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Oracle's Alternatives Dim Without Sun

By becoming a systems vendor, Oracle will move from being a software company to one that packages solutions "from database to disk."

As a result of acquiring Sun Microsystems, Oracle will become an operating system and hardware vendor, two things it's expressed little interest in doing in the past. And in doing so, it will compete more directly with two powerful systems vendors that are frequently its partners, IBM and Hewlett-Packard.

But there's a reason this deal has come off when negotiations with IBM, which is a hardware and operating system vendor, led to a dead end.

As Silicon Valley neighbors, Sun's and Oracle's leadership have been allies and supporters of each other's interests for two decades. Oracle was an early Java supporter, perhaps second only to IBM, and sold many of its database systems to run under Sun's Solaris. Even when it announced several years ago that Linux was its target operating system, Oracle continued to sell the largest share of its databases under Solaris.

"In our opinion, Solaris is by far the best Unix operating system on the market," CEO Larry Ellison said at a teleconference announcing the deal this morning. More Oracle databases run under Solaris than Linux, which is the No. 2 operating system for Oracle "and still important to us," Ellison said.

"Sun and Oracle grew up together in the Silicon Valley. There was more synergy between them. Oracle is a better choice, culture wise, than IBM," said Gartner analyst Kenneth Chin.

And while they sometimes competed, they never fell into the class of competitors who could threaten fundamental interests, as Sun and IBM did in the period between 1998 and 2003. Sun refused to relinquish control of Java to an international standards group, as IBM had recommended after helping establish the language. IBM undercut Sun's effort to enter the Java tools business by releasing the Eclipse programmer's workbench. Their talks that began in March fell apart April 5.

By becoming a systems vendor, Oracle will move from being a software company to one that packages solutions "from database to disk," Ellison said, reminding teleconference listeners that Sun acquired Storage Technology in 2003 for $4.1 billion, and that business also will become part of Oracle. Oracle will pay $5.6 billion for all of Sun, after accounting for Sun's current cash and short-term investments.

Oracle will pay a price similar to the one Sun agreed to in negotiations with IBM, $9.50 a share, and Chin said Gartner "doesn't expect significant regulatory hurdles" to emerge with this deal. If IBM had bought Sun, it would have represented a heavy concentration of the commercial Unix market in one vendor's hands and faced Justice Department review.

Chin said he expects Oracle to evaluate Sun's server line and perhaps trim it back. But he said Oracle is oriented to selling large systems to corporate customers, and that means retaining the high-performance end of the UltraSparc server line. Oracle will have to invest in an UltraSparc design crew designing server chips that compete with Intel's and AMD's. Sun outsources the chip fabrication.

At the same time, Oracle has met success with its data warehouse machine engineered with HP on x86 hardware, and it's likely to explore growth avenues in x86 servers, Chin said.

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