CRN Interview: Sun's New Software Man

CRN Senior Editor Elizabeth Montalbano spoke with Schwartz following Sun's Sun ONE software launch Wednesday. Schwartz made his first public appearance in his new role at the event, where Sun unveiled a free, simplified version of the Sun ONE app server. Schwartz--who solution providers have said is the best man to help Sun pull off a financially successful Java software strategy--spoke frankly about an array of topics, including Sun's nemesis Microsoft, growing tensions between Sun and IBM, and Sun's increasingly competitive relationship with longtime partner BEA.

CRN: What are Sun's financial goals with its Sun ONE software strategy?

Schwartz: The only way I can answer is that we're not Sun 'Microsoftware,' we're Sun Microsystems, and my financial goals are that I hold stock in SUNW and not in SUNW's software subsidiary. So I think our objective overall, in concert with our stockholders' objective, is to maximize the value of the company by leveraging all of the company's assets. We believe software is an absolute key asset and, if anything, I think we've undervalued its contribution to our overall business proposition. And, if anything, I'm going to be focused as much as anything else on ensuring that we drive as high value and aggressive a software strategy as possible, but that's only in the context of driving an overall systems business.

CRN: Do you ever plan to break out the software numbers in financial statements, as IBM does?

Schwartz: I gotta tell you, if I broke out our software business like IBM breaks out theirs, we would have a $6 [billion to $7 billion dollar software business, and then every other business we're in would be $6 [billion to $7 billion, and then there would be a big negative number on the bottom called intracompany transfers, which would net it all out to make it look like our revenue for the year. So I don't see there being any value in breaking it out--in part, because we sell systems. I can't carve out the value because I don't charge the computer company a tax for the operating system I give them. Whereas inside IBM they not only count the software they ship on their computers as revenue, but then they count what their customers purchase as revenue as well, so they get a double bubble, and that's why IBM has such obscure accounting. I don't know how to read an internal company transfer as a revenue statement.

CRN: What do you hope to achieve by offering the app server for free?

Schwartz: Our aim is to No. 1, respond to what our customers have requested, which is a lower cost, lowest common denominator J2EE environment. No. 2, to decrease the cost of the integration of that app server into their operating environment. And No. 3, to ensure that we continue to promote the ubiquity of J2EE and our application infrastructure in competition with our No. 1 competitor Microsoft. And by the way, we're going to ship our app server on their platform, and on Linux, as well as on our own operating platform, and that, I think, is a tough value proposition for a customer not to recognize.

CRN: Microsoft says it won't support Java on Windows after 2004. Will that affect this move at all?

Schwartz: I think that by saying they're not going to support Java on Windows, what they are saying is, 'SAP, get off of my platform, all customers who've relied on Java, get off of my platform.' If that's how Microsoft wants to run their business, I think that's kind of a shortsighted view. The reason they added Java back into the Windows environment wasn't because Sun was sitting there lobbying. It was because their customers were saying, 'You know, if you don't include Java, we're ditching Windows and adopting Linux.' So we think that the secondary part of the sentence is an important statement to make, and we're going to do everything we can to increase the value proposition of Star Office plus Mozilla plus the Linux desktop. We think over time it's inevitable that Microsoft isn't going to be able to continue extracting the monopoly rent and continue to tell its customers what they're allowed to run on the Windows desktop. I think it's consummate arrogance that they would turn off Yahoo's gaming sites, turn off Fidelity's Smart Money management system, turn off Sony's gaming sites. I mean, talk about hubris.

CRN: You said that a lot of Sun's customers know Sun for its software, but I would argue that Sun is much better known as a hardware company, and obviously you've been working to change that image. How will the Sun ONE software launch affect that?

Schwartz: I guess Wall Street views us as a hardware vendor, but our No. 1 most recognized brand is Java. No. 2 is Sun and No. 3 is Solaris. No. 1 and 3 are software brands, and No. 2 is a systems brand.

CRN: But Wall Street is very important right now.

