More thoughts on Oracle and hardware

There are two explanations making the rounds for Oracle’s unexpected entry into the hardware business. Neither on its own is wholly convincing, but each hints at what is probably really going on here.

The first is the explanation that Oracle was putting about on Monday. This holds that vertical integration of all aspects of hardware and software is the next step being demanded by the customers of enterprise technology companies, who want one throat to choke when something goes wrong.

But it hardly feels as though customer expectations have changed enough to force Oracle to buy a deeply troubled server company to take on entrenched rivals like IBM, HP and now Cisco. Not does this explanation take account of the fundamental nature of the enterprise technology industry, which relies on deep technology and business partnerships.

The other explanation is that Oracle had to move quickly to outmaneuver the slow-footed IBM, so it was willing to take on the unappealing hardware business just to get its hands on Sun’s software assets. It then follows, according to this view, that Oracle will now turn around and unload the hardware side as soon as it can, perhaps in pieces.

To judge from the people we’ve spoken to, neither of these explanations quite gets to the bottom of what is going on.

One good pragmatic reason for assuming Sun’s struggling hardware business is that, for the arch cost-cutters at Oracle, this is where many of the biggest opportunities for expense savings lie. Oracle has promised $1.5bn in operating profits from the Sun deal in the first year. Slashing hardware costs is likely to be a quick way to get there - and if the economy turns, Sun’s highly cyclical hardware arm could even provide a pleasant surprise.

One person familiar with Oracle’s thinking suggests that the company will act quickly to narrow the focus of Sun’s hardware on a smaller number of high-end system designs. And a person close to the Sun camp admits that Sun itself simply failed to act aggressively enough to cut costs - though this person adds that a big acquirer like a Oracle also has many more opportunities to save money than Sun could have done on its own, for instance by combining salesforces.

Another pragmatic reason to take on the hardware business is that it offers Oracle a strategic hedge. In a world dominated by a handful of giant systems companies, life as a pure software company could become uncomfortable: what if big partner/rivals like IBM and HP become less enthusiastic about selling and supporting Oracle’s software?

Being able to offer its own hardware gives Oracle a fall-back, according to one person close to the transaction. The very existence of an Oracle hardware division changes the equation and removes a potential weapon in the hands of its enemies.

Of course, none of this changes Oracle’s main motivation for the Sun acquisition: getting its hands on Java, Solaris and MySQL. But it does help to explain why a software company with operating profit margins of 35 per cent is willing to take on a business that recently has had trouble making any money at all.

Author: Richard Waters @ http://blogs.ft.com

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