skip to main |
skip to sidebar
On the heals of what appeared to be a "green light" Monday from the EU bureaucrats on it's $7.4 billion acquisition of Sun Microsystems, Oracle reported better-than-expected second quarter sales and profit Thursday.
According to a Jeffries & Co. analyst, there appears to be a recovering market for corporate software and the second quarter for Oracle was a turning point that signals enterprise spending on software is really starting to improve.
As a one-time employee and continued supporter of Sun Microsystems, a company among the leading technology innovators in the business, I hope this week's news is a good omen for Sun. If Ellison is correct in his September statement that Sun has been losing $100 million a month, employees, shareholders and customers alike will be well served under an Oracle change in control early next year.
As Reuters first reported last Friday, VMware, Cisco and EMC officially announced a special coalition on Tuesday under a new VCE moniker "Virtual Computing Environment".
The new VCE comprises four key components: pre-configured and tested product bundles called Vblocks; a joint direct sales and support organization headed by its own yet-to-be hired CEO; a new joint system integrator ecosystem, and a joint venture services and integration company called Acadia that counts Cisco, EMC, VMware, and Intel as investors.
This coalition is the lastest example of an increasing trend toward consolidation and vertical integration among the large enterprise IT vendors; however, what is unprecedented, is the degree to which it not only excludes, but flat out snubs all three of the VCE's existing OEM partners. Clearly, VMware is taking the biggest risk since HP alone sells 36% of all virtualized servers worldwide.
Furthermore, it's a mystery why BMC Software, a strategic partner and participant in Cisco's major UCS announcement last March, was snubbed. Perhaps it was so EMC CEO, Joe Tucci, could boast about his company's new management stack called Ionix during Tuesday's announcement. Or perhaps it was BMC Software that wouldn't join the "Coalition of the Willing", at the expense of alienating some of it's most strategic and profitable partnerships in Dell, Deloitte, IBM, Microsoft, Oracle, SAP, and Sun Microsystems.
I suspect customers will be taking a "wait and see" stance to this announcement. But judging by the public statements from Dell and NetApp, and HP's converged infrastructure architecture and products announcement today, most of the large IT vendors are viewing the VCE coalition in the context of an all out war.
Since August, rumors have been swirling around the VCE (VMware, Cisco, EMC) alliance companies that a data center joint venture (code named Alpine) was imminent. Fast forward to October 30th when Reuters reported that VCE was preparing to announce a new line of networking, computing, and storage products dubbed "vBlock" to better compete against IBM and HP.
Although officials from all three companies have declined comments, several industry trades have reported the rumor appears a good bet and that it will likely be announced ahead of Cisco's Q1FY2010 financial results due after market close on Wednesday.
The joint venture would allow the companies to appear as one from a customer perspective, but be backed by the credibility and balance sheets of Cisco and EMC. It remains to be seen whether the three separate companies can pull off a neutral position with their existing technology, OEM, and channel partners. Judging by the recent announcements from Dell and IBM partnering with Juniper Networks, the bigger, more strategic partners will increasingly hedge their bets by establishing partnerships with VMware, Cisco, and EMC competitors.
It's interesting that two of the most acquisitive companies in the industry would do a joint venture rather than a traditional merger. But with Cisco's $133 billion market capitalization, and EMC and VMware's combined $49 billion valuation, neither can easily afford to buy the other; however, they can ill-afford to allienate their existing >10% revenue partners either.
Both Sun Microsystems Chairman and co-founder Scott McNealy and Oracle CEO and founder Larry Ellison took the stage to deliver keynotes that kicked off Oracle OpenWorld last night.
In keeping with the industry's fascination with stacks, McNealy made the case for why Oracle is keen on Sun's technology. According to McNealy in his keynote address,
"If you think about the Sun technology that we're bringing to the party here, it's the data center. It's the servers, the storage, the networking, the infrastructure software, all the pieces, all of the executable environment within the cloud, the data center, the distributed computing environment, whatever else you want to say, and then you bring in the database, and the applications and ERP and middleware capabilities and developer tool capabilities of Oracle, and you have a very nice data center. A very robust, very scalable... enterprise data center."
