In previous installments (2017, 2018) of Follow the CAPEX™ (merch store opening soon!), we’ve looked at the capital expenditures behind the three hyper-scale public clouds. Now, we turn our attention to two vendors who often tell us they also belong in that group: IBM and Oracle. While I have written about their CAPEX spending before (IBM, Oracle), if derisively due to the paltry sums involved, in this post we will look at their investments systematically and compare them to the hyper-scale cloud players. Because, unlike marketing, CAPEX doesn’t lie.
CAPEX spending on cloud infrastructure is both a leading indicator of the ability to compete at hyper-scale and also confirmation of success with customers. In cloud computing, CAPEX is the ultimate form of putting your money where your mouth is, because no amount of jawboning alone will conjure up data centers or pack them with millions of servers.
As with previous analysis, the goal is identify an inflection point when a company started investing materially in cloud infrastructure and get a sense of their trajectory and cumulative investment.
Alas, IBM’s CAPEX spending is not the picture we expect from a rapidly (or even modestly) growing hyper-scale public cloud. There is no (positive anyway) inflection point, just protracted decline. Where on IBM’s cash flow statement are the vast data centers, much less transoceanic cables? In the cloud era, IBM’s CAPEX is shrinking in both absolute and relative terms. Even as IBM’s topline 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. The multi-year, $1.2 billion CAPEX announcement from 2014 might actually be a real number, despite IBM’s long history of vacuous “billion dollar” announcements. To update Number Two from Austin Powers for the cloud: “A billion dollars isn’t exactly a lot of money these days.”
Oracle’s fiscal year ends in May, so their annual spending has been normalized to a March through February year. When compared to the other cloud companies in this analysis, they get to pull in two months of spend from the following year. Stay tuned to see how this little advantage pays off.
Oracle’s chart is much better than IBM’s. It is up-and-to-the-right as we expect from cloud providers and there is a discernable, if late for the overall cloud market, inflection point in 2014. This is a much more precise way to figure out when Oracle started to take cloud seriously versus trying to figure out which of their annual OpenWorld proclamations over the last decade to take seriously.
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.
Stepping into the Big Leagues
Now let’s examine how our two challengers stack up with the hyper-scale clouds (trigger warning: it isn’t pretty):
We see IBM’s CAPEX slowly trailing off, like the company itself. IBM has always spent a lot on CAPEX (as high as $7 billion a year in their more glorious past), from well before the cloud era, so we can’t assume the absolute magnitude of spend is going towards the cloud. The big three all surpassed IBM’s CAPEX spend in 2012/13. In resisting the upward pull on CAPEX we see from all the other cloud vendors, IBM simply isn’t playing the hyper-scale cloud game.
That red line you may mistake for the x-axis is Oracle’s CAPEX spending. While they have finally separated themselves from the axis in the last couple years, they’re still by far the smallest spender of the bunch. Amazon, Google, and Microsoft each spent more on CAPEX in 2017 than Oracle has in its entire history.
While the big three have converged to spending about 12% of revenue on CAPEX, IBM and Oracle are eerily similar at 4.8%. It is interesting to compare Oracle to Microsoft, as both were asset-light software companies at the dawn of the century. They had similar CAPEX/Revenue ratios until 2005, when Microsoft started putting its software in data center-sized boxes.
On Magical Thinking
One explanation for lower CAPEX spending, and one advanced by Oracle in particular, is that their technology stack is just so much better than anyone else’s that they don’t have to spend nearly as much on CAPEX. Oracle Co-CEO Mark Hurd:
“We try not to get into this capital expenditure discussion. It’s an interesting thesis that whoever has the most capex wins. If I have two-times faster computers, I don’t need as many data centers. If I can speed up the database, maybe I need one fourth as may data centers. I can go on and on about how tech drives this.”
But more alarming for Oracle is they don’t seem to know that when they think they’re bragging about their cloud scale, they’re actually demonstrating how hopelessly far behind they are. Deploying dozens of racks a week may sound good if you don’t realize the hyper-scale clouds do orders of magnitude more every week. These kind of data points just reinforce that Oracle is falling ever further behind with every passing week.
As I keep repeating, CAPEX is both a prerequisite to play in the big boy cloud and confirmation of customer success. Both IBM and Oracle are tens of billions of dollars in cloud infrastructure CAPEX behind Amazon, Google, and Microsoft. Oracle’s spending has at least ticked up, but their spending is not enough to keep pace, much less to have any hope of catching up to the infrastructure of the big three.
