Why Oracle Missed The Cloud

| About: Oracle Corporation (ORCL)

Summary

Joyent, just bought by Samsung, ran software now controlled by Oracle.

While the industry consolidated, Joyent was left without a dance partner.

Oracle's intransigence on open source has cost it years in the cloud industry.

Cloud host Joyent was bought by Samsung (OTC:SSNLF) this week for an undisclosed price and you're probably asking, what does this have to do with Oracle (NASDAQ:ORCL)?

In my view, quite a lot.

Joyent was a private cloud provider, founded in 2004, and highly innovative. It created node.js, which has become a standard for writing cloud applications using Javascript. It was one of the first providers to move toward containers, which are now associated with Docker.

Yet while other cloud companies consolidated early this decade, with Terremark going to Verizon (NYSE:VZ), Savvis merging into CenturyLink (NYSE:CTL) and NaviSite joining Time Warner Cable (TWC), Joyent remained independent.

While cloud became a capital-intensive business with $1 billion/quarter capital budgets the norm, Joyent remained on the sidelines of the dance. SoftLayer was bought by IBM (NYSE:IBM), Hewlett-Packard (NYSE:HPE) dropped out of the game in favor of Microsoft (NASDAQ:MSFT), AT&T (NYSE:T) deferred to IBM (IBM), and Verizon shut down Terremark. Again, Joyent remained independent.

Why? Why did Joyent miss the cloud business' evolution?

It was because Joyent runs something it calls SmartOS, based on Solaris. Solaris was originally developed by Sun Microsystems, which Oracle bought in 2010. As open source became the standard development model during this decade - node.js is now controlled by the Linux Foundation - Oracle sought to take it back, fighting a long (and so far, losing battle) with Google (NASDAQ:GOOG) (NASDAQ:GOOGL) that those in the open source movement saw as an effort to make Java proprietary.

Oracle, in short, has defied the rest of the computing industry, the rest of the cloud community, and it continues to pay a huge price for this intransigence. Sure, you've doubled your money on it since 2009, and enjoyed some dividends, but the Dow Jones has also doubled, and the NASDAQ composite is up 200%.

Oracle is not a growth company, and its latest quarter continues the trend. Earnings for the quarter ending in May were 81 cents per share, up just 3 cents from a year earlier, on revenue of $10.59 billion, against $10.71 billion a year ago. Analysts were expecting just $10.47 billion in revenue, and so the figures were counted as a beat, the shares rising 2%.

You can spin that any way you like. Forbes chose to spin it as "rapidly growing cloud business helps lift earnings." But Oracle is incredibly late to the cloud growth party. Salesforce.com (NYSE:CRM), which originally developed on Oracle software, and even announced a "cloud partnership" with it in 2013, has absolutely blown it away as an investment, doubling since the deal was announced while Oracle is up just 14%.

Defying the rest of the computing industry, in short, never pays. It doesn't matter whether your management feels justified in ignoring the mainstream, whether the model it chooses can be defended or not. Buyers vote with their wallets, and their wallets speak very clearly. Joyent missed the cloud dance because it wound up tied to Oracle.

Never mind that it made its decision to develop SmartOS when that software was still part of Sun, and Sun was saying it was committed to open source - Joyent became seen as an Oracle shop. Oracle has missed the growth of cloud because it tried to treat open-source software as proprietary after the industry concluded it was the proper development model.

You don't want to buy that. Always buy the mainstream.

Disclosure: I am/we are long GOOGL, MSFT.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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