Financial analysts as well as business and technology journalists were startled when, as part of its earnings announcement earlier this year, Oracle abruptly stopped sharing specific revenue numbers for its cloud business.

But the resulting flurry of analysis misses key points about the bigger picture. Those points are crucial to understanding what Oracle can do to improve its situation. This article will catalog those misconceptions and present a more complete picture.

Not unreasonably, a lot of people jumped to the conclusion that Oracle must be hiding something when they reduced the level of detail. At the very least, analysts were troubled by a loss of transparency. Oracle CEO Safra Catz answered a question on this issue from one financial analyst by saying, “First of all, there is no hiding. I told you the cloud number: $1.7 billion. You can do the math.” Yet no amount of math will tell you the numbers behind that number, such as detail on Software as a Service (SaaS) versus Platform as a Service (PaaS) versus Infrastructure as a Service (IaaS) cloud products, all of which are very different aspects of cloud.

Oracle used to provide granular detail, but is now lumping revenue from cloud services in with traditional software update and maintenance fees. Why the sudden change?

While Oracle has been proclaiming the cloud is its future, analysts could be forgiven for concluding poor results are the reason Oracle is casting a haze over its cloud numbers. Oracle’s chairman famously spent several years dismissing the cloud as inconsequential to enterprise computing. Once he noticed the success of rivals like Salesforce in SaaS and Amazon Web Services (AWS)  in IaaS, Oracle was left playing catch up.

I contacted Oracle through their PR firm about answering several questions related to this story. I did not get a response after waiting more than three weeks.

First Mistake: Thinking Oracle’s Cloud Will Ever Be First Tier

The first mistake is the idea that Oracle’s IaaS and PaaS cloud efforts should be in the same category with the other large players: AWS, Google Cloud Platform (GCP), and Microsoft Azure. My view is that it will never get there.

First of all, it is important to understand how far behind Oracle is. There are lots of ways to compare clouds but to me the most important is this: Has a cloud outage been a big deal? Failures in AWS, GCP, and Microsoft Azure make news and disrupt many services. Either Oracle’s cloud runs perfectly or it isn’t being used that much.

It is not hard to find other evidence. Though Oracle now claims to be all about the cloud, Stifel analyst Brad Reback says he has reason to believe Oracle is losing share in IaaS and PaaS. Meanwhile, CIOs are increasingly unlikely to think of Oracle as a strategic technology partner, with only 2 percent surveyed seeing Oracle as “their most integral vendor for cloud computing.” CIOs often follow each other’s lead, making this is a troubling trend for Oracle.

Even past Oracle cloud revenue reports are being called into question. According to an article in Business Insider, “an Oracle salesperson who’s been with the company for several years told Business Insider that the change could reflect something else: that not all of the cloud revenue was from customers who were really using Oracle’s cloud.” The story discusses tactics Oracle salespeople have used in the past (although the company has since clamped down on them) like selling “cloud credits” for products the customer didn’t actually plan to use in exchange for other discounts or incentives.

The departure of Thomas Kurian in September, who had led Oracle cloud efforts, is hardly an encouraging sign.

The problem is that unlike Google or Microsoft, who correctly saw the emergence of AWS as an existential threat, Oracle blew it off for a long time and still hasn’t understood that it will have to sacrifice net income performance to spend money to really build a cloud. Amazon and Google were criticized for years about the size of their R&D investment, part of which funded their clouds. Oracle may have to suffer such complaints if it is really going to create a first tier cloud, instead of plowing billions into stock buybacks. But it won’t sacrifice financial performance, and so progress will be far slower than it needs to be to really catch up.

Second Mistake: It’s the Developers, Stupid!

The Oracle OpenWorld show last week showed the awesome power of the Oracle ecosystem. The rest of the portfolio of Oracle products, including Oracle’s cloud apps, is vastly different from Oracle’s cloud. If you flipped a switch and turned off all the Oracle products in use today, much of the business world would grind to a halt. Like most vendors, Oracle cloud apps represent only a fraction of the usage of their installed base, but they are on par with the percentage adoption from SAP and other large enterprise software vendors who have on-premise installed bases.

