Sun must acquire Red Hat or Novell - analyst
If it knows what's good for it
Analysis The sage analysts at Merrill Lynch are at it again. This time, they're demanding that Sun Microsystems acquire either Red Hat or Novell. Without such a buy, Sun will never be taken seriously in the Linux server market, and with Red Hat or Novell on its side, Sun could really take the Opteron server market by storm, they argue.
Some of you may already be scratching your heads. Sun sells both Red Hat and Novell to customers who ask for it today. Sun CEO Scott McNealy wore a penguin suit, right?
You're probably scratching your head even harder wondering why Merrill Lynch is talking about the impact that acquiring Red Hat may or may not have on Sun. What the analyst firm presents as "just another deal" would be seen as a nuclear act by much of the rest of the IT industry, which relies on the neutrality of Red Hat and Novell. Any acquisition would destroy the Linux vendors' apparent goodwill. Merrill, however, was intent on ignoring the bigger picture and zeroed in right on what this IT shocker would mean to Sun.
Acknowledging Linux isn't enough for Sun, according to the analysts. Sun spends too much time touting Solaris x86 as the right option on x86 servers. It needs to realize that the Solaris x86 message will only play well with Sun's existing customer base, and that others will be put off by Sun's refusal to go all out with Linux, according to Merrill Lynch.
"We're arguing that Sun's strategy must transform from the initial aversion to Linux to the current tolerance of Linux (but preference for Solaris) to an aggressive pro-Linux stance," Merrill Lynch said in a recent report. "Although there are self-cannibalization risks, we figure they are inevitable and that it is better for Sun to be on the offensive. If Linux is Unix, then Sun should dominate Linux; that, in our view, should have been the company's position from the start."
"We believe Sun's biggest problem is perception. Sun was hot, now it's not. In our opinion, it will take a radical move to change customers' views. Sun needs to own Linux, both figuratively and literally."
Merrill Lynch reports are loved in these parts for their whimsical tone. It's not often that you see one of the most respected financial firms use turns of phrase like, "Sun was hot, now it's not." How many MBAs does it take to come up with that?
Sun's biggest problem is of course not perception but reality. Financial services firms, telcos and service providers awarded Sun with billions upon billions during the dotcom boom. Then vast sums of this money dried up, as companies went out of business or pulled back on their spending. This created a huge gray market for Sun gear that haunts the company to this day. Add to this increased interest in Linux and x86 servers, better Unix kit from IBM, some internal missteps such as Sun's reluctance to sell Lintel gear, and you have the heart of Sun's woes.
Sun most certainly benefitted from the "perception" that it made the best Unix servers around, during the dotcom boom. (Although this again was probably less a perception than a reality.) Analysts at firms such as Merrill Lynch issued unreal projections for Sun's shares and demanded that Sun be more optimistic about its ability to meet their unreal goals. If Sun is suffering from perception inadequacy, it's probably Merrill Lynch's fault.
But let's put whimsy to the side for a moment.
Red Hat is the way to go
It seems unlikely that IBM would allow Sun to buy Novell. Big Blue has put too much investment into both SuSE and Novell to see one of its fiercest rivals own the second most popular version of Linux. Stranger things have happened, but the Magic 8-ball, says, "Don't count on it."
If Sun were to take a risk on a Linux vendor, Red Hat would be the more obvious choice. There's no sense in picking up the Tier II vendor, when your $7bn in the bank makes the Tier I player a possibility. Red Hat would deliver HP and Dell to Sun right off the bat. Worry about IBM later.
Merrill Lynch cites shock value as one of the main reasons for Sun to make a Linux acquisition. Those customers and developers that doubt Sun's Linux love would simply have to get over their concerns - fast. Again, Red Hat is the more effective buy with this rationale as well. Sun could purchase Novell and still be ignored, but Red Hat customers would be forced to deal with Sun even if it was only to hold the fort while they devised an exit strategy.
Merrill Lynch also points out the obvious gains Sun would see by more actively participating in a growth market. Unix sales are declining slowly for all vendors. Why not eat some of your Solaris share today to feast on the robust Linux market later?
There are, however, some more gains Sun could see that Merrill Lynch ignores.
