit in the most recent quarter.

Uptake of Oracle’s cloud applications is great, but when it comes to Oracle really competing with Amazon or Microsoft as a platform for independent software vendors (ISVs), the story is different. The Oracle Cloud Marketplace page of Oracle’s website lists a number of ISVs, but there appear to be few that are multitenant SaaS applications built on OCI. In later correspondence, Oracle did provide three examples of such ISVs–FireEye, PS Technology, and Fair Isaac (FICO)–as well as two others that have not yet been made public. Compare this, for example, to the hundreds if not thousands of Salesforce AppExchange partners and the difference is clear, although Salesforce had over a decade head start.

The relative lack of multitenant ISVs on OCI is not because of a lack of capabilities. Oracle’s flagship database, since v12c was released in 2013, has built-in multitenancy in the form of database containers, which allow multiple tenants to share a single Oracle database, with individual containers assigned to each tenant. This approach puts the multitenancy into the infrastructure layer, allowing developers to focus their efforts on application development, not on the mechanics of multitenancy.

A Big Win for Oracle
Oracle’s relative lack of commercial SaaS providers building on OCI is about to change. At the same time that Ellison claimed Amazon’s lead was over, Oracle made a strategic acquisition of one of the largest SaaS providers, NetSuite. Beginning in the late 1990s, NetSuite built an entire cloud ERP system from scratch as a full multitenant system, that is, with multiple customers running on a single instance of the application. Back then, there was no Amazon AWS, Microsoft Azure, or Oracle OCI to build upon, so NetSuite had no choice.

But now, at NetSuite’s customer conference last month, NetSuite has announced its plans to migrate its application suite to OCI.

The fact that Oracle now owns NetSuite does not take away from the significance of this announcement. Although NetSuite has always been built on Oracle’s database, it has only been using the database for physical storage. (Salesforce takes a similar approach.) NetSuite built all of its administration and provisioning tools, including multitenant management, on top of the database. Although Oracle is currently in process of moving its Fusion customers to OCI, the move by NetSuite is a much larger workload—with tens of thousands of customer instances to migrate. If NetSuite and Oracle can accomplish this migration—and NetSuite executives repeatedly assured us that it will—it will be a major proof case establishing OCI as a platform for cloud ISVs.

The Migration Plan
According to briefings at NetSuite’s annual customer conference this month, NetSuite’s plan to move to OCI will take place in stages.

1. Immediately, instead of opening new data centers worldwide, NetSuite will deploy its system on Oracle data centers, starting with Germany. The work here is primarily to adopt Oracle’s cloud management and administration tools instead of NetSuite’s own. In this step, there will be no change in how NetSuite manages multitenancy within its application.
2. At the same time, NetSuite will work on converting its applications running in its own data centers to take advantage of the multitenancy capabilities of Oracle database 12c. This project will probably take 18-24 months, and once it is complete, NetSuite will be able to transition customers group by group to the new platform.
3. Ultimately, NetSuite will move all of its data centers to OCI and be completely out of the data center business. Running on OCI, NetSuite will be able to take full advantage of the autonomous database features of v18c in Oracle’s public cloud to increase the elasticity of NetSuite’s system.

It’s an ambitious plan, but it will put NetSuite on a modern cloud infrastructure that was not available when NetSuite first began.

What Does OCI Mean for NetSuite Customers?
In a briefing for industry analysts, Evan Goldberg, NetSuite’s co-founder and EVP of development, said, concerning the move to OCI, “If it were not best for our customers, we wouldn’t make the move.”

Although NetSuite claims the transition will be smooth for customers, that does not mean that it is without benefits to them. In our view, the benefits are in four areas:

• Focus. As Oracle takes over the heavy lifting in cloud infrastructure, NetSuite can focus on being an applications provider. The pace of innovation should increase.

• International Coverage. With Oracle’s build out of data centers worldwide, NetSuite’s global expansion can continue without having to build data centers in new regions. Compliance with data residency regulations becomes much easier.

• Elasticity. NetSuite, like many other first-generation SaaS providers, puts limits on customers who have spikes in transaction volume or demand for storage. Much of this is due to an inelastic architecture. In fact, we have seen situations where NetSuite lost deals because of this point. OCI, especially with the autonomous database capabilities of v18c, is a much more elastic computing platform. Customers should see improved performance and ability to accommodate fluctuating demands for compute and storage.

• Cost. Although NetSuite has economies of scale today, it should achieve even greater cost efficiencies with OCI as a larger player. Moreover, NetSuite will be relieved of having to invest in cloud administration and management tools or technical staff to maintain the infrastructure. Ideally, assuming a competitive market for cloud ERP/CRM, new customers, and perhaps even renewing customers, should see lower prices.

Of course, the benefits to Oracle are clear. Oracle gets a large workload to justify its investment in cloud data centers and a proof point for ISVs building true multitenant cloud services. This may have very well been part of the strategy in Oracle’s acquisition of NetSuite. As the picture gets clearer, it looks like a win-win-win for Oracle, NetSuite, and customers.

May 5, 2018: Updated with Oracle’s response regarding ISVs running on OCI.

June 7, 2018: Updated with Oracle’s response providing three examples of multitenant ISVs running on OCI.