Sun chops heads: Can it get any respect?

Sun Microsystems is a pioneering tech company that is having trouble getting any respect.

A Forbes article on Thursday notes that the company's market cap has dropped below $3 billion: "The company has become so toxic that no one dares to swallow it."

As Sun CEO Jonathan Schwartz likes to say, the Forbes writers "over-rotate." But Sun has fallen further and harder on Wall Street than its main competitors over the last few years and months. Schwartz has bravely pushed Sun down the path of open source and created demand for its hardware and service via free software, but the big payoff has been slow in materializing. Add in the crumbling economy, and Sun has no choice but to take cost out of its business model.

From a stock market perspective, Sun has fallen further than its competitors.

(Credit: Yahoo)

This morning, Sun revealed that it is taking the headcount reduction route to profitability, letting go of 15 percent to 18 percent (up to 6,000 employees) of its global workforce and taking a charge of $500 million to $600 million over the next year. The headcount reduction will reduce annual expenses by $700 million to $800 million.

The economic reality is that 2009 isn't going to be a good year for the tech industry. Sun is facing reality with the cuts. Other tech companies will follow with headcount reductions too. This week, IDC cut its 2009 growth rate for spending on tech by enterprise companies worldwide from 5.9 percent to 2.6 percent. The U.S. growth rate for next year was revised from 4.2 percent to 0.9 percent.

Sun CEO Jonathan Schwartz

(Credit: Dan Farber/CNET News)

In the Forbes article, various analysts who cover Sun suggest ways, in addition to headcount reduction, that the company could become more profitable. Among the suggestions: selling the Sparc microprocessor business to Fujitsu, spinning out the Java language group, dropping the low-end hardware business, and selling more customized servers to cloud computing providers.

In an e-mail response Thursday night to my query about the Forbes article--and just hours prior to announcing the layoffs--Schwartz gave his take on the substance of the Forbes piece:

Various analysts have told me our revenue was $299 million last quarter (it was $2.9 billion), that we should lay off 50,000 employees (that would be more than 100% of our employees), that no "real" companies use open source (I guess Google and GE don't count), that we're losing customers in droves (we gained customers last quarter), that we're losing cash (we generated more than $150m last quarter), that Niagara/SPARC is a niche (it was a billion dollar a year business, growing 80% last quarter), that we're losing share on x86 (our biggest competitor was down 18% last quarter, but we grew more than 4%), and that we lost $1.7 billion in cash last quarter (no - we impaired a goodwill asset, just like CNET's parent company, CBS, wrote down $14 billion - it's an accounting change).

So, I'm a tad skeptical of folks looking for sensational column inches... we're very comfortable we're on the right path. We had more than 1,000 requests for our new ZFS-based Storage platforms just a day after launch. And we're deluged with requests from big customers wanting to talk about open source adoption as a vehicle to reduce proprietary licensing fees.

But with even larger companies pre-announcing 15% revenue declines, it's evident the whole industry's got some challenges. I understand everyone's worried, but sensationalism belongs on grocery store checkout counters, not in the business press.

Schwartz is waiting for the world to change, to move to more of a cloud computing model where Sun can power millions of data centers with its hardware, software, and services. This model requires that Sun get more than a fair share of the market compared with competitors like IBM, Hewlett-Packard, Dell and eventually Google. Open-source, free software is Sun's disruptive element. Schwartz maintains that free software brings the marginal cost to acquire a customer to zero and helps drive revenue.

"The majority is going to buy hardware (to run the free software), and not just from Sun," Schwartz said earlier this year.

If Sun cannot intercept enough of the enormous demand for its hardware and services in the coming cloud era, no amount of headcount reduction will earn Sun the respect it craves.

[the_redistributor]

Get rid of the pony tail and Trotsky glasses Schwartz and maybe corporate America will take you more seriously. Right now you look like a pig with lipstick with that pony tail and a suit. In other words, ridiculous.

[JoeF2]

You mean the "corporate America" that brought us the sub-prime mess???
I think we had enough of that.

[Renegade Knight]

I haven't met many stuffed shirts worth impressing. Most of them are too busy being impressed by their own success, and pondering how they can fun for office or move up to a bigger and better company. Most of them are not wise enough to know that their staff laid that success at their feet and that any old stuffed shirt who lets staff do their job will do.

[joetesta70]

So right.

[lorcro2000]

So instead of looking at awesome hardware, great support organisation, absolutely uniquely robust server operating system with unique and massively valuable features like ZFS, Dtrace etc and a very good application server software portfolio like MySQL and Glassfish and so on, you are hung up on the fact that the CEO prefers a ponytail?

Yep, I'm sure it's the ponytail will make or break Sun in the marketplace...

[Len Bullard]

I've never understood how a business makes money by giving away gold if you buy the purse. How do you make that up in volume?

[JoeF2]

Quite a number of Open Source companies, including MySQL before they got bought by Sun, are profitable. Open Source is here to stay. Redhat, for example, seems to do quite well giving away the OS, which is Open Source, and charging for support and additional services.

