Oracle Closes in on Sun, Wall Street Worries
Let the worries begin. The European Commission Thursday approved the $7.4 billion merger between database giant Oracle and long-time Wall Street denizen Sun Microsystems.
"I am now satisfied that competition and innovation will be preserved on all the markets concerned," Competition Commissioner Neelie Kroes said in a statement.
Sun has historically been a powerhouse in capital markets with its Sparc hardware and Solaris operating system, which have allowed brokerages to trade faster and more reliably. Its Java language is used for enterprise software, and the MySQL database is a popular back end for Wall Street's Web-based applications.
The Commission initially had concerns that the merger could put MySQL and Java at risk. But after a four-month investigation, the Commission determined that there were credible open source alternatives to MySQL, and that the Java community development process includes Oracle competitors.
The Commission approval was the biggest obstacle holding up the merger, though China and Russia have yet to weigh in.
"Oracle expects unconditional approval from China and Russia and intends to close the transaction shortly," Oracle said Thursday.
Oracle's plans to acquire Sun will mean tighter integration between Oracle databases and Sun hardware. However, Aite Group analyst Adam Honore recently surveyed two dozen capital markets CIOs about the merger, and says that companies running "critical instances" of MySQL are dubious of Oracle's claims that it will protect that less-costly database.
"There are quite a few MySQL instances [on Wall Street], for a variety of relational database applications. It's all over the place,'' he said.
The uncertain future of MySQL is their biggest concern about the merger, he said. Other CIOs were also worried about the future of the Sun hardware, he said, with the merger accelerating plans to move to a different platform. "You're probably looking at a few percentage point reduction in market share," he said.
At trading platform vendor Marketcetera, Inc., MySQL is the underlying embedded database for the company's trading platform. That platform powers such hedge funds as Cerebellum Capital and Nobilis Capital.
"It stores all the trades and positions," said Toli Kuznets, the company's co-founder and CTO. "We've been using it for four years, from the beginning of Marketcetera."
According to Kuznets, the company chose the MySQL platform, in part, because the firm is philosophically committed to the open source concept. "But obviously, it is because of ease of use and cost," he added.
Kuznets added that he's not worried that Oracle might kill the database.
"And if Oracle stops innovating, someone else will just take over innovating," he said.
According to the European Commission, MySQL's open source nature allows it to be forked - with a new player taking over development. In addition, the Commission also determined that the PostgreSQL database was a credible open source alternative for many database users.
MySQL is a database that is commonly used for Web-based applications on Wall Street. Users include the Chicago Mercantile Exchange, HypoVereinsbank, Credit Agricole, Dun & Bradstreet, Lloyds TSB, and Shinsei Bank.
At Aizawa Securities Co., Ltd., a leading Japanese brokerage, MySQL is used to power a Web-based customer system for viewing transactions.
"We depend for our existence on our Web services to work flawlessly," Kazushige Sato, the IT manager in charge of the company's online services, said in a statement. "We turned to MySQL when we found the total cost of ownership of the previously-planned Oracle solution to be too high."
According to Sun, a typical three-year deployment of MySQL on six dual-core servers would cost around $50,000 - compared to over $900,000 for a similar system running Oracle.
Sun acquired MySQL, the world's most popular open source database, in 2008 for $1 billion. But revenues were tiny, about $40 million in 2008, according to Framingham, Mass.-based research firm IDC.
Revenues for Oracle's database and middleware, by comparison, were $5.1 billion in the fiscal year ending May 2009-with another $7.6 billion in revenue from support contracts.
To convince regulators that it would not sabotage MySQL in order to protect its own database business, Oracle released a ten-point plan for preserving the open source database, which includes a promise that Oracle will spend at least $24 million for each of the next three years on MySQL research and development, which is what Sun spent last year.
Sun's Slipping Position
The maker of what once were unchallenged as the speediest workstations and servers lost ground in recent years as low-cost hardware running on powerful but cheap processors and standard operating systems became more robust and scalable.
For example, in 2008, the New York Stock Exchange migrated its trading systems from Sun Solaris to Linux running on HP servers.
"Sun historically has been very strong on Wall Street," said IDC analyst Jean Bozman, with Sun hardware used for transaction processing and analytics. However, over the course of the previous decade, Sun lost its prominence in the high-end market, which is now dominated by IBM and HP.
A technology manager at an inter-dealer brokerage firm told Securities Industry News that his company is the process of switching from Solaris running on Sun's Sparc servers to commodity hardware from HP.
"The overall performance is better, and the cost performance-there's no comparison," he said. However, the company will continue to use Sun's Solaris operating system, and is worried about its continued survival under Oracle.
"We're very, very deeply dependent on that," he said, speaking on condition of anonymity.
"Historically, that's what we've run on, so we're pretty well committed to the Solaris way of doing things, and it's not so easy to port out of that. And the other thing is, as an operating system, it's just better - it's just hands-down the most functional operating system," he said.
