Well it seems Oracle is serious about expanding its business with telecom operators as it announced today it will acquire diameter routing and SS7 signaling specialist Tekelec. This complements and adds to the announced acquisition of Acme Packet, which was announced just over a month ago on February 4th. It looks to me that Oracle clearly wants to expand its business with telecom operators, but it is doing it in a very complementary and focused way through these two acquisitions. So far, both acquisitions of Tekelec and Acme are providing Oracle relatively high margin revenues in the telecom market in the control, policy and management layers of the core of telecom networks. This complements Oracle’s database revenues in telecom networks focused on business operations, end customer engagement and applications.
My two quick observations on Oracle’s recent telecom acquisitions are as follows:
Staying Focused, Watching SDN For New Entry Points: So far, Oracle has stayed away from entering network infrastructure products that actually carry network traffic and end user information (e.g. routers, switches, optical, etc.). Oracle seems very focused on staying within the network management, policy and control supervisory layers of the network and not entering classic network infrastructure. I suspect Oracle will stay true to this plan of action. In the future, however, as SDN and network virtualization develop as new markets, I would expect Oracle to look at taking advantage of this technology disruption as certain hardware based infrastructure functionality becomes software based running on the network core as potential future revenue opportunities.
Offensive and Defensive Acquisitions Given Cisco’s Software Aspirations: While Cisco and Oracle are not that competitive today, Cisco’s ambition to be more of a software company clearly suggests the two companies are more likely to compete for acquisitions and new markets in the future. I believe Oracle has stepped up its acquisition efforts in the telecom vertical to gain a stronger foothold in telecom policy, control and management core as both an offensive move to expand its addressable market, but also as a defensive move against Cisco as it looks to expand its software business. “Big IT” business models are converging and will continue to converge in the next several years. As an example, five years ago neither Cisco nor Oracle sold servers, now they both do. As network and storage virtualization open up new software markets for new entrants like Oracle and Big Data Analytics potentially open up new software markets for new entrants like Cisco, convergence among “Big IT” players Cisco, EMC, HP, IBM and Oracle is likely to continue to continue.
Today Oracle announced it was acquiring session border controller equipment supplier Acme Packet for about $1.7 billion. Acme Packet has roughly 50% market share of the $500 million session border controller market. What I find interesting in this strategic move by Oracle is that they are entering a market (albeit a relatively small market) that is served by traditional communications equipment suppliers like Cisco, Alcatel-Lucent and Ericsson. One has to ask, why is Oracle entering such a market? My view on this is Oracle sees that the combination of high speed public roaming wireless technologies like LTE, the maturation of IP Multi-Media System (IMS) for IP service manageability (which SBC is a part of), more sophisticated mobile devices (e.g. tablets and smartphones) and cloud hosting as allowing for the first time communications service providers (e.g. Verizon and AT&T) to truly offer a full suite of managed fixed and mobile services to the enterprise customers. Oracle wants to be a solution provider to service providers and large enterprises in the areas of business/services operations, IMS core manageability and application creation elements. Oracle already does a significant amount of business with service providers in business/services operations and is likely looking to expand its offering in IMS core and application creation. Acme fits into the IMS core. I would not be surprised to see Oracle acquire Layer 4-7 application companies within the Software Defined Networking (SDN) architecture as well to enhance their offerings in application creation. These companies, however, may not necessarily be public companies, but rather private start-ups developing pure software applications rather than special purpose network appliances.
What is also clear to me in this move by Oracle is how Cisco and Oracle will become more competitive over time. This is not surprising, as both companies are somewhat mature and seeking new growth vehicles. What probably also accelerates this increasing competition between the two companies is Cisco’s recent strategy shift to being more of a software company. Acme was a main competitor to Cisco, albeit in a small market of only about $500 million. Even so, this deal likely portends of more competitive clashes between the two companies in the future. So while the street has been focused on the increasing competitive dynamics between EMC and Cisco after VMware acquired Nicira back in July of 2012, now we can add another competitive battle with Cisco in the form of Oracle.
Large cap technology companies like IBM, Oracle, Cisco, EMC and HP all are mature when one looks at single digit organic revenue growth or even less for IBM and HP. We are likely to see more of these technology titans continue to compete with each other as we have already seen in the past several years. Even though this is obvious, predicting the actual M&A decisions by each company has not always been so obvious. While VMware acquiring Nicira was not too shocking, I don’t think many were predicting Oracle would buy Acme Packet. More such surprises are likely in 2013 and beyond to the point one has to question how the networking equipment industry landscape will look like in a few years.
Disclosure: I currently own shares of Cisco and Ericsson mentioned in this blog post. NT Advisors LLC may currently or in the future solicit any company mentioned in this blog post for consulting/advisory services.