Oracle Buys Sun: Who Are the Winners And Losers

Posted by: Peter Burrows on April 21, 2009

With no further ado, here’s my take on Oracle’s $7.4 billion acquisition of Sun on April 20:

WINNERS:

Oracle — I’m not a fan of this merger, as described by the companies. I don’t think Oracle, with its high margins, is going to end up wanting to be a major hardware player and duke it out with the IBM’s and Dell’s of the world. For all the talk of this deal being a gamechanger, the idea that Oracle will win with its own proprietary stack of technology—hardware, silicon, operating system, middleware, applications, service—is far easier said than done. And this strategy ensures a fierce competitive response from scores of more specialized players (one that will likely surpass the hoopla over Cisco’s recent entrance into the server market). Still, I think Oracle’s shareholders will still be well-served in the end. For starters, with one relatively cheap deal, Ellison has now vaulted Oracle onto the leader board in the battle royale to own the cloud. Two days ago, it was a software company. Now, it’s a contender versus IBM, H-P, Cisco, Microsoft, Intel and others. And regardless of the grand strategic talk in the press releases, Oracle is ruthless about cutting costs. There are no doubt gems within Sun. If any company will have the discipline to mine only them, and toss the rest, it’s Oracle. Investors seem to agree.

Microsoft — It seems to me that Sun’s loyal installed base would have moved to Windows long ago if it was going to. Same with Oracle in the database business, to some extent, vis a vis Microsoft’s SQL. But this deal could make it harder for Oracle to win more business from Microsoft, either from existing or new customers. That’s because IBM, Dell and other computer makers—Oracle’s key partners in the past—will look for reasons to push other alternatives on their customers.

Jonathan Schwartz — He’s had a turbulent run as CEO of Sun, and his radical strategy for Sun never really worked. But he ended up brokering a deal that serves his shareholders well. And while I doubt he’ll remain at Oracle, I wouldn’t be surprised if he’d see that as more of a reward than a punishment. Clearly a big thinker and effective communicator, it will be interesting to see what he can do with a company that’s not anchored down by as many strategic problems as Sun has been for the past decade.

LOSERS:

Sun Employees — Get past the happy merger talk, and what we have here is a company that’s famous for ruthlessly maximizing profits, buying one that is famous for ruthlessly minimizing them by refusing to make the huge cuts Wall Street has begged for over the years. Already, rumors of massive cuts are percolating around Silicon Valley—up to 70%, according to Citigroup analyst Brent Thill. The press release says it all: even before any of the obligatory mention of long-term synergies and growth possibilities, Oracle assures shareholders the deal will be “accretive”.

Open Source — I’m sure Oracle will make a show of pushing MySQL, and will continue to offer it to accounts that insist on using it. But I’d expect it to push its traditional software license model on customers, especially on start-ups once they “grow up” and need more “enterprise-ready” solutions. That’ll be the pitch, anyway. But I think Jonathan Schwartz’ belief in the power of giving away software will quickly give way to Ellison’s belief in charging for it. Who knows, maybe Ellison will try to monetize Java by cranking up licensing fees. After all, most companies can’t do without it, and what’s the worst that can happen? Oracle rival IBM needs Java at least as much as Oracle does.

Computer Makers — To the extent that Oracle can pull together a soup-to-nuts offering for the data center, rivals such as IBM and HP have two bad choices. They can either lose the hardware business to Oracle’s new Sun-based offerings. Or they can resell Oracle’s software on their own boxes, undoubtedly on terms more attractive to Oracle as these distribution deals aree rewritten in the years ahead.

Scott McNealy — On the press conference today, McNealy read his statement about the merger with about as much enthusiasm as Sarah Palin being introduced to Tina Fay. He sounded monotone, and read at a clip that made me think he was late for a tee time. Maybe I’m wrong, but I wouldn’t have blamed him. While he and Ellison have done billions of dollars worth of business over the years, odds are that McNealy will have no ongoing role at the merged company. There’s not room for two such visionaries (or egos) at one company, especially when their operating philosophies are so different. I hope I’m wrong, since McNealy has proven more right about the evolution of the IT world than almost any other CEO I can think of, with the possible exception of Steve Jobs and John Chambers. Remember the Big Friggin Webtone Switch? That’s a spicier description of what others call clouds or unified computing architectures. And McNealy was talking about this over a decade ago.

