Dim Sun: Hard Times Set In

Unprompted, they would describe their decisions to go with Linux, talking about how much better the value proposition is than Sun's. Surely the increasing numbers of people buying Linux are choosing the platform over a variety of others, but Sun always seemed to be the one they mentioned first, the most prominent loser in the process.

Then, troubling evidence arrived in late August when VARBusiness revealed the winners of its Annual Report Card (ARC) awards. Sun did fairly well in a few categories. VARs ranked it at the top of the advanced desktops and workstations category, tied with HP. Sun also finished second in our entry-level servers rankings, though it was a distant runner-up to HP in all the criteria.

But the company fared dismally in midrange servers, enterprise operating systems and network storage, where it finished dead last each time. In all three categories, VARs pegged Sun as deficient in every area judged, suggesting that for these product families, it might be time to go back to the drawing board.

Going from bad to worse, a few weeks later, in mid-September, Sun announced it would cut about 1,000 jobs, accounting for 3 percent of its workforce; it was the fourth round of layoffs Sun has had since fall 2001. Furthermore, after reporting a modest $12 million quarterly profit in July, by September Sun announced that an increase in an allowance it had made for its deferred tax assets meant that its fourth-quarter earnings would have to be rewritten, resulting in a staggering quarterly loss of $1.04 billion.

Taken together, the evidence is hard to ignore: Sun is hurting. The company has failed thus far to keep pace with the price/performance value proposition of Linux and,at least in the eyes of VARs,it hasn't yet provided the type of products in sectors like storage and midrange servers that makes solution providers and their customers want to switch to Sun. Meanwhile, the workstations that once were the company's bread and butter have lost prominence in the market, although with the advent of Linux on the desktop and grid computing, workstations could make a comeback.

But even if that happens, some customers already have moved away from Sun. Leon Chism, chief Internet architect for online travel discount provider Orbitz, sums up Sun's plight in describing how his company decided to run all its 750 servers on Linux: "There still are applications where Sun is useful, and they tried to talk to us about running our infrastructure on Sun, but there wasn't much of a conversation to be had," he says.

Sun is getting hurt by both the value proposition of Linux and by the increasing robustness and lower cost of servers that run on Intel processors.

"Sun's total cost of ownership is just too expensive compared to Linux," says a Sun partner, a network integrator who asked not to be named. "We're gradually migrating from Sun to Intel and Linux because of price and performance, and next year we're migrating from an Oracle/Sun database to Oracle/AIX, also because of price and performance."

Analysts say this trend will continue to hurt Sun. "From a technological perspective, Sun does a good job of making sure its platform works well with Linux, but it hasn't given customers a good idea about why they should continue spending money with Sun, other than because they've spent it in the past," says Ron Schmelzer, senior analyst at research consultant ZapThink.

Sun isn't completely sitting on its hands. Its server market-share numbers still are solid, the company is partnering with vendors like Red Hat and SuSE Linux to develop much-needed open-source alternatives, and more layoffs,painful as they can be,could be on the way to help pave a road back toward profitability.

Nevertheless, a significant portion of the industry still questions Sun's commitment to Linux,so much so that in early October HP offered $25,000 in services to any customer that migrated from Sun servers running the Solaris OS to HP boxes running Linux. Sun's official response is that it's committed to providing Linux on x86, but if our ARC numbers are any indication, that OS is in decline.

The company's response is a perfect example of how it isn't tuned in to what its partners and customers want, not just from Sun but, perhaps, from technology in general. "Part of the problem is that Sun has lost focus on the particular needs of its customers; too many of its product announcements are just responses to what Microsoft and IBM are doing, and now these and other companies are gaining a serious edge on Sun in all areas where it used to be strong," Schmelzer says.

With an M&A wave well under way in the tech industry and more consolidation likely to come, Sun suddenly looks like the type of flashy acquisition that could turn a market contender into a market dominator. In early October, Merrill Lynch analyst Steve Milunovich said as much, writing a note to his clients in the form of an open letter to Sun chairman Scott McNealy. Milunovich argues for some harsh measures: advocating a workforce reduction of almost 20 percent, spinning off Java into a separate entity and hiring a COO. Failure to do this, he warns, will make Sun a ripe takeover target.

Even Oracle chairman Larry Ellison has been uncharacteristically critical of his old friend McNealy, saying he thinks Sun made a "terrible, terrible mistake" by broadening its product offerings from servers into software and thus running the risk of spreading itself too thin. The two men often have teased the press and analysts with playful talk of a Sun-Oracle marriage. It's a game that could get a lot more serious in the coming months, especially if Oracle's hostile takeover bid for PeopleSoft falls through. And even if Oracle doesn't pop the question, there probably would be other companies that would love to have Sun in the fold; Sun could be a relative bargain with its stock price hovering around $3.50 per share at press time.

Regardless of whether it gets absorbed or continues to go it alone, what Sun needs now is refocused leadership. Milunovich also suggests that the outspoken McNealy needs a long-overdue image makeover. Fostering the perception that he's just a regular, sort-of bright, jeans-wearing guy who seems a little bit mystified about how he got to run such a big, important company, McNealy evidently figures that as long as he's there he might as well shoot his mouth off. It's an act that has grown stale and has always been disingenuous: With a BA from Harvard and an MBA from Stanford, McNealy's pedigree is a lot more JFK than John Q. Public. As Sun enters what might be its most difficult chapter, the company, its partners and customers don't need the same old thing from McNealy; they need decisive direction that will begin to calm the storm.