Oracle's 40% Sun hardware slide: A business under threat?

Oracle's 40% Sun hardware slide: A business under threat?

Summary: How much is Oracle's Sun business under threat? The number give strong clues but is this all we can surmise?.

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TOPICS: Oracle, Banking, Hardware
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Every time Oracle puts out an earnings release I gasp in amazement. How can a company that is so obviously milking its customers for every maintenance dollar imaginable continue to defy gravity and post increasingly solid results? It doesn't seem possible and yet on they march.

It would be easy to draw upon widely held beliefs about how Oracle locks its customers in. It's not the only one by any stretch but it does seem to have mastered the art of turning lock-in into serfdom. The list of anecdotes gets longer with each passing day but I wonder if those glory days are about to come to an end?

Earlier today, Rob Enderle delivered a withering indictment of Oracle's performance in managing the Sun hardware business. He starts with:

Last week Gartner’s numbers came out and they indicated that Oracle server hardware volume dropped a whopping 40 percent in the 4th quarter and 32 percent for the year – in a market that was increasing at 17 percent. Current hardware market share has dropped below 7 percent and, in most markets, players below 10 percent are considered trivial.

Rob then goes on to set out what he believes is happening:

In short, not only is Oracle losing market share in a growing market, it looks like that loss is accelerating, which points to why the company took a hard shot at HP and Intel’s Itanium processor last month. While Oracle has clearly buried the financial impact of this failure in otherwise strong results, customers are increasingly reporting excessive pricing, which suggests that Oracle may be mining these customers for cash to overcome Sun’s losses. That rarely works for long.

The problem likely comes down to two things: Oracle has lost critical mass in its hardware business and it is no longer viable, and/or Sun customers simply are not willing to ride this out and are running from the platform.

Our own Larry Dignan tried assessing Oracle's management of Sun's hardware last month and in comments said:

I view it as a big incomplete at this point.

During the latest earnings call, Oracle made a big deal about progress with Exalogic/Exadata and margins. Co-president Safra Catz is quoted as saying:

This quarter we delivered 55% gross margins on our hardware business. This is the result of the fact that really under the covers of the hardware number the Sun products are growing and the non-Sun products that are resold — that we resell are shrinking dramatically. In addition, we are selling a lot more of the Exadata/Exalogic line. And remember that these systems are sold at good margins and also pull a lot of software with them, like [racks], partitioning and storage management.

How many companies (other than possibly Apple) can talk to gross margins on a server business in those terms? Check out what Dell says (PDF) albeit the comparisons are not 1:1, you get what I mean. But hang on - Catz is saying: "under the covers of the hardware number the Sun products are growing." How does that stack up with what Gartner and Rob are saying? That depends what those words actually mean. Oracle doesn't make it easy to parse the detail because Catz also says:

As I told you a couple of quarters ago, we are really no longer able to identify the exact contribution Sun has made to our operating profit...

OK - so that's the backdrop. Rob concludes his analysis by suggesting that Sun's hardware business is in terminal decline and that Oracle is scrambling for a plan B. He argues this is the motivation behind its attacks on HP which he believes will backfire. This is where it gets interesting. Rob says:

In short, if customers are avoiding Sun hardware because they don’t trust Oracle or don’t understand or trust Sun’s roadmap, the fix should be on those vectors.  By attacking HP in what appears to be a transparent attempt to fix falling sales in a critical area, all it will do is further reduce trust in the company and likely exacerbate its problems.

In other words, Oracle is playing a very dangerous game of chicken with its customers. This won't be the first time we've seen this. There's barely a week goes by that I don't hear about one 'issue' or another around what's happening in Oracle's business. The latest involves allegations (as yet unproven) that Oracle is breaking term maintenance deals Sun struck in order for Oracle to squeeze more out of customers.

