Is Sun In Trouble?

It usually had to do with Linux. I'd be interviewing a VAR or a customer about a new open-source application or toolset or an emerging way of deploying the technology, and unprompted, each person I spoke to would say almost the same thing: "We decided to go with Linux because it's so much better than Sun on price and performance." Or, "Sun tried to talk to us about staying with them, but there wasn't much of a conversation to be had." Surely the increasing numbers of people buying Linux are choosing the platform over a variety of others, but Sun always seemed to be the one they mentioned first, the most prominent loser in the process.

More circumstantial evidence arrived last month as we put together our Annual Report Card (ARC) issue. Sun did OK in a few of our categories. VARs ranked it at or near the top of the entry-level servers and advanced desktop and workstations categories. But the company finished dead last in midrange servers, enterprise operating systems and network storage.

As I said, all this was anecdotal and might be shrugged off as statistical anomalies or the semi-consequential opinions of a few random people. Not anymore. Two weeks ago, Sun announced it would cut about 1,000 jobs, and this week the company announced that an increase in an allowance it had made for its deferred tax assets means its fourth-quarter earnings have to be changed from a $12 million profit to a loss of just over $1 billion.

Taken together, this all means one thing: Sun is hurting. The company has failed thus far to keep pace with the price/performance value proposition of Linux and -- at least in the eyes of VARs -- it hasn't yet provided the type of products in sectors like storage and midrange servers that makes VARs and their customers want to switch to Sun. Meanwhile, the workstations that once were the company's bread and butter have lost prominence in the market (though with the advent of Linux on the desktop and grid computing, workstations could make a comeback).

The good news is Sun isn't completely sitting on its hands. Its server market share numbers still are solid, the company is partnering with vendors like Red Hat and SUSE Linux to develop much-needed open-source alternatives, and more layoffs -- like them or not -- could be coming to help pave a road back toward profitability.

But with an M&A wave well under way in the tech industry and more consolidation sure to come, Sun suddenly looks like the type of flashy acquisition that could turn a market contender into a market dominator. Merrill Lynch analyst Steve Milunovich said as much this week, arguing that the recent developments make Sun a ripe takeover target.

Sun chairman Scott McNealy and his friend Larry Ellison have teased the press and analysts on several occasions with playful talk of a Sun-Oracle marriage. It's a game that could get a lot more serious in the coming months, especially if Oracle's hostile takeover bid for PeopleSoft falls through. And even if Oracle doesn't pop the question, there probably would be other companies that would love to have Sun in the fold.

Regardless, what Sun needs now is refocused leadership. The outspoken McNealy has always fostered the perception that he's just a regular, sort-of bright, jeans-wearing guy who seems just a little bit mystified about how he got to run such a big, important company. But as long as he's there, he might as well shoot his mouth off. It's an act that has grown stale and has always been disingenuous: McNealy has a BA from Harvard and an MBA from Stanford, a pedigree that's a lot more JFK than John Q. Public. As Sun enters what might be its most difficult chapter, the company, its partners and customers don't need the same old thing from McNealy; they need decisive direction that will begin to calm the storm.