CRN Interview: Scott McNealy, Sun Microsystems

Sun Microsystems Chairman, CEO and President Scott McNealy sat down with Senior Editors Elizabeth Montalbano and Joseph F. Kovar recently to dicuss some of the tough issues facing his company.

CRN: People are predicting Sun's demise. Tell me why they're wrong.

MCNEALY: I think lots of people are now calling us spunky. That's the latest thing I saw. We're having a pretty good month here with the Java Enterprise System announcement, the Java Desktop [System] announcement. We've got the Java runtime now being bundled with all the PCs. We just signed up the big China JDS deal. Then you throw on top of it the Intel and AMD announcements and all of the folks who are signing up to do Solaris on x86, whether it be Intel or AMD. The new UltraSPARC 4 announcement of a two core-UltraSPARC 4 that was announced at the recent microprocessor get together. I think people are understanding we're not down and out, we're just spunky. I like that word. We're a better underdog then we are an overdog.

CRN: But there are still serious questions and serious doubts about Sun. Profitability is a big issue. To what products and/or strategy are you tying Sun's future?

MCNEALY: First of all, I think somebody ought to compare our net cash position vs. IBM's. Just go do the math, and you'll like what you see. From a financial strength perspective, people are not really valuing what we have. And by the way, we don't have an underfunded pension plan. Let's take that one off the table. Unless you think IBM is a little risky. Then let's look at cash flow--and we've had nine straight years of cash-flow positive from operations. So let's take that one off the table. Let's look at revenue growth. That ain't so hot, and we need to get that turned around. But there was nobody that took a bigger advantage of the [dot-com] bubble. And there's no company who's better positioned [to serve] the telco and financial services and Web services companies. As those companies start to rebound--and nobody thinks those worlds are going away--as those companies rebound I think you'll see our revenue growth start to return. So there's no one product, there's no one strategy, there's no one piece. I think we've done a pretty good job of taking a lot of the excess capacity out of the system and getting the company right-sized in a way that did not destroy our long-term future. You're going to see a product calendar from Sun over the next two or three years that has no letup, that has no holes, that has no air pockets, if you will. We're going to have a constant stream. Every quarter, every time we do the new NCO3 or starting next year NC04 Q1 announcements ... we're going to rain down a whole bunch of new functionality, price/performance capabilities, features, scalability, availability features. It's going to be relentless because we have totally protected the R&D investment. I have not met one customer who's said, 'Oh, stop hurting me with all this innovation.'

CRN: Looking at all the products and strategies Sun announces in any given week is dizzying.

MCNEALY: Stay tuned!

CRN: But do you think the rush of so many new products could lead to confusion among partners and customers?

MCNEALY: What's confusing? We took 225 products and boiled them down into the Java Enterprise System--100 bucks per employee, per year, unlimited internal use, no extra charge for external use. It can't get more simple, predictable and affordable than that. Then, for an incremental $50 you get the Java Desktop System, a complete desktop with StarOffice included. Then for another 5 bucks per employee you get all of our tools. Those three products for $155 per employee [for] unlimited internal use, unlimited external access. So then that now runs on Trusted Solaris, which runs on Intel, AMD and SPARC, one way to well over 100 ways. Is that really that confusing? What other company can just explain their entire API, development environment and runtime environments more simply?

CRN: But isn't there a chance that because this is a complete departure from the way things are today, that message gets lost?

MCNEALY: Absolutely no chance with great writers like you two. I'm serious. This is so simple. I'll tell you what. I wish you could follow us around to the customers. You're on the big issue. The big issue isn't viability. The big isn't relevance. The big issue isn't even profitability or revenue growth. The big issue is every customer looks at us and says, 'Man, you've got to get this story out.' The big challenge is--and all of these people you're getting all of this negative stuff from are people who are our competitors, who are wishful thinking. But if you get a couple of beers in 'em they're scared to death of what we're going to do.

CRN: I guess then the issue here is how is Sun going to get this message out?

MCNEALY: Well I wouldn't be talking to you all right now [if I wasn't interested in that]. A lot of people are dwelling on the things that are not what the customer wants to hear about. What I have learned is if you're not growing revenue and making money your competitors are allowed to position you, not yourself. That's the biggest message I've learned. You can go look at the products, you go look at their price/performance, you go look at the integration, you go look at reference architectures, you go look at our general contracting model as opposed to our vertically integrated contracting model. If you go look at our leveraged partner strategies, if you go look at the open interfaces, look at how we leverage open source--we're the No. 1 open-source player out there in the marketplace except for the University of California at Berkeley. And if you look at the fact that we indemnify the entire product line, there are some very, very compelling advantages to the x86/SPARC/Solaris/Java Enterprise System environment.

CRN: Sun's EVP of Software Jonathan Schwartz said it will be easier to sell the Java Desktop System overseas, as evidenced by Sun's recent licensing deal in China. What sort of marketing worked for you there that you could apply to win new business in other markets?