Schwartz: Well, Wall Street's as important as Wall Street decides itself to be. At the end of the day, business results are what drives stockholder value, not Wall Street. I mean, Wall Street's very important right now and our customers are very important right now, and I will tell you [Sun Chairman and CEO Scott [McNealy has no focus on selling the stock. Scott and I and every one of the other senior executives at Sun have complete focus on solving customer problems, because if we do, stock price follows. I don't care how much we lobby Wall Street analysts to give us a 'buy' recommendation. I think, if anything, they're losing a lot of credibility right now, and that's just not time well spent. Time well spent is, 'Let's go add another nine of reliability to [Ebay CEO Meg Whitman's system.'

CRN: We recently interviewed Microsoft CEO Steve Ballmer and he said some negative things about Sun. First, he said he doesn't think Sun will recover from its financial problems, and he doesn't understand Sun's value proposition to recover. What would you say in response to that?

Schwartz: I would say that I don't think Microsoft, whether it's the United States Department of Justice, or the European Union Commission on Competition, is ever going to escape from under the constant scrutiny of federal regulators because of the abuse of their marketplace, their competitors and their customers. I haven't run into a customer recently who said they're looking forward to buying more product from Microsoft. I've heard tons of customers come back to me saying 'help me compete with Microsoft,' whether they're banks, financial institutions, telecommunications companies or media companies. So I think it's interesting that Ballmer is worried about the viability of Sun. I'd be more worried about the viability of their market cap when their business isn't growing, and their monopoly is going to be slowly eroded away by systems vendors and by their customers, who all view them as competitors. I haven't found a carrier who's excited about putting Microsoft on their handset; I haven't found a media company that's been excited about putting Microsoft on their set-top box. Those are two industries that have dominantly gone to Java. Those are two industries where Sun will do far, far better than Microsoft will ever do. So do I think we can go serve the small and midsize business marketplace as well as Microsoft can? Probably not in the near term, but I will tell you I've seen Linux adopted in ways that Microsoft cannot compete with it. The No. 1 fastest Linux marketplace that no one talks about because other than Sun, everyone has a relationship with Microsoft they're worried about, the No. 1 Linux growth market is Linux clients. No. 2 is Linux servers. No. 3 is, get this, Unix servers in which Sun is a strong competitor. I haven't seen Microsoft growing at the same rates we're growing. And they're worried about our viability. I would suggest that they go worry about their lawsuit.

CRN: Ballmer also said, and I have talked to solution providers that have said this too: IBM is the best implementer of Java, though Sun built the technology. What are you doing to win over the mind share that Sun can sell Java-based software products that are as strong as IBM's or BEA's?

Schwartz: Let's be clear. IBM has beaten Sun in the market for app servers, but their No. 1 market is in Solaris. We believe that our announcement today [June 19 is going to call into question every deal that IBM has in their pipeline. I have a voice-mail list--my voice mailbox is full of customers saying, 'I'm in the midst of an IBM quote, I want you guys to come in and tell me about your stuff.' You're right, IBM did outexecute us, but they were doing it on the Solaris operating environment, and we believe we know the Solaris operating environment better than they do, and we fully plan on outexecuting them in the next two or three years.

That said, IBM has not outexecuted us on handsets. In fact, I can't think of any handset manufacturers that are running IBM Java. And I can't think of any Web server out there that is being managed by IBM. It's either Apache, or it's a Sun ONE Web server. They have outexecuted us in one place only--that's in the app server--and so you're right. We're going to go out on offense there in a big way, and we're going to get that market back. We believe that we have an incredible value proposition for customers right now that don't want to just pay IBM to build a middleware collection but want to go build out their apps. And moreover, we think the dynamics of the Linux marketplace are going to start accruing to Sun's benefit when you look at the amount of money IBM's been able to collect off of DB2 and the prevalence of our app server on Linux, the Apache Web server on Linux and [open-source databases MySQL and PostGres on Linux, all of which, as far as I can tell, are a threat to IBM's middleware. So we've got a very interesting set of industry dynamics coming to play and interacting at the same time. It's up to us to make sure that we capitalize on that and recoup some of the business we've lost to IBM in the past couple of years.

