Changing of the Guard: Cisco Systems Overtakes Oracle's Lagging Hardware Business

By Markets Fool.com

Sun Microsystems -- the very name evokes nostalgia and respect in computing veterans. The first true server system I ever encountered was an old "pizza box" Sun SPARCstation 5, back during the earliest days of the Internet.

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"SPARCstation5". Licensed under Copyrighted free use via Wikimedia Commons

Cisco Systems is another golden oldie, though better known for its networking chops. Sun built the servers that powered the early Internet, and Cisco knitted them together into a global network. That description is vastly oversimplified, but it is easy to take that liberty with things that happened two decades ago.

These days, Cisco has a vibrant server systems business. Sun, on the other hand, struggled after the dot-com crash. Business software titan,Oracle ,bought the company in 2010 for pennies on the dollar -- focused on the Java programming language, Oracle let the server business wither on the vine.

Here's the situation today:

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iCharts

Cisco and Oracle-Sun had been running neck and neck in global server revenues for some time. But in the latest market report from IDC, Cisco suddenly took a substantial lead. With a 6.2% worldwide market share versus 4.1% for Oracle, Cisco is now 50% larger in this market.

The bigger they are, the harder they fall
Oracle co-CEO Safra Catz expects hardware sales -- including the lucrative systems support portion -- to fall in the next quarter. What strength the hardware business might possess comes from its so-called engineered systems product line. These are not do-it-all servers but rather specialized single-task machines. Meanwhile, Cisco and its Unified Computing Systems are claiming a top spot in the market for flexible multi-taskers.

Sun and Cisco are moving in opposite directions. At this point, I'm convinced that Cisco's change to a systems-oriented strategy might have been worth the high cost of lost partnerships, after all. On the other hand, after all these years, I'm still not sure why Oracle bothers to run a hardware business at all.

Oracle reported a meager 16.3% operating margin in its hardware systems division for the six-month period ending on Nov. 30. Throw in the systems support services, and the number jumps to a more generous 40.9%. But even that figure is a drag on the fantastically profitable software business, where Oracle typically enjoys operating margins as high as 73.4%.

I think it's time for Oracle to stop treating servers like a hobby. The company would be better off separating Sun's hardware operations from the software business, finding a hardware-focused buyer for just the server division, and enjoying the instant boost in profit margins.

Even Cisco might be interested in taking the Sun server business off Oracle's hands. But Lenovo would be a more likely buyer as the Chinese systems vendor continues to build an American asset portfolio. The company bought IBM'sx86 server products for about $2.3 billion last year, complementing a networked storage partnership with EMC. Sun would fit right into that portfolio of American enterprise computing hardware, and Oracle should be willing to drop one of its least profitable divisions for a reasonable price.

I'm not saying that I've heard any rumors to this effect, only explaining what I think Oracle should do with its hardware business. But keep an eye out for Lenovo's next big systems acquisition -- it just might come from 500 Oracle Parkway.

The article Changing of the Guard: Cisco Systems Overtakes Oracle's Lagging Hardware Business originally appeared on Fool.com.

Anders Bylund has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems. The Motley Fool owns shares of EMC, International Business Machines, and Oracle. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.