Oracle's $9.3 billion NetSuite acquisition this week was not entirely a surprise to many in the industry, but it raises questions about Oracle's strategy for the cloud and the SMB ERP market.
NetSuite has been a mainstay of cloud-first ERP applications for small and medium-sized businesses (SMBs), and Oracle has pledged that its products are complementary and "will coexist in the marketplace forever," according to a statement by Oracle CEO Mark Hurd.
The NetSuite acquisition says a lot about where Oracle sees the ERP business moving to in the future, according to Eric Kimberling, founder and managing partner of the ERP consulting firm Panorama Consulting Solutions, who called it a good strategic move for Oracle.
"First, it means that Oracle is placing a big bet on the future of cloud and SaaS applications, and obviously they're betting on the fact that it's going to be a continuing cash cow for them once they've acquired the company," Kimberling said. "Second, it means that Oracle is betting to some degree on more of the midmarket because NetSuite appeals more to small and midsize companies. So I think it's a testament that Oracle may not be moving downstream completely, but they are certainly focusing more resources and money on the SMB market as opposed to their typical E-Business Suite or JD Edwards larger enterprises."
The Oracle sales channel should benefit NetSuite
If the NetSuite acquisition is good strategy for Oracle, it also makes sense for NetSuite because it can help them grow their market share, Kimberling said.
"Oracle has a very strong sales organization and NetSuite will gain access to the sales channels pretty quickly I would imagine, but they also gain access to Oracle's R&D budget which I think is a big thing," he said. "Oracle has a lot of money that they invest in R&D and I'll be curious to see -- if Oracle does invest heavily in NetSuite -- what kind of advancements they might make with Oracle versus what they might have been limited to on their own."
Paul Hamerman, vice president and principal analyst at Forrester Research, agrees that Oracle seems to be making the deal to solidify its cloud position.
"Oracle has started to recognize that there's a lot happening in the world of ERP in terms of on-premises to SaaS conversion," he said. "I think they have over 1,000 customers now on their cloud product, but NetSuite has over 10,000, so it's a good time for Oracle to make this move. NetSuite has good growth and it gives them a bigger market that they can sell into and NetSuite will also benefit from it in that they do sell globally, but Oracle's scale will help them get into more deals abroad than they can do with a relatively small direct sales force."
Oracle gains traction in the cloud ERP market
Hamerman speculated that the deal came about now because NetSuite was starting to move upmarket and make deals with larger companies while Oracle was starting to compete in the midmarket space.
"Oracle is now getting more traction with its ERP cloud product and some of that traction has been down in the midmarket, whereas Oracle has historically focused mainly on enterprise companies," he said. "NetSuite, which was historically more in the midmarket space, is starting to gain more traction with enterprises. So the two were starting to compete with one another, NetSuite for a long time basically avoided competing with Oracle, but it was inevitable that they were going to compete with one another."
The move could position Oracle to have strength in both markets, according to Holger Mueller, principal analyst at Constellation Research.
"It's the end of the one-size-fits-all perspective on the Oracle side, so now there are customers who could have been NetSuite customers who chose Oracle over NetSuite because they felt they fit better there," Mueller said. "SAP has been doing this two-tier ERP approach for a long time and this is something that we should see Oracle doing soon and they'll probably use OpenWorld to clarify when it's going to be the Oracle cloud applications versus when it's going to be NetSuite."
Oracle lacks a sound cloud strategy
Not everyone is convinced of the soundness of Oracle's strategy, however. Joshua Greenbaum, founder and principal analyst at Enterprise Applications Consulting, said it was the latest in a string of poorly planned moves by Oracle.
"I think Oracle once again mistakes acquisition for strategy and mistakes buying a company for fixing a problem, and in this case NetSuite doesn't really help Oracle anywhere near as much as it would like or should need," Greenbaum said. "This is a company that's not a leader in the cloud anymore, their competitors are doing a much more interesting job in the cloud and there's no discernable synergy between these products."
Oracle needs to develop an effective cloud platform strategy, Greenbaum explained, because this presents a real opportunity for companies like Microsoft and Infor that have increasingly strong cloud offerings to go after the NetSuite customer base.
Greenbaum noted that the move seemed to be more of a financial play to give Oracle some credible cloud revenue, but would not solve its existing cloud problem.
Questions also need to be asked about exactly how Oracle will integrate the NetSuite product line, said Cindy Jutras, president of the research firm Mint Jutras.
"[Oracle CEO] Mark Hurd was quoted as saying that the NetSuite products would coexist with their existing solutions, and my thought is that can mean anything -- from NetSuite will continue to run completely autonomously as its own subsidiary, or it could just mean 'Don't worry, we're not going to sunset the product and everything else is going to be integrated in,'" Jutras said. "It could be anything across those two extremes. There's nothing in the quote that I saw that leads me to believe that he's closing any doors of opportunity of how the company is going to absorb NetSuite."
However, Jutras agrees that Oracle's deep-pocketed resources should help NetSuite improve a product that has lagged in many areas. "It's been in catch-up mode in the manufacturing field, but they're making great strides now to catch up," she said.
How Oracle stacks up in a competitive market
There will almost certainly be an impact in the market for cloud ERP and SMB applications.
"This could put SAP under some pressure to understand what they're going to do from a more tier-down perspective, where there's only the failed [Business] ByDesign, which doesn't die or go away because it's exactly in the NetSuite space," Mueller said. "Keep in mind from a history perspective SAP [Business] ByDesign was supposed to take out NetSuite from a positioning perspective; it was never the high-end goal and there's a lot of tier-two ERP happening and interest from the SAP customer side."
Hamerman agrees the NetSuite acquisition will put pressure on SAP to be more credible in the SMB market, but may be a good shakeup for the market as a whole.
"As far as the smaller vendors go, I think it's good for the market; there's plenty of room in the market for SaaS ERP and financial accounting players," he said. "This deal recognizes that this market has excellent traction and the other players will benefit from it."
However, Hamerman explained that it should be a wake-up call for SAP to move more quickly into SaaS ERP, given that its Business ByDesign has disappointed and the vendor hasn't had much traction with its new ERP platform, S/4HANA, as a SaaS offering.
"SAP's going to have to accelerate its path to delivering ERP solutions both at the enterprise level and midmarket as SaaS in order to compete with Oracle and others in the market like Workday," he said.
The highly competitive market may have forced Oracle's hand in this case, Jutras surmised.
"Some people have been saying that the Workdays and the pure cloud solutions have been eating Oracle and SAP's lunch, and I think they go too far in saying that," she said. "But they've all obviously posed a threat to SAP and Oracle, and I think this is a defensive move to stop that and also to prevent someone else from going in and acquiring NetSuite and turning the tables against them."
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