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PALO ALTO, Calif.--It has been a tough year for Sun Microsystems. The recession has sharply reduced corporate demand for the company's high-priced servers, and many of its customers have gone out of business altogether.

But if CEO Scott McNealy is troubled, he's not letting on. In a recent interview with CNET News.com, the 47-year-old co-founder exuded his trademark cockiness. "We're not in a hole. A lot of companies would love to be in our hole," he said.

Perhaps more than any other chief executive in the industry, McNealy has garnered inordinate free publicity for his company with his contrary opinions, cheeky personality and public jabs at rivals. Both fans and foes of McNealy--and there are many of each--acknowledge that his unrelenting public-relations campaign has raised Sun's stature and often framed industry debate in his company's favor.

"We talk of Sun disproportionately to Sun's revenues," said Illuminata analyst Jonathan Eunice, admiring management's knack for capturing customer concerns. "They're the Jedi masters of this art."

Rhetoric, however, can go only so far. In today's unforgiving economy, McNealy's go-it-alone approach is being tested more fiercely than at any point in Sun's nearly 20 years of existence. The result will determine whether he is an independent-minded leader who can successfully buck powerful trends or a high-tech Don Quixote whose direction will only isolate his company from the rest of the industry.

The hypercompetitive McNealy, an amateur hockey player once ranked as the top golfer among CEOs, relishes his role as the unofficial conscience of Silicon Valley. Despite his Midwest upbringing and Ivy League background, the Harvard graduate is firmly rooted in the region: Sun was originally an acronym for Stanford University Network, a tribute to the California institution where he received his M.B.A.

Yet he has retained the survival instincts instilled in him growing up near Detroit at the side of his father, who was vice chairman of the now-defunct American Motors Corp. during the most tumultuous period in the U.S. auto industry's history. Now, McNealy must steer his own company away from a fate similar to AMC's.

At its peak just over a year ago, Sun saw quarterly revenue grow 60 percent to $5 billion. Since then, the company has imposed major layoffs and mandatory vacations, reporting its first unprofitable quarter in 12 years.

Moreover, no easy fixes appear in the offing. Meridien Research forecasts that financial services companies, a top Sun market, will reduce technology spending from $36 billion in 2001 to $33.8 billion in 2002. Salomon Smith Barney expects Sun to return to profitability in the second quarter of the new year.

As if all that weren't enough, Sun faces growing competition from major players. Its lead in the $29 billion Unix server market is eroding, with IBM awakened and Hewlett-Packard within a hairsbreadth of catching up.

Changing direction

"Sun risks isolating itself more and more," said Sanford Bernstein analyst Toni Sacconaghi, warning of the consequences of the company's all-for-Sun-and-Sun-for-all philosophy.

Many large businesses are resisting Sun's predilection for Sun-only simplicity. They must integrate new servers with existing computer networks tied to PCs, IBM mainframes, and servers using Microsoft operating systems with Intel processors--machines reviled by Sun.

Rival Michael Dell, head of Dell Computer, likens Sun's predicament to Apple Computer's situation in the 1980s. That's when the Mac maker began to lose business to mainstream PC manufacturers because much of its technology was incompatible with other hardware and software.

"They're an island unto themselves in terms of processor and software," Dell said, calling Sun "the Apple of the server market."

Dell is encroaching on the low end of Sun's server business, but the more serious threat comes from Big Blue.

Consider the example of eHealthInsurance, which sells health insurance from more than 70 insurers over the Internet. The company's Sun E4500 servers handle about 100 million database transactions per day with aplomb, according to Chief Technology Officer Sheldon Wang, who chose the product line because of its reliability. But as eHealthInsurance prepares to buy servers for a new project, Wang said he has decided to take another look at IBM because it has a more complete package of hardware, software and services.

"If they can have as good a reliability as what we have today, then they probably will get it," Wang said.

Sun vs. Wintel and beyond
Despite such obstacles, McNealy has refused to stray from his original course, generally refusing to buy other companies' technologies. Instead, Sun has chosen to develop its own processors, computers, operating systems and high-level software.

"You should own that intellectual property," said Greg Papadopoulos, Sun's chief technology officer.

Perhaps the best market illustration of Sun's insistence on independence is with Itanium, the high-end, 64-bit processor line HP pioneered and co-developed with Intel. The first Itanium computers hit the market in late 2001, years later than planned. Analysts nonetheless expect solid demand in time.

That potential hasn't swayed Sun, which spurns the Itanium family along with the rest of its technological relatives in Intel processing and Windows software. McNealy dismisses HP as a sellout, calling it just "a grocery store for Wintel computers."

One reason Sun opposes Itanium could be sour grapes. The company tried and failed to partner with Intel by bringing its Unix operating system, Solaris, to the new chip.

"We thought the poor Intel users might want a real operating system," McNealy said. Former Intel CEO Andy Grove "didn't trust us but was willing to give us the benefit of the doubt. As soon as Craig Barrett took over, (Intel) shot it down. They obviously got hammered down by Microsoft and told not to do it."

Intel, for its part, says Sun simply wasn't capable of cooperation. "Anytime you have a partnership, both sides have to have an interest," Barrett said. "Sun makes the majority of their revenue selling hardware. To have a relationship between Intel and Sun, you don't use Intel as an entry vehicle to sell Sun."

Sun's Wintel competitors boast that they collectively possess more research funding and thus offer a strong challenge to Sun. But so far, Microsoft has been largely relegated to the low end of the server market, and $100,000 Intel servers are rare. In the third quarter of 2001, only $12.7 million worth of Itanium servers were sold, compared with $4.6 billion in Unix server sales, according to IDC.

McNealy said his computer plan is the "big frigging Webtone switch"--a collection of servers, networking hardware, storage systems and software, all tuned and tied together to deliver computing services that would be as dependable as a telephone dial tone. In theory, other companies' products could work on this network, but Sun hopes its modules will work best.
 

Java helped Sun garner industry respect and important allies--even as the technology diminished the role of Solaris. Nevertheless, it remains unclear how the popularity of Java, which developers use for free, will translate into major revenue for Sun.

Sun extols the virtues of running software on powerful central computers instead of on less reliable and unmanageable PCs. At the same time, it has pined for consumer recognition, as evidenced by its move into the television set-top box market.

After several fits and starts, Sun may finally have found a way to bring its technology to the average person: Let someone else do it. While Microsoft's "Stinger" cell phone initiative lags far behind, the top six cell phone makers are building Java into their handsets so they can use Internet-aware programs. No. 1 Nokia expects at least 50 million Java phones to ship in 2002.

"We let Motorola, Nokia and Sony carry that water," McNealy said. "We support them. We're in the background."

Collaborating and taking a backseat role may seem awkward for McNealy, but he realizes that teamwork, as well as craftiness, will be needed to weather the current economic and industry challenges. Still, the CEO said he's more motivated than ever to preserve Sun's independence.

"We're not going to let the monopoly win," he said. "I can't leave my kids to a world dominated by Microsoft."
 

Second profile: Steve Ballmer