Larry Ellison, co-founder and CEO of Oracle, once dismissed cloud computing as nonsensical. However, the success of Oracle’s cloud infrastructure division has propelled the company’s stock price and elevated Ellison to the position of the world’s second wealthiest individual.
The rise of AI significantly raised the need for computing power and storage. Oracle, a software company that had previously faced challenges in identifying its target market, successfully secured deals with major clients.
The company is currently supporting Elon Musk’s xAI using a data center in Utah and a cluster of thousands of AI chips to Nvidia in Singapore. Additionally, they have recently agreed to a substantial cloud contract with OpenAI.
Oracle Data Center – Data center managed by Oracle
Oracle is facing financial challenges as it looks to invest billions of dollars in building large data centers in the midst of energy and material shortages. This includes a strategy to allocate over $1 billion annually to equip a new megasite in western Texas with gas generators, rather than relying on the local utility connection.
Oracle experienced a negative annual cash flow for the first time since 1990 due to various expenses, raising concerns about the durability and profitability of their infrastructure for training AI models.
Oracle, established in the 1970s, had deviated from its technological focus. As it aimed to re-enter the era of AI, internal conflicts emerged in persuading CEO Safra Catz to prioritize cloud investments, engaging major clients such as TikTok, and witnessing the emergence of an assertive executive named Clay Magouyrk.
Bloomberg has interviewed more than 30 current and former employees and customers to investigate Oracle’s ability to deliver on its ambitious commitments.
They discussed rising expenses, faster timelines to comply with OpenAI, challenges with regulations, and the recruitment of many ex-Amazon Cloud workers, all while maintaining anonymity to describe the inner workings of a highly secretive and litigious organization.
Oracle chose not to provide a comment.
Constructing a Cloud
With the ascent of cloud computing in the late 2000s, Ellison had little motivation to energize himself.
Oracle’s database, bought outright and installed on clients’ servers, is among the biggest cash transactions globally. Shifting to a cloud sales approach, where users rent software access, would likely lead to reduced profits and require working with rivals.
Oracle’s attitude towards the cloud shifted from dismissal to acknowledgment following criticism of its businesses.
Amazon has introduced more affordable database choices for its cloud clients, while competitors like Salesforce have assured simpler installation and updates for their applications. Ellison recognized the importance of transitioning Oracle Fusion apps, which are frequently utilized for financial and resource planning, to the cloud, as indicated by sources familiar with their thought process.
Competing initiatives were undertaken within Oracle during the 2010s to develop a cloud platform for both internal and external use. An initial project, overseen by Thomas Kurian and launched in 2012, achieved only modest results.
A distinct team, mainly consisting of past Amazon employees and headed by Don Johnson, advocated for a method known as bare metal. This approach eliminates the need for customers to share servers with other users, enabling Oracle to prioritize privacy for its customers.
The group concentrated on constructing smaller data centers, enabling them to enter countries not accessible to major industry players.
Ellison approved the bare metal approach, which continues to be a significant factor in decision-making, despite being CEO for more than ten years.
The new product was named Oracle Cloud Infrastructure, also known as OCI. Kurian departed the company in 2018 when his strategy was rejected, and he subsequently joined Google to head its rival cloud service, where he still works.
Oracle had to address a lengthy history of aggressive sales tactics when introducing the new product.
OCI is favored for its reduced costs resulting from a streamlined product offering and effective compatibility with different cloud services.
Oracle suppliers frequently complain about Amazon Web Services’ wide range of tools, arguing that by using Amazon’s cloud services, customers are essentially supporting ambitious ventures like their Kuiper satellite project.
An Amazon representative stated that many customers opt for AWS over other cloud providers due to its unmatched choices, speed of development, security, and dependability.
Customers who are innovative
During the pandemic, Oracle’s platform gained new customers. Zoom, facing challenges with increased demand during lockdowns, chose Oracle Cloud to handle the surge in consumer traffic. Uber Technologies made a significant investment of around $2 billion in the company in 2023.
TikTok achieved a significant victory during this time by expanding its U.S. infrastructure despite facing scrutiny from legislators due to its connections with China.
Oracle, a national security firm whose CEO backed the ruling Republicans, appeared to be the obvious selection.
Tony Grayson, a former Oracle executive, stated that the arrival of TikTok marked a significant shift in Oracle Cloud Infrastructure (OCI), prompting the company to consider unprecedented scale. By 2022, Oracle had been entrusted with handling all U.S. user traffic for TikTok.
