13 Questions for the Most Powerful Man in Unix Computing: Scott McNealy

During the exchange with VARBusiness senior executive editor T.C. Doyle, McNealy brushed off an attempt to go over Sun's rather dismal scores from the 2002 VARBusiness Annual Report Card. He didn't want to hear the results or discuss their implications. Instead, he laid the blame for Sun's channel woes squarely at the feet of the economy and suggested that Sun VARs should be living off a war chest of cash they presumably amassed during the great Internet build-out. That's what his company is doing, he explained. (He never acknowledged that much of that cash was amassed on the backs of Sun partners.)

That omission has us wondering if Sun really understands the channel and is the friend it longs to be. Read on and decide for yourself.

VB: You have the smallest empire in terms of number of VAR partners and solution providers. You just go to the table and compete [with fewer. You've got better efficacy in that you get more out of the 800 guys that you are engaging in North America. But at some point, do you need a bigger breadth of fortress to represent you in the marketplace? By bigger, I mean by an order of magnitude.
McNealy: We want to do it profitably. We don't just want to flood the market and turn all our channel partners into brokers. We've never had that strategy. We've always believed in the VAR, not the broker, concept. So we've always tried to do it very carefully. We try not to overdistribute and overauthorize and over-franchise the whole Sun technology platform. Maybe that's wrong, maybe that's right. There have been people that have said we should flood the market and make it available to everybody. But we've been trying to build a business with our resellers, and we've tried not to compete with our systems-integrator and reseller partners by getting into their businesses.

VB: Let's talk about that because that has made you tremendous allies and given you tremendous wins over the last few years. But now, when we look at the marketplace,and we measure [partner satisfaction on an annual basis,we're finding that those vendors that have global service forces that compete on some level with their partners actually have better levels of satisfaction. Your guys...?
McNealy: [interrupts I think our guys are struggling financially because they are coming off the bubble like we are. And I think they all had overhead structures that they are having to go face, so, financially, they are dealing with that. If they did it right, they put a lot of cash in the bank like we did. We monetized the bubble, and I hope our VARs monetized the bubble. We have $5.9 billion cash in the bank. And 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 right now. We haven't changed our commitment to them at all. But I just think we're dealing with a bigger hangover because we took better advantage [of the dot-com bubble. Shame on us and shame on our VARs for taking better advantage of the bubble over the last couple of years. I plead guilty. But I still think I wouldn't have done too much differently. I would have anticipated it, by six months maybe, a little more aggressively.

VB: Talk to me about partner satisfaction, and I'll share with you something that will be coming out in a month. In 2001, Sun received the most praise among companies in the VARBusiness Annual Report Card. It won two out of five categories that it competed in...
McNealy: [interrupts I don't need you to go into [that. Don't go there. The issue is: If you're not making money, how can you be satisfied? And we've got to get them back, got to get the market rockin' and rollin', and it's an economy issue. Have you seen [the latest Dataquest numbers on our market-share gains? We crushed them again this last quarter. Crushed the competition. As we did in Q1, in the March quarter, we crushed them in the June quarter. What that says is we may not be outrunning the bear, but we and our VARs are outrunning the other hikers,big time. And when this thing turns around, those who have the financial strength,the commitment, the focus and all the rest of it,are going to come out of this thing sweet. And those who didn't put enough away for the rainy day are going to get clobbered. And those who think you can go and hook up with IBM are just freakin' hopping into the bathtub with the shark. This is IBM's strategy. This is what they are going after. They don't want VARs. They don't need VARs. They say it, but do you really believe it? I think one company and only one company has been absolutely true and committed to partnering and not hollowing out no Trojan horses, or bait and switch, or flat-out lie and steal, if you want to use those terms. We don't do that, and haven't done that. We have a 20-year track record. Unless I get hit with a hockey puck real hard, our strategy is not going to change that way.

VB: So then talk to me about the play with Tech Data. Is that just to bring on a modest level of VARs? How can you fully take advantage of what your technology guys are offering if you're not engaging more partners that will get you into better and more situations?
McNealy: I can't give you the details of [that, and I don't want to go down to the company-level specifics. You can get to our channel directors and get more detailed information.