The reason that Oracle is so powerful has to do with with its ability to create products like its database and enterprise app suite, to buy companies with products that can be improved to supplement Oracle’s existing portfolio, and, most of all, its ability to sell. In my opinion, Oracle’s sales process is where Oracle remains a brilliant company.

Oracle understood very early that enterprise software is sold, not bought. To make a sale, you need an effective salesforce that is well equipped and highly motivated. You need a wide, deep, and highly motivated supporting ecosystem. Oracle has these elements and they have been the foundation of the company’s success.

But the world of IaaS and PaaS is different. It is a developer-driven world. In an IaaS and PaaS cloud, software is bought, mostly by developers, not sold. All the salespeople in the world will not convince a developer to buy an inferior product. Oracle’s mighty sales machine cannot dominate this market; only better products matter. Right now, Oracle may fall further behind in market share in its IaaS and PaaS clouds.

In addition, Oracle’s cloud announcements at Oracle OpenWorld indicate that the company still doesn’t get it. While it’s true that Oracle knows a ton about how to create databases and will create a solid offering, it’s clear the company’s cynicism is driving its marketing. In promoting the security aspects of its architecture, Oracle is attempting to scare some of the conservative IT buyers who may be slow to adopt the cloud into staying with Oracle because the company can be trusted.

There are three problems with this approach:

– It ignores the need to create a large portfolio of related services to make every aspect of building applications easier. AWS is way ahead here, but both Google and Microsoft recognize that they must have a wide portfolio. Oracle is emphasizing its core database, not the surrounding app development ecosystem.
–  It focuses on the IT buyers’ worries about security. Cloud (PaaS/IaaS) adoption is more driven by developer convenience than anything else. The argument that Oracle is substantially more secure than AWS, GCP, or Microsoft Azure won’t hold water.
–  Most importantly, trust is multidimensional. To be trusted as a technology partner, one that delivers excellent security, Oracle must also be trusted as a business partner. Because of its aggressive tactics, Oracle has burned a lot of bridges and reduced a lot of trust.

Third Mistake: Recognize License Audit Chickens Are Coming Home to Roost

How you treat customers matters. For years, Oracle was such a dominant vendor that it could get away with a lot. Today, corporate bad manners that organizations put up with for years to get access to solid technology are not so easily forgiven. CIOs and their teams are taking back control of their technology roadmap decisions and showing they are not willing to be bullied into deals that don’t make business sense.

Oracle’s licensing model is unique in enterprise software. Oracle allows all of its software to be downloaded and used without license keys of any kind. Then, it performs audits and negotiates new deals, using any violations as leverage. This is known as the Audit, Bargain, Close model.

The problem from a customer point of view is that Oracle is really good at this, and clients are sick of being held for ransom.

I’m not the only one making these connections by the way. Writing at UpperEdge, Jeff Lazarto traces Oracle’s cloud struggles to its tendency not to care much about customer relationships “other than when it wants to sell something. This pattern of behavior is very transparent to customers over the years as they rarely, if ever, hear from Oracle except when Oracle wants more money.”

Meanwhile, JPMorgan analyst Mark Murphy remarked that “Oracle is losing its significance in enterprise IT.” Arete Research Services reported in 2017 that 74% of CIOs plan to reduce their spending with Oracle.

Independent minded technology leaders are starting to think twice about how deeply they want to commit to Oracle. On the Customer Service Scoreboard, Oracle earns a rating of “terrible.” Customers complain of the company using tactics such as audits to manipulate them into upgrading or moving to their cloud. Does that sound like an organization you want to give operational control over your data and systems? How will they treat you when your cloud subscription is up for renewal?

In this transitional phase between one era of enterprise technology and the next, organizations have a unique opportunity to reevaluate the kind of technology vendors they want to partner with for the next decade or two. Many customers appear to be reevaluating their relationship with Oracle.