MySQL: The Key to Oracle's Sun Acquisition

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Includes: JAVA, ORCL
by: Matthew Galinko

Oracle (NASDAQ: ORCL) announced in a surprise move Monday morning that it would acquire Sun Microsystems (NASDAQ: JAVA) for $7.4 billion. With the move, Oracle now competes with nearly all of the largest technology companies, including Microsoft (NASDAQ:MSFT) in middleware and server operating systems, SAP and Salesforce.com (NYSE:CRM) in business applications, IBM, Cisco (NASDAQ:CSCO), HP (NYSE:HPQ), and Dell (NASDAQ:DELL) in server hardware, and EMC for storage solutions. Larry Ellison, CEO of Oracle, cited Sun Microsystems Java platform and the Solaris operating system for servers to be the primary motivators behind the acquisition.

While Java is an important component of Oracle’s middleware platform and Solaris an important OS platform for its database servers, it is unclear how Oracle benefits from having either component in-house. Java is not a major revenue generator, and Solaris has been slowly losing relevance in the server market for years, as commodity hardware and operating systems (like Windows Server and Linux) displace UNIX. While recent steps to open source Solaris have slowed the process, I believe that the operating system will continue to be on the decline.

The unmentioned key to the acquisition is MySQL, the open source database that Sun Microsystems acquired in January 2008 for $1 billion. When acquired, MySQL annual revenue was in the range of $50 million and growing rapidly. MySQL is the king of open source databases, receiving the lion share of support and development effort. The software has a dual license, meaning that commercial entities must pay to use the database while individuals can use it for free.

Oracle is, first and foremost, a database company, and MySQL was undoubtedly a long term threat. Many of Oracle’s middleware and software products rely on the use of databases, and even Salesforce.com, a major disruptor and competitor in business software, relies on an Oracle database to run its platform. Many of Oracle’s software acquisitions allow it ensure the usage of Oracle databases, hence allowing it to add both revenue and earnings from the software AND additional database sales. With the acquisition of Sun Microsystems and MySQL, Oracle seeks to control this up-and-coming, open source database, and most importantly, its licensing for commercial use. Our suspicion is that MySQL’s revenue growth rate, while no longer disclosed, will slow precipitously following the integration of Sun Microsystems into Oracle.

Disclosure: No positions