Sun's Rekindled Star
Matthew Harris has witnessed both prosperous and lean times throughout his 16 years as a Sun Microsystems partner, but he's more optimistic than ever about the vendor's future.
Despite Sun's precarious slide in recent years, its fortunes--and those of its partners--appear to be on the rise. For the first time in nearly two years, the company announced a quarterly profit. Sun is aiming to bolster its operating margin from its current level of 3.6 percent to 10 percent by its 2009 fiscal year. It's gaining share at the expense of its larger rivals Dell, Hewlett-Packard and IBM in the market for commodity servers, an area the company barely had a presence two years ago.
January's pact with Intel, while not as historic as the Sun-Microsoft detente back in 2004, is a major breakthrough for Sun that will give its hardware and, yes, software, significantly more clout and potentially much greater breadth.
Like a growing number of Sun loyalists, Harris believes Sun is emerging as a strong and more diversified vendor. While that healthy prognosis is far from certain, here's the case of why Harris' optimism may have legs and the barriers that await the long-troubled Sun.
The company now bases its business on four distinct segments in what CEO Jonathan Schwartz calls the four S's--systems, software, storage and services. With it are strategies and products to drive all four as viable businesses. Harris likes Sun's new approach.
"I haven't seen as complete an offering as I do now in 2007 in the entire history that I have worked for them," says Harris, who is now the Sun relationship liaison at FusionStorm, a solution provider based in San Francisco and No. 183 on the VARBusiness 500.
That's exactly what Schwartz wants to hear. One year into his tenure as company chief executive, Schwartz frequently talks about the broadened portfolio that Sun now offers. With a core focus on the four S's, Sun is simultaneously rearchitecting its indirect sales strategy with its new global Sun Partner Advantage (SPA) program.
Sun last month promoted Bill Cate to lead the SPA on a global basis. His goal is to allow solution partners to profit from focusing on any or all of the four segments. "We are much more aligned than we ever have been with the business units," Cate says.
For example, if a solution provider chooses to emphasize selling large volumes of Sun's x86/64-based Galaxy servers running Windows or Linux, the solution provider won't be penalized for not selling Niagara systems based on its SPARC processor or for passing on Sun's Solaris OS. That's a major shift from the traditional model by which Sun rewarded partners based on how much of the entire Sun portfolio they sold.
NEXT: Software -- Solaris flares
Just how profound are Sun's four S's? Consider when an analyst asked Schwartz if he was concerned that 70 percent of all Solaris shipments were installed on non-Sun hardware. "That would imply we're missing the opportunity to ship elsewhere," he replied at last month's annual analyst conference in San Francisco.
What's more important to Sun nowadays is that customers choose to run Solaris on any servers--be it Sun's, Dell's, HP's or IBM's--rather than picking a rival OS, such as Red Hat Linux or Novell SuSE Linux Enterprise. Even though Sun now offers Solaris 10 for free, the company is betting that the majority of its customers will ultimately purchase maintenance, training and support agreements--a model that's served Red Hat well.
Sun reports that more than 7 million customers and solution providers have downloaded the free version of Solaris in the past 18 months. How many have translated into paid support subscriptions? Sun isn't saying.
"I don't know how much stock to put into download figures," says Gordon Haff, an analyst at Illuminata, which follows Sun. That said, Haff believes Solaris 10 is on the right path. "Sun legitimately does seem to have a revitalized interest in Solaris." Case in point was Intel's decision to finally devote resources to fine-tuning its high-end processors for the OS.
Intel will optimize performance of its Xeon processors for Solaris and will develop and certify device drivers.
"They [Intel] are going to evangelize Solaris," says John Fowler, executive vice president of Sun's systems business. "That has a huge benefit to value-added resellers because you have one of the biggest names in the business behind Solaris."
Sun for the first time is also allowing systems builders and solution providers to install and support Solaris on bare-metal hardware, an area where the company sees huge volume opportunity, especially at the Web tier. Sun's subscription-based pricing for Solaris training, maintenance and support starts at $49 per instance, but there are options for basic and premium-level support, all the way up to site support licenses.
