Sun's CEO pins future hopes on "old strategy"

Sun Microsystems has changed so much in the past two years, one could almost mistake it for a different company.

While Sun's reinvention has captured the attention of the industry, there are signs that company observers are beginning to run out of patience, as they wait for a turnaround. For example, while financial analysts await the company's latest quarterly results, due Thursday, the company's share price took a hit last week when Sanford C. Bernstein & Co. analyst Toni Sacconaghi issued a downgrade, saying he did not believe the company's financials would improve materially over the next few quarters. He also pointed out that revenue growth has been flat for more than three years.

In its effort to boost income and restore confidence in the company, the computer maker has trimmed about a sixth of its workforce since 2003, slashing nearly 7,000 positions and shuffling senior management. It also has softened its image as an industry maverick, reaching out to a number of its industry rivals, most notably Microsoft. In addition to the historic April 2004 settlement with its long-time nemesis, Sun has also handed over much of its microprocessor and system design work to Fujitsu Computer Systems, and become one of the strongest backers of Advanced Micro Devices's 64-bit Opteron processor.

Sun has made some major changes on the software side of things as well, promoting the former head of its software division, Jonathan Schwartz to the number-two role of president and chief operating officer, and announcing plans to release its flagship Solaris operating system under an open source software license. The company has also captured the attention of the industry with a variety of novel software pricing schemes, including a per-citizen licensing rate for governments looking to use its Java software products.

But one constant amidst all of this change has been the company's chairman and chief executive officer, Scott McNealy.

After more than 20 years in charge of the company he co-founded, McNealy remains an iconoclast, but recent years have softened him somewhat. He now admits that his company made missteps in the post-boom years and concedes that Sun needed to change its management team and business philosophy. "What we're doing now," he says, "is our old strategy informing our tactics."

Sun's "old strategy," with its focus on technical innovation and open standards, is clearly on McNealy's mind these days. He recently brought another key member of the original Sun team, Andreas Bechtolsheim back into the fold as part of Sun's 2004 acquisition of server vendor Kealia Inc. And if you ask McNealy when he got the idea to release the company's flagship Solaris operating system under an open source license, without missing a cue, he'll say "1982" -- the year Sun was founded.

It's an interesting comment, coming from someone who just three years ago dismissed open source development as a "peace, love, and dope commune strategy." But McNealy's glib reference to 1982 underscores the open-source contributions of Sun founder (and early Berkeley Software Distribution Unix contributor) Bill Joy, and makes the larger point that Sun has been a proponent of open standards since its inception.

According to Sanford Bernstein's Sacconaghi, however, Sun's software efforts are struggling, and the company's much-hyped Opteron servers have managed to account for just 1 percent of the company's revenue. And despite Sun's recent intensive marketing effort to promote Solaris on processors, like Opteron, that use the x86 instruction set, the majority of Sun's x86 buyers are running Linux, and not Sun's operating system, according to analysts.

McNealy himself is reluctant to say which, if any, of Sun's new initiatives is working out, but analysts are not expecting to see signs of any major breakthroughs when the company reports its most recent financial results on Thursday. In addition to the Bernstein downgrade, the research divisions of Merrill Lynch & Co. and The Goldman Sachs Group have echoed Sacconaghi's diminished expectations and have lowered revenue expectations for the quarter.

"A big part of 2005 for Sun is really going to be about the numbers," said Gordon Haff, an industry analyst with Illuminata. If Sun's financials improve in 2005, he said, "people will be saying their strategies are really good and innovative." If that doesn't occur, however, "people are going to be saying that they're not working."

Sun's chief executive is fond of defying conventional wisdom. When pundits predicted that the Unix market was going to fall to Windows NT in the mid-1990s, McNealy invested in Solaris and Sun grew wildly as the dominant Unix vendor. Now, with critics wondering if Sun's many technology bets will ever pay off, McNealy is staying the course.

"We're designing an end-to-end system that requires actually noodling with transistors and ASICs and microprocessors," he said. "And we do that better than anybody because we understand the software, we understand the memory management architecture, we understand the network latencies, we understand the bus bandwidths, all those things. And we build a better system."

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