Sun deal poses challenges for Oracle

Oracle Corp., which announced plans last month to acquire Sun Microsystems for $7.4 billion, should benefit from the merger but will face significant marketing challenges in communicating the combined brand, industry analysts say.
In announcing the deal April 20, Oracle CEO Larry Ellison emphasized the strength of the end-to-end solution that Oracle will now be able to offer its customers as a result of the acquisition.
“Oracle will be the only company that can engineer an integrated system—applications to disk—where all the pieces fit and work together so customers do not have to do it themselves,” he said. “Our customers benefit as their systems integration costs go down while system performance, reliability and security go up.”
Under the terms of the deal, software company Oracle is acquiring the entire Sun portfolio, which includes hardware, software and services.
Most notably in the software category, Oracle will pick up Sun's Java open source software development platform, its Solaris operating system and MySQL, its open source database software. It will also own Sun's hardware business, which comprises servers, storage devices, desktop workstations and peripherals.
“The first big thing is the cachet, or lack of cachet, that Oracle has had in open source,” said Ray Wong, VP-principal analyst at Forrester Research. “They now have the crown jewels of open source with Java and MySQL.”
Another big advantage of the merger, Wong said, is the end-to-end solution Oracle will be able to deliver. “It used to be just application and database software,” he said. “Now they are trying to make the case that they can deliver hardware, software, middleware and database software all in one-stop shopping, which will help their customers reduce costs.”
Wong added: “The challenge is to figure out the perception of Oracle being in the hardware business. What does it mean, and can they successfully convince people to buy the whole stack from them?”
He noted that Oracle has already been successful in managing and marketing other acquisitions. For example, in 2005 it acquired CRM software company Siebel Systems, and last year it bought enterprise software company BEA Systems.
Jean Bozman, VP-research for IDC's enterprise platforms group, said one of the greatest assets Oracle will get is Sun's installed base of customers and the service contracts and upsell opportunities that go along with that.
“They have at least 1.6 million servers [installed worldwide] and also storage and service contracts,” she said, noting that about 40% of Sun's revenue now comes from services. “From a holistic view, they have a large installed base, the opportunity for new offerings and things like upselling.”
For example, Bozman said that although MySQL is a database product, it does not necessarily compete with Oracle database products. “Oracle has always been about cross platforms and running on as many platforms as possible,” she said. “It may be that the MySQL offering, which is widely used, could bring additional business for other Oracle products.”
Bozman said one of the biggest challenges for Oracle will be integrating Sun into its operations and ensuring that it runs a profitable business.
Bozman also noted that because of the downturn, spending on big IT projects is being cut or deferred but, as conditions improve, IT investment should pick up. That will benefit Oracle in the long run.
Other industry experts, however, were not as bullish on the deal.
Jim Gregory, CEO of brand strategy firm CoreBrand, noted that Sun had a brand score of only 16 on a scale from 1 to 100 in CoreBrand's 2008 Brand Power report, while Oracle had a brand score of 30. “In terms of what they are buying, it is not a heavyweight brand,” Gregory said.
“It seems like it made a lot more sense for IBM [Corp.] to make the acquisition. That seemed like a much better fit,” he said, noting that IBM had a brand score of 76.
In April, IBM made a bid to buy Sun for an estimated $7 billion but was outbid by Oracle, according to people familiar with the talks.
Gregory said one of the immediate challenges for Oracle is to communicate its strategy for the acquisition and what it means to its customers.
“What they will need to do is tell a story very quickly,” he said. “Otherwise, Oracle's image might be hurt. They have to communicate clearly why they made this acquisition, why it fits as a company and what they intend to do with it. They have a short window of opportunity.”