Why Oracle needed NetSuite

[Story updated 8/16/2016 to fix typo: Oracle’s PeopleSoft acquisition was announced in 2004, not 2014.]

Oracle is buying cloud-based CRM/HR/ERP provider NetSuite for $9.3 billion, it announced last week. Although Oracle has been beefing up its applications capability through acquisitions over the past several years, most acquisitions were far smaller. Only its previous acquisition of PeopleSoft for $10.4 billion in 2004 is larger. Given the huge price paid, even though Oracle has plenty of cash on hand to make it happen, can Oracle actually get benefit from such an acquisition?

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Oracle badly needs to court the mid-tier market

Oracle has been shifting aggressively to the cloud over the past two years as its more traditional client/server based enterprise solutions have become less popular with customers. Indeed, its revenue mix has shown just how important cloud is becoming to Oracle’s future. In addition, the traditionally lucrative market for enterprise back-office systems built on Oracle core database and related products that run most big companies has seen a good deal of encroachment from Oracle’s competitors. Much of that encroachment relates to buying full solutions rather than traditional Oracle infrastructure on which custom apps were built, and most of them being served up in the cloud. This is particularly true in the mid-tier markets. Oracle is buying NetSuite at significant expense to bolster its competitive position in the cloud and to advance its own cloud-based capabilities, but also because it wants to be more competitive in small- to mid-tier markets.

If Oracle hadn’t made the move, someone else would have

Why buy NetSuite now? It is quite likely that had Oracle not gone this route, NetSuite would have been acquired by another company (likely candidates would be Salesforce, Microsoft, SAP, or possibly Amazon, which wants to offer more applications in the cloud and not just be a cloud server service). This competitive threat is now off the table. It’s also true that Oracle has had some trouble selling into mid-tier accounts, a market that is growing faster than enterprise. NetSuite can give Oracle a competitive advantage in this market segment. And finally, it is a “poke in the eye” to competitors, particularly Salesforce and Microsoft, which have been taking mid-market share.

NetSuite customers may end up paying more

What isn’t yet clear is what this all means for NetSuite customers. Oracle says it will run NetSuite as an independent company. But if the PeopleSoft acquisition is any guide, it likely won’t be long before Oracle decides to fully integrate NetSuite into its own offerings. This will likely mean price increases for existing NetSuite customers and links to other Oracle products and services. There is some limit to what Oracle can do here if it wants to stay competitive, but it often finds a way to increase revenues despite market pressures.

Ellison and Oracle should both come out richer

So is this a winning strategy for Oracle? This acquisition does give the company a major path to more cloud-based revenues – something that is critical to its future. And despite NetSuite’s current unprofitability ($125 million loss in 2015), it’s likely that Oracle can quickly turn NetSuite’s revenues profitable by “streamlining” the organization and leveraging Oracle’s current channels and overhead functions.

In addition, the massive resources that Oracle can bring to bear on R&D and services should help NetSuite stay ahead of the pack and remain highly competitive in a market that has been consolidating of late. And despite Larry Ellison’s personal gains from this transaction (he was an early investor in NetSuite), I believe this is a good acquisition for Oracle (although perhaps an expensive one) that will allow the company to gain market share and revenue benefits long term. Overall I rate this acquisition as a positive for both Oracle and NetSuite.

Jack Gold is the founder and principal analyst at J.Gold Associates, an IT analyst firm based in Northborough, MA., providing research and analysis of the many aspects of business and consumer computing, and emerging technologies. Follow him on Twitter @jckgld or LinkedIn at https://www.linkedin.com/in/jckgld.