It has been a few weeks since Oracle CEO Larry Ellison publicly challenged Amazon Web Services (AWS), declaring that Oracle would be "price competitive" in the "commodity infrastructure as a service marketplace." It's as laughable now as when Ellison first said it.
Oracle is an exceptional company. What it isn't is a low-margin, commodity business.
AWS Has Dropped Prices How Many Times?!?
By my count, AWS has dropped pricing 32 times. It's like one of those crazy "EVERYTHING MUST GO!" liquidation sales. Amazon tries to figure out just how low it can go on prices and eke out a razor-thin margin...and then it goes even lower.
This is not a one-time pricing gimmick, in other words. It's Amazon's business model.
Oracle, for its part, already started hedging its bets a few seconds after declaring that it would be price competitive:
It is not going to be just infrastructure as a service. Our intention is to sell our customers infrastructure as a service and the same customer a highly differentiated platform as a service will let us get better margins and highly differentiated suite of enterprise applications for the cloud.
So we are going to be cost competitive and price competitive at the infrastructure level while being highly differentiated at both the platform level and the application level. Already we have more enterprise SaaS applications than any other cloud services provider. We will continue to expand our footprint and use our size as an advantage.
In other words, Oracle's master plan is to give away the infrastructure as a loss-leader and make up for it by charging for high-margin, expensive software that runs on top. If that sounds exactly like its current business model, well, it is.
Oracle's New Business: Same As The Old Business
Oracle is intent to own the low-margin platform, rather than cede it to someone else. Back in late 2002, I attended the Enterprise Linux Forum, where Oracle presented its Linux strategy. As then Oracle vice president Rene Bonvanie described, Oracle's strategy was to make its high-price software seem cheaper by running it on Linux-based, commodity hardware.
To illustrate this, Bonvanie had a chart showing everything in the database stack—from hardware to the operating system—getting cheaper... except for Oracle.
Fast forward to 2014 and Oracle's strategy is pretty much the same, except this time it's the cloud that makes running Oracle cheaper. Also, rather than cede control of the underlying platform to someone else, as Oracle originally did with Linux, Oracle is now intent on owning its pricing destiny, at all levels of the stack.
Fitting A High-Margin Peg Into A Low-Margin Hole
It's unlikely to work.
As cloud expert Bernard Golden queries, "Who at at Oracle is going to be motivated to sell a commodity?" Answer? No one.
In fact, no one at Oracle has the experience or DNA to compete in a low-margin business. It's simply not what Oracle does—not even in supposed commodities like Linux.
Oracle, worried by Red Hat's dominance of Linux, eventually got into the game itself, releasing Oracle Unbreakable Linux and vowing to undercut Red Hat pricing. But as Golden goes on to suggest, Oracle has never delivered on this promise. Everything at Oracle, from its salesforce to its balance sheet, is structured to sell high-margin software.
Which means it will never be able to compete with Amazon, which is miles ahead in the IaaS market, and extending its lead every day, as cloud pundit Simon Wardley notes:
@da5is : ... not luck that AMZN's efficiency, apparent rate of innovation, customer focus, stability of revenue increase with ecosystem size— swardley (@swardley) December 27, 2013
It's understandable that Oracle would want to avoid another Red Hat moment, but competing with a commodity platform by charging a little for the actual platform but a lot for everything else that runs on it is a recipe for failure against Amazon.
Old Dog, New Tricks
Still, you've got to feel for Oracle. Nestled in the heart of Silicon Valley, Oracle sees a generation of companies like Facebook that don't really need it anymore. As the world shifts to open-source infrastructure to tame Big Data and the cloud to run it all, Oracle risks getting left behind. But to compete in IaaS, Oracle will need to change how it operates, and how it thinks.
Other cloud providers have tried to beat Amazon with higher-margin, differentiated services, like improved security or better performance; so far, they haven't dented Amazon's momentum or market share. Oracle, with far more to lose from commodity pricing than anyone else, simply can't afford to be both Amazon and Oracle in its approach. The two mentalities simply don't mesh.