Sun's open Solaris strategy is intended to offer an alternative to Red Hat Linux and displace existing installations through superior pricing, service and features, says Tom Goguen, vice president of Sun's Solaris business.
"There's a customer base that's underserved by Red Hat and Linux and is looking to find an alternative," Goguen says. Sun just launched a program called Solaris Ready for Resellers, which will include training, collateral materials, marketing and incentives, Goguen says.
If Sun can prove critics wrong about Solaris, it could mean a major reversal of fortunes. After all, Linux was responsible for eating into the entire Unix market leading to Sun's free fall earlier in the decade.
Indeed, critics are skeptical that Sun is on a roll to the point where it can expect to see huge software growth.
"Sun traditionally had been a hardware company, and I think that's where they're going to remain," says Josh Farina, an analyst at Technology Business Research. His comment echoes the sentiments of numerous analysts.
Sun's challenge is to convince solution providers and enterprise customers that Solaris on any x86/64-based server is a viable alternative to Linux, and indeed can offer a more scalable option on that hardware. Solaris is now an open-source platform. At the same time, Sun makes the ultimate decision and has control over the source code, which is seen as an advantage to many customers.
"We built Solaris. When a customer has an issue or a call, we can contact the inventors of the [intellectual property] who have a Sun badge to turn around proper resolution on that technology quickly," says Richard Green, executive vice president of Sun's software group.
Underscoring his argument that Solaris is a better alternative to Linux, Green points to the third release, Solaris 10, made available in January. It has new security features, such as the ZFS file system, Trusted Extensions for security and improved support for virtualization, clustering and business continuity.
"People can argue back and forth about how it stacks up against various Linux features, but I think it's a fair overall comment that Solaris is more sophisticated than Linux is," Illuminata's Haff says.
As Sun rolls out the new SPA program, the go-to-market strategy with software will be markedly different, moving away from its model of pushing software solely through hardware-only partners. "They don't need to be a Sun hardware channel partner to do this and make a lot of money off Sun programs," Green says.
Sun has other key software assets in its arsenal, such as Java technology, which company officials like to point out runs on millions of applications and devices, ranging from cellphones to cross-platform apps. Much of Sun's Java technology, such as the NetBeans IDE, which is also available as open-source software, doesn't necessarily bring in revenue for Sun, but the company says it has 1.3 millionpaid licenses for the Java Enterprise System platform (which is also the basis of sales for Identity Manager and JavaCAPS software, among other offerings)."At the end of the day, Java is a positive thing for them because of other drag," Haff says.
NEXT: Servers -- a new frontier?
While Solaris and Java clearly are at the core of Sun's software business, its momentum is coming from a once unlikely source--industry-standard hardware. Sun jumped on the x86 bandwagon three years ago when AMD released its 64-bit Opteron processor. About 18 months ago, when Sun released its multicore Galaxy servers, it became the first to stress the engineering for major improvements in power management while employing a unique approach to cooling.
Sun has quickly seen market-share growth in industry-standard servers. The company last fall re-entered the mix with blade servers, dubbed the SunBlade 8000 family. Sun also recently released the SunBlade 8020, a four-socket AMD 2.8-GHz Opteron server that the vendor says is the fastest blade in the market to date. If Sun's momentum in systems sticks, things could get even more interesting this summer when its first servers based on Intel's Xeon processors hit the channel.
"It really adds to our credibility to have both AMD and Intel as we broaden our product range," Sun's Fowler says. Solution providers agree.
"They had an obvious absence, and they are now filling that gap," says Warren Wilkinson, executive vice president of Sigma Solutions, a national IT solution provider.
Just as important, Fowler says there will be marketing and co-op dollars from both Sun and Intel to support the Xeon-based servers.
At the same time, Sun hasn't taken its eye off its SPARC business. Last year, Sun released its Niagara systems, a major leap in multicore computing for its SPARC processors. Today's systems are available in eight-core configurations. And Sun is already prepping the channel for its next SPARC breakthrough--a next-generation processor, code-named "Rock," will be available in 16-core configurations in 2008. "Essentially, we are looking at Rock as redefining the midrange to high-end space," Fowler says.
