Why Oracle's Larry Ellison shelled out $9bn for NetSuite

Big Red paid nearly another PeopleSoft for cloud provider

Other approaches

After years of flogging Dynamics CRM Online, Microsoft is rolling out a revamped offering with ERP starting this month – Dynamics 365, on its Azure cloud and using a combined data model. Dynamics 365 includes customer service, with sales, marketing and operations. The common data model is vital because it provides the architectural plumbing into which ISV app partners can plug. Vertical apps are what makes ERP.

Microsoft remains the world's largest software maker and Azure is, apparently, number two in cloud behind AWS. Microsoft has a strong enterprise sales channel focus through which it can push Dynamics 365, making Microsoft a re-energised threat. It will now try to flip enterprise customers as successfully as it flipped those running desktop versions of Office into Office 365 users.

Salesforce has made noises and gestures about ERP, particularly in the mid-market. There's been talk of verticalisation and it partnered with UK accounting software firm Sage in May 2015. But there's been no bold ERP breakout by Salesforce.

Oracle, the largest ERP firm after SAP, has struggled in SaaS. NetSuite gives Ellison's firm a recognisable brand as well as a footprint of customers. Further, it gives Oracle the footprint and brand in that tier-two of customers – those outside those big corporations and outside those corporate HQs.

Arguably, Oracle's absence accounts for its management's maniacal obsession with ERP SaaS provider Workday, a firm making four per cent of what Oracle does in revenue.

Oracle has stooped to conquer in ERP before – PeopleSoft for $10bn in 2004, which also gave it JD Edwards customers. When it comes to soaking up the competition and their customer footprint, Oracle has form.

But NetSuite is different: Oracle isn't just taking out the rivals, it's buying a growing firm in a segment of business on a new platform where Oracle is weak. It's also buying a firm that was beginning to challenge Oracle more – remember that quarter-on-quarter growth, unlike Oracle.

Moreover, Oracle can still take NetSuite without too much pain: NetSuite's growth means it has reached a critical mass in revenue and in non-GAAP profit. Right now, Oracle can buy NetSuite and swallow the financial side before the price became too big or Oracle would have had to dilute its stock.

Paul Hamerman, Forrester vice president and principal analyst, told The pReg: "Oracle is going to leverage the NetSuite brand and success NetSuite has had. They [Oracle] ... see NetSuite as a real entry path into the mid-market, because Oracle has been very focused on large tents in their apps portfolio."

ERP is a complicated and nuanced market – and cloud ERP takes more than simply being available as a service. The mid-market is doubly more nuanced.

NetSuite had made a number of acquisitions to increase its appeal – buying iQuity in March for advanced manufacturing and adding features in warehousing and distribution. But it has a way to go and it's nowhere near as rich as Oracle's ERP. Here, Oracle has the engineering resources and the sector knowledge to beef up NetSuite.

Hamerman reckons NetSuite had "some way to go" on analytics and usability. "Oracle can help them," he said.

What happens next is a balancing act for Oracle and for NetSuite. Oracle must stop NetSuite growing up too much and keep it exactly where it is – in the tier two and not becoming established in the top tier, taking away from Oracle's more traditional ERP business. ®

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