Oracle gains a cloud customer

Oracle’s deal to act as TikTok’s new “trusted technology partner” could be worth more than $1 billion in potential revenue annually for Oracle’s cloud business in the coming years, according to previously undisclosed data viewed by The Information.

Revenue from housing TikTok’s data on Oracle’s servers would provide a major lift to the database company’s cloud efforts, which lag far behind those of its rivals. The deal would also take business away from Google and Amazon, cloud competitors that have counted TikTok as a major customer in the past year or two as the app grew. Financial details of TikTok’s cloud spending shed new light on the high-stakes courtship for the viral video app among the biggest enterprise tech companies, including Microsoft, which until two weeks ago was seen as the leading contender to buy the app’s U.S. operations outright.

Under the deal, Oracle would reportedly get a minority stake in a new U.S.-based company owning TikTok that would be majority owned by ByteDance. The proposal, which boosted Oracle's stock price by 7% this week, still needs approval from the Trump administration and the Chinese government.

TikTok’s annual costs to store data and run the app on cloud-based servers are large and rising, according to internal TikTok data viewed by The Information. They could surpass $750 million this year, based on the company’s costs in the first and second quarters of 2020. TikTok’s expected growth means that Oracle, currently outmatched by its rivals in selling cloud storage and computing power, among other services, is landing what could be one of the world’s top ten cloud computing customers. Oracle had a 2% share of the global market for selling cloud infrastructure services at the end of June compared to 9% for Google, 18% for Microsoft and 33% for AWS, according to Synergy Research.

Google is more vulnerable than its bigger rival, AWS, to TikTok’s potential spending shift to Oracle. In the past year, TikTok quickly became one of Google’s top cloud platform customers. At one point TikTok was projected to spend $150 million with Google this year, according to a person familiar with TikTok’s three-year cloud services deal with Google, struck last year.

TikTok’s cloud- and data center–related operating expenses for the year would have been higher had it not shut down in India at the end of June, after the government there banned it and other Chinese apps amid alleged national security concerns. The concerns were similar to those that triggered the Trump White House in July to order that the U.S. version of the app be sold to an American entity or else it would be banned. In India, TikTok had more than 100 million daily active users.

Despite the India ban, TikTok is believed to have at least 200 million daily active users, including more than 50 million in the fast-growing U.S. market, a figure it disclosed in August. By comparison, rival video app Snap recently said it has 238 million daily active users, and it previously struck deals to spend around $650 million this year on cloud infrastructure services from AWS and Google, according to the company’s financial disclosures. In other words, TikTok’s operational expenses appear to be somewhat comparable to those of its rivals.

TikTok pays for a combination of cloud services from AWS and Google while also paying to manage its own servers in certain data centers, though spending on the cloud providers appears to be a bigger piece of the pie for now. One question is how long it might take to move TikTok’s computing and storage workloads to Oracle data centers, and what percentage of its workloads the deal will mandate must be under Oracle’s control. It’s also unclear how much it might cost for TikTok to break its existing cloud-spending commitments to providers including Google—deals it struck in order to receive a discounted rate—or to exit its separate data-center commitments in the U.S.

Spokespeople for TikTok, Google Cloud and Microsoft declined to comment for this article. Spokespeople from AWS and Oracle didn’t respond to a request for comment.

Acknowledging the pending TikTok deal without disclosing any details, Oracle publicly stated Monday that it “has a 40-year track record providing secure, highly performant technology solutions.”

That statement may be accurate, but developing a cloud computing business hasn’t always been easy for Oracle, whose executives—including co-founder Larry Ellison—once publicly belittled AWS’ business potential and the entire idea behind cloud computing. That was before Oracle launched a rival cloud service in 2016. Two years ago, some of Oracle’s biggest database customers declined to buy Oracle’s cloud services, in part because of the company’s aggressive sales tactics, The Information reported.

While Oracle more recently touted customers such as videoconferencing companies Zoom and 8x8 as representative of its cloud growth, it doesn’t break out a cloud infrastructure revenue figure that’s comparable to the figures for AWS and Google’s cloud platform.

AWS generated $11 billion in revenue in the second quarter of the year and $3.3 billion in operating profit. Google doesn’t break out revenue for its equivalent business, but it’s likely less than $2 billion per quarter, according to the company’s broader financial disclosures, which include its G Suite application business. Microsoft also doesn’t break out its comparable revenue.

—Kevin McLaughlin, Yunan Zhang and Juro Osawa contributed to this article.