NetSuite and Oracle–Competition or Acquisition?

It’s plainly clear that traditional software vendors can no long rubbish this new breed of Cloud vendors. While once Oracle, Microsoft and SAP could pour scorn at the little pests sniping at their ankles – today we have some impressive vendors waiting in the wings who look increasingly likely to become the mega-vendors of the future – Salesforce, NetSuite, Box and Workday for example are building strong ecosystems of products, partners and impressive companies.

So what’s a traditional vendor to do in the face of this? Well the response until very recently has been one of denial. By spreading FUD about security, reliability and flexibility the traditional vendors have managed to stave off the threat, or at least delay it for awhile. But in the past twelve months that has changed. Traditional vendors are having to respond in new ways;

• By offering “real” cloud products – Oracle has a “cloud”, SAP does SaaS, Microsoft gets all collaborative-y
• By acquiring smart companies – Oracle buys Taleo, SAP buys SuccessFactors

All of this is interesting in light of some recent customer wins that NetSuite has announced. Rapidly growing companies like Groupon, Box and Square are going with NetSuite in place of more well known vendors. Over on PandoDaily Sarah Lacey posted about this and suggested that Larry Ellison in particular, and the traditional vendors more generally will take the fight back to NetSuite;

These wins are suddenly making NetSuite competitive with Oracle, and Oracle’s Larry Ellison was NetSuite’s biggest backer in the company’s pre-IPO days. Ellison invested in Salesforce too, and that relationship has become more complicated over time. Marc Benioff kicked Ellison off its board years ago for becoming too competitive, and last year the two clashed again. Ellison lost much of his control over NetSuite when the company went public and doesn’t serve on the board. Still, you have to wonder: With Oracle is buying cloud vendors, and NetSuite is starting to compete on larger deals, will Nelson have his own Marc Benioff moment?

In suggesting that the battle between Oracle and NetSuite will get harsher, Lacey assumes that these traditional vendors have a viable answer to the threat of the newcomers. This is an assumption that I believe is unfounded. Let’s look at the strategies that these large players have followed in their move to the cloud;

The Acquisition Trail

As I’ve mentioned previously, there has been a clear history of these large vendors developing by acquisition. But acquisitions in this modern age are different to previous ones. While in days gone by an acquisition of Siebel or PeopleSoft might mean a significant amount of work would need to be done around technology integration and organizational culture, today the barriers are far greater – different sales approaches, different monetization model, different workforce attributes – all of these factors make the integration of a cloud company within a traditional enterprise software vendor difficult. Time will tell just how well SuccessFactors and Taleo fit within SAP and Oracle respectively. As one commenter mentioned to me;

Oracle will start to buy more SaaS/cloud companies, but those acquired businesses will meet internal resistance from a culture completely grounded in the status quo. I’m skeptical Oracle can ever adopt to cloud-based, open-source, lower-touch, subscription-based, service-based delivery. It is practically a textbook disruption case.

Crushing by Competition

SAP rolls out ByDesign. Microsoft jumps deep into cloud with Office365. Oracle decides that, in fact, the cloud isn’t merely a joke and offers it to the world – in a box no less. All of these are examples of traditional incumbent vendors seeing that the threat is real and jumping in to offer cloud products that compete with the new players. The legitimacy of these products can be argued, but the focus of the incumbent vendors on competing in the space cannot.

Which brings us nicely back to NetSuite and Oracle.

I’ve been saying for a number of years that I’d be less than surprised at an Oracle acquisition of NetSuite, in fact some colleagues feign surprise that NetSuite isn’t already an Oracle company. Unlike with Salesforce where Larry Ellison has a once hidden, and now public, heated relationship with his once-protégé and now rival Marc Benioff, the relationship between NetSuite and Oracle is much closer. In fact a few of us chuckled last year when the analyst function at NetSuite’s SuiteWorld event was held at Larry Ellison’s own home.

Ellison was one of the first backers in NetSuite and still owns a large chunk of the company. He’s also intimately interested in the increasing competition between NetSuite and the lower level products of his arch-rival SAP. Add to that the small but significant overlap between Salesforce and NetSuite products and you have a nice little fit that would see Ellison really raise his middle finger to a bunch of competitors all at once.

Clearly he has the money. He undoubtedly has the opportunity. The only question is whether Ellison will execute on the deal.