Summary
Oracle has already stated their profit expectations from Sun. They must have a clear plan to turn around Sun’s business. Underestimating Oracle is a losing bargain!
Analysis
Sun has several major problems. Their high-profit legacy server business has been eaten from below by the x86 servers, Solaris has not been able to make any impact beyond Sun hardware, Sun storage is a strong business but dwarfed by IBM, EMC and Network Appliance. They have completely failed to monetize their huge investment in open source (Java, MySQL). In addition, they still carry a huge R&D cost burden left over from the glory days when they ruled the high-margin server market.
Oracle has stated they expect the Sun acquisition to be accretive as soon as next year. Oracle has a sufficient track record on acquisitions that they should be taken seriously when they say this – they’ve done it repeatedly during the last several years. The big question then becomes how do they propose to accomplish what Sun has failed at?
The first and most obvious is massive cost reductions through layoffs. Removing duplicate functions between the two companies is one step, reducing Sun’s R&D investment to levels more customary is a second step, and eliminating redundant products will complete the picture.
Sun’s biggest challenge in monetizing open source is they generally have lacked a migration path. At one time IBM made a fortune by providing mainframes to universities. Students graduated and demanded those mainframes in business. This model worked for IBM because they had a migration path to a highly profitable product. Sun has lacked that for MySQL and generally for Java. Oracle, by contrast, can migrate MySQL users smoothly to the Oracle database. They can use the ubiquity of Java to promote their middleware and applications.
Sun has continuing large investments in server design. That should continue, but the associated investments in SPARC chip development can be dropped if all the Sun servers are migrated to the x86 architecture. The SPARC chip simply doesn’t have a large enough installed base today to justify the investment needed to remain competitive, thus driving up server prices.
Sun has created remarkably effective storage solutions using open source software. While these have been reasonably successful in the market, they still lag the big names in storage, partly because many people doubted Sun’s long-term viability in this market. Oracle can provide that credibility and capitalize on Sun’s products.
If Oracle migrates all Sun servers to x86 chips and aggressively pushes that hardware design together with the associated Sun storage, operating system, database, middleware and applications, they can overcome most of the market’s objections to x86 servers at the high end and provide a complete package. Such a package should have high margins.
None of these steps are difficult to determine. The difficulty is in implementing them. Oracle has the will to make it happen. The “new” Sun may not look much like the “old” Sun, but it will be profitable.