But is it as easy for customers to swap out hardware as Rob is suggesting and especially if it is running business critical applications? Yes and no. I know for example that a significant number of financial houses on both Wall Street and in London will be schmoozed when Sybase ports its database to run on SAP back office systems. The idea is to throw the TCO dice and see if customers are prepared to bite. But those same customers will just as likely be locked into Oracle database and applications deals so any thoughts about a mass exodus any time soon are at best wishful thinking.

However, and this is where we might start to see shoes dropping left and right: What if Rob is right and customers defect on the hardware front? Will that embolden them to more broadly re-evaluate their relationship with Oracle?

Oracle is now entering a critical period in its financial year. I would not be surprised to hear tales of fresh license audits where Oracle thinks there is more to be squeezed. If customers who are currently anything but happy with the hardware arrangements find themselves under scrutiny, then license negotiators will be very busy in the coming weeks. I doubt that will particularly impact Oracle in Q4. That's not the point. It's Q1-2-3 2011/12 where we will know more.

Long story short: can Oracle continue to defy gravity and especially in the face of a rejuvenating and more confident SAP? Are we looking at the thin end of a possible decline in the earnings wedge?

Topics: Oracle, Banking, Hardware

Dennis Howlett

About Dennis Howlett

Dennis Howlett is a 40 year veteran in enterprise IT, working with companies large and small across many industries. He endeavors to inform buyers in a no-nonsense manner and spares no vendor that comes under his microscope.

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26 comments
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  • Grim and reaping

    <ul><i>This quarter we delivered 55% gross margins on our hardware business.</i></ul>
    On a commodity product like UNIX servers? Competing against the likes of IBM, HP, and Dell? They can't be long for this world. Their prices must be so out of line that even those who buy (because they are locked in by something) are privately swearing, "never again."
    Robert Hahn
  • RE: Oracle: 40% Sun hardware slide. Thin end of the wedge?

    Oracle's profits could be due to the paradox of IT cost saving. It is cheaper short term just to pay Oracle for support than to evaluate alternatives and save money in the long run.
    paul2011
    • RE: Oracle: 40% Sun hardware slide. Thin end of the wedge?

      @paul2011 Good point. Can you imagine how bad it will get as the lock-in grows stronger? We'll all be working to pay the Oracle Tax.
      happyharry_z
  • Oracle Can Buy Xerox???

    What good is a database maker and a middleware maker if you cant print anything ? Oracle can buy Xerox to help Oracle enter the printing and computer services!
    brettze
    • RE: Oracle: 40% Sun hardware slide. Thin end of the wedge?

      @brettze
      Been there, done that. Not sure if this is still true, however several years ago Xerox typically used Sun UltraSparc systems running Solaris as the print engine for their DocuTech line.
      smtp4me@...
    • RE: Oracle: 40% Sun hardware slide. Thin end of the wedge?

      @brettze Lol.
      snoop0x7b
  • RE: Oracle: 40% Sun hardware slide. Thin end of the wedge?

    Dennis,
    This is right on with what I've been saying about Oracle. Oracle hardware numbers have declined ever since the takeover... Their latest smoke and mirrors, financial statement, is now comparing their latest quarter to the quarter where they had Sun for one month.

    The x64 midrange market is dying at this point and is resembling the mainframe market in the 1980s. Who will be the last one standing? At this point in time, the numbers would suggest Power... with Ultrasparc and Itanium falling by the wayside.
    scotth_z
  • Larry Ellison Aint Stupid, Anyhow!!

    I thought it was great idea that Oracle bought some hardware as part of healhty fiber intake diet... you know you can go all softy or you would turn into a globware! Boy, was I wrong! Now i undy that Oracle bought Sun to KILL IT!!! ONCE FOR ALL! After what Oracle did to HP's Itanium too.. KILL KILL KILL @@ Now who is still making hardware? I can only think of IBM and those PC clones.. Apple? nah!
    brettze
  • Oracle Want Fewer Hardware

    Oracle used to honor four different hardwares. Now it is down to only two ...IBM and PC clone x86. Less clutterwork... more streamlining.. simpler now!
    brettze
  • Didn't Oracle state they wanted to focus on the high margin hardware?