First off, Sun knows how to run a successful operating system franchise. Sun's Solaris engineering team produces a steady stream of innovation.Solaris is a secure, scalable, and, with Solaris 10, fast operating system with plenty of of ISV support. Sun knows how to pull off the end goal of making a true datacenter-ready operating system, while Red Hat is still learning how to move past web and application servers. Sun could well endear itself to the Linux developer community in a major way by helping guide the OS more quickly toward handling high-end tasks.
Secondly, and this is a stretch, Sun's purchase of a Red Hat or Novell could actually open up conversations around Solaris x86. Dell, HP and IBM would be forced to talk to Sun. These three rivals harbor a type of visceral hatred for Sun that seems to go back to its unfair gains made during the dotcom boom, and goaded by McNealy's relentless bashing. They all rely on Linux though, and would certainly be more open to a Sun with Red Hat on its side.
Sun just might be able to use its Linux leverage to push Solaris x86 discussions along. "Why not offer our whole operating system suite on your servers? We'll do all the work. We're all in this together now." (Incidentally, one of the more amusing bits of a Sun/Red Hat acquisition would be seeing the capitalist McNealy earn his $100,000 a year salary, while the already grossly overpaid socialist Red Hat brass pulled in their millions per year. Not that anyone is feeling sorry for Scott, but still.)
Ultimately, however, Merrill Lynch's latest musings will no doubt end up in the trash can made specifically for them by Sun years ago. At Sun, this is known formally as the "Loony Tunes Receptacle."
Stubborn Sun just isn't buying into the Linux rage
Some of you will remember that Sun actually tried to have its own Linux distribution a couple of years back. That weird exercise ended before it even started. Sun decided to stick with the partner approach where Linux was concerned.
Sun backed away from its Linux distribution just as the company decided to put as many resources as possible behind Solaris x86. Sun has long adopted a "why be like everyone else, when you can be different" approach and its x86 operating system strategy falls in line with this tactic.
As Merrill Lynch points out, Sun believes that its upcoming class of Opteron servers will be far superior to any kit from the likes of HP, Dell or IBM.
"We believe that Sun may publish benchmarks that show its servers (both pizza boxes and blades) running a commodity microprocessor and OS at 2-3X the speed of current x86 systems thanks to the non-commodity architecture built around the parts," the analyst firm wrote in the report. "Running Solaris rather than Red Hat would probably provide an additional performance boost. Sun's value added would be in the design of the board, the I/O, and raw performance. If 3X performance is achieved, then a data center could save significantly on A/C, electricity, and real estate."
These performance projections may sound nuts, but Sun really believes that its new Opteron gear along with its Thumper project will give it a big competitive advantage. If the performance is all Sun claims, customers may well pick Solaris x86 over Linux. And, as has been discussed before, Solaris sales are worth much more than Linux sales to Sun.
Beyond the systems, it's clear that Sun thinks Linux and the big name hardware vendors backing it are vulnerable at this moment. A lot of the Linux fanfare has died down now that it's not really seen as the OS underdog anymore. SCO's lawsuits, while questionable, have also contributed to doubts around the OS.
Merrill Lynch ignores how messy Sun's purchase of a Linux vendor could be. We doubt that open source zealots would warm to the idea of Sun controlling the dominate version of Linux as quickly as the analyst firm suggests. We doubt that IBM, HP or Dell would let such an acquisition happen in the first place.
Merrill Lynch's myopic focus on what Red Hat might mean to Sun is also totally absurd. The entire IT community would be shaken by such a buy. Sun would pay a premium for something it doesn't really need. It can ship Linux on servers just as easily as Dell can.
Backing Linux in a major, major way would make Sun look like every other vendor, and this is not a role Sun is well suited to handle. At times, it seems that Sun exists for no other reason that to be different from the herd and offer customers a choice.
For Sun to "be perceived" as "hot" again, it will need the Solaris x86 bet to pay off. This won't require a "radical move" as Merrill Lynch demands but rather better hardware than any other vendor. As is often the case, Merrill Lynch portrays IT customers as a mindless mob. They go where the pretty lights tell them to go. This theory never panned out with Intel's Itanium processor, despite Merrill Lynch's myriad notes calling the chip an "industry standard."
Sun has got to out-invent, not out-acquire its rivals to be "hot" again. Customers will pay more attention to a screaming fast, cheap Opteron box that can run either Solaris x86 or Red Hat than they will to Sun buying an expensive open source software unit in Raleigh, North Carolina. ®