Point-Counterpoint: Is Sun Microsystems a Friend or Foe?

Two editors debate Scott McNealy's controversial pronouncement Sun VARs "should have been bankrolling, or stuffing in a mattress somewhere [with all the margins that they were making" so they wouldn't be faltering or failing during the current downturn.

Rob Wright: McNealy is Hurting His Company and the Channel

After reading the VARBusiness interview with Sun Microsystems' chairman, president and CEO Scott McNealy, I was baffled. About a year ago, I spoke with several Sun channel executives and they told me that there wasn't a better proposition for the channel that what Sun was offering. Sun seemed committed to partners and had ambitious plans to increase efficiencies for indirect sales and penetrate new markets, such as small and medium businesses. But I should have known something was wrong when, as I was later searching for Sun VARs, the company sent me contacts for its major distributors, MOCA and GE Access.

A year later, Sun still hasn't lived up to its end of the bargain. Sure, the company hasn't shifted to direct sales the way Hewlett-Packard or the former Compaq had, and it hasn't chased IT services dreams like virtually every vendor in the market. But Sun's channel strategy is seriously askew, and McNealy's latest comments further expose the problem, too.

According to McNealy, Sun VARs "should have been bankrolling, or stuffing in a mattress somewhere [with all the margins that they were making." Margins? Stuffing mattresses? Is he serious? Does he know how little cash VARs generate compared to vendors? Sun VARs, while large and steeped in enterprise selling, don't make billions a year as Sun does. They spend much of that mattress money breeding developers and engineers steeped in Sun technology. But McNealy's contention here shows that he doesn't understand how fragile the solution provider model is and much VARs rely on their vendors.

And that's the whole point. McNealy will not apologize for taking advantage of the dot com bubble, nor should he. But even in his own words, McNealy admits he should have anticipated the bubble burst earlier. Even more important, however, is this: McNealy and his team should have helped guide those loyal Sun partners away from dot bombs and to new opportunities. But the company persisted in being the "dot in dot com," and partners followed the Pied Piper into a mine field. Some of these VARs had been so imbedded in the dot com market that they were out of business completely by year's end.

Some, including my colleague Sonia Lelii, believe those struggling Sun VARs need to take responsibility for their financial issues instead of blaming Sun. Maybe that's true. But it cannot be disputed that Sun did little, if anything, to help those struggling VARs find new revenue after the bubble burst, and that's why Sun is at least partially responsible for the pain felt by its channel.

Memo to McNealy: solution providers DEPEND on their vendors! They depend heavily on technical support, training, education, co-marketing and go-to-market strategies, all of which seem to be lacking at Sun. the company's channel is quite possibly more valuable than the channel of any other major vendor in the market because of the small number of Sun partners--about 800 in North America--and the advanced nature of Sun technology. VARs are not islands. They are not dispensable foot soldiers or mercenaries. They are a valuable extension of a vendor's business and Sun should start treating them that way. The company asks for dedicated, loyal VARs committed to its platform, but it has done little to reward that loyalty and instead acts like a cold, detached parent in a dysfunctional family.

I have enormous respect for Sun. Unlike other computer makers in the market today, Sun has a rich heritage of innovation and has never ceased to push technological boundaries. Workstations, Java, Solaris, UltraSparc, SunOne and the forthcoming N1 technology are all testaments to the remarkable talent and skill at Sun. When it comes to IT innovation, few companies can compare to McNealy's company.

But there's a problem here, and I hate to say it is McNealy himself. Normally, I can deal with his brash and unapologetic attitude because he is normally a superb leader, a Silicon Valley icon and technology visionary. But he's clearly at a loss with his assessment of the channel. McNealy may get an A for honesty here, but he gets an F for diplomacy and an F- for channel knowledge. He further exposes his inefficient partner skills in the most recent earnings call, saying that he should have embraced the channel more over the last four or five years. Sun is now rolling out new programs and resources for the channel, but if I was a VAR I'd think more than twice about getting involved with Sun.

