Oracle's (ORCL.US) Larry Ellison once dismissed cloud computing, calling it "complete nonsense" in 2008. Today, the success of Oracle's cloud infrastructure division is driving the company's soaring stock price and has made Ellison, the company's chairman and co-founder, the world's second-richest person.

The AI boom has significantly increased demand for internet computing and storage. Oracle, which had long struggled to find its footing in this market, has established itself by securing major clients. The company now powers Elon Musk's xAI from a data center in Utah, assembles clusters of tens of thousands of AI chips for NVIDIA (NVDA.US) near Singapore, and recently signed what could be the largest cloud computing deal in history with AI leader OpenAI.

Amid energy and material shortages, Oracle needs to invest tens of billions of dollars to develop unprecedented large-scale data centers. According to sources, this includes a plan to spend over $1 billion annually on gas generators to power a new large facility in West Texas rather than wait for grid connections. Alongside these expenditures, Oracle has recorded negative annual free cash flow for the first time since 1990.

Questions remain about the durability and profit margins of the business of providing infrastructure for training AI models. Oracle, founded in the 1970s, had long faded from the tech spotlight. Its journey back to prominence in the AI era involved internal lobbying to convince CEO Safra Catz to invest in cloud business, securing key clients like TikTok, and the rise of a tough executive named Clay Magouyrk.

Over 30 current and former employees and clients were interviewed to understand how Oracle is delivering on its ambitious promises. They anonymously revealed cost surges, accelerated timelines, regulatory hurdles to satisfy OpenAI, and the hiring of hundreds of former Amazon cloud employees.

**Building the Cloud Business**

Despite cloud computing's rapid development in the late 2000s, Larry Ellison showed little interest at the time. Oracle's core database business was an extremely profitable one-time purchase product installed on customers' own servers. Shifting to a cloud sales model, where users rent software access, would almost certainly mean lower profits and require collaboration with competitors.

After years of dismissing cloud computing as a "marketing concept," Oracle's attitude began to shift as its core business faced threats. Amazon promoted cheaper database alternatives among cloud customers, while application competitors like Salesforce (CRM.US) promised simpler installation and updates.

According to sources, Larry Ellison realized Oracle's Fusion applications (commonly used for financial and resource planning) needed to be migrated to the cloud. During the 2010s, Oracle saw competing internal attempts to build cloud services for internal use and customers.

The first attempt in 2012, led by Thomas Kurian, achieved only limited success. Another team, mainly composed of former Amazon employees and led by Don Johnson, pushed the so-called "bare metal" solution. This approach attracted privacy-conscious users by allowing customers to avoid sharing servers with other tenants. The team also focused on building smaller data centers, enabling expansion into countries where industry giants had not yet entered.

The bare metal solution gained Larry Ellison's approval—despite stepping down as CEO over a decade ago, he remained a key decision-maker. This new product later became known as Oracle Cloud Infrastructure (OCI). Thomas Kurian's approach was marginalized, and he left in 2018 to join Google, where he has led competitive cloud services ever since.

**Cloud Business Expected to Become Core by 2029**

Wall Street expects OCI to grow rapidly in the coming years. When promoting the new product, Oracle had to overcome its long-standing negative reputation for aggressive sales tactics. OCI's main selling points included lower prices through simplified product sets and good integration with other clouds.

Oracle salespeople often mocked Amazon AWS's complex tool set, telling customers that buying AWS cloud services was essentially paying for expensive projects like the satellite program "Kuiper." An Amazon spokesperson responded: "More customers choose AWS over any other cloud provider because we offer unmatched choice, pace of innovation, security, and reliability."

**Breakthrough Customers**

During the pandemic, several game-changing customers joined Oracle's platform. Zoom chose Oracle Cloud to handle traffic overflow during pandemic-driven demand surges. The company also secured nearly $2 billion in cooperation commitments from Uber in 2023.

The biggest victory was undoubtedly TikTok. Former executive Tony Grayson, who was responsible for Oracle's data center construction, said: "OCI was completely different before and after TikTok." He noted that the new client forced the company to think at unprecedented scale.

TikTok announced in 2022 that all US user traffic would go through Oracle servers. Annual revenue from this new client quickly exceeded $1 billion, at one point surpassing the total of all other OCI business combined. Oracle also accumulated AI infrastructure experience in the process, running thousands of NVIDIA GPUs for TikTok before the ChatGPT boom.

