Why is Oracle fighting so hard for Sun's MySQL?

Oracle Corp has allowed regulatory approval of its USD 7 billion acquisition of Sun Microsystems Inc to drag on for months due to controversy over a database that most users get for free.

Sun's MySQL database, while minuscule in revenue terms, is important to Oracle because it can help the company expand into new markets and improve its competitive edge against arch-rival Microsoft Corp, analysts say.

MySQL's customer base comprises small- and mid-sized companies that use its technology to run websites and store business data. Oracle's database has traditionally been weak in these markets, focused instead on large corporations.

"Oracle's install base represents the Old World — the existing enterprise application space. There is a whole New World that Oracle hasn't been able to capture," said Marten Mickos, a former chief executive of MySQL.

MySQL is one of several assets that Oracle will gain with its acquisition of Sun, but it is the only one that antitrust regulators have singled out for scrutiny.

While US authorities have approved the deal, European Union antitrust regulators issued a statement of objections on Monday, saying it would hurt competition in the USD 19 billion-a-year database market if No 1 player Oracle gained control of MySQL.

Such concerns have held up the Sun deal for months and resulted in what Oracle CEO Larry Ellison has said are hundreds of millions of dollars in related losses.

Oracle has refused to compromise on MySQL, an asset that analysts say will help the world's No 2 business software maker expand into new markets. Google, Amazon, Facebook and several travel agents are among the Web giants that use MySQL to run their websites, a market Oracle has had a tough time cracking.

A one-stop shop

MySQL, an open-source software product that is available via Internet download, is the only such database from a major company that is available at no cost. Sun makes money by charging customers for versions with extra bells and whistles. It also offers services such as updates and bug fixes.

Since most customers do not pay for the product, market research firm Gartner Inc ranks MySQL as the 15th-largest database maker by sales. MySQL generated revenue of USD 9 million last year and had a market share that was below 1%.

Oracle, by comparison, held about 49% of the database market by sales, bringing in revenue of USD 9.2 billion. IBM came in second with 22% of the market, and Microsoft ranked third at 17%.

Acquiring MySQL will enable Oracle to offer a one-stop shop for data customers. MySQL would compete with Microsoft Corp's SQL Server on the low end, while Oracle's existing flagship database would go up against products from Microsoft and IBM in the the mid-to-high range of the market.

"If Oracle doesn't control MySQL, it's a potential threat to them. They need MySQL to secure the perimeter of the low-end of the market," said ITIC analyst Laura DiDio.

Analysts are betting that Oracle will likely heavily promote MySQL against Microsoft's SQL Server, even if small businesses don't pay for the product, in a bid to discourage them from buying Microsoft's products.

Oracle's strategy would allow Oracle to get its foot in the door at small companies, setting the stage for them to buy big-ticket products as the customer gets bigger, they said.

Investors expect Oracle to hold firm in its demands that the EU approve the deal, a position backed by the US Department of Justice, at least until the EU makes a final decision following a formal hearing on November 25.

"It seems that they will be fairly uncompromising because the US DOJ agrees with them and Oracle has never been shy about fighting for something it wants," said Steve Sosnick, equity risk manager at Timber Hill.

If EU regulators block the deal, Oracle may still benefit as it would set the stage for the company to negotiate a lower purchase price for all of the rest of Sun's assets, said Jefferies & Co analyst Ross MacMillan. Other key Sun products include server computers, storage equipment, the Java computer language and Solaris operating system.

Investors are unsure as to how things will shake out. Market reaction was muted on Tuesday after the EU issued a formal statement of preliminary objections to the deal. Sun shares fell 1.1% to USD 8.15 and options trading was mixed with strong interest in both puts and calls.

"The options market is trying to figure out when the deal will get finished and under what conditions," said Timber Hill's Sosnick.