MCNEALY: Well, I think Jonathan would probably totally agree that the farther you get away from the U.S. and the farther you get away from the most developed countries, the better chance you have at selling thin clients, environments based on open-source technologies and value-based propositions where you don't need a big, expensive Wintel system on everybody's desk. There's not enough power in India to run all the PCs we run here. Certainly nobody can afford the Microsoft licenses. As a result, I think we have a very, very compelling model in a China or an India or a South America or Eastern Europe and all these other places. We don't have to conquer Manhattan. New York's going to be the last place [we conquer].

CRN: What do you see as the biggest misconception about Sun right now? What do you want to clear up that maybe people don't understand about what Sun is doing?

MCNEALY: I think it's painfully clear what we're doing on the product side. And it's painful in the sense that IBM doesn't really know how to respond. ... There's two ways to go about it: Everything can be custom and hire a bunch of IBM mechanics; or you can go buy a reference architecture and have it already done. It isn't a misconception; it's just a lack of understanding and it's partly self-inflicted. We had our executive advisory council last week and at the end of it we sat down and told them about our reference architectures and where we have complete solutions, like in data warehousing or thin client or server consolidation or disaster recovery or security and identity or infinite mailboxes. We went down through all these lists. And at the end of them they all looked at us like, 'Holy mackerel. These are already done with blueprints already assembled, already bill of materials, already tested, already certified, all the rest of it?' [We said,] 'Yeah, any of you interested in these?' It's not supposed to be a sales event; they're supposed to be giving feedback. They were basically all over it, saying, 'I want one of those, two or three of those, half-dozen of the other. Come in, I want you to talk to this person, that person.' My message to the resellers is that they should stop selling piston rings and start getting these reference architectures. We have 20 or 30 of them right now, and we're investing heavily. Just get a slide on each one of them and sit down in front of your customers and say, 'Would you like an identity solution?' 'No.' All right, throw that away. 'Would you like the server consolidation?' 'Yeah, absolutely, I'm coming off lease. Let's put that in the go talk about it pile.' 'Would you like an infinite mailbox?' 'Oh, yeah, I have to keep my mail for seven years.' 'Would you like data warehousing?' 'No, I don't need that.' If they went through those lists, I can guarantee they'd come out with five to 10 major solutions that the customer would love to sit down and talk to them about. And you know what the customer cares nothing about? What microprocessor is there, what operating system is there, what storage vendor is in there, what file system is in there. They don't care. What they care about is that we put the whole solution together and we priced it outrageously aggressively and we've got the service partners and the integrator partners and the third-party hardware and software vendors all tested, all certified, ready to go, all certified, batteries included. And we'll run it for them.

CRN: But how many more financial quarters can you go without returning to profitability before you start taking the advice of analysts that want you to cut parts of your business?

MCNEALY: We're still reducing our spending, but we're doing it carefully without rolling in the product calendar. I think the customers ought to be scared to death if we just start slashing and hacking the product calendar. Not only that, we're actually leveraging even more R&D, growing our R&D in SPARC. At the same time, we're allowing our customers to leverage all of the Intel 32-bit R&D and all of the AMD Opteron R&D. So now think of all the silicon R&D that our customers are now able to leverage by running trusted Solaris. Then, we're running the Java Enterprise System so that they can leverage the entire Java Community Process, all 3-plus million Java developers and all the Web services development that's happening across the board. Now that's what our customers should be worried about. That's the conventional wisdom that's being missed in all of this. We have lots more we can do to lower the cost, the break-even point of this company. Without getting into all of the accounting issues, we had over $3 billion of noncash write-offs last fiscal year. Noncash, nobody wrote a check, there's no difference in the physical asset base of this company. Nobody understands that, and certainly our competition is not explaining that to people when they say we lost a big bag of money last year.

CRN: But say a year from now Sun still isn't profitable. Will you continue to operate in the same way?

MCNEALY: We'll get profitable. And like I said, there's lots of ways we can take a lot more cost out of the system. We expect that our markets will rebound post-bubble. You know what's going on in telco spending. You know what's going on in financial services spending, but [those markets] aren't going away.

CRN: So you're waiting for those markets to rebound instead of going after new opportunities?

MCNEALY: That's not true. Come on, don't put words in my mouth. We are doing a great job, and if you look at all of the new customer announcements we've made over the past few weeks, you see us into retail, manufacturing, all the rest. We aren't losing the design wins in the other spaces, but we're having to go out and create new markets. I think that actually strengthens the company. We were 60-plus percent in three markets during the bubble. This is making us a much stronger, and much more diverse company. That which doesn't kill you only makes you stronger. Let me tell you none of this came close to killing us.

CRN: What do our readers need to hear about Sun that hasn't been said in light of all the negative press?

MCNEALY: [We have] outstanding financial strength; [are] cash-flow positive nine straight years; one of two developer communities in the world with the Java Web services development community, the other being .Net; the right product strategy; the most partnered company in the world because every reseller out there knows it's us vs. IBM Global Services, and a wanna-be HP; and an absolutely stunning price/performance story across the board, whether you're talking microprocessors, servers, storage, operating systems, middleware or the whole reference architecture. Just go look at the numbers. We're cheaper than Dell, cheaper than IBM, we've got more integration, [we] blow the doors off of Microsoft from a pricing perspective. These are very, very good messages, and [we have] an incredible focus in this company to provide you the world's best network computer data center anywhere.