Storage: The Must Fix
Sun execs are bullish on the company's storage business, which has taken on a new look over the past year with the acquisition of StorageTek's product portfolio. But observers say Sun's integration of StorageTek has been rocky. The company lost key execs--from both StorageTek and Sun--while it took longer than expected to create a common line card.
For the most recent quarter, Sun's storage revenue declined 7 percent over the same period last year. "Sun's storage business remains a work in progress," Illuminata's Haff says.
Technology Business Research analyst Farina puts it more bluntly. "I see it continuing to decline," he says.
Of course, Sun sees it differently.
Nigel Dessau, Sun's senior vice president of storage marketing and business operations, argues that much of the revenue decline stems from the fact that before the company combined businesses, it drew revenue from each other based on prior reselling relationships. "We don't get to count that twice anymore," Dessau says.
He admits that the integration of the companies was complex, but as of October, the majority of it was complete. "It was painful, but integration of that magnitude is always painful," he says.
With StorageTek's high-end tape business, Sun has a new entry into the high-end data center--specifically regarding connectivity to IBM mainframes. In addition, Sun remains a key OEM partner of Hitachi Data Systems at the high end, LSI Logic's Enginio division at the midrange and Dot Hill at the SMB level.
Meanwhile, by acquiring StorageTek, Sun is pushing into the network attached storage (NAS) space, where it's been notably absent. Indeed, it's not clear that CEO Schwartz is entirely satisfied with Sun's storage position. At last month's analyst meeting, he indicated he would love to make some kind of deal with EMC.
"I haven't been shy about talking about potential partnering opportunities with EMC," Schwartz told analysts. Sun's next big technology could be Project Blackbox, which it describes as the next-generation data center. (See "In the Pipeline," left.)
NEXT: Service -- the ties that bind
Sun's service business is showing signs of life. Service revenue increased for the sixth consecutive quarter ended Dec. 31. For the most recent period, its $1.3 billion showed a respectable 6 percent year-over-year spike.
Don Grantham, Sun's vice president of services, told analysts that the company's service business has 9,000 salespeople, half of which are presales engineers--an area Sun plans to focus on with more intensity this year, he says.
The model of integrating services with products has helped drive volumes overall, he adds.
Grantham says the channel represents four to five times its overall sales presence, and it's put margin programs in place for those who sell and/or deliver services. The area of focus this year will be extending that to volume business.
"If we're going to be successful in generating value from volume, we know we have to go to market in different ways," he told analysts.
One key question that remains is Sun's utility-computing effort, Sun Grid Compute Utility. For years, the company has evangelized a model whereby customers pay only for the capacity and processing power they use--much like electricity. But it doesn't appear that model has gained much traction.
"For traditional resale, I haven't seen where that plays," Cate admits. "But for ISVs and service providers, that's a big play."
NEXT: Four projects in Sun's pipeline
Four projects in Sun's pipeline:
1 PROJECT BLACKBOX
Due out later this year, Project Blackbox is housed in a 20-foot shipping container that consists of systems, storage, network infrastructure, cooling and power distribution, with a systems-management overlay.
2 ROCK PROCESSOR
Rock is the next generation of Sun's Niagara SPARC-based processor, due for release in late 2008. It will be a 16-core server that promises to up the ante in CMT (chip multi-threading) capability. This, in turn, should vastly increase processing capability and energy efficiency.
3 INTEL XEON-BASED SYSTEMS
Don't look for a product blitz initially, but the midyear debut of a Xeon-based server will be closely watched. This could help break Sun into accounts still resistant to AMD's Opteron. Expect new systems on that platform to appear too.
4 SOLARIS
Updates will remain continual, but with Intel providing its own engineering resources, anticipate tighter integration with the x86 platform. Also, native multiplatform virtualization is in the works.
NEXT: Is the worst over for Sun? Take a look at its 1997-2007 financials.