Innovation — It was probably inevitable, but America lost one of the most innovative, swaggering, damn-the-torpedos companies in Silicon Valley history yesterday. Shareholders should rightly cheer, but the odds of Sun pulling off another revolution as part of Oracle, as it did with the workstation, the UNIX server and Java just got a lot more remote.

Reader Comments

chindichormor

April 21, 2009 5:28 PM

Don't want to sound like a nitpicky grammarian, but this was the very first sentence! It should be "Without further ado".

"Ado" as in "much ado about nothing".

"Adieu" means farewell.

PierreRT

April 21, 2009 5:37 PM

Oracle's e Business Suite was going nowhere: they needed to greatly enlarge their partnering base with niche software developers across industries to actually keep their high end support license fees working. Recurrent income from billings was their problem: with current downturn no one was going to upgrade to next generation database releases 11, et al. Since all real development with Oracle is either (a) on the db table/flat file creation back) end (where MySQL can help bring in more fresh product), or (b) on the GUI (front) end in Java or XML, the Sun purchase was a critical matter of survival for Oracle. IBM and MS were both very foolish to let this deal get away. Microsoft specifically is the big loser in this deal.

The key to this is Linux. MS SQL simply is not a multiprocessor enterprise solution: it isn't scaleable and requires massive power, etc., and is very vulnerable to internet threats. Oracle running on Linux is impervious and works on half the processor power and a third the network bandwidth that both competitors require.
IBM's sales numbers (weaker albeit) are increasingly dependent on Linux/Oracle boxes (P series, X series, etc.)

Innovation here is probably a winner, not a loser though losing Sun is painful for many reasons.

The vertical integration this deal may offer is much, much more powerful than Mr. Burrows credits it: it all depends on Larry Ellison's willingness to reduce his appetitite for license fees to promote more development competition. If Oracle can loosen it's collar, Microsoft is in real trouble for the first time since the X386 DOS version was sold. I think that's the way Oracle was headed anyway: the RAC Clustering, et al only really pays off if currently unrelated LAN's can be roped in to data sharing/mining.

Don't forget: Google is completely dependent on Java now. The next shoe to drop may be an Oracle/Google merger, which makes even more sense. I'd be shorting Mr. Softee pretty much forever from now on if I were you.

Rgds

tiddle

April 21, 2009 5:57 PM

Yes, I will miss Sun, solaris, java, and MySQL, at the very least. Sun has been at the forefront of innovation for so long. As Sun is being folded into Oracle, MySQL and JRockit (the VM from BEA) will probably die a quiet, if not slow, death. But then, Oracle has a recipe book for absorbing acquired companies quick. It's sad though, that another iconic Silicon Valley company is going to be disappear.

Robert Espinoza

April 21, 2009 6:01 PM

Get ready for the deep workforce cuts. The main reason for the purchase was because of MySQL, Larry Ellison could not afford to let IBM have it.


RE

Sergius

April 21, 2009 7:30 PM

It's "no further ado"
Adieu is bye in french :P

Paul D. Bain

April 21, 2009 8:48 PM

Congratulations! You wrote this story without mentioning the term "Linux" even once! I did not think that that was possible.

Sardonically,
Paul D. Bain
paulbain@pobox.com

Bosco

April 22, 2009 2:15 AM

Oracle enters hardware business, I think Oracle is braver than I thought. Hardware business is a very different beast from selling software. You can cut you software developers from US and countries with high cost base, and moves its work to India or Eastern Europe to cut costs. As to Big Iron servers, they are expansive, low margin business. In addition, they need tons of expertise and patent portfolios as well as a lot of R&D money. I can only think only IBM and Intel can afford, since both of them have significant amount of business in server business. As to Oracle, it achieved growth mainly through acquisitions with its financial skill. I cannot see how Oracle grow Sun's business and subsidizes Sun with its high margin profit. Even if Oracle is willing to risk to spend big bucks on Sun's hardware business, it may not be capable to challenge IBM, as we all can see how Intel's Itanic performs against IBM,s Power architect.

David Miron (Soluto)

April 22, 2009 5:25 AM

michel vandenberghe

April 22, 2009 7:31 AM

what next ?

steve

April 22, 2009 11:02 AM

I think it's the beginning of the end for the open source leanings of java, mysql, and solaris. If they decide to charge for java, that will kill it for sure. I think mysql is already dead. I don't know about sparc, but I can't imagine that Oracle would have much of appetite for hardware. There have been plenty of opportunities for Oracle to get into hardware, and they haven't done it. I tend to think it's for the same reasons Microsoft doesn't get into hardware. Attaching themselves to a particular platform limits their market. Oracle hates Microsoft, but they are certainly happy to sell you a Windows version of Oracle.

