The hardware honey trap

After Oracle’s Q3 earnings figures were released last week, it has been interesting to reflect further on the impact of Oracle becoming a hardware business after its acquisition of Sun. As I predicted, Oracle hardware sales were not...

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After Oracle’s Q3 earnings figures were released last week, it has been interesting to reflect further on the impact of Oracle becoming a hardware business after its acquisition of Sun. As I predicted, Oracle hardware sales were not particularly impressive but margins soared to 55%. This was no surprise as Oracle had stated that the Sun acquisition would be earnings accretive within 12 months at the time of the deal, although at the time not many would have believed that Sun’s losses could be patched up that quickly. During this time of uncertainty the European Commission fruitlessly investigated the competitive impact Oracle’s acquisition would have, while HP and IBM made hay. So how exactly have Oracle ensured such great success? Oracle strategy master class Oracle’s integration strategy has been publicly stated but much more is evidenced by its actual global behaviour patterns. Its focus has been:
  • Stop “loss leader” activity and cull low margin third party business
  • Take money out of the channel
  • Harmonise sales and back office costs
  • Repackage offerings and aggressively position Oracle against the competition.
The Sun acquisition has been text book execution in term of critical shareholder ambitions. The costs of sale have been annihilated and sales levels have been broadly stabilised. It’s difficult to make like for like comparisons as Oracle does not disclose much granularity in its earnings statements and the business is quite a different beast now, compared to a few years ago. Exadata Drive But Oracle has nerves of steel. It knows that its direct and indirect channels enjoy fatter margins, but ultimately they have to sell what clients want to buy. Hence the Oracle marketing drive around Exadata and then, less successfully to date, Exalogic. Although lacking in depth of true innovation at this point, Exadata is a highly effective pitch. The marketing drive fits into what we perceive to be Oracle’s vision of ‘engineered as one, supported as one, with excellent scalability in high transaction environments and with great price performance’. The Oracle stack is a ‘dream solution’ in many situations and it is selling better than we expected for what, prior to the Sun acquisition, was a lackluster HP/Oracle joint marketing campaign. HP was inevitably ditched after the Sun deal and seemed pretty pragmatic, until it was hit by differential database pricing. HP taste Oracle boot leather In December last year, Oracle re-priced its core factor database offerings for Itanium - the HP choice of enterprise processor. This simple move jacked up the total cost of ownership (TCO) for HP servers running an Oracle environment by circa 20%. In the relatively commoditised server market this is catastrophic. However, many clients still don’t compare TCO with software cost in the calculation so Oracle had to elevate the message. It did this by withdrawing future development for Itanium a few weeks ago, blaming Intel’s lack of future roadmap. Oracle’s bet is that clients facing increased database costs on HP will be more likely to migrate from HP to Sun than move to a different enterprise database solution. A bold bet - we suspect it is well calculated as a winner. The Honey Trap Hence the honey trap conundrum. If Oracle is a great database company and Sun a great hardware organisation, and the combination is great value, should Oracle/Sun clients be wary of the potential anti-competitive nature of the relationship, or just carry on with business as usual?

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