Sunny, With Dull Patches

So Oracle has bid $9.50 a share for Sun Microsystems, valuing the US hardware fallen giant at $7.4bn. It's a far cry from what Sun might have been worth a few years ago but it currently is worth a 42% premium over Friday's closing stock price for Sun - how the mighty have fallen.

IBM had tried to secure a deal with Sun last month but nothing came of it. To be frank, it may have been a more natural fit in some ways - two hardware vendors with software and services interests combining to plug the gaps in each others' portfolios. But the recent past has seen the once mighty Compaq get severe indigestion when it took over the lumbering has-been Digital only to see the failed combination being bought by HP under Carly Fiorini.

The fact is, Oracle is a software giant and although threatened by the likes of IBM, in reality the two models are poles apart. The computer industry has always segmented the business models of software and hardware. Many hardware companies had software interests but they never really came to the fore and dominated any specific space. Similarly, some software companies have had some hardware interests but again, none that ever really dominated a sector.

The plain facts are that software is a gross margin rich business model with development costs underpinning it. Hardware has seen its gross margins eroded, made worse as each vendor has attempted to service major supply agreements as Prime Contractors and therefore had to buy other hardware vendor products in at reseller type margins, often securing long term supply at single digit margins on other vendor equipment and so dissipating its true gross margin on deals. It has been the nature of the beast in getting revenue growth at the cost of profit. Dell, in particular, has felt the pinch using this tactic.

So what would happen when you combine the two models, particularly of two giants of their specific sectors? I have to say, that the jury is out for me. Sun made a walloping $1.9bn loss last year on £13bn of sales but Scott McNealy, the colourful Chairman behind Sun, reckons that Sun will contribute $1.5bn of profits this year and $2bn next year to the new group.

Industry Speak

Industry analysts reckon that Sun's customer list will give Oracle access to those customers who are not currently using their database products. How often have we heard that kind of speak before? The fact is that hardware vendors rarely 'own' their customers in the way that a software company does unless they have a major stake in their applications or infrastructure. The chances of Sun dictating what database it customers use are pretty slim to say the least. Moreover, it is not as if Oracle is not known in the corporate world so that Sun customers will not have heard of them - all in all it's a silly argument and would be similar to Microsoft buying Apple to force their operating system and products down the throats of Apple customers.

The best way to make such a combination work is to produce database-engine boxes which were tuned in performance to run Oracle applications - 'Appliances' if you like. The storage industry has a number of such products and giants in this sector like EMC and NetApp have acquired strongly tuned software products to work specifically with their hardware.

But such an avenue is fraught with danger, as EMC has seen in acquiring VMware. As great an acquisition as that was (EMC got its money back by floating just 10% of VMware stock), the issue was always that VMware had to remain independent of its parent in order to remain the credible market leader, particularly with Microsoft gearing up to get on the attack. If VMware were to favour its parent by tuning performance or showing preference, long term it could ruin its position with the likes of HP, IBM, Dell and others and so allow Microsoft in as the 'independent vendor' who was hardware agnostic.

This is the danger for Sun-Oracle. If Oracle tries to leverage its new hardware purchase by tuning the performance to the hardware or showing preference in development, then the vast array of hardware vendors will slowly but surely get jaundiced and it allows a gap for an independent supplier with good brains and products to win their hearts as there is no vested interest. Right now, HP or IBM executives who have a strong relationship with Oracle, are probably thinking that all their Oracle installations are potential Sun Microsystems targets.

Long term that may not be proven to be the wisest of choices. If you are going to buy a hardware vendor as a leading software supplier, make sure you buy the biggest as your first step, not the cheapest, as you may just have bought yourself not just a chump but a liability that will lose you a lot of friends.

What may have started as a plan to strengthen Oracle's position against IBM may be the first gong of the death knell of a giant of the software industry. If there is one watchword in this industry that determines success it is FOCUS.

Yahoo! - This Should Be Interesting

After a period when it seemed nothing could wrong for Yahoo! it did toward the end of 2008. It resulted in one of Silicon Valley's whizzier kids resigning and making way for an industry powerhouse, Carol Bartz. But can this software veteran turn around Yahoo!?

The End of The Yahoo! Era?

