IBM (IBM) is in the midst of negotiating to acquire Sun Microsystems (JAVA) at a critical time for the tech industry. A major shift is at hand in the way businesses handle computing tasks, and giants such as IBM and Sun are under pressure to alter the way they operate. Neither company would comment on the potential $6.5 billion deal, but it's clear that if IBM adds Sun's Internet technologies to its arsenal, it will be better poised for what comes next.
The rise of what's known as cloud computing has the potential to turn the tech industry on its head. Rather than buying and managing their own machines, businesses can buy everything from salesforce-tracking software to supply chain management as a service, over the Internet. They pay monthly fees to companies that specialize in operating data centers. "Cloud computing is a different way of consuming and delivering computing," said Erich Clementi, general manager of enterprise initiatives at IBM, before news of the Sun negotiations leaked. "It has the potential to transform nearly everything we do."
Sun has a broad portfolio of Net-oriented technologies including the Java programming language and systems for running consumer Web sites, such as Last.fm, a popular music service. Those technologies give Sun a strong foothold in cloud computing and could help IBM in the business.
For large computer makers, including IBM, Sun, Hewlett-Packard (HPQ), and Dell (DELL), the shift to cloud computing brings challenges as well as opportunities. Computers in cloud data centers are shared by many companies, so more is done with less equipment—putting a potential drag on server-computer sales. Cloud pioneer Salesforce.com (CRM), for instance, handles 54,000 companies and their 1.5 million employees via just 1,000 servers.
The cloud phenomenon will put pressure on margins, too. In some cases, computer makers will sell gear to cloud-hosting outfits that in turn provide services to companies. Large hosting companies may have the scale to negotiate rock-bottom prices. "We'll have pricing leverage," says Bryan Doerr, chief technology officer at Savvis (SVVS), a large hosting company.
If computer companies offer their own cloud services, they'll be trading the instant gratification of lucrative computer sales for a stream of payments stretched over months. After Sun launched a precursor of cloud services four years ago, some salespeople balked at losing out on hardware commissions. Analyst Frank E. Gillett of Forrester Research (FORR) predicts that "the server guys are in for a long, difficult transition."
Sun's earlier foray shows how difficult it might be. In 2005, Sun began offering computing power delivered as a service at $1 per hour. But Sun's Network.com service never took off. Lew Tucker, chief technology officer for Sun's new cloud initiative, says the problem was the narrow target market, mainly Wall Street firms that already operated their own data centers. Tucker calls it a learning experience. The company's new Sun Cloud service, unveiled Mar. 17, is aimed at a broader audience: Web 2.0 startups and units of large corporations.
Web startups long favored Sun gear for running their sites, but the company has lost momentum. For several years, Web companies have been shifting away from Sun's powerful computers and opting for lower-cost, basic servers.
Purchasing Sun would be a risk for IBM, but the merger would enhance its chances of becoming a major player in cloud computing. With a $13 billion cash hoard, IBM can afford the gamble.