Dell and Oracle Jointly Improve Their Cloud Ecosystem Competitiveness

Strengths and weaknesses dovetail for a sum greater than the parts

Highlights of the Dell-Oracle joint announcement on 9/25/2013  Dell directly sells/renews Oracle Linux and Oracle VM support services  Dell Active Infrastructure optimized reference architectures for Oracle, based on: o Oracle Linux and Oracle VM o Dell converged infrastructure solutions o Dell Services single-point purchasing and first-call support capability  Dell Services incorporation of Oracle's Agile Product Lifecycle Management (PLM) services for large- and medium-scale implementations  Dell integration of Oracle Enterprise Manager 12c with Dell OpenManage, availability planned for 1q2014  SharePlex Connector for Hadoop released, enabling near real-time replication from Oracle databases directly to Hadoop HDFS and HBase environments, targeted at business intelligence and big data analytics

Executive Summary We believe these announcements are only the beginning of a much stronger relationship between Dell and Oracle.

Oracle’s Aspirations Oracle completed its acquisition of Sun Microsystems in January of 2010, almost 4 years ago. Larry Ellison very clearly stated his intent to compete with IBM across the data center infrastructure market via that purchase, and that he specifically intended to use Sun’s SPARC processor architecture as a lever against IBM’s POWER processor architecture in the big dollar, “big iron” high-end server market. During the course of this week, Oracle has carried through with Larry’s commitment to high-end RISC-based system development.

But with the SPARC business came Sun’s emerging x86 server systems business. Sun was never a serious contender for x86 server market share, and that business has been trending downward for Oracle ever since the most recent recession started in late 2008 – even though the growth of scale-out hyperscale data center servers has driven server system unit sales volume up at companies like Dell, and despite Oracle’s success in core enterprise IT software.

There are two primary reasons that Oracle’s x86 server system sales have never been relevant. First, since their Sun acquisition they have focused their hardware sales resources on promoting their SPARC-based systems and, as is becoming apparent, they have also focused their hardware R&D resources SPARC technology and system development.

Second, despite some very good branding campaigns, Oracle has not yet managed to become a credible public cloud infrastructure supplier or even a credible multi-tenant hosting or private cloud infrastructure supplier. These server markets today demand x86 processors, and at a much lower pricing structure than Oracle’s SPARC-based solutions. In the future they will try to reach even lower pricing via small core processors – where Intel’s Atom and a host of ARM-based solutions are the early leaders. Oracle does not appear to be investing in the low-cost infrastructure they really need to turn their innovative SPARC processor architectures into high-volume alternatives.

We believe that Oracle has two alternatives to become a relevant as a cloud hardware vendor: first, become a vertically-integrated cloud services provider (sand to services), and second, partner with a complimentary hardware manufacturer who can take Oracle software into existing high-volume cloud hardware accounts. They are not mutually exclusive for a large company with a lot of resources – Oracle appears to be investing in both alternatives, but we’ll concentrate on the second for the remainder of this paper.

Dell’s Aspirations Michael Dell’s very recently successful effort to take Dell private means that much of their forward investment strategies – technology, markets, sales, etc. – have already been hidden from public view and will be harder to piece together going forward.

Looking at Dell’s high-level server market share, IDC’s publicly posted market data place Dell at #3 for branded server revenue in Q2 2013. With IBM edging out HP for #1, Dell came in at about three-quarters of HP’s revenue and two-thirds of IBM’s revenue. But the branded server shipments picture is much different, with Dell measured at a strong #2, only 6% behind HP, which closes the gap significantly from HP’s 20%+ lead one year ago in Q2 2012. We believe that Dell’s unit share may be understated as the hyperscale infrastructure market is harder for IDC to measure than traditional branded IT sales. That won’t change the revenue picture much, because “cloud” servers tend to sell at lower prices than enterprise IT servers.

The market dynamics underneath this seeming disparity are simple: Dell’s DCS has been very successful in the hyperscale infrastructure market compared to HP and IBM, but Dell’s core enterprise software products and services are not yet as mature as either HP or IBM offerings. Therefore, Dell’s server sales mix is much more skewed toward hyperscale deployments than HP’s mix. IBM is in the same camp as Oracle and does not have a volume hardware presence at hyperscale customers (more on that later).

So, we believe that Dell needs a better software and services play to increase their enterprise IT share of wallet and credibly challenge HP at classic enterprise IT accounts.

Dell-Oracle Deeper Partnership Their partnership announcements might seem tactical. At face value it looks like Dell is defining a new top tier category as an Oracle sales channel. The agreements give Dell some core enterprise IT database goodness and access to Oracle’s impressive enterprise accounts, and reciprocally they give Oracle access to proven high volume hyperscale infrastructure, which enables conversations with a smaller number of very high volume hyperscale customers.

Clicking down a few levels, we believe that Sun’s legacy x86 business is a total distraction for Oracle. They are investing a SPARC hardware future to compete with IBM and its POWER architecture underpinnings for high-end software and services. Oracle is so far behind the learning curve for low-priced, high-volume hyperscale systems that a native development program would siphon away a significant amount of their SPARC R&D spend, and most likely would prevent Oracle from creating a competitive SPARC product offering. Dell has the enterprise-grade server technology and volume server business model to do credit to Oracle’s volume software stack.

This matches our expectations for Dell as well. We assume that Dell’s end-game is to take the #1 position in server unit sales and then #1 in overall server revenue. To displace HP in core enterprise IT accounts they will need to take ownership of the hardware portion of a significant enterprise IT solution stack. Oracle certainly has the “known good” enterprise solution stack that Dell can leverage into better market share.

If this sounds familiar in the context of a much rumored IBM sale of x86 server technologies and business to Lenovo, it should. One of the benefits of being a successful founder-run company is that decision making tends to be much faster. Michael and Larry appear to have found common ground and we assume they will both act with speed and confidence.

These first announcements start the gears moving, they get customers thinking of Dell and Oracle in the same sentence with an initial set of projects for which both companies should find it easy to fulfill their obligations. This set of joint projects comprise a large portion of the technical and organizational work needed for Oracle to offload their x86 server business to Dell.

We think that today’s announcements are the beginning of a beautiful friendship.

Important Information About This Paper

Author Paul Teich, Senior Analyst at Moor Insights & Strategy.

Editor Patrick Moorhead, President & Principal Analyst at Moor Insights & Strategy.

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