How Sun Would Help IBM Get into the Cloud

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Talks between IBM and Sun, reported earlier by The Wall Street Journal, come amid accelerating competition in providing data-center capabilities. IBM already competes hard with Hewlett-Packard (HPQ) and Dell (DELL) and faces new challenges from Cisco Systems (CSCO), which on Mar. 16 made a high-profile plunge into the market for data-center server computers. "A Sun deal would…bolster IBM in its competitive battle in servers and the data center vs. both HP and now Cisco," writes Barclays Capital (BCS) analyst Ben Reitzes in a Mar. 18 research note.

Sun's Cloud Initiative

Sun announced its own cloud computing strategy at an event in New York on Mar. 18 just as word of its talks with IBM was leaking out. Its first offering, Sun Cloud, is targeted at Web site developers and corporate IT departments. "I hope we capture the next Facebook on our cloud," says Lew Tucker, the chief technical officer for Sun's cloud initiative, speaking to BusinessWeek on Mar. 17. In six to nine months, Sun plans to introduce a service aimed at large corporations and a package of products aimed at cloud service providers.

With its array of Internet technologies, including the Java software programming language, Sun has long been a favorite among Web startup companies. That affinity would clearly have some value for IBM.

But making the deal work wouldn't be a sure thing. Over the past several years Web companies have been shifting away from the large server computers from Sun that powered the dot-com revolution in the late 1990s. Increasingly, new Web companies are using lower-cost servers running processors from chipmakers Intel (INTC) and Advanced Micro Devices (AMD). For example, software-as-a-service pioneer Salesforce.com (CRM), which originally relied on Sun servers, has shifted to commodity-style servers bought from Dell. Sun sells lower-end servers, too, but it no longer has a lock on the Internet set the way it used to.

IBM would be taking a risk by purchasing Sun…with no assurances that Sun's cloud offerings will take off. Still, its chances of being a major player in the era of cloud computing would be enhanced by the merger. And IBM, with a $13 billion cash hoard, can afford to pay the price.

Hamm is a senior writer for BusinessWeek in New York and author of the Globespotting blog.