**"Sarcastic Management"**

OCI division leader Clay Magouyrk gained significant recognition within the company as a result. The 39-year-old executive rapidly advanced and reports directly to Larry Ellison. He was among OCI's first employees and previously worked at Amazon. He was promoted to president in June and is viewed by company leadership as a potential successor to 81-year-old Larry Ellison.

Clay Magouyrk said in a podcast: "Sometimes looking back, I'm not sure I was completely competent at every step, but so far it seems to have worked out well." Those who have worked with him describe him as efficient but confrontational. According to a 2021 lawsuit, he once called an executive's approach "f---king stupid" in a public executive meeting. The lawsuit alleged a toxic work culture at OCI.

Outspoken bosses are not uncommon in companies under Larry Ellison, who has called his leadership style "sarcastic management." In OCI's early days, the division was called "Sparta." It could offer employees higher pay than other Oracle divisions, was headquartered in Seattle rather than the Bay Area, and adopted AWS practices of constantly eliminating low performers.

As the cloud business's share of the company has grown, OCI's importance has increased. Currently, about 23,000 employees report to Clay Magouyrk. Over the past two years, more than 600 employees have jumped ship from Amazon. Amazon's policy requiring five days per week in the office has made Oracle's recruiting easier, as OCI still operates primarily on hybrid or remote work.

**Unprecedented Scale**

AI is now the biggest driver of OCI growth. Most of Oracle's order backlog is reportedly related to customers using GPU-based servers to train or deploy AI models. OpenAI is expected to become Oracle's largest customer. The two parties have reached an agreement to provide over 5 gigawatts of computing power—an unprecedented scale sufficient to meet the energy needs of millions of American households.

The construction timeline for related data centers is very tight, with the goal of completing everything by early 2027, and many servers expected to come online next summer. These facilities are used both for training AI models and are assumed to be available for inference (running trained model applications).

It's generally believed that providing infrastructure for AI training has lower profit margins than inference because it requires more advanced semiconductors and cooling systems. Within Oracle, there has long been disagreement about OCI's positioning. Some leadership believes its primary role is to protect the database business and modernize applications; others want to compete directly with Amazon and Microsoft for a share of the hundreds of billions of dollars general cloud market.

Convincing Oracle CEO Safra Catz to accept this grand vision wasn't easy. Sources say she was skeptical due to the high operating costs and low profit margins of data centers. This cost consciousness drove OCI's initial focus on small data centers. But with major deals like TikTok and later OpenAI landing, she and other traditional executives were also convinced.

Finding developers and power suppliers remains challenging. Tariffs and strong demand have pushed up prices for various goods and services. Meanwhile, obtaining approval and building infrastructure capable of drawing the required scale of power from local grids could take years.

**Cash Flow Turns Negative Due to Cloud Business Expansion**

Oracle's planned site relying entirely on natural gas generation is located in Shackelford County, Texas. The site, developed by Vantage Data Centers, will have 1.4 gigawatts of computing capacity, becoming one of the largest known data centers.

Part of OCI's appeal to AI companies lies in its long-standing focus on bare metal servers. This approach has become standard for AI work, and Oracle was among the first major vendors to offer this service. Users and employees also point to Oracle's network quality and high customization capabilities as advantages.

Industry analysis firm Semianalysis ranked Oracle Cloud among the top AI infrastructure providers in March, citing reasons including cost-effectiveness, network quality, and excellent customer service. Another major AI customer of Oracle is NVIDIA, which uses OCI for internal development and supports its own cloud infrastructure services. NVIDIA's H100 chip clusters in Japan and data centers in Batam, Indonesia both lease Oracle's computing power.

Oracle is also reportedly in talks with Meta and Musk's xAI for further cooperation. Oracle's cloud business remains much smaller than Amazon, Microsoft, and third-place Google under Alphabet. But its growth potential is enormous. According to Synergy Research Group, the market generated nearly $100 billion in revenue last quarter and is expanding at about 25% annually.

Bernstein analyst Mark Moerdler says the key question is how Oracle will finance these constructions and what this means for profitability. However, he notes that unlike smaller competitors like CoreWeave, Oracle has not borrowed money to develop data centers.

Mark Moerdler stated: "We believe that once past the investment phase, profit margins will recover and cash flow will grow significantly." He compared Oracle at this time to Microsoft's cloud transformation under Satya Nadella: "Oracle is undergoing a business model transformation that is more impactful in a shorter timeframe."