Outside the Lines

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.

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.

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.

Guest post: Jean-Louis Gassée explains how Microsoft's future business model will borrow from both Apple and Google to compete with the free world of software. The essay was originally posted on Monday Note.

How do you compete with free? That's the question Steve Ballmer, Microsoft's CEO, is trying to answer every morning when he goes to work. On the server software side, Windows Server is doing well, especially with the Exchange e-mail server and the unheralded but very good collaboration server, SharePoint. These products have matured, they're relatively easy to set up and manage by IT organizations. The Exchange component is a spectacular success: it manages e-mail, contacts, calendars for hundreds of thousands of organizations all over the world. Even Apple finally embraced Exchange: the iPhone now syncs well with Microsoft's server and the next version of OS X promises "native" Exchange support. In plainer English: Apple's Mail, Address Book and iCal programs, for example, will sync with Exchange "out-of-the-box" just like the iPhone does. (This will be a relief to suffering Entourage users. Entourage is Microsoft's own Outlook sibling on the Mac, but it is a poor relative and lacks Windows' Outlook depth and polish.) Seeing that Windows Server generated more than $20 billion last year, one is tempted to think everything is going swimmingly.

Unix is the problem or, rather, the free Open Source implementations of its function set called Linux and FreeBSD, to name the best-known variants. While Windows Server and Exchange still reign for many Enterprise applications, tens of millions of Web sites run on Linux of FreeBSD software. Further, the Open Source nature of such software encourages sophisticated users to modify the operating system to fit their specific hardware configurations or applications requirements. For example, Google designs and manufactures (!) its own servers and customizes the Open Source OS they run. There's even a rumor they "roll their own" 10-gigabit Ethernet switches but I don't know vouch for that one. In any event, imagine how much the Google account would be worth to Microsoft if the Mountain View company used Windows Server? Knowledgeable readers will immediately object: Google running Windows Server isn't realistic. Not for price reasons but because Microsoft's server software isn't technically suitable for large "server farms" such as Google's. True. It'll be interesting to look at what Microsoft uses for its own Live cloud. In the past, Microsoft has had to resort to "other" server software for applications such as Hotmail. But, "scalability issues" (the ability to grow to serve very large server farms) aside, Microsoft is losing against free server software for the millions of simpler Web servers sprouting all over the world. And, as Linux and its cousins mature, they will inevitably make inroads in Enterprise applications where Microsoft still leads. Open Source competitors to Exchange do exist, they're not yet a strong threat but, if they keep improving, they will erode Microsoft very juicy server business.

On the desktop, Linux is trouble again, but much less so than in server farms. For consumers, as opposed to technically versed sysadmins, ease of use is still a strong plus for Windows. I bought two identical Asus EeePC netbooks, one running Windows, the other a Linux distribution. Windows is still much easier to use and update, Linux is still a little rough on normal humans. One example out of many glitches: the version I used didn't remember Wi-Fi access points and passwords. I had to re-enter everything each time I turned the machine on. This type of problem has prevented Linux from gaining much ground on the desktop.

But this could change: the success of netbooks, their large unit volumes could encourage a manufacturer such as Asus, Acer or Lenovo to invest in the needed polish to make a Linux-based netbook as easy to use as a PC or Mac -- or close enough at a much lower price. And the name, netbook, reminds us it might not need today's (or is it yesterday's?) full suite of robust desktop applications to succeed--it will run applications on/from the Cloud. Imagine a Google netbook.

Lastly, smartphones. Ballmer tries to change the subject by suggesting Apple ought to license its iPhone OS as opposed to keeping it all to itself. Let's skip over Microsoft's proprietary Xbox and Zune software and, perhaps, the upcoming Danger smartphone. Danger, the maker of the Sidekick PDA, is the company Microsoft bought earlier this year,. Microsoft has been selling Windows Mobile licenses for close to eight years now. In the licensing business, the iPhone isn't the real competition, Android is. How do you compete with a free smartphone OS, and a good one at that, which is supported by Google Cloud applications?

My guess is Steve Ballmer is working on a combined answer, one that is sketched before our very eyes already. Microsoft's Live services are but a rehearsal for a much bigger act, Microsoft's Cloud OS, sometimes called Strata. And, based on Microsoft's own Cloud services, we'll see a Danger-based smartphone, as proprietary as the Xbox and the iPod competitor Zune. Put another way, Microsoft's future business model will borrow from Apple and Google, it will have two components: proprietary devices and "universal" Cloud services. And like its models, it will attempt to extract extra profits by nicely tying both components together. For example: iPods are tied to the iTunes service, Android phones might (we don't know yet) better enjoy Google applications.

