SAN JOSE, Calif. For more than a decade the computer industry has been evolving from a hardware to a services business. In that light, Oracle Corp.'s proposed $7.4 billion acquisition of Sun Microsystems marks a strange step back to the future that raises questions about the outlook for Sun's hardware, Java software and the database giant itself.
To date, the $22 billion Oracle has defined itself by a simple, bold statement. "We are the world's largest enterprise software company," it claims in the opening of its latest annual report.
In the past four years, Oracle has aggressively pursued that role, gobbling up more than 50 enterprise software companies including PeopleSoft for $10.6 billion in 2005, Siebel Systems for $6.1 billion in 2006 and BEA for $8.6 billion in 2008. Along the way Oracle has more than doubled its revenues and profits in less than five years.
But the majority of Sun's $13 billion business is in servers and storage systems with margins thin as razors. Oracle sees those systems as code containers it will customize for its end users.
"Oracle plans to engineer and deliver an integrated system—applications to disk—where all the pieces fit and work together so customers do not have to do it themselves," the company said in a press statement.
"They are saying they want to sell Oracle-in-a-box," said Martin Reynolds a vice president and principal analyst for Gartner Inc. "It's like the IBM of the 1960's saying 'Here's a big box that will run your business for you,'" he said.
The move saves Sun which has been teetering on the edge since the dotcom crash. "The challenge for Sun's customers has been do users believe in their future and with Oracle behind them I think they will," said Reynolds
But there's no quick fix for making Sun more profitable. One of Sun's biggest costs is in maintaining its proprietary line of Sparc microprocessors.
"Even if they wanted to wind down Sparc, that takes the better part of a decade," said Nathan Brookwood, principal of market watcher Insight64. "It would be nonsensical not to keep [that business] going for the indefinite future, at least through the next generations of Niagara and Rock processors," said Brookwood who was bullish on the merger.
But Reynolds notes Sparc is coming under increasing pressure from Intel's x86.
Intel's "new Nehalem processors are dynamite. The two-socket Nehalem is eating up all the four-socket systems, and unless Sun's upcoming Rock CPU is something incredible, Sparc is going to have a hard time," said Reynolds.
Indeed, Rock is already a year late, and Sun just lost to Microsoft the company's lead architect on the chip, Marc Tremblay.
Given the early state of the plan, Oracle has not detailed its plans for Sparc or for any layoffs. "A week ago this wasn't even a glimmer in Larry Ellison's eye," said Brookwood.