Oracle seeks fast profit from Sun

Oracle on Wednesday tried to answer the question that has vexed much of the technology industry since it announced its acquisition of Sun Microsystems last April: How will Oracle make the ailing systems and software vendor a profitable part of its business?

The challenge appears all the greater given that Oracle has pledged to invest heavily in all of Sun's main server families, including its Sparc- and x86-based systems, as well as Sun's Solaris OS, storage technologies and other products.

John Fowler, the former head of Sun's systems group and now executive vice president of hardware engineering at Oracle, gave a candid response to reporters following an event at Oracle's headquarters Wednesday, where Oracle laid out its Sun strategy.

"Oracle is a much more business-like, efficient company, and it works much more effectively in terms of how they market and sell products," Fowler said.

Oracle will make sweeping changes to Sun's supply chain, including moving the company to a build-to-order model, in which servers are shipped directly to customers from the factory.

In contrast, Sun has used a "build to stock" model, where systems are sent first to distribution centers and held there until customers place orders. That model works only when demand is predictable, said Cindy Reese, the former head of Sun's supply chain operations and now an Oracle employee.

Sun's model resulted in unsold systems being shipped back to factories to be reconfigured or fitted with newer components, she said. "When you have to send a unit back to a partner in China or Mexico, you've used up any opportunity you had to save money."

Oracle will also cut in half the number of manufacturers Sun dealt with, and assemble its servers at far fewer locations. "We're going to move the supply chain from complex to simple," Reese said.

Oracle will also revamp Sun's sales efforts. It will hire 2,000 additional salespeople, have teams that specialize in tape storage and servers, and reward salespeople based on the profit margins of the products they sell, rather than their gross value, said Charles Phillips, an Oracle co-president.

Like most mergers, savings will also come from combining general and administrative operations. But CEO Larry Ellison shot back at an analyst report that predicted Oracle will cut half of Sun's workforce to slash costs. He called it a "highly irresponsible thing to make up."

"We'll hire 2,000 people, and that will be twice as many people as we'll lay off," Ellison said.

Still, asked for a clarification later about how many workers Sun has laid off already, and how many more will go, an Oracle spokeswoman said the company hasn't released "specific numbers."

While Oracle plans to keep most of Sun's products alive, including its MySQL database and JavaFX development platform, it will also exit certain businesses. Ed Screven, Oracle's chief corporate architect, said Oracle has no plans to offer on-demand computing services like those from Amazon Web Services, meaning Sun's nacent Open Cloud initiative appears to have been cut.

Fowler also confirmed a report that Sun had killed the development of its Rock processor, saving further money. And Oracle will focus its efforts primarily on the high end of the server market, which tends to yield higher profits.

"We're not too interested in the commodity Windows x86 market, we'll let Dell do that," Fowler said.

Oracle will also sell far fewer server models, or "SKUs", than did Sun, Reese said.

While Sun has reported financial losses for many of its recent quarters, it might not have been that far from profitability, said Dan Olds, principal analyst with Gabriel Consulting. "They have lost money recently, but if you go back two or three years they actually weren't that far from being profitable," he said.

Sun reported a net loss of $120 million for its 2009 fiscal year, which ended Sept. 27, an improvement on the $1.7 billion that it lost in fiscal 2008. It is unlikely to report financial results for its most recent quarter, since Oracle completed its purchase of Sun on Tuesday and Sun's shares have been withdrawn from the Nasdaq.

Ellison said in September that Sun was losing "$100 million a month" while Oracle waited for European regulators to approve the deal. But on Wednesday he insisted that Sun will generate profits for Oracle almost immediately. "It will be contributing to Oracle's profits the first month we own the company," Ellison said.

Phillips said the delay in closing the acquisition had one advantage. "We're not just hitting the ground running, we've been running for a while," he said, meaning Oracle has had nine months to figure out its strategy. The company is also experienced at managing acquisitions, having bought about 60 companies in the last five years.

The deal's success will depend partly on convincing customers that Sparc and Solaris are good investments. Oracle is also betting that companies will pay a premium for integrated systems, like its recently launched Exadata Database Machine, that combine Oracle software with Sun servers and storage.

"Over the last few years when I talked to Sun shops they were very concerned," Fowler told reporters Wednesday. "They asked, 'When is Sparc going to fall off a cliff?' Now obviously it's not going to fall off a cliff; we're going to invest more in Sparc than Sun does."