The new client’s yearly earnings surpassed $1 billion in a short time, making TikTok’s operations bigger than all of the IOC’s combined, as reported by individuals knowledgeable in the matter. Oracle gained expertise in AI infrastructure by managing numerous Nvidia GPUs, which are utilized for AI tasks, for TikTok even prior to the onset of ChatGPT hype.
Foolish behavior
There was a prolonged debate within Oracle regarding the purpose of the IOC. Some viewed it as a means to protect the database business and update applications, while others aimed to rival Amazon and Microsoft in cloud services and secure a portion of the lucrative market valued at hundreds of billions annually.
It was challenging to persuade Oracle CEO Safra Catz about the broad vision. She was doubtful because of the steep operational expenses of data centers and the narrower profit margins of the business, according to sources familiar with her thoughts.
The increased focus on cost prompted the initial attention of the IOC towards small data centers. However, as significant companies such as TikTok and later OpenAI emerged, she and other traditional company leaders became convinced.
Magouyrk, a 39-year-old executive at OCI, has been praised internally for his rapid rise within the company. He now reports directly to Ellison and is considered a potential successor to the 81-year-old boss.
Magouyrk expressed on the Modern CTO podcast in July 2023 that there were instances when they doubted their qualifications at different points in their career, but acknowledged that things have been successful thus far.
Those who collaborated with Magouyrk portray him as extremely efficient. In a 2021 case alleging a toxic work environment at the IOC, it was reported that he labeled an executive’s actions as foolish in front of a group of leaders. Ellison’s company is known for having abrasive supervisors, with Ellison himself characterizing his leadership approach as “management by absurdity.”
In the past, the division within the IOC was called “Esparta.” It operated out of Seattle instead of the Bay Area, offered higher pay than other parts of Oracle, and followed the AWS approach of regularly dismissing underperforming employees.
Cloud is becoming more prominent within Oracle.
The significance of OCI has increased due to the cloud’s expanding role in the company’s operations, with approximately 23,000 employees now under Magouyrk’s leadership.
More than 600 Amazon employees have joined our team in the last two years, as reported by a Workforce analysis.
The new policy requiring employees to work in the Amazon office five days a week has made it easier to hire, according to company staff, as OCI mostly operates as a hybrid or remote workplace.
AI is currently the main driver of IOC growth, with a significant portion of Oracle’s order portfolio related to the implementation or training of AI models using GPU-based servers.
OpenAI is set to become Oracle’s biggest client and is commercializing the project under the name “Stargate”, which was initially revealed at the White House in January with President Donald Trump.
Companies have finalized deals for over 5 gigawatts of computing power, an unprecedented quantity capable of supplying energy to millions of American households.
The project for OpenAI is progressing quickly, with data centers expected to be finished by early 2027 and servers already in operation by the following summer, as reported by sources familiar with the project timeline.
The facilities are being created to educate AI models with the aim of supporting the applications that utilize these trained models, known as inference.
Setting up infrastructure for AI training is typically viewed as a less lucrative venture compared to inference, given the need for more sophisticated semiconductors and cooling systems. The specific timeline and project specifics for OpenAI’s operations are subject to potential changes, according to sources.
Developers and power suppliers at reasonable prices are difficult to find for this project, according to individuals engaged in its development. Rising costs of goods and services, tariffs, and high demand from suppliers have made the search challenging. Moreover, obtaining the necessary electricity from local networks can be a lengthy process due to approval and infrastructure requirements.
Oracle intends to power a location in Shackleford County, Texas, solely with gas generation. The site, adjacent to another Oracle server park in Abilene, is being constructed by DigitalBridge’s Vantage Data Centers. It will have a computational capacity of 1.4 gigawatts, making it one of the largest facilities of its kind.
Oracle’s cloud business is significantly smaller than Amazon, Microsoft, and Google’s, but there is considerable potential for expansion. The market generated close to $100 billion in revenue in the last quarter, with a growth rate of around 25% compared to the previous year, as reported by Synergy Research Group.
Mark Moerdler, an analyst at Bernstein, raised concerns about how Oracle will fund its expansion and the potential impact on the company’s profits. However, unlike smaller competitors like CoreWeave, Oracle did not need to take out loans to develop its facilities.
“We anticipate that the profit margin will improve and there will be significant cash flow once they complete this investment phase,” stated Moerdler, drawing a parallel to Microsoft’s shift to cloud services led by Satya Nadella. “Oracle is currently experiencing a business model transformation that is more significant and quicker.”
