Opinion

The Great Debate

After Sun, expect new Oracle hardware deals

By Eric Auchard
May 11, 2009

ericauchard1– Eric Auchard is a Reuters columnist. The opinions expressed are his own –

Larry Ellison, Oracle Corp’s chief executive, is famous for making outrageous predictions about the future of the computer industry and being mocked by rivals and pundits.

But don’t underestimate the software maker’s latest moves into the hardware business.

Oracle’s surprised many last month that the company would buy Sun Microsystems for $7.4 billion. Now Ellison has gone one better, telling Reuters he was “definitely not going to exit” Sun’s various hardware businesses.

The Oracle leader is not saying so directly yet, but the unmistakable conclusion to draw is that he is ready to embark on a new wave of mergers to consolidate the business computer market, once the Sun deal closes.

Hanging on to Sun’s computer, chip and storage businesses implies Oracle is ready to bulk up via mergers to reinforce Sun’s competitive position and check rival countermoves. Sun wouldn’t be selling itself if its franchise could survive alone.

Why would Oracle bother to pay $7.4 billion for a company known largely for its hardware, unless, that is, it has specific reasons to enter the hardware market? Oracle may be able to better exploit Sun’s Java software franchise. Java is used on more than 1 billion computers and phones, but Sun received only $200 million in revenue in 2008 for its 14-year-old software.

Oracle wants to improve the performance of its software by building it into its own lines of hardware. It dipped its toe into hardware last year with Exadata, a machine designed to run the most demanding database tasks. Built on Intel chips in partnership with Hewlett-Packard Co, Oracle’s database software runs far faster than on standard computers.

The old technical distinctions that once divided software from hardware, chips or network equipment are blurring, if not disappearing. The entry of network equipment maker Cisco Systems into the market for big business computers earlier this year is a harbinger of the opportunity that outsiders like Oracle see in hardware.

“Once we own Sun, we’ll be able to plan and synchronize new features from silicon to software, just like IBM and the other big system suppliers,” Ellison said last week.

Financial dynamics are at work here. Hardware businesses operate at far lower margins than software ones. But companies that control both hardware and software are able to charge a premium for combined products. Apple, Cisco and IBM are examples. Roughly 20 percent of computer maker IBM’s revenue comes from hardware. It’s not computers themselves, but the software and services bundled along with them that generate most of IBM’s revenue and profit.

No company in the technology world has proved a more relentless consolidator of adjacent businesses than Oracle. Its track record over the past six years shows it must be taken seriously when Ellison says he has no intention of shedding Sun’s hardware businesses. Fifty acquisitions priced at nearly $35 billion later, he’s rolled up vast stretches of the once fragmented software business — PeopleSoft, Siebel and BEA among them.

Oracle focuses almost entirely on sales to big companies and governments. The home for most of its products is big data centers. Sun is surely a play by Oracle to grab a bigger part of the data center market. Dozens of companies, both software and hardware may be in play once Sun joins Oracle. Names such as EMC, VMware, Network Appliance, Brocade and Juniper Networks could be targets, if not of Oracle, then of rivals seeking to fend off the combined Oracle-Sun challenge.

Oracle will end its 2009 fiscal year in May with around $23 billion in sales. Once the Sun deal closes, Oracle sales could easily top $30 billion a year.

It is attacking a market led by IBM and HP, the world’s biggest technology companies, by sales. But Oracle can afford to be nimble as it generated $8 billion in free cash flow for the 12 months ended in February. Vivek Ranidive, CEO of rival Tibco Software, complains that Ellison has transformed Oracle into a kind of private equity firm.

Sun is a stepping stone to bigger things for Oracle, not an end in itself. Once the Sun deal closes, there is every sign that Ellison could do to the market for business computer hardware what he has done to software.

– At the time of publication Eric Auchard did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. –

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Larry is the Vince McMahon of the IT world for you wrestling fans. He makes things happen.

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