The new great game — Oracle buys DataFox

Another week, another acquisition. Last week Oracle announced the acquisition of DataFox, a developer of “predictive intelligence as a service”. This latest announcement follows a now familiar playbook — incumbents across industries are looking to gather and analyze as much data as possible, with the goal of delivering actionable intelligence to their customers.

The digital transformation of industry has unleashed a race between incumbent players, but that race has evolved over time. What started out as a race to capture data and monitor and show what is happening in an organization has rapidly turned into a competition to deliver insights and actionable intelligence — with some talking of the eventual holy grail to automate the organization itself, or parts thereof.

This race has primarily been between the challengers (such as DataFox) and two sets of incumbents, each taking a different strategy. OEMs, such as GE or Siemens in industry, or Daimler in the automotive world, have been acquiring platforms and applications. They control access to the machine and want to secure access to the machine operators and their data. Recognizing that the old business model may not return a few have gone further and made big bets on new business models. This is particularly true in the automotive industry, where every major auto OEM today has a mobility services division, recognizing that auto ownership may decline in the future.

The other approach is being taken by traditional enterprise IT players — Microsoft, SAP and Oracle fit in this segment. These players already have access to the end customer’s organizational data and rules — what they need is to secure control of machine data that resides lower than where they operate and applications that sit above their platforms that can help monetize their trove of data. Witness SAP and Microsoft’s attempts to position themselves as middleware players while acquiring intelligence applications such as DataFox.

It would appear that enterprise players are making significant gains, despite being late to this game. GE’s digital strategy lies in disarray, even as Microsoft is emerging as a serious contender — witness Chevron’s adoption of the Azure IoT stack to implement predictive maintenance at its oil fields. Chevron is perhaps only the first to deploy predictive maintenance at scale but it won’t be the last (only about 4% of data generated in oil fields is ever used). Having evaluated Microsoft’s IoT platform and capabilities for predictive maintenance deployments against competitors both large and small, I am not surprised by their success.

The Chevron deployment illustrates that after years of lagging overly optimistic growth projections, IoT deployments might finally be picking up. It, together with the DataFox acquisitions, also illustrates that while startups may succeed in convincing companies of the value of digital transformation, large companies will likely deploy at scale with firms with the financial strength and global footprint to bear the risk of such rollouts.

Therein has been the opportunity for more agile companies — develop a disruptive business model, gather meaningful clients (in DataFox’s case, the likes of Goldman Sachs) and a meaningful trove of data, and be acquired. It took only 4 years of operations for DataFox to be acquired. Given the company was valued in 2017 at $33mn, the exit valuation was likely around the $100mn mark. Low multiples, potentially, but very good returns for the investors in the last round. Both in terms of time horizon and returns, this is a very different lifecycle and return profile from the typical Silicon Valley VC-backed startup.

In addition to the two checkboxes required for exit that I have previously written about, vertical value proposition and meaningful clients / datapoints, add now a third — integration. New digital transformation toolkits must not only be disruptive and achieve some scale quickly, but should integrate and play nice with existing systems. DataFox did not create new data — it simply connected with existing company records sitting and in turn delivered insights to CRM and ERP systems. We hear this increasingly that the days of expecting large companies to deploy entirely new systems for individual pieces of innovation are past.

In this race, one question remains open — what happens to everyone in between the OEM and the enterprise platform provider? That remains an existential question for device and component manufacturers, system integrators, and others in the value chain. Many are pursuing their own strategies to move up or along the customer relationship. Some position themselves to better help their clients move along the transformation journey — a position taken by most consulting or system integration firms. Accenture, for instance, has been one of the most active participants in digital tech/IoT M&A. The other path is to move to delivering a higher-value product or eventually services. This is happening in the renewables O&M industry — where once such services were dominated by OEMs, they are now increasingly being taken over either by operators themselves (such is the case with E.ON) or by independent service providers, which are likely to see market share grow, according to Taylor Wessing.

The quest for delivering intelligence will reshape today’s technology landscape significantly as value chain boundaries between existing players blur or are actively moved. Something similar happened at the turn of the century to the telco industry, which became a provider of a near commodity asset. It is too early to conclude the same will happen here nor to conclude that companies not already integrated into customers’ decision-making cannot carve a space for themselves. Nonetheless, it is clear that the incumbent players are actively working to re-position themselves for this new reality, with M&A to drive changes both external and internal to the organization a critical component of that move.