Oracle-Sun: A glass half full

Analyst Opinion This morning, we found out that the Sun might rise again. Oracle has decided to spend approximately $7.4 billion to buy its long time neighbor down the highway. This combination of two stalwarts instrumental in the rise of the Silicon Valley high-tech powerbase signals a regretful passing of a member of the old guard. But times change and Sun did not change with the times (much as Digital, Compaq, SGI, Cray and others before it.) The question is, why would Oracle, a company who has been gobbling up companies over the past few years (e.g., Siebel, Peoplesoft, BEA), but with its own set of challenges, want to move into hardware – a commodity, cut throat business?

The obvious answer is:  It probably doesn’t – at least not directly. But this acquisition is attractive to both Oracle and Sun for different reasons, although it may not be so attractive to end-user organizations. Let’s look at who gains through this acquisition, to see who the winners and losers might be.

From Oracle’s perspective, through acquisition of Sun it gets to control Java and the ability to kill off an imminent threat to its database hegemony in the MySQL open source database. Control of Java, at the core of Oracle’s enterprise software products and similarly for many of its competitors, is a real coup for Oracle and Larry Ellison. This can’t make IBM (or SAP) very happy as it has also built its key business software offerings around Java. It also puts Oracle in even more direct conflict with Microsoft beyond the database and into its middleware efforts with .NET framework.

Obviously, Oracle is buying a large hardware business. Oracle gets the opportunity to up-sell the vast array of Sun shops in which it may not currently have installed its back office suites. However, Oracle has attempted to get into the hardware business more than once in the past and was never very good at it – always allowing its products to die a slow, silent death. We believe that Oracle will not stay in the hardware business very long. Indeed, we would expect Oracle to take the software assets (primarily Java and Solaris), perhaps keep some key hardware subsystems (networked storage – an increasingly important market for Oracle’s analytics, BI and databases) and phase out or sell off the commodity hardware business (perhaps to IBM or HP). There is no advantage in Oracle owning a hardware business. If anything, it is a disadvantage, both in terms of alienating partners (e.g., HP, Dell, etc.) and in the challenge of making a profit on hardware. If Oracle’s true intent in this acquisition is to stay in the hardware business, then the board needs to do some serious soul searching.

What about Sun? It gets to stave off its forthcoming collapse. This deal is really a life line to Sun, which it surely needs. Sun did not keep up with the challenges of the new, commodity and Open Source-based needs of its customers. It is top heavy and can’t compete with leaner suppliers like Dell, HP and even IBM.  IBM’s offer to buy Sun fell apart on a number of points. But the Silicon Valley philosophy of McNealy and Ellison are more closely aligned than those of McNealy and the IBM juggernaut would have been, so this may be a better fit overall anyway. But we would expect significant changes to come to Sun once the acquisition is completed, including substantial layoffs and the jettisoning of numerous products and technologies.

This may be a good deal for Oracle and Sun, but is it good for the marketplace? Not really. End users get a more controlling influence in Oracle that could ultimately mean fewer choices and increased prices. Oracle has a history of being “pricey” and this probably won’t change. How will Java licensing change? Will there be Oracle proprietary extensions (like in SQL)? What will happen to Solaris and Open Solaris? Oracle would be smart to spin out the hardware business as soon as possible. This may actually benefit IBM, HP and other Unix server suppliers, and may also signal the death knell for the Sparc processor (to the benefit of Intel and AMD).

So the winner in this event is clearly Oracle, but Sun wins as well since it would have floundered without a rescue. The losers are the end user organizations who can now expect higher prices for software and fewer choices. Open Source is an ugly word at Oracle. Of course, IBM and HP are short term losers but may ultimately gain if the Sun hardware business suffers or is sold off, which is highly likely (and both IBM and HP could ultimately bid for the business). And Microsoft and/or Sybase may gain share at the edges if Oracle loses customers due to heavy handed terms and pricing, or may gain some MySQL accounts.

Clearly, this acquisition by Oracle of Sun is a glass half full for business users.

Jack Gold is the founder and Principal Analyst at J.Gold Associates, an information technology analyst firm based in Northborough, MA, covering the many aspects of business and consumer computing and emerging technologies. The opinions expressed in this commentary are solely those of the writer.