Oracle now knows its got hardware problem and co-president Mark Hurd is looking into it.
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Despite all the sunny talk about happy Sun Sparc/Solaris customers and upbeat chatter on earnings calls about Exadata and Exalogic pipelines, the falloff in bread-and-butter Sparc server sales has spooked those at the top of the software behemoth. Of course, Sun shops and resellers have been saying that for more than a year, but now Hurd is taking an interest.
The downward spiral in hardware sales “has gotten everyone’s attention here,” said one Oracle insider who declined to be named. “It’s all hands on deck now when it comes to hardware.”
An Oracle spokeswoman would not comment on whether Oracle is rethinking its high-margin hardware strategy, but company sources said that Hurd, a “hardware guy” who was formerly Hewlett-Packard (HP) Co.’s CEO, is taking a hard look at the competitive x86 server market to see if Oracle is leaving money on the table by not pushing lower-end boxes. Smaller single and dual processor servers generate thinner margins, but there is indeed a market for them.
This bread-and-butter part of the server market was spurned by Oracle’s CEO Larry Ellison early last year when Oracle completed its $7.4 billion buyout of Sun. At the January 2010 press conference outlining Oracle’s Sun plans, Ellison and then-president Charles Phillips said the company would cede the x86 “commodity server” market to competitors like Dell. Instead, it would focus on high-margin, high-priced Exadata and Exalogic data center appliances that run a full complement of Oracle software. List prices for those appliances start at $300,000 for a quarter-rack Exadata, not including software, support or maintenance, and range up to $1.5 million for a full-rack, hardware-only Exadata, according to the Oracle Exadata/Exalogic price list.
That strategy has been a mixed bag. On Oracle’s third-quarter earnings call in late March, co-president Safra Catz said the company is thrilled that the hardware business is generating a robust 55% gross margin. But the hardware sales number -- $1.03 billion — came in below the consensus estimate of $1.16 billion for the quarter, according to Dow Jones.
Oracle has sold several Exadata machines since announcing the Sun version two years ago. The x86-based Exalogic just started coming off the production lines in December, so it’s still too early to gauge sales. Oracle also announced a SPARC-based Exalogic in December, but has not started making it, a spokeswoman said.
Can Exadata/Exalogic sales make up for lost low-end deals?
Marty Boos is someone Oracle should pay attention to. Boos is the CIO of MarketLive Inc., which develops and hosts e-commerce software and services for big retailers. It runs its own e-commerce software atop Oracle databases now, having moved off Windows and SQL Server over the past few years. Boos is a big fan of Oracle software because of the total cost of ownership he realized moving off the Windows stack.
“We went from 100 databases on 1,000 servers to 10 databases on a couple hundred servers. We have far fewer boxes, they’re cooler and we have less licenses.” MarketLive is still running some repurposed Sun and Dell boxes that survived the Windows transition, and he is happy about Oracle’s stated intention to keep investing in Sparc and Solaris.
Is Boos looking at Exadata/Exalogic? Nope. He will stick with more conventional servers and is encouraged by the new T3 Sparc chip.
Meanwhile, Oracle channel sources said that the company’s sales force, including its hard-core software sales reps, are being pushed to make hardware sales. “They’re being told to sell one Exadata or Exalogic box per quarter or get dinged pretty hard on their compensation,” said one source close to Oracle.
A quarter-rack Exadata ends up listing for about $1.4 million once all the cores and database licenses are figured in, but then, in tried-and-true Oracle fashion, discounting begins, said this source.
“Typical deals are two-thirds off the software [price] and 20% to 25% off the hardware, so the street price of quarter racks can be in the $600,000 range net before annual support costs,” he said.
Oracle also offers some “sweet” financing to close deals, he said. He and a few other long-time Oracle partners said they have sold or are about to sell several Exadata deals.
But even these folks who are closing big sales said it’s far from clear whether the market for these high-end boxes will make up for defecting Sun server customers.
Oracle is losing out on “a major refresh cycle among companies that held off on server buys during the roughest waters of the downturn,” said another channel source. Most of those shops have zero intention of forklifting in a big Exadata box to replace aging Sparc servers. Instead, they are moving to HP, IBM, or Dell Inc.’s “commodity” servers, customer and channel sources said.
This decline started well before Oracle even bid on Sun. The hardware maker had been ailing for some time and,customers worried about the future of the Sparc/Solaris franchise. But anxiety ratcheted up when Oracle instituted its price and support changes.
Some Sun customers that might normally buy into heavy Sun iron are not doing it now because of Oracle ownership, said one big Oracle reseller.
“About half of our customers run their Oracle [databases and applications] on Sun, and they are moving off that hardware,” said the vice president of this West-coast reseller. “Our Oracle software pipeline is very, very strong but [these customers] are not re-upping on their Sun hardware.”
This exec said the reason is Oracle’s handling of these accounts up till now. They are irked by price hikes and support policy changes, and all of those things built up a big hurdle to further Sun hardware sales.
“It’s not just the pricing, it’s not just the support. It’s that customers don’t trust Oracle, and they don’t want all their eggs in the Oracle basket,” the vice president said.
Macro trends hurt Oracle in big accounts
The hardware sales woes are not all attributable to Oracle’s perceived misbehavior, however.
Several data center sources said the ability of even C-level execs to sign off on big IT deals has evaporated under new compliance and cost-control requirements.
One data center pro on the West Coast said he was ready to sign off on an $80,000 Oracle deal but had to get his supplier to cut the deal in half and invoice him in two parts to get the work done. “I can only authorize up to 40 grand now without going to a committee,” he said.
This executive works for a $16-billion company and has an $11-million IT spending budget but can’t sign off on more than $40,000 at a whack. That’s the kind of restriction that will mitigate against big Exadata/Exalogic sales, he noted. And that is one reason that Oracle’s decision to deep six “commodity” hardware is coming back to haunt it.