The possible merger of IBM (IBM) and Sun Microsystems (JAVA) comes at a critical time for the tech industry. A major shift in the way companies and consumers handle a vast array of computing tasks is at hand. With Sun's Internet technologies in its arsenal, IBM would be better poised to deal with the change.
Sun would give IBM a large portfolio of computer, chip, and software technologies and some of the most innovative scientists and engineers in the tech world. It would also strengthen IBM's hand in key markets, including government and telecommunications.
Perhaps the most important element of the deal lies in Sun's potential for cloud computing. This emerging technology lets people and businesses buy processing power as a service, over the Internet, rather than having to purchase, own, and manage their own expensive machines. Cloud computing consumers pay monthly fees for services provided by companies that specialize in operating computers super-efficiently in vast data centers. "Cloud computing is a different way of consuming and delivering computing," says Erich Clementi, general manager of enterprise initiatives at IBM, who spoke to BusinessWeek two weeks before news of the Sun negotiations was made public. "It has the potential to transform nearly everything we do."
Trouble is, few companies are tapping that potential. While the concept of cloud computing has been a hot topic in techdom for the past couple of years, there's actually very little of this kind of computing being done in the corporate world. A February survey of corporate computer purchasers by the market research firm Forrester Research (FORR) showed that only 5% are using cloud services, currently provided by companies such as Amazon.com (AMZN) and Rackspace (RAX). Many companies know little about cloud computing, and there's a dearth of such services available to larger corporations. In some cases, corporations are leery of handing computing tasks over to an outside provider.
The good news for would-be cloud computing vendors: Almost half of those surveyed say they are considering it, and 54% are interested in using cloud technologies within their own data centers. "This is a big thing. It's going to be transformational…eventually," says Frank Gillett, a senior analyst at Forrester. Little wonder. A small business buying cloud services from Rackspace, for example, could pay as little as $10 a month, compared with $100 to $200 for comparable services delivered in a more traditional manner, using a dedicated server.
Sun might help IBM better go after that market, analysts say. IBM has for decades been the leading provider of tech products and services for large corporate data centers. For corporate customers, IBM currently builds cloud-based data centers or provides computing services from its own data centers. A Sun acquisition would give IBM a better entr�e into another segment of the nascent market: providing technology to the companies that operate cloud data centers for large consumer-oriented Web services such as Facebook and Google's (GOOG) YouTube.
Talks between IBM and Sun, reported earlier by The Wall Street Journal, come amid accelerating competition in providing data-center capabilities. IBM already competes hard with Hewlett-Packard (HPQ) and Dell (DELL) and faces new challenges from Cisco Systems (CSCO), which on Mar. 16 made a high-profile plunge into the market for data-center server computers. "A Sun deal would…bolster IBM in its competitive battle in servers and the data center vs. both HP and now Cisco," writes Barclays Capital (BCS) analyst Ben Reitzes in a Mar. 18 research note.
Sun's Cloud Initiative
Sun announced its own cloud computing strategy at an event in New York on Mar. 18 just as word of its talks with IBM was leaking out. Its first offering, Sun Cloud, is targeted at Web site developers and corporate IT departments. "I hope we capture the next Facebook on our cloud," says Lew Tucker, the chief technical officer for Sun's cloud initiative, speaking to BusinessWeek on Mar. 17. In six to nine months, Sun plans to introduce a service aimed at large corporations and a package of products aimed at cloud service providers.
With its array of Internet technologies, including the Java software programming language, Sun has long been a favorite among Web startup companies. That affinity would clearly have some value for IBM.
But making the deal work wouldn't be a sure thing. Over the past several years Web companies have been shifting away from the large server computers from Sun that powered the dot-com revolution in the late 1990s. Increasingly, new Web companies are using lower-cost servers running processors from chipmakers Intel (INTC) and Advanced Micro Devices (AMD). For example, software-as-a-service pioneer Salesforce.com (CRM), which originally relied on Sun servers, has shifted to commodity-style servers bought from Dell. Sun sells lower-end servers, too, but it no longer has a lock on the Internet set the way it used to.
IBM would be taking a risk by purchasing Sun…with no assurances that Sun's cloud offerings will take off. Still, its chances of being a major player in the era of cloud computing would be enhanced by the merger. And IBM, with a $13 billion cash hoard, can afford to pay the price.