Considering the steady erosion of Sun Microsystems’ stock price ever since the bursting of the dotcom bubble, it came as little surprise to learn of Sun’s imminent acquisition. Even before IBM made its initial offer in March, speculation about potential offers for Sun was rife. The identity of the acquirer, however, was a surprise. Oracle remains one of the primary drivers of enterprise technology market consolidation. With the exception of several ventures in the domain of appliances, Oracle remains firmly a software company. The sheer prospect of a software giant acquiring a diversified conglomerate may have far-reaching implications for the future of enterprise technology.
The acquisition can be interpreted in many ways. Datamonitor identifies two principal trajectories revolving around the destiny of Sun’s hardware assets: a business as usual scenario, in which Oracle disposes of Sun’s hardware and focuses on software; and a disruptive scenario, in which Oracle keeps Sun’s hardware to adopt a systems-based approach.
The business as usual scenario
The attractive valuation of the deal could mean that Oracle has identified an opportunity in divesting Sun hardware product lines, focusing on a range of the acquired software assets instead. Given Oracle’s focus on enterprise software, this is not a fanciful prospect. Sun’s hardware business has suffered in recent years, particularly as the vendor has missed out on the high-volume commodity hardware market. Regardless, Sun’s server products could be of interest to the likes of HP or Fujitsu, while Sun’s storage products may attract the attention of EMC. Hardware divestiture would mean that Oracle could focus on the software assets in order to continue the consolidation of database, middleware and application markets.
It is easy to identify the crown jewels of Sun’s software portfolio, most of which is available as open source software (OSS). Oracle would be particularly interested in Solaris, the de facto operating system of choice for Oracle database deployments, MySQL databases and the Java platform. In addition, Oracle stands to take over products such as the GlassFish application server, Java JCAPS middleware, OpenOffice office productivity suite and Sun’s Identity Management. Since most of these are competitors to Oracle’s existing products, the rationalization strategy will be central to the integration.
MySQL, a vital part of the LAMP stack which underpins many web properties and applications, represents a microcosm of concerns regarding the rationalization process. While MySQL has made huge improvements, it remains doubtful whether the OSS database is a direct rival to Oracle. Nevertheless, MySQL’s disruptive potential is clear. The perceived threat to Oracle’s principal database product line makes many MySQL users anxious regarding the OSS database’s future. Datamonitor believes that there are reasons to be optimistic about MySQL’s prospects.
The first reason is Oracle’s pragmatism. If any vendor understands the value of a large customer base, it is Oracle. MySQL represents an entry point into an entirely new set of organizations and deployment scenarios. Even if just a fraction of those opportunities are converted to one of the many Oracle enterprise product lines, it could represent a worthwhile return. More importantly, should Oracle decide to tamper with MySQL, there is a danger of the newly acquired users switching to a range of OSS alternatives. Contrary to what many claim, such an exodus would not be instantaneous. Database migration is not a trivial task, and many substitute candidates require further development. However, the situation illustrates a fine balance of mutual interest which will safeguard MySQL’s future.
Datamonitor considers that a similar prospect applies to most of the other key assets, particularly Java. Since Java underpins Oracle’s technology stack, the vendor has a vested interest in being a good steward of such a strategic asset. As per the rest of the stack, Oracle is likely to demonstrate its ability to rationalize the portfolio by selecting the best product, just as it has done with BEA’s assets. Datamonitor highlights Sun Identity Management as a candidate for the status of lead product in its domain. Most of the other Sun products are likely to revert to a supporting role, possibly positioned as ramp-ons for the established products.
Essentially, Oracle could choose to fund the acquisition of highly strategic assets like Solaris, Java and MySQL through the fire sale of the Sun hardware business. The success of such an approach would hinge on the execution, given the likely skeptical user base, at least in the first instance. The enterprise technology competitive landscape would not change radically, although Oracle’s position would be greatly consolidated.
The disruptive scenario
Another, far more disruptive, scenario is also conceivable. In this scenario, Oracle would retain most of Sun’s hardware assets and play the role of vertical integrator. As Oracle indicated in the deal announcement, it stands to become the only vendor commanding the complete stack from servers to enterprise applications. In fact, if the Sun Ray thin client and OpenOffice productivity suite are taken into account, the Oracle stack extends as far as desktop. This prospect raises the possibility of a new Oracle, radically transformed into a systems vendor akin to IBM or HP.
