Competing for Sun's Hardware Business

What will become of Sun's hardware business? In the aftermath of Oracle's move to acquire Sun Microsystems for $7.4 billion, some industry observers and analysts have begun to question the value of the deal for Sun's hardware customers.

In the aftermath of Oracle's move to acquire Sun Microsystems $7.4 billion, some industry observers and analysts have begun to question the value of the deal for Sun's hardware customers.

At issue is Oracle's stated objective to gain higher profit margins from a slimmed-down Sun, with the stated objective of generating an estimated $1.5 billion a year in operating profits. During a news conference to announce the deal, Oracle President Safra Catz said Oracle was looking at $1.5 billion out of Sun.

To make good, some say they believe Oracle will have to slash the hardware business while also possibly raising software services prices.

Charles King, an analyst with Pund-IT, said, "Overall, the proposed Oracle-Sun deal offers more questions than it does answers."

Will Oracle abandon Sun's SPARC-based hardware business and shift it to Intel-based technology? Since Sun's $1.8 billion research and development budget consists of an estimated 50-50 split between hardware and software, Oracle would save upward of $900 million by eliminating hardware R&D.

Meanwhile, a skeptical King said: "Numerous acquisitions aside, Oracle has not demonstrated that it can manage a second business model and is not likely to have the skill sets necessary to evaluate which of Sun's businesses should be saved, sold or abandoned. Some have suggested that Oracle can rely on Sun's existing management team and board members to help, but if they were truly able why did they miss the opportunity to turn around the company? Going outside to bring in turnaround managers is a tricky business, particularly when you are dealing with a work force that needs to hear some good news in the very worst way."

Added King: "At the end of the day, enterprise IT customers tend to regard two things above all others: reliability and predictability. Related to this, it can take very little uncertainty for a business to shift allegiance if it feels a trusted vendor has lost its way, and numerous competitors stand to gain when and where Oracle and Sun lose."

Chief among those competitors is IBM, which has steadily been gaining server market share over Sun.

On April 22, IBM announced that more than 100 companies worldwide chose IBM systems in the first quarter of 2009 over offerings from HP and Sun, building on 500 competitive IBM system wins in 2008.

Indeed, during the company's quarterly earnings call on April 20, IBM said its Power Systems picked up four points of share in the first quarter of 2009. As a result, IBM's high-end Power Systems revenue grew 35 percent in the first quarter.

"Customer poaching is a fine art in the IT business and can be attributed to numerous factors, including the appreciation of new technologies, a loss of faith in existing solutions and how easy some vendors make life for clients switching server platforms," King said.

For instance, IBM's Migration Factory, which focuses on shifting business users to IBM's Power and System z mainframe solutions, has enjoyed some success in this regard, moving enterprise customers away from UNIX platforms.

King said: "Some of these migrations can be attributed to normal attrition; despite vendors' wishes that clients will stick with them forever, some do stray as a matter of course. But the consistent movement of scores of HP and Sun customers may suggest that something else is afoot. Despite HP's efforts, its Itanium-based servers remain a hard or impossible sell among many companies. Sun's continuing problems have likely contributed to its migratory woes-like most gamblers, most businesses tend to wager their IT budgets on winning teams."

Moreover, with 90 percent-plus of its customers already on Solaris, Oracle will need to find new ways to get additional software revenue from its clients.