Both IBM and Oracle (like many vendors) make it difficult to do apples-to-apples comparisons across different parts of their cloud businesses, but we can draw some conclusions from their reported growth rates. For the first quarter in 2018, IBM claimed their cloud business at the broadest level (which includes both SaaS revenue and – literally hardware — the proverbial kitchen sink) was up 22%, while their “as-a-service” cloud business was up 25% (which is less than half the size of their “not-cloud cloud business”, whatever that is). Oracle claimed their overall cloud business was up 32% (again, a lot of SaaS) while IaaS and PaaS lagged slightly at 28%. Contrast this to first calendar quarter 2018 reported growth for AWS of 48% and 89% for Microsoft Azure (Google doesn’t report growth or break out Google Cloud Platform revenue). Both Amazon and Microsoft are growing much faster than IBM or Oracle on dramatically larger revenue bases. Given vastly smaller CAPEX investment and a fraction of the revenue growth on an at least one order of magnitude smaller base, it is next to impossible to see how IBM or Oracle ever really are competitive with the hyper-scale cloud vendors.
Maybe they are reconciled to sitting at the children’s table of cloud, but the problem for both IBM and Oracle is cloud is eating their 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. IBM’s revenue implosion has been on display quarterly for years. Oracle likes to point out Amazon runs their e-commerce business on Oracle database, and there are a lot of other legacy Oracle customers out there. But there just aren’t very many new customers for Oracle’s database. New software license revenue is down to 14% of total revenue in the most recent quarter and that number continues to decline. And be sure that when Amazon.com gets off Oracle (and they’re hard at work on this), they’re going to show the whole world how to do it. AWS already has a booming migration service for Oracle (and other) databases. The need to replace the database business and/or move it to the Oracle cloud will only become more acute.
The problem for both IBM and Oracle is their sticky, high margin platform businesses are being eroded, and their customers are migrating to other cloud platforms. Both companies have acquired a number of SaaS applications, which will bolster their sense of self-worth and belonging in the cloud, but there is little to no platform leverage associated with these apps (and platform leverage = profits!!!). Meanwhile, the big clouds will leverage their platforms and move up from the infrastructure layer to take an ever larger bite out of overall IT spend, i.e. IBM and Oracle’s customer bases.
IBM at this point has greater self-awareness about their predicament than Oracle (and perhaps that is why they’re not making any incremental CAPEX investment because they know they can’t win this game). I’ve expressed some skepticism about IBM’s prospects in the cloud era for a while. After a cringe-inducing campaign claiming to be bigger than AWS (which reinforced IBM doesn’t really understand the difference between hosting and cloud), they have mostly moved on to making preposterous claims in other areas (Watson which is in serious contention to be the biggest “overpromise and underdeliver” in tech industry history, now blockchain as they try to save humanity from our looming existential tomato provenance crisis, and as that founders in its absurdity, they are moving onto quantum computing). IBM has been better at storytelling than delivering technology in the 21st century. They still tell Wall Street ridiculous things with Watson-esque bravado about their “position as the leading enterprise cloud provider”, but it seems half-hearted at best. IBM’s biggest investment in cloud seems to be “convincing” (perhaps using monetary inducements) a boutique analyst firm to define cloud as cloud plus whatever it is that IBM does (“private hosted cloud” ¯\_(ツ)_/¯ ) in a way that lets them claim to be a “Big Four” cloud provider (Synergy’s numbers are ridiculous, but that is a post for another day).
At the most basic level, IBM has a product problem and a customer problem. The product problem is they can’t build competitive technology any more. As Gartner delicately puts it: “IBM has, throughout its history in the cloud IaaS business, repeatedly encountered engineering challenges that have negatively impacted its time to market.” And their customer problem is who their customers are at this point: the disrupted. You may not get fired for buying IBM, as the old saying goes, but it is increasingly likely your employer will go out of business if you’re in an industry where technology matters.
Oracle finally understands the threat cloud poses, and have aggressively responded, but don’t yet seem to have a realistic view of their prospects. Their traditional strategy of picking a verbal fight with the leader in a new market isn’t going to work when they haven’t actually spent the money to build out a cloud to back up the rhetoric. Oracle doesn’t suffer from IBM’s product development problem. They’re throwing tons of money at people in Seattle and, like a bank, making every employee a vice president. But they’re way behind, need to spend tens of billions to have a competitive global cloud infrastructure, and have a much more severe customer problem than IBM: their customers hate them.
No one is looking to electively increase their dependency on Oracle (and embracing cloud takes vendor dependency to a whole new level). Oracle has always been very aggressive on the sales side, and their desperation around cloud appears to be taking it to new heights. Gartner, who are otherwise
inexplicitly inexplicably upbeat about Oracle’s cloud efforts, says, “Oracle sometimes uses high-pressure sales tactics to sell its cloud IaaS offerings, including software audits or threatening to dramatically raise the cost of database licenses if the customer chooses another cloud provider.” The risk for all existing Oracle customers, as the company’s cloud ambitions collide with reality, is the company will get even more aggressive in monetizing its non-cloud installed base in order to sustain its revenue. If you think their maintenance fees and audits are bad now, just wait until they start waterboarding customers (or maybe they already do?).
TL;DR: Thanks for playing IBM and Oracle.