You have to love rumors, especially those about companies being sold.
This always happens when large and established firms stumble. Amateur
investors will take a series of underperforming quarterly reports as an omen
that executives will sell-off an entire company to protect their golden
parachutes, look like strategic genius, and avoid being lynched by a shareholder
mob.
This week alone I have received rumors of Novell and Sun being sold … and
these rumors came from people inside of those companies. I doubt Novell
would sell out at this time, despite Larry Ellison’s recent speculative public
thinking about owning an entire stack. For Novell to sell they would first
have to deplete their resurrection alternatives (and they do have options) and
they would need a willing buyer (which they likely won’t have unless they
demonstrate better market traction in at least one market/segment).
I also don’t think Sun will sell … at least not in one piece. Let’s
look at what Sun has, and ask ourselves who their alleged buyers might be.
Server hardware: Sun makes interesting servers, but was very
late in meeting the market shift to commodity products. They are the kings
of UNIX servers, which is a rapidly shrinking market. With IBM, HP and
Dell all exploiting the Linux-on-X86 market imperative, there are very few
people who would want to acquire a non-standard RISC server technology. No
sale.
Storage hardware: This is a hot market, as Sun’s recent purchase of
StorageTek showed. But it is a highly competitive market, Sun paid an 18%
premium for the company, and the cost mechanics of the virtual storage market
are forcing pricing pressure. If this were not gloomy enough,
Open Source stands ready to create virtual storage alternatives, making future profitability risky. No sale.
Operating systems: Yeah. Suuuure. Let’s make money
selling Solaris. Even Sun isn’t doing that these days. No sale.
Misc software: Sun has a mixed bag of software from desktop
applications, to storage utilities, to N1 (to date, the most poorly describe
"solution" ever whelped from Silicon Valley’s womb). Sun has no broad,
unifying, and complete software set, and thus nothing that an acquiring company
would need to grow their dominance in the market. No sale.
Java: This is the one golden egg in Sun’s withering nest.
IBM would like to own Java as they have invested so much into it and guided
their customers toward adoption. Oracle would like to own Java as it gives
Larry a key part of the stack that has become nearly indispensable to
enterprises. Even HP might like to own Java, though they have more
fundamental issues to deal with.
Yes, Java is the one piece of Sun which has market strength, demand,
dominance, and potential for profitable market control. And because of
that, it is the one piece that Sun will not consider selling to another firm.
But given the weakness of Sun’s other offerings, they will have to make more
money from Java in the future. They may well start charging deeper license
fees once Java becomes nearly ubiquitous and enterprises are fully addicted.
In the meanwhile, Sun needs to bolster profits in ways other than gutting their workforce.
They have a dichotomy of choices - either expand on what they do well, or find
new paths to profitability. They may have chosen the latter.
Sun thinks that "Classic IT" may not be worth the effort any longer.
Sun is shifting their R&D budget away from the datacenter to "internet-based
computing". This seems odd since Sun currently receives upwards of 90% of
their revenues from IT buyers. Their poorly placed announcement sent
shocks through the few remaining loyal customers, who are now thinking twice
about commitments to Sun technology. We may well see Sun’s revenues slide
even further over the course of the year as IT buyers reevaluate their strategic
decisions.
Part of Sun’s R&D spending decision appears to be based on the belief that Software as a Service (SaaS) will be a growing trend. This may well be, but SaaS finds traction in (a) serving the SMB market and (b) through sales to a small number of providers (enterprises will still bring technology and talent in-house as it is cheaper, more effective, and reduces risk). SaaS players are heavy consumers of commodity computing technology, and Sun’s new R&D
will not likely produce commodity products. So one has to ask who will buy these new products Sun is developing?
Likely nobody.
