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April 27, 2009

Oracle's Sun Buy: Eclipsing the Competition?

As a mammoth union changes the technology landscape, a few things to watch for

By embracing Sun, Oracle gains huge heft and extends its shadow to cover a wider swathe of the technology industry. The two companies clearly have significant synergies. But where do these synergies lie, and how will Oracle capitalize on them? Here's an analysis of a few elements of Oracle's strategy, and some implications for the industry, that any observer of the technology industry should track over the next year or two.


Oracle's Server Strategy

The buy gives Oracle an entree into the server business, a space where it lacks a footprint. However the server business has been getting increasingly commoditized, and this trend will accelerate as Cloud Computing gains traction. This is because Cloud Computing (CC) is inherently a large-scale operation, and CC service providers tend to be behemoths that buy up servers on a humongous scale. Oracle's server business will thus see its customers' bargaining power grow, and watch its margins being squeezed. These dropping margins and Oracle’s inexperience in the hardware business have prompted several observers to speculate that Oracle will jettison Sun’s server business. However Oracle is unlikely to do any such thing. In fact, this is where Oracle can exploit one synergy : its flagship product, the Oracle database has for long been tightly integrated with Sun's Solaris, which Larry Ellison calls "the heart of Sun's business". Oracle will need an astute bundling of servers, OS (Solaris), database and Apps to pull back margins somewhat in the non-CC market.


Oracle's Cloud Computing strategy

Oracle may also perhaps become a Cloud Computing provider itself, although there is no indication of such a move yet. Sun has a fledgling CC service called Sun Cloud (a title that appears oxymoronic until you realize that Sun, with characteristic flair, has given it the ingenious tag line, "Behind every cloud, you'll see the Sun" !! ). Oracle may choose to develop this service, but will have to reckon with the formidable Google, Amazon, IBM and Microsoft which are already striding this space. If it does decide to throw its hat into the CC ring with Sun Cloud, Oracle may have an advantage in that Sun Cloud is touted as being much more open than rival CC services. This will help assuage the concerns that many prospective CC customers have, of being locked-in by CC vendors. However this openness may sit uncomfortably with Oracle, which has neither shown much predilection nor strategic commitment towards openness thus far.

Ironically, buying Sun may be sending Oracle deeper into the clouds. But a strong foray into Cloud Computing may be what it takes to put the competition in the shadow.

Oracle's strategy for MySQL

This is perhaps the most closely watched aspect of the union, and there is considerable trepidation that Oracle will "kill" MySQL, Sun's database asset. However, Oracle is hardly likely to waste the considerable brand equity and installation base that MySQL enjoys. It is far more likely to position MySQL as an entry-level option for SMBs. However, there is a wild card here: The deal may come under Antitrust scrutiny, as regulators may not relish the idea of MySQL falling into the hands of a company that is already sells the industry-leading database. And if antitrust regulators do force Oracle to jettison MySQL, IBM is a likely contender to snap up the database. If it is indeed true, as the more conspiratorially-inclined believe, that keeping MySQL out of IBM’s hands was a major driver for Oracle’s Sun buy, then Oracle may be achieving just the opposite.

Oracle's Java strategy

Larry Ellison calls Java "the single most important software asset we have ever acquired." Nevertheless, Java has effectively been open-sourced, so Oracle will not "control" it in the conventional sense. However Java has been a backbone of Oracle’s product strategy and even if Oracle is unable to exercise significant control over the broader Java platform, it should still be able to draw considerable benefits from the synergies that its products enjoy with Java. How powerful competitors including IBM and SAP – which themselves have considerable commitment to Java - will respond to Oracle's stewardship of the Java platform also remains to be seen.  

Oracle's services strategy

For its part, Oracle has touted reduced integration costs as a key customer benefit arising from the Sun acquisition. However Oracle still lags in integration services provision capability. And it may well train its by-now redoubtable acquisitive might towards buying a company that will help bridge this yawning gap in its footprint.


Towards further industry consolidation?

The Oracle acquisition juggernaut is hardly done. As noted above, Oracle is certainly motivated to acquire further, with a view to strengthening it's service provision capability. Another logical fallout is that this will force IBM to look at the enterprise applications space for acquisitions, in a move to counter Oracle’s growing might. So, this is an intriguing – but certainly not the last – move in the technology industry’s continuing march towards further consolidation.

April 16, 2009

The World Economy: Clear Skies Ahead?

Why we should be optimistic about the prospects for an economic recovery

Note: This piece was written on April 16th, 2009. Subsequent developments in the world economy have substanitally borne out the assertion made here that "there will be concrete signs of recovery as early as July". See details in the July 19th update at bottom of this piece.

