Why is there such a buzz among the analyst, press, and blogging community that Oracle is going to sell of the Sun hardware business? It makes no sense to me. I shared my thoughts on the acquisition in a previous post, but I am going to elaborate a bit here. Not only do I believe Oracle will continue selling Sun hardware, I think it is the primary reason they bought Sun.

Why would Oracle spend $7.4B to buy Sun? Is it for Solaris? I don’t think so. Solaris is open source and Sun would have welcomed Oracle’s help in tuning the operating system for Oracle’s software applications. Is it for Java? That is a little more plausible, but there was no need for Oracle to control Java. As far as I know, Sun was not doing anything to make it difficult for Oracle to use Java. Oracle is buying Sun for the hardware business. The hardware (and support) business is what generates the revenue at Sun.

I would like to share a few relevant quotes. The first comes from Larry Ellison in a recent interview. He did his best to shut down the rumor mill churning on what will happen to Sun’s hardware business.

Interviewer – “Are you going to exit the hardware business?”

Larry Ellison – “No, we are definitely not going to exit the hardware business. [...] If a company designs both hardware and software, it can build much better systems than if they only design the software.”

Laura DiDio, an analyst with ITIC, was quoted in a recent Reuters article. “Sun has three decades and billions of dollars in investment in superlative hardware. They have some brilliant engineers,” she said. “But Sun’s marketing has not matched its technology. Larry Ellison is brilliant at marketing.” Laura is being kind to Sun marketing when she suggests that it has not matched their technology. Sun has struggled to deliver a clear message to the market about their technology.

Oracle has roughly 50% market share in the relational database market. They also have a dominant market share in other markets with products like Siebel, BEA, and PeopleSoft. Even a sizable portion of SAP deployments use Oracle DB as the back end database. This means Oracle is sitting in the room when a customer makes their application decision most of the time. This application/software decision is made long before any hardware decisions.

The support matrix for the software application has a major influence on the hardware and operating systems decisions. What fibre channel HBA do you run? Probably the one that your storage vendor recommended. Solaris is the number one operating system for Oracle today. Linux was an afterthought for enterprise application deployment until Oracle put their name behind it and started pushing it as the platform for Oracle. What impact Oracle’s endorsement of Solaris have on AIX?

While Oracle will continue to support the major operating systems in the marketplace, it is only logical that Solaris will become their recommended operating system. Larry suggests in the above interview that Oracle is planning to tightly integrate Oracle with Solaris. That is another logical reason for customers to run on Solaris. If the customer has picked an Oracle software platform and Oracle recommends they run on Solaris, then why not sell them the hardware as well?

Oracle has used software pricing to move the market in the past and I expect they will continue the practice. Today, Oracle DB licenses are more cost effective (at list price) for IBM Power CPUs than they are for Sun SPARC CPUs. If Oracle is selling the Sun servers, it only makes sense that it will be more cost effective to deploy the application on Sun servers moving forward. In the future, I can see Oracle selling you 2 sockets of Oracle DB licenses and shipping you a 2 socket server that is included with those licenses to plug into an existing RAC cluster. You are welcome to run on a different platform, but this one is preinstalled and will join your cluster after you answer 3 simple setup questions.

Will the Oracle hardware offering bother IBM, EMC, HP, Dell, NetApp, etc? Yes. It will. What can they do though? Recommend a different database? It is to late for that. IBM has DB2, but nobody has a stack that is as complete as Oracle. Perhaps this will drive someone like HP to acquire SAP.

Why does Oracle want to keep the Sun hardware business if Sun is losing money? The answer is that Sun is generating positive cash flow from operations every quarter. They post a GAAP loss because they make poor investment decisions and then have to write off those investments. Jonathan Schwartz was promoted to president and COO of Sun in 2004. Under his guidance, Sun paid $4.1B for StorageTek in 2005. In mid-2007, Sun announced a $3B stock buyback. Sun stock fell by nearly 50% in the next 12 months. In 2008, Sun paid ~$1B for mySQL. When Sun’s stock price fell and the market cap with it, all of these events required write downs that show a GAAP loss. If Sun would stop spending on acquisitions, their bank balance would be rising every quarter.

In the last 4 years, Oracle has acquired over 40 companies. It has built a complete software portfolio that allows them to compete effectively throughout the entire software stack. With the purchase of Sun, they will now own the bottom half of the datacenter stack. The operating system down to the disk drives.

1. Oracle & Sun – What to do with the hardware business
2. Oracle to buy Sun for $7.4B – How will it affect the industry?
3. Exadata V2 Surprises
4. Column – The Sun Virtualization Guide