I may not always be the biggest fan of Oracle founder Larry Ellison when it comes to issues like executive pay. But I do appreciate his business savvy and ability to cut through the fog of marketing nonsense and get right to the heart of things. I thought about this when I read his remarks from his appearance at the Churchill Club with Ed Zander.
Ellison was asked about cloud computing, and Merc reporter Brandon Bailey wrote:
“Known for his strong ego and outspoken views, Ellison drew laughter when he ridiculed the industry trend known as “cloud computing,” saying as he has before that it’s nothing more than a faddish term for the established concept of computers linked by networks. “A cloud is water vapor,” he observed.
But what really struck me is that in his remarks this week, and other recent statements like the announcement of the configured Sun database product, that Ellison is actually going to do the unthinkable: He’s going to keep the hardware business.
This shocks me for a couple of reasons.
First, Oracle has been incredibly disciplined when it comes to operations. It runs a tight ship. And as it’s swallowed endless software rivals, it’s managed to continue to increase its operating margins over the years. It’s something that Oracle has rightfully bragged about.
But Sun’s margins on hardware are thin. The conventional wisdom is that Ellison will slash thousands of jobs to cut expenses. But that’s trickier than it sounds. Who are you going to cut? The hardware engineers who maintain and upgrade the technology? The sales people who have specialized knowledge of the products and the markets?
It’s hard to see how else Oracle boosts the margins on Sun’s products when Sun hasn’t been able to do it by itself. The announcement earlier this month about the Sun server pre-configured to run Oracle’s database seems to be a nod toward a hybrid strategy. But I’m not sure how compelling that really is for most customers.
Going forward, Oracle is going to need to continue pouring research money into Sun’s products to keep them advancing and competitive. That also won’t be cheap.
And finally, this has all the making of one giant distraction. Ellison showed he has the ability to remain focused and integrate a big acquisition when Oracle bought PeopleSoft. But getting into a hardware business might be a whole different learning curve. And already, the fact that the European Union is extending its review is deepening the whole Sun is in, and demanding attention from Oracle executives.
Of course, even if Oracle did want to spin off the hardware business, it’s in a tricky spot. If it says that directly, the bottom would probably fall out of Sun’s revenues. And as the EU review drags on, Sun is probably becoming less valuable every day. PeopleSoft fought aggressively to hold onto business when its fight against Oracle lasted almost 18 months. It doesn’t seem like Sun is doing anything similar.
So if Oracle did want to sell the hardware business to Hewlett Packard or IBM, it’s probably can’t even hint about it until after the deal closes. Which now won’t be until early next year.
But I’m wondering what you think. Is this really a stroke of genius on the part of Ellison? Or is the makings of a train wreck?