ANALYSIS: McNealy's Sunset, Schwartz's Sunrise


Like a precocious but fussy child, Sun Microsystems has often had trouble deciding what it wants to be when it grows up. Now, with CEO Scott McNealy stepping down—and COO Jonathan Schwartz stepping up—Sun needs to prove it's mature enough to focus and find growth opportunities that fit its technical abilities.

If it can't, analysts say, the beleaguered vendor is in danger of continuing the struggle for identity that has made the once high-flying company a shadow of its former self.

"Since its rise and fall during the dot-com boom-bust era, Sun has been an organization in constant transition," says Stephen O'Grady, analyst at RedMonk in Bath, Maine. "But over the past year, they have charted a new path with OpenSolaris, and the Try And Buy Program for servers, that has worked out well. And they are right out of [Schwartz's] playbook. I think he's the best leader for the new company."

According to experts, Schwartz's challenge is to take a break from his penchant for great visions and get his hands dirty. It's going to be hard, roll-up-your-sleeves-type work, analysts note.

"They have a lot of pieces in place, or that are coming soon, that they need to be successful. Schwartz's challenge is to step away from the vision thing and execute," says Michael Goulde, senior analyst in the Application Development and Infrastructure research team at Forrester Research in Cambridge, Mass. "When it comes to marketing and getting people excited about buying, [that's] where Sun flops."

Under McNealy's leadership, Sun has wavered on key strategies, insiders note. Most notably, the company has been unable to balance its Linux and Solaris-based server strategies. As a result, the company has lost low-end and midrange server sales to rivals with strong Linux commitments such as IBM and Hewlett-Packard.

"They continue to have a split brain on Linux," says Gordon Haff, principal IT adviser at Illuminata in Nashua, N.H. "They know it's important for their Intel-based servers, but they have fundamentally chosen to make Solaris their core environment. They say Linux is important, but they are thinking, 'We would rather be selling Solaris.'"
Not that a strategy involving Linux and OpenSolaris on SPARC and Intel servers is necessarily a bad thing. The yearlong OpenSolaris project, according to some, has generated much more interest than analysts initially predicted.

"An open-source Solaris community is critical to the product's future because it enables Sun to have very engaged discussions with its partners, its users and the development community at large," says Stephen Walli, vice president of Open Source Development Strategy at Optaros, a Boston-based consultancy that focuses on open-source technology and integration. "These are the people who can take Solaris and OpenSolaris to the next level."

But most observers say the 40-year-old Schwartz, a firm believer in open-source technology, will bring a more consistent focus to the company's software strategy. Under Schwartz's direction, Sun has established more than just OpenSolaris in the open-source world. It has contributed a significant amount of code to the community that became TomCat, an open-source implementation of the Java Servlet and JavaServer Pages; Sun continues to work extensively with the Apache community on a number of other projects as well.
In the view of some, however, the company has not clearly articulated its achievements in the open-source space.

"They have not done a good job of publicizing their [open-source] efforts, but, more important, they have not created a strong sense of community with the outside world," Goulde says. "They are doing a lot of the right things, but somehow they don't get credit for it because it gets perceived as self-serving."

Other analysts say that the company should not focus on software to the exclusion of its hardware business.

At its core, Sun still derives the bulk of its revenue from its SPARC and Intel server lines. In fact, some say, the company should focus on hardware opportunities in new markets in much the way Apple resisted temptations to make its Mac OS the focus of its business.

"Sun is a hardware company and it should not forget that," says Rob Enderle, president and principal analyst at the Enderle Group, a consultancy based in San Jose, Calif. "Apple didn't go into software but applied its skills to a new hardware platform, the iPod. For Sun to transition [from what it is] into a software company would be painful."

Another problem Sun would have as a software firm is in befriending many other hardware companies as business partners. But since McNealy has "gone around [angering] most of the biggest hardware companies on the planet," Enderle says, it would be hard for Schwartz and Sun to now bury the hatchet.

Sun has delivered a couple of promising hardware technologies over the past 12 months, but few have borne much fruit in terms of revenue. One such area includes the vendor's T1000 and T2000 multithreaded chips engineered specifically for Web processing.

"They could retool this chip around a new hardware model and combine that with open-source [technology]," Optaros' Walli says. "It would be another way to engage open-source developers regarding their [Solaris] operating system and a new hardware platform."

And in a move that could fuel momentum in the open-source world, Sun last December released the specifications of its 8-core processor, the UltraSPARC T1, code-named Niagara.

Another hardware asset that has yet to pay off fully is Sun's $4.1 billion acquisition of StorageTek last year, its joint development partnership with Fujitsu announced in mid-2004. The deal calls for the development and delivery of next-generation Solaris and SPARC-based servers. The first 64-bit systems, however, are not expected to ship for several months.

At the announcement of his appointment, Schwartz said that over the next 90 days he plans to "embark on a comprehensive view of all growth opportunities."

"We have an incredible customer base," Schwartz says. "We're in a rare market in that the demand for network innovation will never decline for as long as any of us are on this earth."

For his part, the often brash McNealy was lavish in his praise for the work Schwartz has done.

"He's never blinked in all the time I've known him," says McNealy, who will retain the chairman's role at Sun and head up Sun Federal. "He has executed."