McNealy says Sun has $5.9 billion in the bank. I'm proud of him. But I'm wondering how much of that money was generated through the channel and how much more Sun could have made if it had been more supportive of the partners that help drive Sun's business.

Sonia Lelii: Times are Tough; Cash is King

Shortly after the Scott McNealy cover story hit the streets, I met with a storage vendor who had no direct ties with Sun Microsystems. He mentioned McNealy's comment that was prominently featured on the front cover: "Our VARs should have been bankrolling or stuffing in a mattress somewhere all the margins that they were making. If they didn't, they got into a little trouble." The vendor was, let's say, a bit astounded by the comment.

Sheepishly, I put forth my opinion on a remark that seems to have created a bit of a stir. "I agree with McNealy," I said, "Whether you are running a business or a household, you should always put aside cash that will be available when things get rough." That is absolutely right, said the vendor. There is nothing illogical with what McNealy said. It's just that he could have been a bit more diplomatic with his words.

Okay, I can understand McNealy was blunt. You can just tell by the guy's haircut that he's not interested in being smooth or slick. But a blunt statement doesn't necessarily make him an enemy of the channel. And it's this basic point that pulled me into a debate with my co-worker, Rob Wright.

To me, McNealy's statement about putting money away is just financial prudence. This is even clearer now than it was several years ago when everybody was making money hand-over-fist, and we thought gold coins would be raining from heaven forever. Just listen to most of the earnings calls these days. Companies like EMC, Sun and Veritas Software are all leaning on their cash as proof that they still are financially healthy companies, even through their stock prices are down to nail-biting levels.

VARs argue that they don't make the billions that vendors do. A lot of their profits are re-invested in training and certification and marketing of Sun products. That's true. But doesn't every business have operating costs? Isn't that just a basic part of a balance sheet? Has anybody checked out how much Sun invests in technology development and innovation? Probably a lot more than Dell Computer.

VARs also argue that comparing the reseller business model to Sun's business model is an apples-to-oranges comparison. Point taken. But I don't think McNealy was saying that resellers should have at least $5 billion in cash stashed away to buffer the economic fallout.

What VARs should have is a portion of revenues saved that is relative to their profits.

Sun is now getting ready to reduce its workforce by another 11 percent, even though it has $5.2 billion in cash. Times are tough; cash is king. That's what McNealy told financial analysts during Sun's recent earnings call. Most companies are out to reduce their cost structures. EMC has about $5 billion in cash reserve. They, too, are getting ready for another round of lay-offs.

The problem is very simple here. Sun and its resellers profited during the dot com glory days--a time when companies where buying hardware like crazy. Now the dot com cash cow is dead. The market is glutted with Sun servers, so much so that Sun had to spend money buying back those machines that are now being sold through the gray market for a faction of their original costs. And in case no one has heard, there is a vicious price war going on in the high-end server market right now.

A lot of Sun VARs focused too much of their business on the dot com companies. That revenue stream has dried up now. So, it's time to move forward and diversify. Sun has to ride these rocky seas just like everyone else right now. One of the last remarks McNealy made during the earnings call was related to the channel. He stressed that Sun is looking to get partners to do more service deliveries in the future. He also said Sun will work more aggressively with the partner community to do things like installation, first-line service and support, system integration and hosting. They have more than 70 iForce centers where customer proof-of-concepts will be done with channel partners. At least 50 of those centers are actually run by partner groups, McNealy said.

He also offered some hindsight on what he would do if he had the last three or four years to do over: "I would have definitely leaned on the channel much more aggressively. I would have trained them up, developed them and driven those kinds of partnerships and relationships much more aggressively as opposed to cranking up the head count. We ended up with a lot of accounts where, just because they were booking so much business, we threw a whole bunch of folks on it. I'm not sure those folks added any extra value. So we are doing a lot of rebalancing and reorganization."

McNealy also added that "we are going to continue to drive architecture, intellectual property and technical content and do a lot more training of the trainers, if you will, as we go out there and work more aggressively with the partner community."