At first we viewed the Oracle acquisition of Sun as a purely defensive move with the value being more in IBM not having it than Oracle enjoying it.

However now it appears that Oracle is coming around to addressing the SaaS market more directly (over their own strenuous objections from the recent past.)  Some elements of Sun could provide Oracle with a “lite” stack that could be used as a full and viable SaaS solution (unlike Netsuite) that *might* not be as much of a threat to the core Oracle software business.

So far SAP has failed miserably in this space thanks to their profound over-engineering of what is supposed to be a lightweight and easy alternative to the “poured concrete” foundation of SAP software.  This gives Oracle a window of opportunity to at least not be “worst and last” in the space.

We expect Oracle to do far less with the core assets of Sun than Oracle management has promised.  A reasonable “failure strategy” may end up being to use most of the remaining Sun assets inside a SaaS-focused business entity.

From an investment standpoint the move into SaaS by Oracle is a classic good news/bad news situation.  While a nice strategic move it will be a difficult transition in terms of revenue growth and margins.  Although recurring revenues from SaaS models can justify higher valuation multiples, they deliver fewer dollars up-front and lower initial profit margins.  Any meaningful transition for Oracle would create substantial pressure on revenue growth and margins.  (This is probably the primary reason Larry Ellison dislikes this model so much.)

Oracle would seem to have little choice.  Salesforce.com has continued to be successful in creating and growing the market while platform technology providers like Microsoft and IBM are moving (perhaps with a few kicks and screams) to embrace the SaaS/Cloud model.  Even the mighty Oracle can’t afford to face down all competition.   These vendors have credible solutions and distribution channels and if they are waving a small monthly fee over a large Oracle proposal, many customers may opt for it.

Thusfar most analysts have cheered the Oracle purchase of Sun and expect it to generate additional earnings for shareholders.  We think they are at least wrong in magnitude and may even have the direction wrong depending on how things evolve at Sun.  Secondly the transition to SaaS will be a strategic improvement in Oracle positioning and may threaten other vendors, but it won’t be good news for Oracle shareholders in the short and medium term.

Pressure on revenue growth and declining margins are rarely good for a growth stock, we don’t think they will be good for Oracle.

[Disclosure: Research 2.0 has a short position in Oracle at the time of this writing.]

Primarily this is a defensive (meaning not very creative) move by Oracle.  IBM would have been a measurably stronger competitor for Oracle with Java and MySQL added to their formidable software stack.  So the real value for Oracle is more in IBM not having Sun rather than direct benefits for Oracle.  All their statements to the contrary are only corporate posturing.  That fact is not going to be good news for Sun employees who can expect Oracle to make the Sun acquisition highly profitable by dramatically eliminating costs, shutting down initiatives and exiting businesses.

We’re aware of the fact that many commentators are taking Oracle comments at face value that they are going to create a real full service counter to IBM in the industry by preserving all the major elements of the company and adding more global services.   We see no chance that this will actually happen.  Failing that the speculation is that HP will act in concert with Oracle to present a unified solution to large customers but we see the Oracle move as being more threatening to HP and that they will be extremely aggressive at undermining Oracle’s efforts.

Oracle may do some constructive things with the Java assets which hold great sway in the enterprise and are tied with Microsoft .NET in most corporate development environments.  However Oracle doesn’t exactly inspire confidence in the hearts and minds of end users.  That they will be around is a certainty but whether they will put the community and customers first is more questionable.

MySQL would seem to be doomed in the hands of a proprietary monopolist like Oracle.  However it may not be quite the case.  After all there are open source licenses in force and a community in place.  This will help to keep MySQL viable in the short and medium term.  What steps Oracle takes will influence the decisions of the key developers and users.  The rhetoric won’t be a tell at all.

From an end-user perspective we can be fairly sure this will force some strategic rethinking.   Java and MySQL in the hands of Sun meant they were safe and stable and owned by a company that wasn’t much of a threat.  Now it’s a bit different. Oracle is seen in the same light as Microsoft.  Providing a valuable set of technologies and services but also charging heavily for it thanks to their proprietary IP and very fat operating profit margins.

Implications by company:

Microsoft (MSFT) – Probably good news.  IBM would have been more customer and open source friendly than Oracle is likely to be.  It makes Java and MySQL along with frameworks based on them more similar to the .NET and SQL Server choice. Oracle may try and take OpenOffice into battle but we’ve seen similar efforts from Oracle for the past 10 years or so and they have never been able to “get” productivity applications.

IBM (IBM) – Looks like a bumbling loss from where we sit.  May force them to take a more serious look at Red Hat (RHT) which is doing very well in the enterprise.  We don’t know Red Hat management well enough to say if they are up to the task but they are sitting on a powerful industry opportunity right now.  IBM is big enough that it won’t effect the company but we expect the IBM Software Group is scrambling this week.

Cisco (CSCO) & HP (HPQ) – Many Sun customers are going to have to look at alternatives.  HP is the market leader in servers and this will bump up the pace of their share gains vis a vis Sun.  Cisco will have work to do in order to break into the server market but this event will spur some percentage of Sun server customers to start a fresh evaluation which will help Cisco get a foot in the door at some large accounts.

