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Friday, June 7, 2013

The New Economics Behind the Oracle-Dell Partnership

This week, Dell and Oracle announced a partnership unique to both companies. Dell would offer Oracle software on its machines and would resell Oracle services. Much head-scratching ensued among industry analysts, largely over misunderstandings about where the industry was headed.

What bothered many of these analysts was the idea that both Dell and Oracle sell commodity servers based on Intel’s x86 reference designs. Oracle picked up that business when it acquired Sun Microsystems for $7.4 billion in 2010. Sun was never a big player in that business, however, having come to it late and grudgingly. It always preferred its own machines, which used the Sparc chip.

From the Sun deal, Oracle got many loyal (or locked-in) Sparc customers and insights to make the combined hardware and software “engineered systems” that advanced its in-memory data and analytics products. If it ever wanted to compete with Dell or Hewlett-Packard on commodity servers, it doesn’t want to now. In its third fiscal quarter, Oracle had hardware revenue of $671 million, down 23 percent. Much of that was faltering x86 sales.

What Oracle still wants, and Dell can offer, is exposure to smaller and midsize companies, which Oracle’s high-ticket sales force has trouble reaching.

“Oracle has a phenomenal engine into the top 500 enterprise accounts worldwide,” said Marius Haas, the head of Dell’s enterprise business. “They’d like to go after the broader market, and we’ve got a great relationship with companies there.”

There is also some bad blood behind this story: Mr. Haas worked at Hewlett-Packard when Mark Hurd was its chief executive. He left during Léo Apotheker’s brief tenure at the top of H.P., after Mr. Hurd’s resignation in August 2010.

So putting a little more pressure on H.P. probably sweetened the deal. Mr. Haas said this week’s announcement could lead to Dell selling even more Oracle products, both applications and databases. It appears to be the first time that Oracle has entrusted another company to sell its services. Even Oracle’s enemies like SAP and I.B.M. resell Oracle databases.

More important is what the deal says about selling hardware these days: Compared with even five years ago, companies are being forced to add more capabilities to their products.

It’s not just that Oracle is fusing high-performance hardware and software, or Dell is shipping servers preloaded with Oracle products.

At the bottom of the food chain, Taiwanese companies like Quanta and Delta, which used to make motherboards that go inside servers, now sell shrink-wrapped racks of servers for big data centers. No one there cares about the brand; they care about price. Even below any kind of systems level, Intel is increasing the capability of its chips and buying software companies.

Thanks to clouds, mobility, sensors and big networks, there is so much computing around now that it has changed everyone’s economics. For a while, that creates new alliances and tensions.