Setting Sun: McNealy vows to keep fighting Sun Microsystems' setbacks
CEO discounts accounting revisions, stock drop, says firm will rise again
Benjamin Pimentel, Chronicle Staff Writer Sunday, October 12, 2003
www.sfgate.com
In the technology world, Scott McNealy is known for his feisty leadership of Sun Microsystems -- and his passion for ice hockey.
Asked what ice hockey tactics he's been able to apply to running a business, he quipped in an interview with The Chronicle last month, "Mostly spearing, cross-checking and elbowing."
The outspoken McNealy, 48, has been fighting fiercely to lead his company out of its worst crisis, amid a severe technology slump and mounting skepticism from analysts who believe that Sun is on its way to total irrelevance -- if not collapse.
During the past few weeks, the Santa Clara firm has stunned Wall Street by posting a $1 billion loss, which caused its stock price to take a hit and prompted another round of criticisms from some industry and financial analysts.
Once known as the leading provider of corporate computing, Sun has struggled with sagging revenues and speculation that it could be a target for a takeover or turn into an inconsequential niche player in the tech industry.
McNealy shrugs off such predictions.
"We've been underestimated for 22 years," he told The Chronicle last month at the SunNetworks conference in San Francisco.
"We'll probably be underestimated for the next 22," he added. "That's OK. I'd rather come in as the underdog. Sun wants to be the underdog. Sun is a great underdog."
When McNealy co-founded the company with students from Stanford University and UC Berkeley in 1982, few expected the startup that sold computer engineering workstations to emerge as a major company.
But by the 1990s, Sun was a technology powerhouse.
During the technology boom, the company billed itself as the "dot in dot. com." It was more than a PR slogan.
To the hundreds of cash-flush tech startups that were rushing to set up computer systems linked to the Internet, Sun machines became the computer of choice. Many of these companies were led by young entrepreneurs in their 20s.
In a 2001 meeting with foreign reporters, McNealy described the craziness of the time: "People with spiked hair were throwing money at us, saying 'Where's my server? Where's my server?' "
But then the technology market collapsed. Like other major technology firms, Sun's earnings plummeted.
From a profit of $1.8 billion in 2000, the company reported a loss of $3. 43 billion in its fiscal 2003, which ended June 30.
Other major tech firms, including IBM and Hewlett-Packard, have also struggled with sluggish sales, due to a steep decline in corporate spending on technology.
But of the big guns, Sun has taken the biggest hit.
Its worldwide revenue from servers dropped about 34 percent, from $9.7 billion in 2000 to $6.4 billion in 2002, according to Gartner Dataquest.
In comparison, IBM's revenue slid 4 percent from $13.9 billion to $13.4 billion in the same period; Dell's dipped 6 percent from $3.5 billion to $3.35 billion and HP's when combined with that of Compaq Computer, which the Palo Alto firm bought last year, dropped 27 percent, from $15.4 billion to $11.2 billion.
Sun faces a bigger dilemma.
The company's major selling point has been its high-quality corporate servers, which companies used for such tasks as monitoring inventory and managing payroll.
But Sun's machines are based on a chip and an operating system of its own design -- the Sparc chip and its version of Unix, called Solaris.
Sun's rivals, led by IBM, HP and Dell, sold machines based on industry standard chips and operating systems, mainly Windows and Linux.
Although some of them were considered less sophisticated than Sun's, they were less expensive and considered good enough for companies that had become more cost conscious.
"It's not that Sun's products didn't work," said Gary Beach, publisher of CIO magazine, which is geared to chief information officers. "They worked fine.
They were just expensive."
Analysts and Sun's competitors believe that this shift to industry standard technology in the corporate technology market is inevitable -- and that because of Sun's position, the company is doomed.
The company is battling it out with Dell and HP in the low-end server market, an area defined as machines priced at $100,000 or less, sold mainly to small- and medium-size businesses.
In a sign that many companies are shifting to lower-priced machines, Dell has posted the most dramatic rise in shipments of server computers, from about 568,000 in 2000 to about 852,000 in 2002, according to Gartner Dataquest.
The mid- to high-end market for servers covers machines priced at $100, 000 and up -- including mainframes and supercomputers -- sold to big corporations, government, the military and universities.
While Sun has remained dominant in this arena, it has also begun to lose ground, mainly to IBM.