[JLBer]

@the_redistributor:

Bull. Jonathan Schwartz is a geek, and I find it to be a very refreshing change compared to the stuffed-shirt-and-tie mentality that has infested corporate America for decades. Why is it okay for people like Google to have such an anti-establishment mentality but not Sun?

Sun is a company that makes awesome hardware and a freaking great operating system, but they put the price of their hardware out of the range of a lot of companies and their support has been less than stellar lately. That has absolutely zero to do with a pony tail. Get over yourself.

[the_redistributor]

All I'll say is, when in Rome do as the Romans do!

[meh130]

I fail to see how Sun can arbitrarily cut its way to greatness. Their market cap is below book value. They should have offers to acquire them from larger players, but there are no suitors. I thought Dell might be interested, but Unisys would be a better acquisition for Dell.

Therefore, Sun should go private, and then cut products (and associated engineering, marketing, and sales employees), based on the particular products' lack of ability to generate gross profit dollars and gross profit percentage. New management would be helpful too.

[Penguinisto]

Sun has had this dilemma stalking it ever since the dot-bust, when folks realized that they don't have to pay through the nose (usually to Sun) just to get decent server hardware.

The phrases "Sparc Workstation" and "Sun Server" lost the wow-factor and badge of geekdom way back in 2001. Don't get me wrong - in many aspects, the Sparc processor is still quite the badass. That said, x86 pretty much caught up to it and then some a long, long time ago.

[JoeF2]

The problem Sun has is that they open-sourced Solaris way too late.
They had a Solaris for x86 at some time, shelved it, and only recently released it again. Of course, by that time, Linux has been entrenched in the x86 server market. Now they open-sourced Solaris, but it is going to be an up-hill battle against Linux.

[Penguinisto]

Agreed, but with caveats. Solaris was around for x86 for a very long time (I know it goes back further, but I have a Sun-distributed x86 installation disk for Solaris 7 in my "I'll probably never use it again but just in case..." pile).

They were unable to open-source Solaris earlier though, because of all the SysV licenses they were paying to AT&T, then UNIXV, then SCO... up until Novell gave away that store 2-3 years ago.

[lorcro2000]

Actually, that's untrue. The current SPARC generation with multiple cores and threads handles a heavy parallellized workload far better than x86, and that is what is needed on servers these days. That said, it's not the sole answer to what a company needs, sometimes you need maximum single thread performance and thats where x86 shines, but for those who actually know and work with this stuff, "SPARC server" is still a pretty wow-filled phrase.

However, the point is moot since Sun sells very price competitive i386 (x64) systems as well and that part of their business is even growing. So you can pick and choose and still get some of the best server hardware out there, regardless of what architecture you want to go with.

[dennisl59]

Didn't these guys buy StorageTek?...Destroyed the Brand. It's D2D Backup now, but someone forgot to tell them, yes?
Don't these guys continue to launch Storage Systems that, wait for it...NOBODY BUYS!!!
Question: What support doesn't get contracted out by them to someone else?
Question: How many people does this company actually employ(badged)?
Question: If they went away, who would really care(except the last few employees that would turn out the lights?)

Go private and just pack it in...A sad tale of a technology company that technology has left in the dust. Not the first and won't be the last.

Thank You.

[joetesta70]

Sun is a dying star.

[ozicecool]

SUN had a great opportunity to become a leader in Open Source space when Scott was leading the company, however so very wired reasons he did not want to take that route. Of course they did started later on however I think it is bit too late to make major in-roads soon. MySQL acquisition was a costly one. Everyone seems these days cutting the head count is the way to save money and grow. I don't totally agree on that. Yes you can save some in the short-term, however you cannot grow your business by cutting down staff.

[Penguinisto]

@ozicecool: For Solaris, that "weird reason" had to do with UNIX SysV licensing. For Java? Dunno... ask them.

/P

[jimwhite467]

SUN had lost its radiance long time ago. Java has lost its appeal. The Wintel world dominates the enterprise as well as the consumer market. Is it time for SUN to go the way of DEC? Gone forever? Maybe IBM should buy SUN just to grab the customers. With open source, it is too little, too late.

[The_Decider]

Java still rules the enterprise arena and likely will for a long time despite .net's rather weak attempt to take over.

[idfubar]

Not a whole lot of quantitative substance in the comments thus far...

[aintnorainbowdorothy]

You're right. I like to read the comments just to laugh. And mostly I get to laugh long and loudly. There happen to be a few, very few and far between, serious comments, and then I sometimes ac tually get some information. But mostly, the comments are just plain laughable.

[brianjhodgson]

Unfortunately, Sun's current strategy is only a distant cousin of what made them great.

http://fivepond.com/2008/11/16/setting-sun/

[technogeist2k6]

I too have a pile of solaris cds and it's not for want of trying, but I have yet see solaris install on anything approaching humble consumer hardware.

If they are wanting a bigger market share, then they *must* do better to address the issues facing the ordinary consumer market. Sun appears to be diametrically opposed to MSFT which has good consumer focus. It's no good relying on enthusiasts to populate their hardware compatibility list. Do it yourselves if you want to accelerate the takeup of solaris.