Tuesday, February 10, 2009

Why Yahoo! should buy Sun!

Forget the ill-fated on-again, off-again merger with Microsoft, if Yahoo! wants to be relevant in 2010 they need to buy Sun Microsystems. If/when Yahoo! sells their search business to Microsoft, there is going to be a big unanswered question. Who/What is Yahoo!?

Yahoo! needs a purpose/identity other than "a portal". Sun on the other hand needs to make some key acquisitions so it can complete its software stack. A merger of the two companies would create the ultimate open source company and the ultimate Microsoft competitor.

Both companies have already started restructuring exercises to trim the fat; together they would have quite a number of synergies:

Cloud Computing

Both Yahoo! and Sun are behind the pack in terms of cloud computing. This is particularly ironic for Sun given that they were one of the early innovators in the field. Together they could quickly make up lost ground and address all three layers of the cloud.

Image courtesy of Expert TextureSaaS - This is primarily Yahoo!'s domain. Their acquisition of Zimbra has already started them down this path.

PaaS - This is where they meet in the middle. Yahoo! brings PHP and Hadoop, Sun brings Java/JRuby/Jython/Groovy and MySQL.

IaaS - This is Sun's domain. When relaunches it will feature technology from Sun's Xen based products and their Q-layer acquisition.

The In-Cloud/On-Premises Continum

Increasingly business want the flexibility to either deploy highly customized software on-premises, take advantage of a hosted solution, or deploy some hybrid combination of the two (company specific virtual appliance hosted in a 3rd party datacenter). The companies that can deliver these solutions to their users while providing seamless migration path between them will be the ones that dominate the future of IT.

Both Yahoo and Sun have already made individual strides in this direction. Together they would be even stronger. Yahoo!'s portal and brand recognition will allow it to deliver the SaaS solutions to the masses and the SMBs, while Sun's brand will capture the enterprise.

Open Source

Yahoo!'s entire web infrastructure is built on the open source LAMP (Linux, Apache, MySQL, PHP) platform, Sun sees this as an important growth area and they are trying to get a foothold. Over the last few years Yahoo! has developed active communities around two key open source products that it uses internally:
  • YUI a CSS/Javascript framework being used for building rich internet application on multiple Yahoo! properties.
  • Hadoop an open source implementation of Google's MapReduce framework for distributed computing.. Yahoo! has the largest know Hadoop implementation.
Sun is no slouch when it comes to open source either. However it is only within that last year or so that I think Sun has shown a real commitment to a business model the truly depends on, and benefits from open source:
  • Sun's acquisition of MySQL last year for $1 billion was a bold statement about its commitment to open source (and the LAMP stack).
  • Sun has developed thriving communities around its Glassfish and OpenESB projects and used them as the basis for several supported product offerings.
  • Sun has abandoned its legacy portal product and released new product based an open partnership (no money exchanged) with Liferay

Datacenter Consolidation/Optimization

The combined company could take advantage of each other's strenghts in the datacenter. Yahoo! would have access to high-quality hardware and software and the lowest possible prices. Sun would have direct access to the internal operations one of its largest "customers" (at least where MySQL is concerned). Together they would be able to "dog-food" new ideas on a massive scale before turning them into products.

Expertise Exchange

Yahoo is known for their front-end engineering, Sun is known for their enterprise-level engineering. Together they fight crime Microsoft.

Competing with Microsoft

People having been doubting Microsoft long-term survival for along time, but the reality is that no one company can truly compete with them when it comes to software. We all know that the Windows/Office cash cow will gradually yield less and less, but their long term strategy is still a very compelling one: embrace SaaS, continue enterprise expansion, and build out the MS centric ecosystem. No one has the breadth and depth of interoperable software that can scale from individuals using ad-supported hosted solutions, to large organizations using highly customized on premises solutions. This combination will allow Microsoft to continue making ridiculous amounts of cash as computing paradigms continue to shift. Any company that figures out how to actually compete with them will carve out a big chunk of that cash for themselves.

But Yahoo!?

Yahoo! wasn't the first company to spring to mind when I though about possible suitors for Sun, but now that I have thought about it, they really seems to fit. I suppose that by extension Google could fit the bill as well, but they are not as desperate as Yahoo!

There are plenty reasons why this merger will probably never happen, both companies are hurting pretty bad as far as their stocks are concerned and investors may not be crazy about such bold moves. But I can dream can't I?

What do you think can nothing plus nothing add up to something?


Anonymous said...

An interesting combo.

I think both companies are underrated in terms of what they offer. Sun offers some great products at compelling prices. Both companies seems to be under a dark cloud of public/industry opinion. Their 'market share' being so low many folks won't take a risk on their services instead going with something safe, ie Microsoft, HP, IBM, etc. It may be that some sort of bold move is the only thing that will snap that way of looking at these two companies.

Anonymous said...

Marc, I don't know if that acquisition would add value to Yahoo. To compete with Microsoft, you need to be valuable to the consumer of those services you offer.

Marc Richards said...