It seemed not much could go wrong for Yahoo! in the early 2000's. A steady stream of revenue announcements showed the company was growing along the lines everyone thought was the future - effectively an internet play that made its money on the marginal returns on advertising. It wasn't the only form of revenue but over time it became overly dependent. In 2008, when the global markets started to dive, this model was exposed. Yahoo! had to shed staff and suddenly Jerry Yang, once the brighest of CEO's in the Valley, was being ridiculed for his folly.

Enter Carol Bartz.

Autodesk - The Software Phenonemon

Having worked for Datech in the 90's, albeit setting up and running a specialist Videoconferencing Division within the company, I knew that Carol Bartz's name was already being revered. At one time Autodesk was a sleepy CAD company which had indeed brought design to the desktop and so had collapsed not only the price of CAD software but had also brought down the cost of running it. Soon CAD, which had always been associated with huge software costs and heavy computing power to run it, was running on Intel based PCs. It brought about a quantum shift in sales.

But under Bartz's control, Autodesk was not content with CAD only sales. Soon a whole raft of associated products hit the market that helped the company drive revenues from $300m to $1.5bn and become the fifth largest software company in the world and one of the most profitable at that.

Carol Bartz became widely respected for her hard-nosed and often uncompromising style which ensured Autodesk became one of the great success stories in software instead of being a niche also-ran. The company, situated in the picturesque Bay town of Sausalito, had a great view of the rat race of Silicon Vallay over the Golden Gate Bridge and South of the majestic City of San Francisco across the water. It remained quietly apart from the often incestuous and inbred feeling the Valley has and maybe that was a part of it's success.

Whichever way you cut it, Carol Bartz presided over a dramatic growth in sales at Autodesk and is rightly credited for her tenure there. Now she sits on the Board of prestiguous companies like Cisco, NetApp and Intel. Her resume is very powerful indeed.

The Web

There is one thing that is missing in Carol Bartz's superb success story - she has little or no exposure to the web. Autodesk was essentially an off-the-shelf software in a box company which leveraged a great deal of after sale revenue on complimentary products and services like training or maintenance. It had a very traditional feel to the sales effort and while at Datech we often talked in terms of 'How many CADs had been sold' which referred to licences shipped.

Yahoo! is very, very different. It is a 100% web 'pure play'. Classic Web 1.0, Yahoo! grew through giving away software and services to a vast web community that lapped up its email and directory services amongst other things. Now there is messenging, video calls, communities, blogs, websites and much more. The sorts of things Carol Bartz will not find are boxes of software, lots of juicy, high margin services and no third party Distribution companies to woo.

Growth or Turnaround?

Some still think Yahoo!'s current predicament is one of lacking growth - a minor blip in the upward trend that the web offers clever companies. However, there is more of a concensus that Yahoo!'s model has been the issue and that continuing in the same way will not be the right thing. Critics of Bartz, and there are a few, say that she is a CEO who is fine managing an upward trend or even an 'even keel' as Rob Enderle of The Enderle Group describes her. For him, growing a company fivefold is actually just manning the tiller. But he does have a point - Yahoo! is not just an entirely different company, it is a serious turnaround situation.

Very different from Autodesk, which was entirely in control of its operating margin by adjusting the price of its product and production, Yahoo! is a marginal player entirely dependent on the supply and demand of online advertising - and that is up the creek at the moment. Supply and demand means that pricing and margins are much more sensitive and you cannot easily change the operating costs by sacking programmers, it means wholesale redundancies as there is little Intellectual Property (IP) that Yahoo! gains revenue for - and that's the nub of the problem.

Freebie Business Models

Perhaps this was an obvious outcome of a freebie business model and we have seen the last of these. I am not so sure. I think Yahoo! went far too far down the path of earning from marginal sales and did not get some core technology it could obtain revenue from as Google has done. The giants of this space have all got a crown jewel, a black box of core technology that has to be paid for - Yahoo! bypassed that and went for an advertising biased model for which it has paid a big price.

Will Bartz Succeed?

It's a huge ask, that's for sure. It's new territory for Carol Bartz - as head of Autodesk, and even on the Board of such companies like Intel and Cisco, she has always been associated with businesses with traditional models and IP, which can shore up its profits by flexing its pricing model because it owns the technology. Not so Yahoo! - it's a different ball game.

The jury is out, but as someone who saw at first hand the company she transformed, I think the lady who shook the masculaine status quo and became one of the first female CEOs of a software giant has a great deal more up her sleeve than most think. I think she may just prove the sceptics wrong (no rhyming slang intended).