Like the other big players in the enterprise IT market, IBM, HP, and Cisco (via its VCE alliance), Sun-Oracle recognizes the power of owning all the pieces of the end-to-end stack. There are clear advantages in a company being able to offer its customers fully integrated cross-domain bundles and be a one-stop shop to the enterprise data center. One of the biggest advantages is having a sticky reason for customers to want and value you that's not based on price.
Clearly, the major vendors are seeing a shift among enterprise customers toward a focus on higher level application value and services rather than a focus on specific technologies and products at the bits and bytes level. This shift is partly due to the economic downturn and the pressure on IT to cut costs and add tangible value to the business.
When it comes to the single integrated stack concept, analysts say they've seen this movie before. Back in the dotcom era, a lot of industry pundits talked about the "God box" in the networking space. It was basically a big, intelligent network switch that functioned as a router, switch, PBX, VPN, and firewall integrated within a single device. In the end, no customers wanted to go there. For the networking vendors, it was sufficient to articulate the vision as part of their corporate strategy, and have the majority of the individual components within their product portfolio.
Time will tell whether the integrated stack concept is a remake of this movie. For now, we're watching industry consolidation in action and having a fascination with stacks.
Shares of Brocade Communications jumped nearly 19% today due to a report in the Wall Street Journal the company has put itself up for sale. Based on today's closing price, Brocade has a market capitalization of $3.8 Billion, which is a relatively low multiple for a company that holds a strong market position in the data center LAN and SAN switching segments to ride the next wave in the transition to a converged network.
Not surprisingly, the WSJ report included speculation on the potential buyers, siting HP and Oracle as the most likely suitors. IMHO, Oracle is a very unlikely suitor given it's preoccupation with the Sun Microsystems acquisition, and the unlikelihood Larry Ellison wants to own a LAN and SAN hardware business.
HP, however, could gain a lot from the acquisition of Brocade's business, particularly in light of its heightened competition and bitter rivalry with Cisco Systems since the networking behemoth entered the market for blade servers this Spring. Let's take a closer look at the various dynamics at work that make an HP-Brocade marriage a good bet:
- With the trend toward IT industry consolidation heating up, many of the large, enterprise IT vendors are finding it cheaper and less risky to buy and control their own destiny than build R&D and/or forge partnerships with companies that might one day be their fiercest competitor... Precisely what happened to HP when it once enjoyed being a 10% customer for Cisco as a reseller of its switches and routers, only to later become its biggest target in the server market.
- There is a large push towards a converged IT infrastructure to deliver more agility and less complexity to IT operations. The converged network (aka Unified Fabric) is a big piece of this vision, bringing together IP, Ethernet, Fibre Channel, CNAs and switch ports. When it comes to networking, Cisco is in a position of strength, both in market share and driving the standards bodies. The only other networking and storage interconnect company with great technology and the FC installed base to compete with Cisco is Brocade.
- Although HP has recently beefed up its networking business with its own ProCurve line of Ethernet switches, it's rarely deployed in the core of the network, and to date, HP has yet to articulate a comprehensive roadmap or a compelling story around FCoE or DCB to its enterprise customers who are keenly interested in hearing about its converged network vision.
- HP ProCurve could be repositioned for the access and aggregation layers of the network while Brocade's Foundry Ethernet/IP switches could be positioned in the core along with its FC Directors and FCoE convergence products so there would be very little product overlap and the merged technologies would be a genuine challenger to Cisco.
One of the potential areas of concern would be around the impact to Brocade's OEM business should HP acquire Brocade. Reportedly, IBM is a 15%-20% revenue customer for Brocade and EMC is a 10% customer. Worst case scenario, it could mean a 25 -30% hit to revenue if the IBM and EMC OEM business went away entirely. Perhaps EMC could funnel all its FC switching business to Cisco in retaliation, but that would be unlikely given Brocade's FC installed base. As for IBM, they have multiple reseller agreements, including Brocade, Cisco, and Juniper, and they are currently supporting Juniper's development of an FCoE switch, so a change in control with respect to Brocade probably wouldn't make much of a difference.
In summary, I think HP and Brocade would be a terrific match. It would be great for the two companies as well as the industry, and it would certainly give Cisco a force to be reconned with in its quest for domination of the data center.