Solaris offers better performance, ability to handle large applications, and support for cloud computing, he said, and has better trouble-shooting and diagnostic tools than Linux.
His company, an inter-dealer brokerage, runs all its products on Solaris, uses Java for some applications such as a new 3D data visualization tool-but doesn't use MySQL. Instead, the company uses the Sybase database as the back for for its order management systems and Oracle Database for business administration, he said.
The merger, announced in April of 2009, was originally meant to protect Java, according to to IDC's Bozman. Java underpins Oracle's Web services platform, WebLogic. Java is also used by IBM, and throughout Wall Street for SOA-services oriented architecture.
SOA helps buy-side firms distribute equities information and sell side firms reduce the cost of integrating systems. According to research firm Zapthink, the financial services industry was one of the leaders in the move to SOA. Merrill Lynch and Morgan Stanley are among the earliest adopters of the technology.
But Java isn't just for SOA. For example, AllianceBernstein's execution management system is a Java-based application from New York-based trading vendor Portware. Even firms that haven't officially adopted Java as a platform are likely to be using Java as part of third-party applications or integration projects with service providers.
"Oracle would not have the incentives to restrict its competitors' access to the Java IP rights as this would jeopardize the gains derived from broad adoption of the Java platform," said the European Commission in its approval announcement.
In fact, Oracle's acquisition of Java will help guarantee the long-term survival of the technology, said IDC's Bozman.
"So much of Oracle's software works on Java technology," she said. "But there's also a very large base of customers worldwide that has the combination of Sun hardware and Oracle software. What Oracle has been saying to that install base is that they would continue investing in those technologies."
Oracle is a major power on Wall Street. According to the company, all 20 of the top 20 banks including JPMorgan Chase and Goldman Sachs are customers, and the database is the first choice for the financial services industry when it comes to customer relationship management and internal human resources systems.
The Positive Spin
"This could bode really well for Wall Street," said Rodney Nelsestuen, an analyst at Tower Group, Inc. "Right now, if you're using both Oracle and Sun, your IT department has to do a lot of systems integration."
After the merger, Oracle will focus on the high-end systems that currently distinguish Sun from its competitors-and which make it popular on Wall Street, Oracle CEO Larry Ellison told investors last month.
"Sun just really does not now and is never likely to have the volume to compete in the high volume, low margin business," Ellison said. "Instead, we are pursuing the high value, high performance market."
"Sun's new SPARC Solaris system and Sun's new Exadata database machine both run the Oracle database faster than IBM's fastest computer," said Ellison. "We expect Sun to rapidly improve both its market share and margins once this merger closes."
For example, he said, Oracle will add a memory cache that will speed up the performance of Oracle databases on the SPARC Solaris M9000.
In addition, the Sun mainframes will become the heart of cloud environments, he said. Private clouds are increasingly becoming popular on Wall Street as a cost-effective way to deliver computing power.
"We are not going to sell operating systems just for an individual computer but ... the next generation of Solaris is going to be a cloud addition to Solaris where it manages a group, a cloud, a cluster of these computers that we sell together as a unit," he said.
"That is highly differentiated, high margin for us and no systems integration required for the customer. How big is that business? We think that is what the computer business is going to look like for large customers going forward. We think that is billions and billions of dollars," Ellison said.
More information about Oracle's plans for Sun will come on January 27, when Oracle will hold a five-hour live strategy event for customers, partners, press and analysts.
Hard on Hardware
Sun's server shipments have been slipping over the past few years, more than those of its competitors.
Acording to IDC's Bozman, Sun used to the top seller of the Unix-based computers popular on Wall Street. Today, the company is in third place.
In the summer of 2003, Sun's UNIX server revenues accounted for 33 percent of all Unix server factory revenues, putting the company first in sales of this high-end segment. But its market share has been sliding ever since. Sun today accounts for 26% of the UNIX market, putting it third behind IBM and HP, which offer Intel and AMD-based servers at a substantial savings over Sun Sparc.
HP claims it can cut a typical Wall Street user's hardware costs by 50 percent. But there is still a large based of users of Sun hardware and Sun's Solaris operating system in the securities industry.
Berlin Bourse's Equiduct Platform, for example, runs on 24 Sun multicore servers running Solaris.
According to Aite Group's Honore, the merger may accelerate movement away from Sun-because it is owned by Oracle.
"There is a perception by some that Oracle isn't the easiest company to deal with," he said.
However, some users may have been planning to make a switch anyway, as commodity systems based on the Microsoft-Intel architecture are less expensive and continually improving in power and resilience.
To address these concerns, Oracle has promised its customers that it would spend more money on the SPARC server hardware than Sun does now-and more money on developing the Solaris operating system, though no specific amount has been announced.
Oracle also said it would double the number of hardware specialists selling and servicing the SPARC-Solaris systems compared to Sun's current staffing levels.
This article can also be found at SecuritiesIndustry.com.