Mike

April 22, 2009 12:29 PM

it's something sad to see the Sun sets.

Catalina588

April 22, 2009 4:33 PM

Good column, Peter. To your list I would add:

1. Death of Sparc. Sun's silicon has been dying for this decade. Oracle has no reason to keep a couple of thousand engineers working on it. RIP. The way to do it is to look to HP after the Compaq/DEC merger: set a date for the last Sparc machines to ship about five years out; spin a couple of revs in the meantime; spruce up Solaris on Intel Itanium (don't laugh); give customers the time and services to migrate. Looking back, this worked great for HP and can work well for Sun-Oracle. Oh, and too bad-so sad to the Sun dealer channel.

2. Even crisper lines between the Technology Integrators versus the Commodity Do-It-Yourselfer's (DIY):
- Oracle ends up as the most highly integrated computer company since IBM before the anti-trust ruling decades ago. Commodity industry-standard servers up to the application layer. IBM and HP lack the apps, and newcomer Cisco lacks a full datacenter stack let alone middleware and apps. Add the so-called systems integrators like Accenture and Wipro to this camp. If your company needs a business (process) problem solved, the Technology Integrators will get it done.

Oracle gets all the ingredients of a first-tier Technology Integrator but my handicapping says they are more apt to blow the opportunity than sweep the field.

- DIY is for those projects or companies that can't afford or don't want the Technology Integrator approach (and price structure). DIY appeals to small-medium business and many tech-savvy companies, not to mention the tech industry. The hardware/software/apps/service Technology Integrators are the natural enemies of the DIY and those companies who are components of a DIY solution. Think SalesForce.com, NetApp, and (drumroll) Microsoft. The DIY supplier community will by market forces realign to compete with the Technology Integrators.

We live in interesting times. The tech industry has always lived in interesting times.

AK

April 22, 2009 4:44 PM

3 words: MySQL, Open Office.

Bruno

April 23, 2009 1:03 AM

Sun fits in the Oracle culture much better than IBM; the offer to IBM was likely a trial deal to let the stakeholders feel better about Oracle. Java, MySQL and open-source connections are the keys to the deal, but like already said the complete data center stack could position Oracle where it needs to be. It will be interesting to see if Ellison will recognize the value of MySQL and Linux.
The difference in price between IBM and Oracle deals might pay for a good part of Scott McNealy's retirement package. He deserves after spending so much of Sun's resources ranting about Microsoft and missing the boat with open-source and Linux which actually ate Sun's lunch. He got his millions whereas stockholders are left with the crumbs.

Steve

April 23, 2009 1:03 AM

YAWN......Peter, when the last person at BusinessWeek leaves the building for the last time, please 'Tweet' about that. You're not "a fan of this merger?" Who really gives a rat's ass what you think? Apparently, not too many folks on the Webosphere. Only 12 replies in more than 24 hours? A typical 2.0-focused blog post gets far more replies than your tired article did. YAWN......

Mike

April 23, 2009 10:28 AM

Companies may be willing to pay a premium for hardware when they get "one throat to choke" lol.

boscoII

April 23, 2009 12:56 PM

Bosco - Intel doesn't make servers... they make PROCESSORS that happen to run in Sun, Dell, HP, IBM etc. etc.

About to be former Sun Employee

April 24, 2009 4:16 PM

For anyone who has been here at Sun during Jonathan's reign of ruin, the fact that he'll come out on top is enough to induce a spell of non-stop vomiting.

A great communicator? Puh-lease... He hid behind his blog. He had no use for employees and only cared about people in his own little club. He didn't have the cojones to get out and meet with employees because... they might say something mean to him and he couldn't take it. Snippy, arrogant and repulsed by his own employees - what a prize package Mr. Schwartz is.

Any company that cares about its talent should be very careful about hiring Jonathan. Pretty? Yes. A leader? Absolutely NOT.

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Bloomberg Businessweek writers Peter Burrows, Cliff Edwards, Olga Kharif, Aaron Ricadela, and Douglas MacMillan, dig behind the headlines to analyze what’s really happening throughout the world of technology. Tech Beat covers everything from tech bellwethers like Apple, Google, and Intel and emerging new leaders such as Facebook to new technologies, trends, and controversies.

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