For two decades, horizontal business models in the high tech industry reigned supreme, as companies like Intel, Microsoft, EMC, HP, Cisco, and Oracle came to dominate within their horizontal layer at the expense of DEC, Wang, Apollo, Data General, and others that clung to vertical business models despite fundamental shifts in the industry.
Fast forward to today, coming off a near-death experience in the financial markets, where we live in an environment of increasing consolidation, reduced competition, and greater uncertainty. An environment ideal for vertical reintegration by select companies who can utilize the changing dynamics to potentially build winning vertically integrated strategies to own the end-to-end stack. Here are a few examples of vertical reintegration in action:
- Oracle buying Sun to deliver hardware & software combinations to become the backbone of most enterprises worldwide
- Cisco getting into the server market with UCS - and with a $33B war chest, they can buy their way into storage and IT services if they choose
- EMC getting into server virtualization (aka VMware), systems provisioning and management in the data center
- Dell buying Perot Systems to get into the higher margin, more strategic enterprise IT services space
If you're skeptical these examples equate to a 'back to the future' shift towards vertical business models, consider the following dynamics:
- Co-opetition is out; Bare-knuckle competition is in. Larry Ellison has declared war on IBM to become the dominant player in the software and systems business from application to disk. Cisco served notice to HP and IBM concerning the server business, and is willing to sacrifice their networking OEM business for world domination in the converged infrastructure business.
- Vertical is relatively cheap. Despite a much improved stock market, company valuations are still relatively cheap. Combine cheap valuations with open source, fabless semiconductor businesses, commodity hardware, and SaaS, and it's not as expensive to buy your way up the stack as it used to be.
- Businesses buy solutions, not products. Products don't solve business problems, solutions do. A lot of companies make good point products, but the companies that can package them up so customers don't have to allocate their own IT resources to put them together, will have a seat at the table, be strategically positioned, and win the sale.
- Eroding margins. This is the nature of a maturing industry. But if you own the end-to-end stack, are the backbone of most enterprise infrastructures, and are sticky and strategic to IT operations, you're in a better position to control margins.
Whether this vertical reintegration trend is good or bad for the industry and customers is a topic for another blog. It's way too early to judge, anyway. But it's a good bet there will be more M&A, further shifting battle lines, and several bumps in the road that will prevent a quick return to the future in this unfolding plot.
To make up for a summer of silence, Oracle and Sun are now taking the gloves off as Larry Ellison gave tangible proof on September 15th of his intention to be a formidable player in the hardware infrastructure business, launching his first joint product with Sun Microsystems called Exadata V2.
Effectively dumping HP, after launching Exadata V1 with Mark Hurd at Oracle OpenWorld 2008 nearly a year ago, Ellison has quelled any lingering speculation he might spin off Sun's hardware business to HP. Although HP was not directly mentioned during the Exadata V2 launch, it was quintessential Larry Ellison on center stage, calling out a few of his favorite rivals, IBM, Teradata, Netezza, HDS, and the unnamed in-memory OLTP database start-ups that venture capitalists, according to Ellison, "may be sorry they invested in."
Exadata V2, benefiting from the inherent performance gains of Intel Nehalem 5500 series processors and DDR3 memory, also incorporates Sun IP designed by the brilliant Andy Bechtolsheim such as "FlashFire" flash memory cards and 40Gb/sec Infiniband switches, that all told, can reach up to 1 Million random read/write IOPS. These performance numbers make Exadata V2 scream in running OLTP workloads, but can also run data warehousing workloads twice as fast as Exadata V1.
Subsequent to the joint Sun Oracle product launch, several analysts were quick to point out that Exadata V2 incorporates Intel x86 processors and Oracle Enterprise Linux as opposed to Sun's latest generation "Victoria Falls" dual socket, eight-core CMT processors and Solaris 10, appearing to contradict Oracle's recent WSJ ad proclaiming its increased investment in the SPARC/Solaris platform.
But rumor has it that Larry is saving his joint Oracle-Sun SPARC/Solaris product announcement, that will likely be even bigger on superlatives, for October 12th at this year's Oracle OpenWorld.
Although 2009 marked the summer of silence for the technology sector, it's gearing up to be anything but that as we close out the remaining months of a challenging, yet interesting year.