Interesting times ahead.

Jean-Louis Gassée is a general partner at Allegis Capital. Prior to his venture capital career he founded Be, Inc., which was sold to Palm in 2001. Gassée also held several positions at Apple Computer. He started Apple France in 1981, and in 1985 became president of the Apple Products Division. Earlier in his career Gassée as worked at Data General, Exxon Office Systems and Hewlett-Packard.

On this week's EIC Squared podcast, ZDNet's Larry Dignan and I talk about the big story of this month--the Olympics. Microsoft and NBC are hoping that their servers and software can handle the load as the Silverlight code (Microsoft's competitor to Adobe's Flash) takes its maiden voyage at NBCOlympics.com. In addition, the Department of Homeland Security is advising that people traveling to the Olympics leave their phones, laptops, and other digital equipment at home. "Somebody with a wireless device in China should expect it to be compromised," said Joel Brenner, the U.S. national counterintelligence executive. The "somebody" includes cybercriminals and Chinese security forces. We also talk about LinuxWorld in San Francisco, which wasn't a big hit, and Google's new opt-out policy, which has merged its tracking efforts with DoubleClick's.

Click here for more stories on tech and the Beijing Olympics.

Netvibes, a developer of customizable start pages, plans to make its widget platform, application programming interfaces, and iPhone version open source, according to CEO Tariq Krim.

"We want to compete with Google widgets," Krim said. "Our container supports Google widgets and every other platform. If we release our code, people will leverage it and grow the reach of our platform."

Krim hopes that supporting a broad range of platforms, including Windows Vista and Windows Live, Mac OS X, Opera, Yahoo, and Google, will inspire the developer community to adopt and innovate on the Netvibes platform.

Netvibes will make money with sponsored widgets, Netvibe Universes, and business services. Opening up the code to developers will enable them to compete on more equal footing with Netvibes as well.

Bret Taylor, formerly of Google and now of FriendFeed, has a greater appreciation for the business development function. In a post today he wrote about the challenges of getting legal access to factual data--such as mapping, stock quotes, white pages, TV schedules, movie show times, and sports scores--for use in applications.

If you want to experiment with a new driving directions algorithm, it is infinitely more difficult than coming up with an algorithm; you have to hire a lawyer and a sign a contract with a company that collects that data in the country you are developing for.

He adds that some of the data has quality problems or is incomplete. In sum, Taylor believes that innovation is stymied and the barrier to entry is raised in the current environment. It's not just the need for lawyers and contracts but also the issue of companies that sell data restricting use.

What the solution to freeing up the data? Taylor advocates open-sourcing factual data, and competing on use of the data, not access to it. He wrote:

To this end, I think we should create a Wikipedia for data: a global database for all of these important data sources to which we all contribute and that anyone can use. When a user reports an inaccurate phone number in your products, save it back to the DataWiki so everyone can benefit, and in return, you get everyone else's improvements as well. If your local movie theater doesn't have listings data in DataWiki, you can type it in yourself, and everyone in your town can benefit, and all the products you use that access movie listings will automatically update. Need better mapping data for a city? Pay to collect it, and upload it to the DataWiki. In return you get all the other cities other companies paid for (sort of like a company contributing device drivers to the Linux kernel).

For centuries, companies have made money in exchange for doing the busy work of collecting, massaging, and publishing factual data. The same was true for encyclopedia data until recently. Taylor is definitely onto something, but it presents some real data collection challenges. The open-source community is sure to take up the challenge.

The question is, will the companies that already have the data be of assistance? It's not exactly in their best financial interest to give away their content, but the example of Wikipedia should give them the incentive to press the pause button.

See also: Sarah Perez discusses where to find open data on the Web, such as CKAN (Comprehensive Knowledge Archive Network), OpenStreetMap and Freebase.

Blog network GigaOm has launched OStatic to cover open-source software.

OStatic is an example of GigaOm's beyond-blogging approach, integrating various services as part of a more complete microsite. In addition to blogs, OStatic includes a comprehensive directory of 150,000 open-source applications (similar to SourceForge), 30,000 closed-source applications, and a question-and-answer forum similar to Yahoo Answers. Readers can participate by contributing product reviews.

"We plant to track open source as a business and to make it easy to access information about various open-source projects," said Om Malik, founder and editor of GigaOm.

OStatic has about nine contributors who will be blogging about the news and events shaking up the open-source world.

The timing is right for OStatic as evidenced by growing acceptance of open source in corporations and the increasing valuations of open-source companies, Malik said. Sun Microsystems, for example, recently acquired MySQL for $1 billion.

OStatic was built in conjunction with Vox Holdings.