    If that's the case I can see their market share decrease due to this strategy.
    ye
    • RE: Oracle: 40% Sun hardware slide. Thin end of the wedge?

      @ye Ding ding ding! Nice work. You get the prize. I'm quite surprised Dennis didn't alight on this point as well.
      reyito2
    • RE: Oracle: 40% Sun hardware slide. Thin end of the wedge?

      @ye Actually this was my understanding as well. Quick clarifiication - I meant high end hardware (Exadata/exalogic and similar sizes bozes). I do not think that they are trying to make commodity servers high margin but rather take high end servers and add some oracle specific stuff to it to make it work better for oracle and sell that at a higher margin as it does X better when running oracle software. This obviously implies that there will be a cost savings by buying oracle optimized hardware than commodity hardware that you decide to put oracle on.

      In this context the high margins and low volume makes sense. Isnt this their strategy?
      georgef
  • RE: Oracle: 40% Sun hardware slide. Thin end of the wedge?

    Oracle customers are pretty upset with their changes. You can no longer buy Sun hardware and get a hardware support contract without also paying for full software contracts. So shops that had Solaris and Windows servers, both Sun, are by and large switching their Windows servers to a different hardware manufacturer so that they don't have to pay the ridiculous support premiums. They've also dropped lines like their 2500 series disk arrays that are rebranded LSI products (requiring very little R&D costs).
    Further, looking at our own experience
    toddc@...
  • RE: Oracle's 40% Sun hardware slide

    Part of this is due to the long replacement cycles in environments where Sun has been used. We still have 5-7 y.o. machines in production. We decided 2 years ago to switch from Solaris to Linux on x86 due to the problems we were having with Sun back then, but the replacements will be happening for the next 2 years.
    Netmanager
  • RE: Oracle: 40% Sun hardware slide. Thin end of the wedge?

    I have long held that Larry Ellison is the Darth Vader of the industry. 'Nuf said.
    bionicbub
  • What is the old cliche....

    "Do one thing, and do it well"

    Enterprise software companies should stay away from the "one stop shopping" mentality and stop trying to own the entire stack through acquisitions. Stick to what you know!
    smtp4me@...
  • Oracle...Duh, winning!

    I hope I won't get sued by Mr. Sheen.
    Linux Geek
  • Google acquisition?

    Maybe Google can buy them. They seem to be basing their future on java with Android.
    jabailo1
  • RE: Oracle: 40% Sun hardware slide. Thin end of the wedge?

    What does declining Sun server share mean to Exadata? Could this be an early indication of the demise of what is really just the latest attempt by Oracle to establish a hardware/software partnership?
    mnavar13
  • I have nothing to contribute, but ...

    IMO an excellent article and great talkbacks! 've read every one so far and will be back to see what else comes up. My very puny perpheral familairity with any of this has been OO.0's future and my disgust with Oracle and what they could do to Java in that future. I've already switched to LibreOffice with good results at their latest stable release and it run perfectly for me. If it's just because I don't use some buggy feature, that's OK too, as long as they aren't bothering me.
    Other than the long-standing lack of MY support for Oracle, well preceding these office activities, the only way I've found to show my objections are to remove OO.o and replace it. I still haven 't dropped my old MS Office to do thiing OO.o couldn't do, and found that LO can now do them. With a little luck I'll be able to drop MSO soon when I've run LO long enough to be sure I won't need the MSO.
    Eventually, if a 'nix flavor ever makes the bigtime (for MY use), XP will also go excinct for me. A 'nix needs to:
    1. Meet my driver needs. I can't replace expensive equipmtnet when I can't get drivers for it.
    and
    2. Applications become available to replace three of mine that can't run under/over 'nix.
    sidelight: I don't mention specifics because I know EXACTLY what the answers wil typically be from doing so in the past. The 'nix users her don't appear to be very well educated in their own " wonderful OS" I've even tried running these MS apps under 'nix shells; no go.

    Sorry for going so far OT.
    tom@...