Oracle Buys Sun: What Will Happen Next?

SANTA CLARA, Calif., April 20, 2009. Sun Microsystems (NASDAQ: JAVA) and Oracle Corporation (NASDAQ: ORCL) announced today they have entered into a definitive agreement under which Oracle will acquire Sun common stock for $9.50 per share in cash. The transaction is valued at approximately $7.4 billion, or $5.6 billion net of Sun’s cash and debt. The price represents a 42 percent premium to Sun’s Friday closing stock price of $6.69. This acquisition came after Sun broke negotiations with IBM, which was offering $9.40 per share.

Sun Press release said “There are substantial long-term strategic customer advantages to Oracle owning two key Sun software assets: Java and Solaris.” I think that this last sentence will reflect the main point of this purchase, as far as software developers are concerned. In his quest for getting a more important share of the software infrastructure of companies, Oracle acquires mainly a programming expertise and operating system that should complement its application and databases solutions. The hardware part should also allow Oracle to offer a complete optimized hardware and software solution to its customers, even if, due to Sun smaller market share, Oracle has to be friendly with its other hardware partners like HP or Dell. Acquiring Sun, Oracle also increase its expertise in the Java middleware area, after the acquisition last year of BEA Systems.

The other fact which is contained in Sun press release sentence, or I should say which is omitted, is MySQL. Sun acquired MySQL in January 2008, as a way to boost its software offer. MySQL has been for a long time an important issue for Oracle, as it was a big competitor in the lower end of the market for databases. With this acquisition, Oracle has the possibility of “quietly” killing the MySQL development process and offer the current MySQL paying customer an opportunity to migrate towards its own database product. I don’t see Oracle maintaining two database product lines, especially if one is mainly “given away” for free. Even if existing Oracle customers may not be tempted by MySQL, this new database was always in consideration for startups. There were also some companies that tried to build upon MySQL the missing tools to bring it close to the power of Oracle products.

We expect a similar fate, silent slow death through lower financial support, for mainly of the other Sun’s technologies: NetBeans, GlassFish, JavaFX or OpenOffice. Oracle always want to get the most of the financial aspect of acquisitions and spending money on open source projects and technology that has low immediate return on investment is not something that it would consider, unless it could be used as a tactical weapon against some of its competitors, like Microsoft or SAP for instance.

Sun Press Release
http://www.sun.com/third-party/global/oracle/index.jsp

Between the Magic Quadrant and the Bermuda Triangle

Software vendors are always proud to communicate evaluations from research companies that indicate how good their products are. These ratings are to the software development tools market what the gastronomic guides are for restaurants. You always wonder what is their exact credibility, as relationships between analysts and vendors are not always neutral. You have also witness a lot of “pilot projects” from inside “technology staff” failing to discover how a product really impacts the work of developers and know that evaluating products out of a real context is difficult. Anyway, there are still a lot of people that will use them as a base for their purchase decision. A good position in these evaluations is something sought after, especially by smaller and young companies, as it could be a driver for their future growth. Technology is however only one component of the success equation, as we know that the best products are not always inside the most successful companies. No I didn’t say Microsoft ;o)

Even if the role of these external assessments is still important for the software development market, the rules have certainly changed these recent years. The software tool eco-system has evolved and the relationships between software tools vendors and developers have been transformed, both in their form and in their content.

The investments needed to launch a new software tool have decreased as a consequence of the diminution of the solid content of software tools. You are no more obliged to build a physical distribution network and to manufacture software CDs, boxes and documentation manuals. Everything can be available on-line from a web site and the vendor sells directly to the buyer, everywhere on the world. This model could be seen for instance in the Scrum project management software market where operates tinyPM, one of our sponsor. I remember interviewing in 1993 a manager of Cadre Technologies, a disappeared CASE vendor of the last century, for one of the first paper issue of Methods & Tools. He told me that the barriers to growth for a software vendor were high, because for every dollar you spend to develop a product, you needed ten dollars to sell it. I think that the relative marketing/product cost ratio has notably decreased, moreover if you target a market of small and mid-size companies. You can now promote for free your product to developers in a lot of blogs, forums and community sites. Things could be a little bit different if you want to sell to larger companies where you need more direct personal contact, but I think that the trend to less human contact will continue.

A second major change in the software market rules, is that some vendors are not selling software anymore, but only the services provided by the software. Amazon and other Web or Cloud-based tools vendors are not selling database software, but the service of using a database to store and retrieve your data, located somewhere on the net. The advantage of this solution is that you don’t have to install and manage your tools and your costs are directly related to your needs and activity. You become also more dependent on your supplier and this could not be without risks. The recent end of Coghead activities is giving its customers only a short delay to find another solution. On the contrary, if your traditional supplier has a problem, its software would continue to run on your machines for some time, leaving you more time for transition.

A third major difference is the growth of software-less software companies. By this I mean that companies like Red Hat or Spring Source do not sell software tools. They sell mainly the support and the consulting that goes with open source tools. This is not surprising if you know that the majority of IBM’s revenues come from its service division. On the other side, there is also the success of Atlassian that only sells software. Buyers do not fear that the quality of this open source software is inferior to commercial products, as it is true that the development of these tools is mostly as professional as commercial software in its recent evolution.

What will be the impact of the current economic crisis on the software tools market? Do these new market rules change something? I think that the new “nimble” vendors and their low-cost Internet models could have more chances to survive longer. The “no license cost” aspect of open source software could event lure people to switch from commercial products towards solutions offered by open source companies. However, contrarily to former slowdown periods where larger companies will buy smaller one to grab some new customers or technology, we should see fewer acquisitions, as it will be more difficult to have credit and less incentive to buy small companies in fragmented markets. The recent failure of Agitar and Coghead was followed by migration plans offered by competitors to their customers. McCabe then acquired Agitar. Larger acquisitions or mergers, like that was that is rumored of Sun by IBM, will be more likely.