Oracle's Cloud Business Surges 25% Annually, Powering AI Giants

Oracle Corporation, a longstanding technology giant, has undergone a remarkable transformation in its approach to cloud computing. Initially dismissive of the technology, the company has now fully embraced it, investing heavily in its cloud services. This shift is driven by the surging demand for internet computing and storage, propelled by the rise of artificial intelligence. Oracle's strategic acquisition of high-profile clients has solidified its position in the market, positioning it to compete with the industry's top three cloud service providers.

Oracle's pivot towards cloud computing marks a significant departure from its earlier skepticism. In 2008, the company's leadership openly criticized cloud computing, labeling it as "utter nonsense." However, the rapid advancements in technology and the increasing reliance on cloud services have compelled Oracle to re-evaluate its strategy. The company has since made substantial investments in its cloud infrastructure, aiming to capture a larger share of the market.

Oracle's recent success in securing major clients has been a pivotal moment for the company. These breakthrough clients have not only validated Oracle's cloud services but have also provided a significant boost to its revenue. The company's cloud business has seen a notable increase in demand, driven by the need for scalable and secure computing solutions. This surge in demand has allowed Oracle to expand its services and enhance its offerings, making it a formidable competitor in the cloud computing landscape.

Oracle's strategic investments in cloud infrastructure have enabled it to offer a comprehensive suite of cloud services, including data storage, analytics, and artificial intelligence. These services are designed to meet the evolving needs of businesses, providing them with the tools necessary to thrive in the digital age. Oracle's cloud services are particularly appealing to enterprises that require robust and reliable computing solutions, making it a preferred choice for many organizations.

Oracle's transformation from a skeptic to a champion of cloud computing is a testament to its adaptability and strategic foresight. The company's ability to pivot and invest in emerging technologies has positioned it to compete with the industry's top players. As the demand for cloud services continues to grow, Oracle is well-positioned to capture a larger share of the market, solidifying its position as a leader in the technology sector.

Oracle's cloud infrastructure department has become a key driver of the company's stock price surge, propelling the company's chairman and co-founder to become the second wealthiest person globally. The company is now powering data centers in Utah for Elon Musk's xAI and in Singapore for NVIDIA, which is building a cluster of tens of thousands of AI chips. Additionally, Oracle has recently signed a potentially record-breaking cloud computing deal with OpenAI.

Despite these successes, Oracle faces significant challenges. The company must invest hundreds of billions of dollars to develop unprecedentedly large data centers, a task made more difficult by shortages in energy and materials. One plan involves spending over 100 million dollars annually to power a new large-scale data center in West Texas using gas-powered generators, rather than waiting for grid connectivity.

These investments have led to Oracle recording a negative annual free cash flow for the first time since 1990. There are ongoing questions about the sustainability and profitability of providing infrastructure for training AI models. Oracle, founded in the 1970s, has a history of being overshadowed in the tech industry. Its return to prominence in the AI era has involved internal lobbying to convince the CEO to invest in cloud services, attracting key clients like TikTok, and the rise of a tough executive.

Oracle's journey to building its cloud business has been marked by internal competition and strategic decisions. In the 2010s, the company saw competing efforts to develop cloud services for both internal use and clients. One initiative, led by Thomas Kurian, had limited success. Another team, primarily composed of former Amazon employees and led by Don Johnson, pushed for a "bare metal" solution. This approach, which allows clients to use servers without sharing them with other tenants, attracted privacy-conscious users and focused on building smaller data centers to expand into regions not yet dominated by industry giants.

The bare metal solution gained approval from Larry Ellison, who, despite stepping down as CEO over a decade ago, remains a key decision-maker. This new product was later named Oracle Cloud Infrastructure (OCI). Thomas Kurian's initiative was sidelined, and he left Oracle in 2018 to join Google, where he continues to lead competitive cloud services.

Oracle's cloud business is expected to become the company's core by 2029. To promote its new product, Oracle had to overcome its reputation for aggressive sales tactics. OCI's main selling points include lower prices through simplified product suites and seamless integration with other clouds. Oracle's sales team often criticized Amazon's AWS tools as overly complex, suggesting that purchasing AWS services effectively funds expensive projects like the Kuiper satellite program.

