Microsoft And Oracle Team Up To Challenge Amazon

Microsoft (NASDAQ:MSFT) and Oracle (NYSE:ORCL) compete against each other in the database software and cloud platform markets, but the two rivals recently partnered up to challenge Amazon (NASDAQ:AMZN). This new partnership will allow enterprise customers to split their workloads between Microsoft and Oracle's cloud platforms.

This means customers can directly link Microsoft's Azure services, like analytics and AI, to Oracle's Cloud services, like its Autonomous Database. Microsoft's Azure is the second largest cloud platform in the world after Amazon Web Services (AWS), but it trails behind Oracle in the database market. Oracle controls nearly half of the database market, but its cloud platform is tiny compared to AWS and Azure.

Simply put, Microsoft and Oracle are setting aside their differences to reinforce each other's weaknesses. That strategy, which makes it much easier for enterprise customers to use Microsoft and Oracle's services together, could widen both companies' moats against Amazon -- which threatens both companies with its DynamoDB and Aurora database services on AWS.

How this deal helps Microsoft

Microsoft's commercial cloud revenues rose 41% annually to $9.6 billion last quarter and accounted for 31% of its top line. The business has three core growth engines -- Office 365, Dynamics CRM, and Azure.

Azure consistently generates the strongest growth out of those three segments. Its revenue rose 75% annually during the quarter on constant currency terms, buoyed by robust enterprise demand and the introduction of new AI, IoT, and security features.

Microsoft doesn't disclose Azure's exact revenue figures, but KeyBanc analysts estimate that it generated $7.1 billion in revenue in fiscal 2018 (which ended last June). That's significantly less than AWS's $25.7 billion in revenue last year, but Azure is growing at a much faster clip than AWS -- which posted 41% sales growth last quarter.

As AWS's growth decelerates, Amazon is cross-selling more services to boost its revenue and lock in customers. One of its top targets is the database market. If Oracle loses database customers to Amazon, it hurts Microsoft as more enterprise customers get locked into the AWS ecosystem. Therefore, it's in Microsoft's best interest to integrate Azure into Oracle's database software to counter AWS.

How this deal helps Oracle

Like Microsoft, Oracle is trying to expand its cloud-based businesses to reduce its dependence on legacy software sales. Unfortunately, Oracle's transformation was less successful than Microsoft's, and its sales growth flatlined.

The growth of Oracle's cloud services decelerated throughout fiscal 2018, and the company finally stopped disclosing those growth figures separately in the fourth quarter. Instead, it clumped its cloud and on-premise business results together in two more opaque units: the "cloud services and license support" group and the "cloud license and on-premise license" group.

However, shifting those segments didn't boost its revenue, which fell 1% annually last quarter, and it only beat earnings expectations by aggressively repurchasing its shares. In other words, it was repeating IBM's mistakes.

Oracle isn't prioritizing the growth of its legacy database business. Instead, it's focusing on growing its newer Fusion HCM (human capital management), ERP (enterprise resource planning), supply chain, and manufacturing cloud applications. But it also can't afford to lose database customers to Amazon because many of its cloud services are bundled with its database solutions, and the loss of that steady revenue would throttle its top-line growth.

Will this alliance stop Amazon?

Microsoft and Oracle's team-up is a smart move, but it also indicates that Amazon is gaining ground in the database market. Amazon already plans to stop using all Oracle database software by 2020, and many of its AWS customers could follow suit. Microsoft and Oracle are strengthening each other's ecosystems, but I doubt that alliance will prevent Amazon from luring away more database customers over the long term.

This article originally appeared in the Motley Fool.

Leo Sun owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon and Microsoft. The Motley Fool is short shares of IBM. The Motley Fool has a disclosure policy.