CRN: Sun and IBM worked closely together on Java in the beginning, but that relationship has since been fractured with the closer relationship between IBM and Microsoft, particularly with regard to the Web Services Interoperability Organization (WS-I) debacle. What is Sun's stance on IBM these days?

Schwartz: I think what IBM is doing with Microsoft is realizing they were not making the headway that they wanted to in the Java world. They're cozying up to both Microsoft as a business partner as well as Microsoft's business practices and intellectual property. If you look what WS-I is all about--I'll tell you, I fully endorse UDDI and SOAP. I think they were great ideas and needed to happen. I'm glad they happened. But I worry a lot about the licensing and patent protection that IBM has spun around it, because what I hear from my customers is that worries them. They don't know what they're being exposed to.

We believe in royalty-free standards. We believe in work like the Liberty Alliance and the delivery of open standards for a very dynamic and growing industry that can't be hobbled by weird intellectual property terms that IBM is trying to put into WS-I. Would we join it if we were offered a board membership? Yes, but we'd want our condition to be that they would agree to offer open, royalty-free standards. They haven't made that offer to us, and we haven't seen them be willing to deliver royalty-free standards. So we're going to probably go our own way. And we believe that, at the end of the day, there are only two Web standards that really matter. There is the Java Web standard and the Microsoft Web standard. And it's up to us to make sure that the Java Web standards are open and royalty-free.

CRN: But J2EE is not royalty-free.

Schwartz: It absolutely is.

CRN: There is still a license that vendors buy from Sun.

Schwartz: If you want to go implement J2EE in the open-source community, have at it. You just can't call it J2EE. You can go ahead and implement it. Go look at JBoss. It's open source. Sun's not going to go sue them. IBM might.

CRN: But you still have to work with IBM in some respects because IBM is a J2EE licensee. It seems IBM is becoming counter to Sun as opposed to a partner.

Schwartz: IBM's pretty much shown their hand in the last couple of years, that they've had no interest in trying to drive Java standards. They had every interest in trying to drive IBM standards. So with their partnership with Microsoft, I think they're tipping their hand and saying they want the world to collect IBM middleware, deploy IBM Global Services, pay IBM for patents on standards that ought to be royalty-free. That's their call. Do I wish that we could work together more effectively? Absolutely, I really wish we could. But IBM has cast their lot with Microsoft, and if the marketplace needs to see Sun on the one hand, IBM-Microsoft on the other, well then, that's the way it will be.

CRN: Just as you said IBM does a lot of WebSphere deployment on Solaris, BEA does a lot of WebLogic on Solaris. I've heard BEA and Hewlett-Packard are going to form a closer alliance to deploy WebLogic on HP servers.

Schwartz: Wouldn't it be interesting if HP decided to deploy Sun's app server on HP-UX because it was free and they didn't want to pay BEA a lot of money.

CRN: That would be interesting. But what happens to BEA? You are close partners with them. At what point are you going to have to cut them loose a little bit?

Schwartz: We're never going to cut them loose. I had dinner with [BEA CEO and President Alfred [Chuang a month ago. I think he's a great business partner. We've just been encouraging Alfred to move up the [software stack. There used to be 15 or 16 vendors who delivered Web servers. Then Apache and the Netscape Web server just obliterated the market. And we said, 'Look, there's no more value there. The value is in the initial implementation.' And Alfred has done a great job outexecuting everybody [on app servers--he's collected the rent. Now go invest it higher up in the stack. We've been very open with them. Hewlett-Packard is already running our directory infrastructure. It's not hard, and I'll tell you, we've had a very interesting dialogue around the app server. If and when that happens--and I have some degree of confidence that it will--all it's going to say to the world is. 'This is the lowest common denominator. There's no reason for anyone to pay royalties on it.'