Should this scenario come to pass, it would represent a major validation of the integrated vertical stack, upsetting the competitive equilibrium by breaking a series of strategic alliances and potentially shaping a further wave of acquisitions. The latter trend has already led to speculation regarding the possible takeover of SAP, Oracle’s primary competitor in the enterprise applications market, or regarding Oracle’s venture into IT services, which many believe to be a necessary step for the adoption of a systems-driven approach.
Datamonitor believes that M&A speculation relating to either Oracle or SAP is not justified. Oracle’s service capabilities remain lightweight compared to HP or IBM, but a simultaneous venture into hardware and services eclipses even Oracle’s abilities. Speculation regarding SAP stands to be buoyed by the 33% decrease in SAP’s software license revenues reported in Q1 2009. The latest financials notwithstanding, it is clear that SAP is not a distressed asset by any stretch of the imagination. In fact, SAP has the opportunity to capitalize on the anti-consolidation sentiment in the short term, while simultaneously exploring partnership opportunities such as the recently announced link with Teradata. Should a buyer for SAP appear, Datamonitor maintains that it is most likely to be a vendor with a minimal enterprise application footprint.
Nevertheless, Oracle’s endorsement of a systems-driven approach does represent the culmination of a market consolidation trend. Oracle’s bold acquisition could ignite the breakdown of vendor stratification and a chain of alliances. This will ultimately result in further consolidation and alignment into a handful of technology ecosystems, ushering in an era in which enterprises’ procurement decisions are reduced to the selection of a single strategic ecosystem that can deliver hardware, software and services. In such a constellation, the Sun acquisition certainly earns Oracle mega-vendor status alongside IBM and HP, with further places taken up by the likes of Microsoft, Cisco and perhaps in the future an OSS conglomerate led by the likes of RedHat.
The Sun acquisition could help Oracle push deeper into cloud computing
Oracle could also decide to retain Sun hardware since a more or less complete Sun could boost Oracle’s cloud computing capabilities. Sun holds a tremendous amount of the cloud computing DNA in its culture, along with a series of relevant assets such as cloud provisioning and management acquired from Q-layer. The combined Oracle/Sun entity could build cloud-friendly hardware, optimize the OS layer with Solaris and xVM hypervisor and subsequently combine that platform with a range of Oracle middleware or enterprise applications, some of which already run in Software as a Service (SaaS) mode. Furthermore, the Sun acquisition would allow Oracle to embark on a much bolder strategy that could render it a credible threat to Amazon.com’s early lead in cloud computing infrastructure services. Even if Oracle would not have the appetite to provide such services itself, it could capitalize on the demand for cloud infrastructure build-out.
However, there has been no indication that Oracle sees Sun as a cornerstone of such an ambitious cloud strategy. Recent reports published by the Wall Street Journal speculate that Oracle could be thinking of a more extensive SaaS strategy. On the other hand, many are quick to quote Oracle executives’ dismissive stance on cloud computing as proof against such a strategy. Datamonitor notes that despite quick put-downs, the firm’s CEO has invested in NetSuite and salesforce.com, the two pre-eminent SaaS vendors.
Ultimately, Datamonitor believes that Oracle’s acquisition of Sun, due to close in summer 2009, could be a success. The attractive price is certainly a good omen. However, the onus is now upon Oracle to execute the integration effectively, justify the expectations surrounding the deal and cause IBM to regret opting to increase its dividend by 10% and allocate $3 billion to a share-buyback scheme instead of proceeding with its offer to acquire Sun.
Be that as it may, the 18% decline in IBM’s hardware revenues revealed in its Q1 2009 earnings statement highlights the scale of Oracle’s task. Even if Oracle opts for the safer option of divesting Sun’s hardware businesses, finding an interested buyer and striking the right deal will not be easy. In the other scenario, Oracle would have to navigate the treacherous hardware market. As if this is not challenging enough, the vendor would simultaneously need to balance maintaining good stewardship over assets such as Java or MySQL while capitalizing on those OSS products far better than Sun proved to be able to do.
Given the scale of Oracle’s ambition and its propensity to take on challenges, Datamonitor is inclined to believe that the vendor will opt to keep most of Sun’s hardware business and pursue a more ambitious trajectory. While Oracle’s integration track record has so far been impeccable, the Sun takeover brings an entirely new scale of challenges.