Three years since his Sun gobble, what hath Ellison wrought?
Can li'l Larry build a better Big Blue than Big Tom Watson?
Let's take a look under the hood
For the purposes of a thought experiment and to see if what Hurd said about the Sun deal paying for itself is reasonable, El Reg took the last couple of years of financials for Sun and plotted them against the hardware systems and support businesses of Oracle.
Sun's overall revenues came mostly from systems, and most of Oracle's Sun product sales are also mostly for systems, but obviously they are not perfect apples-to-apples comparisons. But the data is interesting nonetheless.
Here's what the revenue curves look like for the two companies, with the quarter of sales at the end of 2009 – before the acquisition was done and before Sun has reported its second quarter of fiscal 2010 financial results – blocked out. The comparison also ignores the first month of Sun product sales at Oracle, which closes its third quarter in February each year. Check it out:
The revenues of Sun in total, and Oracle for hardware systems and support for them
Sun was declining on its own – and perhaps intentionally for all we know – starting in November 2008 when it first approached IBM to try to stem its losses from the low-margin x86 server business. You can see that Oracle continued Sun on this trend line, doing absolutely intentionally what Sun itself might have best done by itself had it realized that it could not be all things to all data centers.
Oracle promised to sell Sun's own products backed by its own intellectual property and to jettison unprofitable storage products to get out of the volume-server biz where there are no margins unless you're Intel, Microsoft, or Red Hat.
Oracle has chopped back those bad businesses even as it has built up new "engineered systems" businesses based on the Exadata database cluster, the Exalogic application server cluster, the Exalytics in-memory database machine, and the Sparc SuperCluster – a kind of database-application server hybrid based on Sparc T4 server nodes and the flash-pumped Exadata storage servers that give the database cluster its name.
As you can see, Oracle figured out the hardware systems support business right away. It is rock steady, and probably was fairly steady when Sun was running it, too.
Hardware revenues have been declining, along with sales for all of those engineered systems as well as for free-standing Sparc T4 systems that saw double-digit growth in Oracle's most recent quarter. Hurd said that ZFS storage array sales are also growing, and that there was over 70 per cent sequential growth in the quarter for engineered systems, with over 700 systems sold in the quarter. The engineered-systems business tripled (that's shipments, not revenues) in Oracle's prior fiscal year and was on track to double this fiscal year. As Oracle's top brass said back in December, the company is committed to growing this hardware business again.
"We're right about at those crossroads," said Hurd. "We don't pinpoint it to within a week or a month, but we're right in that wheelhouse where right in the next period of time you will start to see complete growth for the top end of the business overall."
We think Hurd meant to say "top line," not "top end." It doesn't make sense otherwise.
It gets interesting when you look at the gross income for Sun, on the left, and Oracle's hardware systems business, on the right:
Oracle has been able to smooth out some of the choppiness in the gross income of Sun systems biz
What you can't see in those gross income numbers above – which take out the cost of providing the products sold by Sun and Oracle but do not include sales, marketing, research, development, and other administrative costs as well as pesky things like writeoffs and taxes – is that Sun took a huge wonking write-off while the Oracle deal was pending, shedding nearly 6,000 workers and writing off the value of some acquisitions. This was done to gussy up Sun's books before the company was to be absorbed by Oracle, should the governments of the world approve the acquisition.
But you can see that write-off and the fact that Sun was never able to make much money in this chart, which shows the operating income for Sun as a whole and the Oracle hardware systems biz:
Operating income at Sun versus estimated operating income for Oracle's hardware biz
Oracle reports its operating income only as a whole, not for individual product lines, and the chart above reckons that the operating income for hardware eventually settles out to be roughly proportional to Oracle as a whole. This is what Oracle's stated goal was, more or less, when it acquired Sun.
If you do some estimating for sales and gross and operating incomes in December and January at Oracle for the hardware biz, and then do some math, here is what the numbers look like: since taking over Sun in the last week of January 2010, Oracle has done $11.72bn in hardware system sales and $7.37bn in hardware-support sales, for a grand total of $19.1bn. Gross income from the Sun hardware business, after it has been pared down by Oracle, was just under $10bn, and if our operating-income estimates hold, they come to just a smidgen below $6.7bn. So at the moment, Oracle has gotten its $5.6bn back plus another $1.1bn.
That's not too shabby.
Moreover, if Oracle had decided to get into hardware and had to bootstrap itself into servers, it would have had to spend countless billions on research and development, learning how to do a hardware supply chain, and then marketing the hell out of the boxes. In actuality, all Oracle had to do was say, "Larry Ellison is a grown up and he is now going to fix the Sun business like Scott McNealy either couldn't or wouldn't."
Sun's problem was that it was more of an offshoot of Stanford University, and that like IBM in the late 1980s and early 1990s had an expensive research organization that was paid for by a monopoly that was drying up. For IBM it was the mainframe and at Sun it was the Sparc/Solaris platform that was, for about a decade, one of its heirs and one that made lots and lots of money for Sun.
But when IBM came fighting back with Power Systems, boosting performance and getting very aggressive on price – which IBM could do because it had a vast base of proprietary systems that are stickier than the La Brea tar pits – Sun acted like nothing had changed. Just like IBM did for about the same amount of time when the mainframe business started collapsing thanks to Unix servers.
Oracle is a vastly more efficient operation than Sun was, and it doesn't wander off and spend hundreds of millions of dollars a year on science projects that may or may not pan out. The company spends plenty on R&D, but it is not trying to match the patent portfolios of IBM. Oracle sees an adjacent market and eats enough players to become either the largest or second-largest player.
That is probably not going to happen in systems – but you never know.
After all, the stickiest thing in the world is a database housing all your vital business data. As long as customers love Oracle's database, and Oracle makes the systems that run it best, Oracle has every bit as good of a chance of ruling the enterprise data center when it comes to systems as does upstart Cisco Systems, which will be half Oracle's size in systems if 2013 plays out as expected.
The difference is, Cisco is still growing like crazy and Oracle is still shrinking. Cisco could level out with a systems business somewhere around $3bn to $4bn a year several years hence. Oracle is already there (and I am just talking about hardware, not support), and could get back to maybe $5bn.
Oracle has staked its game on integrated systems, in owning the entire customer experience from disk drive to application screen, and thus far it is the only vendor who can claim this. The IBM of the 1970s and 1980s, which used to develop its own application software as well as databases, transaction monitors, and so on, is the last time any company had this much control over a stack.
The question is, will customers want to be locked so tightly into Larry's World? ®