"They are, at this point, turning into a niche company -- but without a niche," said analyst Joseph Beaulieu of Morningstar. "They've got the high-end stuff. They've got the low-end stuff. At the low end, there is a lot of price sensitivity. At the high end, the technology matters a lot, and you throw in a lot of R&D to support that."
Analysts say trying to do both has become increasingly more difficult for a company whose revenue has plunged dramatically during the past three years.
"It remains a question of Sun's ability for sustained margins to support its lifestyle,'' said analyst Gordon Haff of Illuminata, a technology research firm in New Hampshire.
A big part of the Sun lifestyle is heavy investment in research and development.
Sun spent $1.8 billion, or 15 percent of its revenue, on R&D in fiscal 2003, compared with Dell, which spends only $500 million a year -- less than 1 percent of its revenue.
Despite criticism that it was simply spending too much on R&D given its sagging sales, McNealy and the rest of his team have continually stressed that Sun will remain committed to innovation.
In many ways, Sun's persistence in pouring its precious dollars into research is fueling one of the big debates in the technology industry: How big a role does innovation -- that is, remaining a pioneer -- truly play in the success of a technology company?
Some analysts consider Dell the model of the future: a company that achieved success by being a quick follower, plunging swiftly into emerging markets rather than by blazing trails.
Analyst Steve Allen of Sierra Tech Research disagrees.
He says that despite the rough ride the company is having, McNealy and Co. are on the right track in working to discover the next big thing in technology.
"Sun has been scaling down for a while, but to scale down R&D spending, I think, would be the kiss of death," Allen said. "They have to out-innovate and out-think their competition."
Sun appeared to be doing just that last month, with a host of new initiatives and technological breakthroughs.
The company unveiled new strategies, including a bold plan to sell software systems at $100 per employee.
The initiatives were part of Sun's bid to reinvent itself from a company that sells mainly servers to one that tries to offer complete IT systems that are less complex and less costly than the competition.
"I think Sun is going to be a niche player -- the niche is technology infrastructure," said Larry Singer, Sun's senior vice president for global market strategies.
A week later, Sun wowed the technology world by announcing that its scientists were developing a revolutionary new chip that could transmit data between 60 and 100 times faster than today's fastest chip.
Analysts, even those who have been critical of the firm, say it was a good sign that Sun was fighting back.
But then, about two weeks later, Sun dropped a bombshell. The company announced accounting revisions that led its fiscal 2003 losses to balloon by more than $1 billion.
The revision caused Sun's stock price to drop by more than 20 percent in the days following the announcement. The price has recovered since then. Sun shares were up 12 cents, or 3.38 percent, at $3.67 at the end of Friday's regular trading. The announcement also prompted a prominent Wall Street analyst, Steven Milunovich of Merrill Lynch, to write an unusual and scathing open letter to McNealy and the Sun board.
Arguing that Sun is at risk of becoming irrelevant, he wrote, "There is simply no choice but to be profitable now. Users are consolidating purchases among fewer vendors."
He argued that, to become competitive again, Sun must cut up to 7,000 jobs, spin off its Java technology and give McNealy "a makeover" to make him less "brash and contrarian."
Milunovich does not own Sun stock, but his company has had an investment banking relationship with the technology firm.
Sun had also announced that it did not expect to become as profitable as it had hoped in the near future. It will report first-quarter earnings later this week. The company has said that it expects a loss of 7 to 10 cents per share.
That's bad news for the company because it is happening at a time when the technology industry appears to be reviving, analysts said.
"Sun is not showing any signs of coming out of the downturn, while other companies are starting to show some signs" of recovery, Haff of Illuminata said.
But Singer compared Sun's situation with one of the tech industry's most incredible turnaround stories. In 1993, IBM, faced with sluggish sales, transformed itself from a mainly computer hardware firm into an increasingly IT services company. Today, Big Blue is once again among the strongest of the tech world's big guns.
Singer argued that Sun, which has already managed to transform itself from a workstation company to a server maker, was in the process of reinventing itself again. And it will take time for the shift in strategy to pay off.
"Any successful company has to mature and evolve," Singer said. "The best time to do this is when the market is down."
Some analysts have speculated that Sun could become the corporate computing world's Apple Computer, a highly respected technology with a small group of loyal followers.
Asked about his reaction to this comparison, McNealy sounded defiant.
"I don't react," he said. "I don't get paid to react. I get paid to go deliver returns." |
