If the rumors turn out to be true, a couple of Oracle's (NYSE: ORCL) key customers could be heading for the exits.
The Information [subscription required] reported on Jan. 2 that both Amazon (NASDAQ: AMZN) and Salesforce (NYSE: CRM) are actively looking to replace the proprietary Oracle database in their operations with open-source alternatives.
This is just hearsay for the moment, and at least one professional analyst is already claiming the story sounds like "fake news." But Foolish investors never want to be caught off guard, and we should recognize what a blow it could be for Oracle if Amazon and Salesforce do walk away.
Why the Oracle database matters
Let's start with some background. The Oracle database is a relational database that is used for software applications to pull information and display it on websites. It's similar to being asked to solve a math problem, where you need to think for a moment before providing the answer.
Oracle's database has become one of the world's most popular developer tools. First released in 1979, it has become the industry standard. Thousands of customized programs are built on top of it, which has provided Oracle an incredibly powerful competitive advantage in the form of switching costs: Because Oracle is so firmly embedded into a company's software applications, it becomes extremely difficult to replace it. No company is eager to gut their entire IT infrastructure.
But while replacing the Oracle database would be difficult, it would not be impossible.
Amazon and Salesforce have by now built very large and competent IT departments. Given enough time and enough motivation, they can find alternatives to the Oracle database that would avoid its hefty license, maintenance, and support fees. Oracle already has a team of 400 employees who travel globally to aggressively enforce its licensing terms, which sometimes means levying fines for non-compliance.
In other words, Oracle doesn't exactly have a warm and fuzzy relationship with its customers. Many of them are ticked off from being what they consider overcharged for decades, and have reached the point that they're ready to look elsewhere for another solution.
Those other solutions
Amazon has also reportedly already switched two of its internal e-commerce databases to open-source projects that are integral to maintaining its customer account and order information. Salesforce, too, is developing its own open-source database project, and reportedly plans to be Oracle-free by 2023. They have already reportedly selected an appropriate code name for the early stage project: Sayonara.
Open-source tools have become available for companies to begin to design their own databases, specifically for use with unstructured data sets provided by social media banter or in machine-to-machine communication. "Open source" means that the software code is freely distributed for use. A flood of new mobile software applications designed in recent years have required database costs to come down and made several of these open-source tools quite popular. MongoDB is a pure play in the space. It just went public in October and already sports a $1.5 billion market cap.
But Amazon and Salesforce are likely motivated by more than just saving money.
Both of the companies are cloud computing vendors, meaning they provide infrastructure as a service to customers who don't want to spend to build out their own IT infrastructure. They're rapidly adding features to boost the appeal of their cloud offering, and would love more than anything to cut Oracle out of the picture.
The Foolish bottom line
Oracle has purposely drawn a lot of investor attention to its outsized cloud-based growth, even though much of this is just cannibalizing its existing legacy business. Shares also recently dipped after the company issued soft guidance.
Oracle is no stranger to motivated competitors such as Microsoft nibbling away at its dominant market share. But the loss of Amazon or Salesforce as a customer would be significant, and could cause investors to second-guess whether Oracle's growth rates and competitive advantages are quite as strong and sustainable as it claims.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Simon Erickson owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool owns shares of Oracle. The Motley Fool recommends Salesforce.com. The Motley Fool has a disclosure policy.