The curious case of Sun's hardware biz
It's time for Oracle to come clean
Comment Today is the day that shareholders of Sun Microsystems will gather to decide the fate of the company, either approving or disapproving of Oracle's $5.6bn takeover of the server and operating system maker.
Considering Sun's options - which are basically none if the Oracle deal isn't approved - the fate of the company is not really in question. Oracle will almost certainly prevail, and if not, Sun will probably bust itself up or take itself private after its stock nosedives to nearly nothing.
As for the fate of Sun's various server, storage, and software product lines and the myriad research projects that Sun sponsors as a (former) bigwig in IT, that's another thing entirely.
We have all read the statements coming out of Oracle since it started publicly doing its takeover dance with Sun on April 20 that it was going to keep Sun's hardware business going. Co-president Charles Phillips said on day one that Oracle spends a lot of money making sure its databases, middleware, and applications all run properly on a wide variety of different piece parts.
He added that by "engineering a true system", Oracle would be able to eliminate costs and reduce the total cost of ownership of its systems. He said that Oracle might, for instance, deliver ready-to-deploy servers, "a complete industry in a box" on a Sun-Oracle appliance.
Then Larry Ellison granted an
audience interview with Reuters - supposedly part one of a two part series, the second part of which has yet to materialize - where he explained that Oracle was committed to Sun's iron and "we're definitely not going to exit the hardware business." And just in case you didn't believe that, Ellison went on some more. "Sun was very successful for a very long time selling computer systems based on the Sparc chip and the Solaris operating system. Now, with the added power of integrated Oracle software, we think they can be again."
And then we come to find out a few days later, when Sun issued a proxy filing with the Securities and Exchange Commission detailing IBM's failed effort to acquire Sun, that Oracle had been in the negotiations trying to get its hands on Sun's software business - mainly Solaris and Java - since late February. It actually made an offer to acquire Sun's software on March 12 and never was interested in the Sun hardware business it is now championing as it tried to close the deal.
It seems clear that Sun could not find an alternative buyer for its hardware business - there was talk that Hewlett-Packard, Fujitsu, and Cisco Systems gave it some thought, but none of that has been confirmed - and made taking the hardware business a condition of the Oracle acquisition.
In mid-June, the word coming out of Sun's ranks is that the company had killed off the delayed 16-core "Rock" UltraSparc-RK processors and their "Supernova" server lineup ahead of the Oracle acquisition. It was not a condition of the deal, but certainly something that Oracle didn't want to get its hands dirty over even if it probably did want the expensive project killed off. Neither Sun nor Oracle have commented on the rumours, but the Rock project could have been technically dead with or without the Oracle acquisition. Still, such rumours about Sun backing away from a key product, that it had staked its aspirations and reputation in the high-end server racket upon, do not exactly breed confidence.
And further undermining confidence in Oracle's commitment to iron is the talk that it has continued to shop around Sun's hardware businesses even before it actually closes the Sun acquisition.
It is hard to figure out what Oracle really has planned. Perhaps once the voting is over, or perhaps after the deal gets regulatory approval in the United States and Europe, or after the deal is actually done, or maybe after the product roadmaps are all cut and redrawn, Oracle will actually enlighten us and its Sun customers as to what the plan really is.
Not being clear about the plan has its costs, as Sun's preliminary results for the fourth quarter of fiscal 2009 show, after they were announced earlier this week ahead of the Sun shareholder vote on the Oracle takeover. Sun said that based on a first pass on the numbers, sales in Q4 would be in the range of $2.58bn to $2.68bn, down between 29.1 to 31.7 per cent over the $3.78bn in sales in fiscal 2008's fourth quarter. Sun added that it would lose between 24 cents and 34 cents per share, which I estimate to be a loss of between $179m to $253m (provided Sun hasn't done a lot of share buybacks in Q4).
The amazing thing, given the economic meltdown and the considerable uncertainty about Sun's hardware and software product lines, is that Sun's sales in Q4 weren't off 40 or even 50 per cent compared to last year. And if they were, Oracle might have been under intense pressure to back out of the deal.
The fact is, Sun is a dot-com darling that was paired with the other big Silicon Valley startup - Oracle - to become the de factor standard for dot-com companies a decade ago. And that pairing did indeed make Sun and Oracle a heap of cash. In the fiscal 2000 year, you have to remember, Sun posted sales of $15.7bn and brought in $2.39bn in operating income and $1.85bn in net income. For that year - the best in Sun's history - the company's sales were growing at 33.2 per cent annually and net earnings were growing at a stunning 80 per cent.
Here we are, nine years later, and Sun's "Niagara" family of Sparc T servers are not competitive with the most recent x64 boxes. Its high-end Sparc Enterprise servers (rebadged boxes using Fujitsu's quad-core Sparc64-VII processors) have fallen behind IBM's Power6-AIX iron, and can barely keep pace with the Itanium-based Unix boxes from Hewlett-Packard, which are themselves looking pretty long in the tooth with so many delays in the "Tukwila" quad-core Itaniums.
Sun's "Galaxy" family of x64 servers are competitive, and they support Solaris just like Sparc boxes do, but obviously applications compiled for Sparc can't run without recompiling on x64 iron. This is not a position of strength, but it could be worse. There could be no x64 variant of Solaris, a position that Hewlett-Packard is in with its HP-UX for Itanium and IBM is in with its AIX for Power. This oversight could come back to haunt these vendors a few years from now.
Oracle was still saying this week that it can generate $1.5bn in operating earnings out of Sun in the first year following the close of the deal, and can hit in excess of $2bn in operating earnings in the second year. By itself, Sun has only demonstrated breakeven, losses, and tiny profits since its dot-com heyday. So what is Oracle to do? Probably what it always does in the wake of acquisitions, but with a hardware twist. Jack up prices on some Sun products, cut lots of overhead, kill off some projects and products, and be aggressive in other areas.
It seems fairly likely that Rock is indeed dead, particularly if it doesn't yet work. If the 16-core Niagara-3 chips work, and can be shoehorned into the Supernova chassis, Oracle might be tempted to fob these boxes off as Supernova machines.
Entry and midrange Niagara boxes will probably live on just fine, and there's no reason to believe that Oracle will stop selling Sparc64-VII machines or even do a deal with Fujitsu to peddle future boxes based on the eight-core "Venus" Sparc64-VII due in late 2010 or early 2011. It is almost certain that Oracle will try to charge a hefty premium for these boxes and at the same time position the Galaxy Solaris boxes as the price/performance leaders in the x64 market.
This will be particularly true when eight-core "Nehalem EX" Xeon processors from Intel and twelve-core "Magny-Cours" Opteron processors from Advanced Micro Devices are in the market early next year. Machines ganging up 8, 16, or 32 sockets of these x64 chips might be less elegant than a Rock design might have been, had it ever seen the light of day, but such x64 machines will have more than enough oomph to run big Solaris workloads. And there is every reason to believe that Oracle will be much more aggressive with x64 iron, in terms of scalability and pricing, than Sun has been.
Storage is anybody's guess. Oracle has said that it is keen on creating integrated systems and keeping alive disk and tape storage product lines. But it is much less clear what Oracle will change - or not change - in Sun's storage lineup. ®