What Oracle Sees in Sun

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Oracle executives suggested during the conference call that they could sell specially tuned packages of Sun hardware and Oracle software in industries including telecom, retail, and banking.

But Oracle's 46% operating profit margins, among the industry's highest, will no doubt be squeezed by the addition of Sun's server business. "There are far more challenges here than opportunities," says James Staten, an analyst at Forrester Research (FORR). Some Wall Street and industry analysts suggested Oracle sell Sun's hardware business to help pay for the software with more long-term value.

In that regard, Java could be a trump card for Ellison. For one, Oracle can throw its large and effective sales force at Java, and contracts with Nokia and other handset vendors are coming due for renewal, says one source close to Oracle.

A Counterweight to Microsoft

Second, Java is key to a set of Oracle business applications called Fusion, designed to stitch together the array of programs Oracle has scooped up through its acquisition binge. Controlling the software in house could help Oracle assure customers of a smooth transition from older products to new ones. And owning Java gives Oracle a counterweight to Microsoft (MSFT) as it tries to convince more developers to incorporate its database, middleware, and other software into their products.

Oracle is expected to generate more than half of its estimated $23.1 billion in 2009 sales from technical support and "maintenance" of products its customers have already licensed. Those support contracts carry profit margins of about 90%. Controlling Java "is all about future maintenance streams," says Citigroup's Thill. "This will create stickier lock-in for the Oracle installed base."

One company that notably held its fire about the Oracle-Sun deal is IBM (IBM), which also heavily relies on Java. Oracle's bid for Sun edged out IBM's $7 billion offer, which fell apart earlier this month. While Oracle could use the acquisition to make it harder for Big Blue to develop software using Java, a person close to IBM says Oracle would be better served using Java as a bulwark against Microsoft, whose .Net technology competes with Java. "Both IBM and Oracle need, more than anything else, a healthy Java market," says consultant Greenbaum. Now that IBM has taken a pass, Java's fate lies largely in Oracle's hands.

Ricadela is a writer for BusinessWeek in Silicon Valley.

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