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.
Sun CEO Jonathan Schwartz
(Credit: Dan Farber)
It seems counter-intuitive, but Sun CEO Jonathan Schwartz has been betting the company on that strategy. Speaking at the Supernova 2008 conference, Schwartz explained that free software brings the marginal cost to acquire a customer to zero and helps drive revenue.
Schwartz showed a world map with clusters of dots representing all the people who registered with Sun when they downloaded ZFS (an open-source storage file system) in the last 12 months. Each dot represents a potential customer that cost Sun zero to acquire, Schwartz said. MySQL adds about 100,000 dots a day to the map, he added.
Sun's customer funnel...a world of dots representing free software downloaders.
"The majority is going to buy hardware (to run the free software), and not just from Sun," Schwartz said. The challenge for Sun is when not enough customers choose Sun as a hardware vendor, and buy support services for the free software, to cover their operating costs.
Schwartz pointed to Thumper (Sun Fire X4500 Server0, a server with 48 TB of storage running Open Solaris and ZFS that was on a $100 million annual run rate after two quarters of sales as evidence of free software driving hardware sales. He also shared a conversation with CIOs from major corporations and government agencies, who weren't aware that their IT staff had downloaded MySQL hundreds of times.
Those who charge for new customers by putting a price on software, such as Microsoft, are under siege, Schwartz claimed. He may be right long term, but Microsoft's business for Office and other products has never been better.
Schwartz said the Sun released a version of OpenOffice.org, a competitor to Microsoft Office, about 10 years ago. The suite now has 110 million active users, but Sun hasn't turned that into a significant revenue stream.
"The audiences want the products for free...the only question is will they pick yours," Schwartz said. "However, if ZFS isn't interesting enough to pull the interest of the community, we and our partners can't make money. Free and popular tend to go hand in hand, but they are not mutually exclusive."
Schwartz believes that the free software movement is in its infancy. "We are in the second inning. The first service for free was search, then news and now data center software, but a whole lot of products have yet to see their retail price affected by the network," he said. "Imagine a free phone with no guaranteed contract on the back end. That is all in front of us."
SAN FRANCISCO--While an interview with Neil Young has been my big highlight of JavaOne, I also managed to hook up with Sun CEO Jonathan Schwartz for a video interview. We talked about Project Hydrazine, a new cloud computing initiative with services similar to what Google and Amazon.com offer. We also discussed JavaFX, Sun's competitor to Adobe AIR and Microsoft Silverlight, and Project Insight, which is designed to gather instrumented user action data via JavaFX and provide it to developers.
JavaFX, which includes a runtime, scripting, and a media framework, could have a hard time competing with Adobe and Silverlight, which means attracting developers to the platform could be a challenge. But Sun has a powerful platform accelerant--85 percent of cell phones, 91 percent of desktops, and 100 percent of all Blu-ray Disc players run Java and can be automatically updated to run JavaFX.
Project Hydrazine is slated to deliver immersive, creative experiences in the cloud via services. Rich Green, executive vice president of software at Sun, told me that a storage service, similar to Amazon's S3, would be available later this year. The company is also working on tools to make it easier for developers, as well as consumers, to mash up applications.
Sun CTO Robert Brewin described the emergent Project Hydrazine as a combination of Amazon Elastic Compute Cloud, Microsoft Live Mesh and Google Analytics.
Green also said that e-mail, calendaring, and messaging services would be available as cloud services this year. While Sun isn't widely known for its e-mail services, the Sun Java Communications Suite powers companies such as Verizon.
Project Hydrazine will run on Sun's Network.com platform, which is mostly employed as pay-per-use computing infrastructure for high-performance computing applications.
Sun has to be both an arms dealer to the Amazons, eBays and telcos of the world, and also a direct supplier of infrastructure services.
"It's important for us to be a neutral technology supplier to developers and to operate as a service for those who don't have the wherewithal to buy their own infrastructure," Schwartz told me off camera. "Network.com is the backplane for everything we build--servers, MySQL, JavaFX, tape storage, and the software stack." It's the latest instantiation of Sun's slogan, "The network is the computer."
As an example of its arms dealer persona, Sun announced this week that it is partnering with Amazon to offer OpenSolaris as an on-demand service Amazon's Elastic Compute Cloud (EC2).
Sun has the elements to provide high performance and reliable infrastructure. Now, Schwartz needs to show that his company can intercept the increasing demand for the hardware and software required for the wired planet.
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