During the pandemic, several pivotal clients joined Oracle's platform. Zoom chose Oracle Cloud to handle increased traffic during the pandemic, and Uber committed nearly 20 billion dollars to Oracle in 2023. The most significant win was TikTok, which chose Oracle Cloud to manage all its U.S. user traffic. This client brought in over 100 million dollars in annual revenue, surpassing the combined revenue of all other OCI businesses. Oracle also gained valuable AI infrastructure experience by running thousands of NVIDIA GPUs for TikTok before the ChatGPT craze.

Clay Magouyrk, the leader of the OCI department, has gained significant internal recognition. This 39-year-old executive, who previously worked at Amazon, has quickly risen through the ranks and now reports directly to Larry Ellison. He was promoted to president in June and is seen as a potential successor to the 81-year-old Ellison. Magouyrk's leadership style is described as efficient but conflict-prone. A 2021 lawsuit alleged that he publicly berated a colleague during a management meeting, reflecting a toxic work culture within OCI. This style is not uncommon in a company led by Ellison, who has described his management approach as "sarcastic management."

OCI's early days were marked by a "Spartan" culture, offering higher salaries than other Oracle departments and adopting AWS's practice of regularly culling low-performing employees. As the cloud business grows in importance, OCI now employs around 23,000 people, with over 600 former Amazon employees joining in the past two years. Amazon's requirement for in-office work five days a week has made it easier for Oracle to poach talent, as OCI primarily operates with a hybrid or remote work model.

AI is now the primary driver of OCI's growth. Most of Oracle's backlog is related to clients using GPU-based servers to train or deploy AI models. OpenAI is poised to become Oracle's largest client, with a deal providing over 5 gigawatts of computing power—a scale unprecedented in the industry. The construction timeline for related data centers is extremely tight, with many servers expected to go online as early as next summer. These facilities will be used for both training AI models and running pre-trained model applications, with the latter generally considered more profitable.

Within Oracle, there has been long-standing debate about OCI's role. Some leaders view it as a means to protect the database business and modernize applications, while others see it as a direct competitor to Amazon and Microsoft in the multi-billion-dollar general cloud market. Convincing Oracle's CEO to embrace this ambitious vision was not easy. The CEO was skeptical due to the high operational costs and low profit margins of data centers. This cost-consciousness initially led OCI to focus on smaller data centers, but high-value deals with TikTok and OpenAI eventually won over the CEO and other traditionalists.

Finding developers and securing power supplies remains challenging. Tariffs and high demand have driven up the cost of goods and services. Obtaining approval and building infrastructure capable of drawing the required power from local grids can take years. Oracle's new data center in Texas, developed by Vantage Data Centers, will have 1.4 gigawatts of computing power, making it one of the largest known data centers. It will be fully powered by natural gas, a first for Oracle.

OCI's focus on bare metal servers has been a key attraction for AI companies. This approach has become the industry standard, and Oracle was one of the first major providers to offer it. Users and employees also highlight Oracle's network quality and high customization capabilities as advantages. Industry analysts have ranked Oracle Cloud highly for its cost-effectiveness, network quality, and excellent customer service.

Another major AI client for Oracle is NVIDIA, which uses OCI for internal development and to support its own cloud infrastructure services. NVIDIA's H100 chip cluster in Japan and data center in Indonesia's Batam Island both utilize Oracle's computing power. Oracle is also in discussions with Meta and Elon Musk's xAI for further collaborations. Despite its smaller scale compared to Amazon, Microsoft, and Alphabet's Google, Oracle's growth potential is significant. The market's recent quarterly revenue was nearly 100 billion dollars, growing at an annual rate of about 25%.

Analysts are closely watching how Oracle will finance these expansions and the impact on its profitability. Unlike smaller competitors, Oracle has not taken on debt for data center development. Analysts believe that once the investment phase is over, profit margins and cash flow will improve significantly. Oracle's current situation is compared to Microsoft's cloud transformation under Satya Nadella, with Oracle undergoing a more rapid and impactful business model shift.