@Don - Definitely agree about Sun being underrated, but I think their overall strategy is pretty sound, particularly in this market.

@Yozey - I think Yahoo! needs more than just added value, they need a shot of adrenaline and they need to stand for something.

I think getting into the hosted/on-premises software business is the right move for them. I think the Zimbra acquisition was the first step in this direction and the fact that it competes with MS Exchange and Outlook is no coincidence.

Anonymous said...

Yes but Microsoft adds value to the services over their competitors. Google now licenses ActiveSync for use with Microsoft Exchange; so you have to see how valuable those services are to someone. How can Yahoo's acquisition of Sun add value to a competing service? How will your organization find it more valuable than Exchange Server or even BES?

Marc Richards said...

Ironically, Google's licensing of ActiveSync has more to do with Apple than with least at first glance. Google licensed ActiveSync on the server-side so that iPhones can sync with Google "natively". Now the reason that the iPhone supports ActiveSync in the first place is because Apple wanted the iPhone to work with MS Exchange (because it is so popular in the enterprise setting).

This is exactly what Microsoft is good at, locking companies into using their technology because it works with all their other products. That is how they derive value. There is nothing particularly special about the ActiveSync protocol itself, Google also supports SyncML, an open standard that is supported by Nokia and Sony Ericsson. It just that Microsoft has already pushed Exchange/ActiveSync into the enterprise, something Yahoo will have trouble doing on its own.

How Sun could add value to Yahoo!? In the specific instance of Zimbra vs Exchange:

1) Sun's brand would help drive Zimbra into the Enterprise.

2) Together they build robust SyncML support into the their consumer, business and enterprise lines (Yahoo! Mail, Zimbra, Zimbra hosted).

3) Over time the iPhone joins sees the demand and adds native SyncML support.

More generally the value that Sun provides to Yahoo! is that it brings the enterprise to the table and together they deliver an open interoperable ecosystem of products. The value to the customer is that they can get the benefits of interoperability without succumbing to vendor lock-in.

I have another blog post in the pipeline that outlines the companies Sun/Yahoo! should acquire to build out their software stack. Perhaps it will provide more clarity about the overall strategy.

Crafton said...

I don't see Yahoo! having enough to bring to the table to warrant Sun even considering this acquisition. It's like Voltron asking to get a malignant hump put on its back. The hump being Yahoo! of course. Their market share is low, their board of directors are skittish at best and they completely lack a sense of identity and direction. I think Yahoo! needs to pray that they get snatched up by M$.

Marc Richards said...

Sun brings corporate/enterprise, Yahoo! brings consumer/SMB.

In terms of market share Yahoo is still the number one portal. According to comScore they are still #1 in display ads (the type shown on a portal rather than a search engine) and #2 for unique visitors to web properties (behind google). They are also still #1 for webmail by a good margin.

Despite its current woes, Yahoo! is still a very strong consumer/SMB brand and that is an area where Sun can't possible compete with Microsoft.

The icing on the (somewhat difficult to digest) cake is that Yahoo! also owns Zimbra. With Sun's backing Zimbra could really give Exchange/Outlook a run for its money.

Anonymous said...

Marc, if I were the chairman of either boards I would have to vote against that move (acquisition by and acquisition of) simply because neither company offers any additional value to the things they already provide in such a way to take on Microsoft. You've been mentioning Enterprise alot in your postings but have you even defined what is an Enterprise (not Star Trek now). The Enterprise (catch word for the late 2000s even though I am beginning to detest its over usage) can simply be defined as you workspace or company or business. For MBAs who dabbled in tech, they pushed Enterprise to focus on huge companies with large requirements. So when you see a company make an Enterprise version, they are making a version for large organizations. So along those lines, you are saying Sun carries with it, the tools that a lot of Enterprises currently use (volumes can cause that be argued for a long time). Now Yahoo! carries what? Tools that Small business, Medium business, Micro businesses use? How many non-Enterprise entities rely on Yahoo? My business certainly does not depend on Yahoo for anything, my personal life maybe for email and a few messages. Yahoo is more of a consumer brand than a corporate brand. Sun is an extreme corporate brand, and the gap between the two realms is too great. They have no middle ground to meet. A successful takeover of a company has to be based on the fact that the acquisition does not leave either company less valuable than before.

(Sun+Yahoo) * 10E < Microsoft.

Marc Richards said...

What you see as a gap, I see as an opportunity. The SMB market has a lot of untapped potential and I think both Sun and Yahoo! recognize that. They are both making moves towards the middle, I think that together (plus a few acquisitions) they will get there faster.

Yahoo's acquisiton of Zimbra indicates to me that they are ready to start making moves beyond their existing SMB offerings

Sun's acquisition of MySQL brought them more into the SMB space but the fact they the still rely so heavily on Windows/Exchange for their SMB offerings is indicative of the fact that they need to step up their game in this space. They just need to make a few acquisitions/partnerships (see next blog post) to do it.

Marc Richards said...

@Crafton - Oh yeah, and Yahoo! also brings the cash from the sale of the search business. They will need it for further acquisitions.

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