How soon should we expect the world economy to be back on a growth trajectory? I've been following statements from a varied set of economic gurus and masters of world destiny, and have found the overall sense of pessimism quite remarkable.
Jan 13th, 2009: President Bush said in a press conference that his economic advisors believed that the economic situation could be worse than the Great Depression.
Jan 23rd, 2009: Steve Ballmer, Microsoft CEO said, “The economy could remain in the doldrums for "a year, two years..”.
Feb 14th, 2009: the G7 meeting of the Finance Ministers of the world’s most powerful countries in Rome declared that "the severe downturn will persist through 2009".
Feb 18th, 2009: The US Federal Reserve warned that “the crippled U.S. economy is even worse than thought, and would deteriorate throughout 2009”.
Mar 16th, 2009: Federal Reserve Chairman Dr. Ben Bernanke, in carefully hedged remarks on CBS 60 Minutes, said the recession will “probably” end in 2009, provided the US government’s efforts to stabilize the financial markets bore fruit.
Mar 19th, 2009:  the IMF said the world economy will shrink by 1 percent in 2009, lowering its own forecast of 0.5 percent decline made in January 2009.  It said recovery would begin only in 2010. 

While the above assertions come from people and institutions with gold-plated credentials, I believe they are overly gloomy – far more so than warranted by the evidence. There have been ample reasons to believe at least since late December that the US (and world) economy will be on a strong recovery path well before the end of 2009, and there will be concrete signs of recovery as early as July. What are the reasons for this optimism, which appears at odds to much of the expert opinion expressed by the Gurus above?

To be sure, enormous problems remain - imbalance between savings rates in the US and other countries notably China, continuing insolvency in major industries including banking and automobiles, some divergence of opinion between major powers as to how the financial crisis is to be tackled. Yet a clear-headed look at the world economy today shows a wide array of factors that give much cause for hope:

1. Managing the economy is a fairly sophisticated science today. Most people who hark back to the Great Depression (or even the 1970s recession) fail to realize just how much more we know about economic management today. Government response to the 1930s depression was plodding and wrongheaded. It is not that President Hoover and his economic team were extraordinarily inept - it is just that too little was known about managing the economy. For example they believed, not unreasonably, that government should tighten its own belt to help manage the crisis. They thus failed to provide the Keynesian stimulus that could have jump-started the economy in the crucial early years of the depression. Economic managers are much more sophisticated today, and adept at using the full arsenal of monetary and fiscal tools at their disposal. Regulatory and institutional frameworks to manage the economy are far more robust today (many, in fact, owe their origin to the lessons learnt from the Great Depression). There is also hardly any ideological barrier to create confusion as to what action to take.

2. Information on economic activity is abundant and travels faster today. Thus the US consumer confidence or unemployment figures are probably watched as avidly in Frankfurt, Shanghai or Mumbai as in New York. This was not the case earlier (people in the rest of the world probably didn’t know much about the crash of 1929 for weeks, nor what the US government was doing about it).

3. There is a much greater sense of shared destiny.  I doubt if Indian or Chinese financial regulators cared much about the 1973 oil price shock and its economic effects in the developed countries; I am quite sure they did not scramble to take counter-measures, as they are doing now. Thus with a few exceptions, governments are taking concerted action. (Uptil the 90s, there was so much distrust / apathy across countries that USSR, India, China etc. would never have participated in any such action). 

4. A lot of the 'crisis' is overblown. Most financial figures (even asset prices) are phantom numbers which can zoom up and down. The real economy does not perform heady gyrations.It can neither fall off a cliff nor zoom to stratospheric levels - it must necessarily behave in a much more staid manner. Nothing that has happened in the past few months needs us to revise what we already knew about how the economy behaves*. In fact, one factor that clobbered the world economy in 2008 - exorbitant oil and commodity prices - has reversed completely.

5. Human enterprise is irrepressible. Most importantly, thinking that this crisis will persist for years is grossly underestimating human nature. People don't crawl under a rock and wait for an economic crisis to blow over. And the unprecedented level of combined action we are seeing – from political leaders, regulators, CEOs, and lots of plain folks – can scarcely fail to bear fruit soon.


* In fact, many of those developments could have been foreseen with a bit of clear-headedness. See here for a detailed explanation.  

Update (July 19th, 2009):

I wrote above in April that we need to be optimistic about a recovery in the world economy in 2009, and that there are likely to be concrete signs as early as July. At the time this statement appeared to be at odds with what many leading experts including senior government officials, economists and CEOs were saying (see details above).

How has the economy been faring since then, and what's the latest prognosis? The Conference Board's Leading Economic Index showed a rise of 1.2% in May - the largest in many years. This and other bright signs prompted Business Week to state on June 18th that the worst is over in the economy. Newsweek magazine, citing expert sources, pronounced on July 14th that The Recession is over.

Perhaps most tellingly, the IMF - hardly known for taking an overly sanguine view on matters economic - declared on July 8th that "the world economy has begun to pull out of the recession".

Of course, the optimism needs to be tempered. There are still many indicators that are in the red. Large tracts of the world's leading economies remain steeped in weakness. The reverberations from the financial crisis and resulting credit crunch are yet to work themselves out fully, although they have gone past their trough. Unemployment remains high in the US and other Western economies. The IMF itself has released mixed figures for its growth prognosis over the next few quarters. Uber-Guru Warren Buffet remains skeptical about recovery anytime soon.

None of these points however can detract from the assertion, backed by the factors #1-5 listed in my post above and now supported by the Conference Board and the IMFs' findings, that the recession has begun to blow over. What the observations in the foregoing paragraph do mean is that the slope of recovery is likely to be excruciatingly slow.

It thus appears safe to state that the recession in the world economy has begun to recede.