IBM's Response to Oracle + Sun: Buy SAP?

In my previous post I speculated that Oracle will sell off most of Sun's hardware businesses allowing them to keep Sun's software businesses effectively for free.  I still think that's the right strategy for Oracle.  It would allow them to cement relationships with partners like HP, Dell, Fujitsu, EMC, NEC, etc. while further isolating IBM.  If Oracle remains in the hardware business they are, like IBM, competing with everyone on that list.  This only serves to strengthen the Microsoft relationship with companies like HP and Dell and isolates Oracle.

But let's assume for the moment that Oracle does stay in the hardware business.  How does IBM respond?  IBM has traditionally positioned itself as an infrastructure and services company, drawing the dividing line in its businesses at applications.  IBM provides the infrastructure (hardware and software) and services; its partners provide the applications.  This has worked well in the past.  It has encouraged application developers to partner with IBM, building on IBM infrastructure and turning IBM into the leading application platform vendor.

Oracle, in contrast, started as a software infrastructure vendor and many years ago decided to compete with it's partners by moving into the applications business. As Oracle has gobbled up applications vendors, IBM has seen it's software partners shrink. With the acquisition of Sun, Oracle now competes squarely with IBM in infrastructure in both the hardware and software spaces. Add to this Oracle's already strong presence in applications and it presents a problem for IBM.

The downside to being in the infrastructure business is that you depend on the application to pull demand for the infrrastructure. That is, business people decide first what applications they need and second what platform they need for those applications, not the other way around. So if your applications portfolio (either directly or through partners) is strong, infrastructure does very well. If not, it's a very difficult business. Oracle today owns a healthy applications business that can pull its infrastructure. IBM does not.

Further, IBM's dividing line of applications was drawn at a time when there were more applications vendors who needed its infrastructure.  Today the landscape has thinned.  Companies that used to be infrastructure like Oracle and Microsoft have entered the applications business.  Microsoft, arguably IBM's largest competitor as a platform vendor, is in the applications business.  Finally, in another trend worthy of a separate discussion applications themselves are beginning to look more like infrastructure as they become platforms for third party extensions.   All of this leaves IBM looking lonelier and lonelier without applications as part of its portfolio.

Enter SAP. Given the competitive landscape an IBM acquisition of SAP no longer looks as threatening to the applications market as it once did.  Now it just looks like IBM trying to stay competitive with the likes of Oracle and Microsoft.  Further, SAP finds itself isolated as the infrastructure partners it needs (e.g. Oracle and Microsoft) increasingly compete for its business with their own offerings.  By acquiring SAP IBM solves its gap at the applications tier in the stack and remains competitive with Oracle and Microsoft.  By combining with IBM SAP gains the rest of the stack it needs to stay competitive in the middleware space.  It's a win-win for both parties.

Comments

[Alex]

I think the battle goes even beyond that. It is conceivable that in the not so distant future most computation will be done in the Cloud (with potentially "private Clouds" for the privacy oriented folk). So the battles will be along the lines of

1.Who provides the interface to the Cloud: Amazon has a leg up there, Google is closing in

2.Who provides the applications in the Cloud: one could potentially run Office in the Cloud so Microsoft should be more than interested in doing something here

3. Who provides the infrastructure for the Cloud: Cisco is moving in, IBM has announced plans, Oracle/Sun have a shot if they keep the hardware, HP/Dell must do something before they become obsolete

4. Who provides the means for deploying new applications to the Cloud: I think this is good startup material

So again, if I was Oracle I would not rush selling off Sun's hardware unless I make a deal to have access to it or have alternative plans for the hardware otherwise somebody else will call the shots.

[Kyle Shank]

The irony of both of these types of business is that there really isn't much of an incentive to build great applications. The goal is mediocrity. Mediocrity allows you to sell apps that don't perform and lack intuition. Poor performance sells more hardware. Confusing software sells tons of global services.

With this lens SAP is the perfect acquisition :)

[CliveBoulton]

My conjecture Larry Ellison wants the complete Sun technology stack to transform the Oracle Java-based ERP apps to an Oracle App Cloud.

[Business Opportunities]

Oracle has stepped up the rhetoric when it comes to its plans for Sun. In a message to Sun customers, the company said it would "dramatically improve Sun's hardware performance by tightly integrating Oracle software and Sun hardware