Software Perspectives On Oracle's Sun Acquisition: Java Control and Disruptive Appliances

Comment by Bo lykkegaard

(PresseBox) ( Frankfurt am Main, )
Oracle announced has announced its acquisition of Sun Microsystems for $9.50 a share, valuing Sun at$7.4 billion, or $5.6 billion net of Sun's cash. This price is slightly above the offer IBM was rumored to have made for Sun earlier in the year. The acquisition is set to close during the summer. The Sun price tag is smaller than what Oracle paid for PeopleSoft ($10.3 billion) and BEA ($7.2 billion net of cash), but larger than Siebel ($3.6 billion net of cash) and Hyperion ($3.3 billion).

At the time of the acquisition, Sun was in a difficult position to say the least. After talks with would-be acquirer IBM ended early April this year, Sun stock fell below $6.50 a share. Sun also incurred a massive $1.9 billion net loss for its first fiscal half-year ending December 28, 2008, and its financial viability and ability to compete in larger deals was damaged. IDC believes the deal sparks an early beginning of an upcoming wave of software consolidation, as predicted in IDC Predictions: European Software in 2009(IDC LC51R, February 2009).

Previous hardware and software acquisitions have typically been hardware vendors buying their way into a higher margin software market, such as IBM's acquisition of Lotus, Tivoli, Filenet, and Rational, Sun's acquisition of SeeBeyond and mySQL, and EMC's acquisition of WMWare, Documentum, and RSA Security. Oracle's acquisition of Sun appears to take the opposite direction: a software company acquiring its way into hardware. However, two of the key assets that Oracle is buying are indeed software assets:

Java and the Solaris operating system. Getting control of Java in particular was a key motivator for the acquisition as Oracle's middleware portfolio is Java-based. Seeing Java in the hands of key competitors such as IBM or SAP would be a serious strategic concern for Oracle.

Furthermore, Sun's servers and storage hardware will enable Oracle to offer a full stack to customers from front- and back-office applications, over middleware and database, to the operating system and the box itself. At a time when budgetary pressures and risk adversity calls for pragmatic buying decisions, some buyers will prefer a one-stop-shop over separate, independent suppliers requiring additional systems integration.

Finally, Sun's hardware provides an outlet for Oracle's appliance strategy. With the Exadata offering as a first example of prepackaged hardware and software, i.e. an appliance, IDC expects Oracle to push ahead in this direction. The goal is to get more simplicity and lower cost of ownership compared with a softwareonly approach. During the press conference, Oracle President Charles Phillips talked about the future concept of "Industry in a Box," for example a preconfigured blade with a retail application including middleware and database software, ready to plug in for retailers with relatively generic needs.

The proposed deal raises a number of questions:

- What will Oracle do with Sun's open source offerings, such as mySQL, OpenOffice, and OpenSolaris? Oracle has previously launched offerings such as Beehive as alternatives to Microsoft-based products, and there is no reason why Oracle should not promote OpenOffice as an alternative to Microsoft Office. IDC expects Oracle to maintain these open source products and promote them in entry-level and SMB offerings, including the mySQL database, which has competed in the past with Oracle's low-end database offerings.
What will Oracle's control of Java mean to Java-based competitors such as IBM and SAP? The combination of Java custody and the BEA brand provides Oracle with strong mind share in the middleware space. In particular IBM will be affected, because IBM and Oracle are close competitors in the middleware field. SAP should be less affected because its NetWeaver middleware is primarily sold into the SAP installed base under less competitive pressures than standalone middleware offerings. Oracle's Java custody will carry less significance in such a setting. IDC expects IBM to mobilize the Java and open source community to keep Oracle's future actions under close surveillance.
- How will Oracle position its HP hardware-based Exadata storage offering versus Sun's storage solutions? This is an area certain to overlap that IDC analysts will look at closer over time.
- Will Oracle's expected push into appliances provide a competitive advantage over competitors? In enterprise applications, the appliance delivery model is still in an embryonic stage. However, appliances are an important deployment model in markets such as storage and security, where the appliance delivery model in many instances has replaced the traditional software approach. The reason is that customers with relatively standard needs have experienced dramatic cost reductions using appliances. IDC believes that appliancebased applications have the potential to disrupt the software market in ways similar to other disruptive approaches, such as open source and software as a service. All application vendors, in particular those looking to move down market, should at least have appliances on the radar, if not on the product roadmap.
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