Oracle’s and IBM’s hybrid cloud defense may not hold

Why AWS, Microsoft, and even Google are targeting on-premises—with IT buy-in

Oracle’s and IBM’s hybrid cloud defense may not hold

Both Oracle and IBM have missed out on a $10 billion U.S. Department of Defense cloud contract. Amazon Web Services and Microsoft remain in the running. While $10 billion is a big prize, the bigger concern is that Oracle and IBM are increasingly out of the running for the much larger grand prize of $117 billion in cloud spending (across IaaS and PaaS) expected by 2021, according to IDC.

While their incumbency in traditional data center workloads makes them contenders for cloud contracts in a hybrid cloud world, this DoD indifference to their cloud future suggests something is fundamentally wrong with their product strategies.

That “something” may be as simple as “spending.”

It’s a hybrid world for IT and cloud vendors alike

The good news for IBM and Oracle is that both have sizeable legacy businesses. While this may seem a liability in an increasingly cloud-first, developer-driven world, the reality is more complicated. According to a recent Credit Suisse survey of IT executives, 80 percent of workloads are still run on-premises, with some workloads that were pushed to public cloud coming back to roost in private data centers. As much as enterprises may want to be sexy and cool in the public cloud, they simply can’t get there fast enough.

Nor do they always want to.

As IDC found in a survey of senior IT leaders, given an imaginary blank slate without the need to take care of legacy workloads, 48 percent would still invest in on-premises infrastructure, and 60 percent of IT spend would still be dedicated to traditional IT and private cloud by 2022. Even if you handicap these numbers a little as wishful thinking by rearguard CIOs, there’s still going to be plenty of private data center spending for the foreseeable future.

Small wonder, then, that the big three public clouds (AWS, Microsoft, and Google) have increasingly built out their hybrid cloud product offerings. While the future may be in the public cloud, they’re intent on collecting as much on-premises cash as possible along the way.

Not all hybrid stories are created equal, however. When Credit Suisse asked which vendors they see getting the biggest increases in IT spending, Microsoft topped the charts with 74 percent, giving it the nod as a big beneficiary of increased spending, while AWS claimed second (62 percent).

Oracle and IBM? Just 16 percent and 12 percent of senior IT leaders, respectively, see them getting more. Much of this Dickensian dilemma of prospective poverty may, perversely, stem from an unwillingness to invest in capital expenditures (capex) to compete with the hyperscale cloud vendors.

Cloud providers have to spend to earn

Simply put, cloud is capex-intensive. A provider simply can’t hope to compete with $1 billion on a random data center here and another there, when the Big Three cloud vendors spent $68 billion collectively on data centers. And that’s just last year, as Fitzgerald has captured.

In a separate post, Fitzgerald correctly acknowledges, “Capex spending on cloud infrastructure is both a leading indicator of the ability to compete at hyperscale and also confirmation of success with customers.” The more you spend, the more you (can) earn. And the more you earn from customers drives further investment to win more of the exploding cloud market.

In a recent Credit Suisse survey of IT executives, while most indicated they currently spend less than 10 percent of their overall IT spend on public cloud, a significant 35 percent expect to expand that to 30 percent of overall spend within two years. Competition for that cloud budget is fierce, at least among the Big Three cloud vendors.

Oracle and IBM: Contrasting approaches but likely the samae result

Alas, Not so much with IBM and Oracle, as reflected in their capex spending.

As Fitzgerald notes on IBM:

In the cloud era, IBM’s capex is shrinking in both absolute and relative terms. Even as IBM’s top line has plummeted by almost $28 billion since 2011 (equivalent roughly to today’s combined annual revenues of Adobe, Nvidia, and Salesforce), their capex spending has plunged even faster. In the absence of any clear upward inflection point, it is hard to make any estimates of IBM’s cumulative capex spending on cloud, which is tantamount to saying they haven’t even started to compete.

And what of Oracle?

Oracle’s [capex spend] is much better than IBM’s. It is up and to the right as we expect from cloud providers, and there is a discernible, if late for the overall cloud market, inflection point in 2014. … While there is some capex in here for various SaaS acquisitions, Oracle’s cumulative spend on cloud capex looks to be about $3.5 billion. However, that’s about what each of the Big Three public clouds spend in a quarter.

Oracle, in other words, is at least starting to spend rather than simply spin hyperbole (and silly chatter about how it doesn’t need to spend big because its data centers are somehow dramatically more efficient than everyone else’s).

But both IBM and Oracle are ridiculously far behind, and not making any serious attempts to close the gap. Indeed, as Fitzgerald highlights, each of the Big Three cloud vendors spends roughly 12 percent of revenue on capex, while IBM and Oracle spend just 4.8 percent, with that number in terminal decline for IBM.

For IBM, there’s some hope that its Red Hat acquisition gives it a meaningful voice in the cloud conversation, even without capex. For Oracle, there’s the reality that its SaaS business is doing well even if its infrastructure business is a rounding error.

The problem, as Fitzgerald concludes, is that losing the cloud infrastructure game is starting to cannibalize Oracle’s and IBM’s formerly safe existing businesses: “It has eaten the server business and now starting to feast in earnest on software infrastructure, including the database, which is the profitable heart of these companies.”

In short, Oracle’s and IBM’s inability to compete with the hyperscale clouds started with their unwillingness to spend on capex. That now looks like a very, very costly error.

Copyright © 2019 IDG Communications, Inc.

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