Sun and Oracle Head for Low-End Servers

Hard-pressed Sun Microsystems ( SUNW) did the expected Monday, announcing an expanded partnership with Oracle ( ORCL) and rolling out low-cost servers based on Intel chips.

But Sun CEO Scott McNealy and Oracle's Chief Executive Larry Ellison went beyond the prepared script and made it clear that both companies are moving aggressively into the lower end of the enterprise computing market now dominated by Dell ( DELL), IBM ( IBM), Hewlett-Packard ( HPQ) and Microsoft ( MSFT).

"We've been too fired up about 64-bit computing, McNealy said. "And we didn't jump on the low-cost 32-bit computing bandwagon," he added a bit later. Ellison went even further, saying "Scott and I are abandoning high-cost computing," but he quickly backpedaled when McNealy corrected him.

Simply put, the two companies announced four things:

  • An expanded partnership, and a promise that all Oracle products will run on all Sun hardware, including Solaris x86-based systems and Linux on x86-based systems as well as Solaris SPARC and Unix.
  • Cheap servers from Sun. The company is now offering servers for as little as $2,450, running the customer's choice of Solaris or Red Hat (RHAT)Linux.
  • A promise from Sun to help expand the number of applications written or tweaked to run under Solaris on an Intel-based server. There are now 1,000 applications available on Sun's Solaris x86 platform, the company said.
  • A partnership with Red Hat, the leading provider of the open-source Linux operating system. Sun will distribute Red Hat's version of Linux, and Red Hat will distribute Sun's Java Virtual Machine with Red Hat Linux.
  • Wall Street's initial reaction to the well-hyped announcement was a yawn. Both Sun and Oracle were down moderately in regular trading on a generally down-day for the Nasdaq; Sun lost 16 cents, or 3.7%, to $4.14 a share, while Oracle lost 39 cents, or 3.1% to $12.17.

    Pacific Crest Securities analyst Brent Bracelin, however, said the announcements were too little, too late. "It's taken Sun two years to come out with a cheap server with a Xeon chip. What do they do with all the R&D money," he wondered? Bracelin's company does not have a banking relationship with Sun.

    To be sure, Sun is a latecomer to low-end computing, offering only two x86-based servers (one powered by Intel and one by AMD ( AMD) chips) in addition to proprietary servers built around the company's SPARC family of microprocessors. As U.S. companies have increasingly opted for cheaper models, Sun's server business has taken a painful hit.

    Cheaper servers have lower margins, of course, but because the company's market share of 32-bit servers is around zero, the extra revenue will help, regardless of the margin.

    In the first quarter of 2003, Sun was the only leading vendor to suffer a decline in global server shipments, according to market researcher Gartner Dataquest. The company's share of the market slipped to 4.9% from 6.3% last year. Unit shipments dropped by 13.2% during the year.

    Within the $100,000-and-under segment of the server market, Sun also has lagged. Between 2001 and 2002, it grew unit shipments by a mere 6.3%, compared with a robust 25.1% for Hewlett-Packard, 19.2% for Dell, and 14.7% for IBM, according to IDC.

    As a result, Sun's revenue has been sliding for several years. Year-over revenue was down three straight quarters, and analysts polled by Thomson First Call expect that trend to continue in the June quarter. The company also has lost money (on a GAAP basis) in six of the last 10 quarters.

    Moreover, Sun's stock has slid for years. In fact, Sun's latest rally was triggered by takeover rumors. Although the two CEOs joked a bit about the rumor that Oracle would buy Sun, neither spoke seriously about the issue.

    Staff writer K.C. Swanson contributed to this report.

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