EMC (EMC) & VMware (VMW) – EMC is likely to pick up some share in the storage market and VMware gains some strategic value as in infrastructure layer that can help improve the fluidity of server infrastructure and enable a containment and migration from Sun servers in places where that will be happening.

Probably also good for: Salesforce.com (CRM), Sybase (SY), Google (GOOG) and Amazon (AMZN).

Probably also bad for: SAP (SAP) who is increasingly irrelevant with software that isn’t aging well.

We have published a number of full reports that are useful in looking at this sector including The IBM Software Group ($), Microsoft ($) , HP Software ($), Google ($) and Open Source ($).  (They are also available to clients in the research library after login.)

[Disclosure: At the time of this writing Research 2.0 does not have an investment position in any of the stocks mentioned in this post.]

Less than a week after Cisco delivered on their announced intent to get deeper into the cloud computing space with their own line of servers IBM is said to be in serious talks to acquire Sun Microsystems (JAVA).  This is the just one of what should be many moves to consolidate positions to address the “Compute 2.0″ opportunity that blurs the lines between servers, networks, storage and devices.  

Sun has blundered it’s way to only a 10% market share in servers but it will help put IBM firmly in the #1 spot ahead of a surging HP.  It makes it clear that IBM is going to take this battle seriously and Cisco may be surprised how competitive the old Big Blue can be if you come into their living room.   The hardware though is not what interests us the most.

Sun would bring IBM some very strategic software assets.  Java occupies a key role in enterprise computing and some open source products like MySQL are king in the more open general Internet space.   Sun has many software product lines but for something to matter in the context of IBM it has to be bigger than most of these.

If the deal goes through we will be especially interested in what IBM will do with StarOffice.  (An equal to Microsoft Office on Linux.)  Linux on the desktop has yet to catch on in any mainstream way but has seen some pockets of success with individuals and government organizations in Europe.   In the hands of IBM it might be a very different story and a very unpleasant outcome for Microsoft.  

The potential deal would make it clear that IBM will not sit back and watch Cisco gain share in the server space but we don’t yet know if part of this is to counter growing client computing influence from Google and Apple and the ability for Microsoft to rebuild itself on the back of Windows 7.

If IBM does take the initiative with OpenOffice they will again occupy a prominent space in the client computing space, at least on the software side.  With no personal computers or mobile devices they may be feeling that they have to do something to prevent Google and Apple be putting down roots from the client and mobile computing spaces.

Sun (JAVA) ponied up some real money this week to join the Object Management Group (OMG)-administered SOA (service oriented architecture) Consortium. Other sponsors include Cisco (CSCO), IBM (IBM), SAP (SAP) and Sparx Systems. I believe BEA (BEAS) was a sponsor when the consortium began in March 2007 but it does not seem to be listed any longer.

Sun’s press release raised two questions in my mind:

The SOA Consortium is the group that said at its founding that it was going to go out of business in 2010 (“a closed-end operation” was the term the OMG used). So why did Sun join now?

Who to hell is Sparx Systems and what are they doing in the pool with those sharks?

The SOA Consortium says it is all about “Redirecting the industry conversation to business-driven SOA.” I think the SOA Consortium—perhaps because of IBM’s apparent instigating sponsorship—is trying to overcome the common technical use of the words “services” and “architecture,” trying to position SOA as a business strategy as part of an IBM marketing messaging tactic.

The better analogy in my opinion is to compare two eras:

In 1995: client/server was the architecture behind a business process re-engineering (where have you gone, Michael Hammer?) business strategy

In 2010: service oriented architecture is the architecture behind a business process management (BPM) business strategy

BPR was all about using a single large monolithic package such as SAP R/3 in an enterprise. BPM is all about tying together multiple packages within and among enterprises.

As part of its kick off in 2007, the SOA Consortium interviewed CIO and CTO focus groups. I interpreted the consortium’s findings in the BPR vs. BPM context to mean that SOA would cause a fundamental market change for packaged application providers. In the client/server generation, suppliers gave away the platform (e.g., ABAP, PeopleTools) to sell the application modules (R/3, PeopleSoft HR). Users say they expect application developers to do the opposite in the SOA generation: give them the services (SAP ESA) if they acquire the SOA platform (NetWeaver).

Perhaps that’s why startup ERP SaaS provider Workday acquired the Ireland-based Cape Clear middleware maker this week. (Oh by the way, scratch another independent middleware player off this recent list.)

The answer to why Sun is getting involved with this evolving SOA buzzword game seems to lie in the Sun executive quoted in the press release. It didn’t come out of the Sun front office but from Bill Vass, president and COO of Sun Microsystems Federal. So there’s probably a tactical U.S. government opportunity somewhere in there with the pony.

As for the second question, according to an excerpt of an IDC report released as a promotional piece by Sparx in May 2007, it is a private 10-year-old Australian software development tool maker that is not even that well known in Australia. Its tools are mostly deployed into midsized development organizations according to the IDC article.

Sparx’s product is based around Model Driven Development and the Unified Modeling Language and is platform agnostic. That is, it works with the Eclipse/Java-oriented guys that Sparx is in the shark tank with at the OMG, as well as with Microsoft (MSFT) Visual Studio and Visio.

Interestingly, I can’t find the term SOA anywhere in the IDC report on Sparx? Go figure.

– Dennis Byron

Tags: Microsoft, SOA Consortium, Sparx, Object Management Group, UML, SOA