The news that software giant Oracle will buy Sun Microsystems came as a surprise to most industry observers. Apparently, Oracle made its first offer on Thursday and had a signed deal by Sunday night. Larry Ellison and his team are clearly the masters of IT M&A.
This deal clearly has the potential to re-shape the IT industry. Or maybe it’s more accurate to say that it will complete a trend that has been going on for several years. Oracle is now the third conglomerate next to IBM and HP that can offer a complete technology stack, from server hardware to client software, plus implementation services.
On top of that, Oracle has a rich portfolio of application software and of course its market-leading database. It competes not only against IBM and HP, but also against SAP and Microsoft. No other company comes even close to these top 5 of the IT world. In just a decade, the IT industry has morphed from the innovation explosion of the dot-com era into an oligopolistic structure that is typical for mature industries.
But maybe more importantly, Oracle’s acquisition of Sun probably marks the end of Open Source Software (OSS) as a business model. Sun was one of the most active promoters of OSS and saw this focus as a strategic advantage to gain credibility in the tech scene. The company not only open-sourced its Java programming language three years ago, but also acquired several stars of the OSS industry, including office suite OpenOffice and most recently the world’s dominant free database (and thorn in Oracle’s side), MySQL.
Contrary to the romantic Robin Hood-type image that the OSS movement still has, most really complex OSS packages are not predominately developed by independent programmers in their basement, but sponsored (with money and human resources) by actual companies. MySQL was mostly developed by MySQL AB, a Swedish company that made money from support services and commercial licenses for enterprise customers. Without this cross-subsidy, it would probably be very hard for hobbyists to maintain and support such a complex software package.
MySQL AB was acquired by Sun for $1 billion a few months ago and will now become part of Oracle — which is not exactly one of the OSS movement’s favorite companies. You don’t have to be a fan of conspiracy theories to expect that Oracle will certainly not go out of its way to keep MySQL well supported as a free OSS product. I don’t think that Oracle will kill MySQL, but it will probably pressure its current users to buy enterprise support contracts and, you know, just maybe look at a really cheap upgrade to a full Oracle database product.
So finally the by far most successful OSS database ended up in the huge product portfolio of the very company that MySQL primarily tried to compete with. Facebook, Twitter, Yahoo and many other Internet companies are now suddenly proud owners of technical architectures that are based to a large part on the latest Oracle product…
Pretty much the only major independent open source software company left standing is Red Hat, the dominant provider of commerical Linux versions. There have been rumours that Oracle is interested in buying this company too, and at Red Hat’s current market valuation of $3.3 billion, Oracle could easily afford it.
It’s by now unfortunately fairly obvious that commercial open source has largely failed as a stand-alone business model. There are still some smaller OSS companies — e.g. SugarCRM, Alfresco, Pentaho, WordPress — that have a respectable position and could develop into profitable growth companies. But most complex high-profile OSS packages are now part of huge companies, often used as bait to sell hardware, services or commercial software products.
And for the IT industry in general, it looks like we’re going back to a vertically integrated model that we last saw in the 1970s. Customers can now — and many will — buy most of their IT components from one single vendor. It will be interesting to see how Microsoft and SAP will react to this. And another potential competitor, Cisco, is already extending its portfolio from networking to servers and software.
Where will innovation come from in this new world of vertical integration and huge IT conglomerates? Clearly, Internet-based software companies (such as Salesforce.com, 37signals) are the potential disruptors: They currently offer products that are far inferior to the large-scale solutions that Oracle and friends can provide, but they satisfy the needs of a certain customer group at a very low price point. We will see if that’s enough to keep innovation alive and compete against the giants.