Sun Launches 'Open Cloud' as Merger Rumors Swirl -

Sun Launches 'Open Cloud' as Merger Rumors Swirl

Sun Microsystems (NASDAQ: JAVA) today pushed its Open Storage efforts in a new direction with the launch of its "Open Cloud" service — even as rumors swirl that the company could soon be acquired by IBM (NYSE: IBM).

Sun announced today that it has tapped open source backup provider Zmanda to provide data backup and recovery services for the Sun Cloud, Sun's public cloud service. Sun Cloud Storage Service and Sun Cloud Compute Service will be at the core of the Sun Cloud, which will also be based on Sun's Java, MySQL, OpenSolaris and Open Storage technologies. Zmanda will provide backup and recovery to protect applications running on the service.

Open Storage has been one of Sun's bright spots, with sales growing 21 percent in the fourth quarter. But with IBM looming as a potential suitor, as the Wall Street Journal reported today, what could a merger mean for Sun's Open Storage efforts — and its storage business in general?

"If IBM were to buy all of Sun, I highly doubt that IBM would pursue the Open Storage strategy, as IBM takes a more capitalistic approach to technology by charging for the value it brings to customers," said Enterprise Strategy Group analyst Brian Babineau.

But Illuminata analyst John Webster said IBM could see value in Sun's open source strategy. "Sun's Open Storage would be a positive addition to IBM's disk portfolio," he said.

Wedbush Morgan Securities analyst Kaushik Roy sees OpenSolaris continuing under a merger because it is "portable," but he added that "Sun's Open Storage is not really open and is not portable. This will probably die."

Tape Business Could Face Scrutiny

One of the biggest issues an IBM-Sun merger might face could be in the tape business, as the deal would combine the top two data tape vendors. And a Sun-IBM deal could also face issues in mainframe disk storage.

Webster puts the odds of a deal happening at 50-50, particularly because of antitrust issues, noting that the Justice Department in the late 1990s raised objections to an IBM-StorageTek mainframe disk storage deal. Sun later acquired StorageTek.

"This would be the first big merger deal of the new administration," said Webster. "Will it behave like the Clinton-era DoJ that quashed an IBM/STK disk deal?"

Mainframe tape could raise antitrust concerns because of the market share the two would command, said Webster. And competitive pricing was a big issue for the government in opposing the IBM-StorageTek deal a decade ago, he noted.

"The federal government was and still is a big buyer of mainframe disk, and at the time bought both IBM and STK," said Webster. "They essentially wanted to maintain competitive pricing between STK and IBM. They could want the same competitive pricing pressure to survive in this case as well as with mainframe tape."

Babineau said that if the deal goes through and clears antitrust hurdles, "we may actually see some brief stabilization in the tape market." In an era of open systems and disk backup, mainframe and tape storage might not raise the concerns they once did, he said.

"The only antitrust issues that will arise is if EMC, HP and Cisco lobby the regulators to take a look," said Babineau. "However, there are too many alternatives to tape for anyone to care. If anything, and that's a big if, the antitrust folks would have to look at the server business."

On the disk storage side, Webster said a merger "would raise huge question marks" about IBM's OEM relationship with NetApp (NASDAQ: NTAP) and Sun's relationship with HDS. But both also work with LSI (NYSE: LSI), so LSI might be unaffected.

Babineau said IBM could also buy just parts of Sun's business. "They could buy all things hardware and leave Sun a much smaller software- and services-only company," he said. "This would allow Sun to continue some of its open source software strategy without having to compete against the big server and storage guys."

Roy said some kind of deal would make sense for Sun.

"Sun as it stands now is struggling and is likely to shrink," said Roy. "It is better for Sun shareholders to sell the company to some other entity. ... Let's keep in mind that most of IBM's acquisitions in the last few years have been software or services. That's the area IBM is doing well in. But it's possible that IBM can buy Sun's technology pieces and add value to customers."

Sun shares soared 79 percent today on the merger reports. Oddly enough, NetApp shares rose 8 percent, as traders speculated that either the company might be the next to be acquired, or that an IBM-Sun deal could make the company's patent dispute with Sun go away.

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