VB: Philosophically, then, you're [considering adding a broad-line distributor of principally PC-related Intel products?
McNealy: I think there's an opportunity here with the two-way, one-use servers to get broader distribution into the SME environment, although that's not the target market. I shouldn't say that's not the target; that's just not the market we are focusing on. It is a target market. But it takes time, and I think we'll ease into it and go after the low-hanging watermelon. I think there are some channel partners out there that know and understand that business and can take what we are offering and put the rest of the pieces around it and make it a solution,as opposed to a piece of technology. That's what we'll do.

VB: One last question on the partners, and I'm going to bring you back to where you cut me off. I understand philosophically that you guys have demonstrated year-in and year-out that you have been a good ally. But right now, you are probably aware that you do have some dissatisfaction out there between the direct arm that you have and your indirect partners. What can you do to help mitigate that conflict in the field, or do you think it's a [function of the economy?
McNealy: I think it's mostly the economy. If anything, we are ramping up the commissions paid to our sales reps to sell through channel partners, through our SunTone-certified service providers and our systems integrators and our VAR partners. We are not hiring in the field organization. In fact, we are shrinking our field organization, so we will have to work more with partners to get the kind of distribution and coverage that we want. We are doing nothing compensationwise or investmentwise to try to compete more with the VARs or to take more direct. I just think when things get tough, [customers are probably going more direct, thinking they'll get a better deal. But it isn't because we are trying to get them to come to our direction. I think it's just that we are the source of last resort, as opposed to first resort in a boom economy. VARs grew faster than we did in the boom times and are probably getting hit harder [now. That's just part of being out there in the chain a little bit. We don't like it; we're not happy about it. And we're doing everything we can to protect them through the air pocket here.

VB: You more comfortable with the company and its position than you were a few months ago?
McNealy: As funny as it seems, I'm way more calm, way more excited about having the company undervalued at one-times revenue than overvalued at 10-times revenue. The Gartner-Dataquest numbers are only validating what I've been saying that nobody's writing about: We are crushing the competition. We are totally outrunning all the other hikers. And, by the way, we are starting to put some distance on the bear a little bit. The analysts expect us actually to grow year-over-year this quarter. We're finally starting to make the transition from all financial services and telcos and dot bombs to this new-old economy. As we start to do that, I think people will start to feel more comfortable. And I have no issues around integrity, character or financial stability in the company, so that doesn't keep me up at night. I guess the only thing that really worries me at all is the mucking around that the politicians are doing that's really hurting our shareholders.

VB: With stock options issues?
McNealy: With stock-options issues, the garbage with the Sarbanes-Oxley Act and the whole blame game...

VB: [interrupts %85signing off on disclosures?
McNealy: And the paralysis that that could put the fear in the risk aversion. The politicians are so busy trying to save us from ourselves that they are going to take the win-lose out of the market economy. But that's what makes the market economy work. And that scares me.

VB: But what about those that say, "Oh, hey, you brought it on yourself. Look at the disasters that have happened at Enron, WorldCom, etc."
McNealy: What do you mean? I didn't do anything. That's like saying every running back ought to be in jail. C'mon, gang. Let's throw the perpetrators in jail, but let's not tie up the whole system. Does that mean we have to put every running back under house arrest with an ankle bracelet?

VB: No, not unless he or she has done something in violation of the covenants of the law.
McNealy: Right, so why are putting every company under house arrest or in ankle bracelets? That's what I fear can happen here.

VB: So that would mean that IT in the United States doesn't wind up attracting the people that it once did in the 1970s, '80s and '90s when it got the cream of the crop?
McNealy: I just think the U.S. economy was a very special, albeit over-regulated,but less regulated than anyplace in the world,thing. [Now it's totally over-regulated, totally overtaxed, etc. The government is way beyond its bounds. It's so into insurance. The last time I read the Bill of Rights and the Constitution, there was nothing in there about the government being an insurance organization.

VB: I got to ask you,couple of young kids working out of Stanford today: Could they form a Sun in this current economic climate?
McNealy: Some of the things that were critical were that they didn't have to worry about [regulation and bureaucracy. They could give out stock options. They could get low-cost services, including accounting services, etc., and people would be willing to take a risk and take a challenge. There will be a slowdown in that. It's a lot tougher than it was for us. And I think it's a shame.