Sun Looks to Wall Street in a Comeback Bid
The New York Times
September 20, 2004
By JOHN MARKOFF
S AN FRANCISCO, Sept. 19 - Standing before 30 executives from
a Wall Street investment banking customer, Jonathan Schwartz, the
38-year-old software executive who is trying to revive the foundering
computer company Sun Microsystems, acknowledged why his company
was in trouble.
"What happened three years ago is that you became bitter
and cynical," he said to the executives from the financial
services industry, which has long been Sun's bread and butter.
Sun once was widely respected as a technology innovator that
powered Wall Street and other parts of corporate
America with computers and operating system software.
Now the company has the challenge of convincing customers
that it has not grown lazy and ineffective in middle age and
that it remains relevant in a rapidly changing industry.
Mr. Schwartz, who was named president and chief operating officer
in April by Scott G. McNealy, a Sun co-founder, is betting that he has a plan
that will bring customers back on board.
On Tuesday that strategy will get its first major test in New York.
In a "Take Back Wall Street" campaign, Mr. Schwartz plans to introduce the
latest version of Sun's Solaris operating system, which he hopes
can convince Wall Street firms that Sun's technology remains relevant to their
huge data centers. While it will be a challenge, industry executives
and analysts say it is not an impossible sell. Sun, based in Santa Clara, Calif.,
is still widely perceived to be a technology leader, despite having laid
off 11,800 employees - 27 percent of its former work force - and sustaining a
collapse of its stock, to less than $4 from over $60 in 2000.
And Mr. Schwartz, a longtime software entrepreneur who joined
Sun Microsystems when it acquired his company in 1996, is taking bold steps in
an effort to save Sun.
After years of clinging to its own proprietary hardware standard
based on Sparc microprocessors, Sun is now moving its Solaris
software into the mainstream: the market for big network server
computers based on the so-called x86 series of processors
standardized by the chip maker Intel and
its rival Advanced Micro Devices.
Freeing Solaris from its reliance on Sun's Sparc chips makes
it available on computers from more than 200 manufacturers. That, in turn, can
enable Solaris to compete more effectively against the increasingly
popular Linux operating system, which is distributed by a variety of companies
and is used to power a growing number of corporate data centers.
(The new Solaris will be able to run Linux application programs, further
enhancing its potential appeal.)
Mr. Schwartz is also relying on the company's historic détente
with Microsoft earlier this year, in which the two companies agreed to coordinate
their products. The first results from the joint effort, expected before
the end of the year, will interconnect Microsoft's computer network sign-on
system, known as Passport, and Sun's, known as Liberty Alliance.
Software is not the only play. Sun is also counting on the recent
return of one of its four founders, Andreas Bechtolsheim, to build computers to
win back a meaningful performance edge that the company has allowed to erode.
More than any other factor, though, it will be the success or failure
of Solaris 10 - the new operating system being shown to Wall Street this week -
that could determine whether Sun can return to anything resembling
its former glory. Analysts and first customers of the new software say it
represents a generational shift for Sun, offering a variety of technology
features not available under Linux or Windows.
Key functions include a performance monitoring system
alled D-Trace that makes it easy to see how programs are functioning during normal
business operations, and to identify any bottlenecks and
work around them to make the programs run faster. Another new feature, Containers, is
meant to let corporate users crowd programs more efficiently onto a single computer.
A file storage system called ZFS organizes information in
a modular fashion that removes many of the data limits of a file-based system and is
designed to offer better data protection. ZFS is particularly impressive,
analysts note, because a similar feature has proved a thorny technical
challenge for Microsoft and is one of the reasons it has delayed
introduction of its Longhorn version of Windows.
One early customer of Solaris 10 has been the Philadelphia
Stock Exchange. In July, the exchange started using an electronic options trading
system based on Solaris 10, which runs on the Sun servers
that were already in place. "Solaris was key for us," said William H. Morgan, the chief
information officer of the exchange. "We needed a significant increase
in system capacity, and the new software let us scale up without changing
our computing environment."
While it will take many more customers like the exchange
for Mr. Schwartz to prove his strategy, there are already
indications that the battered computer maker is showing signs of revival.
In recent weeks the company's stock price has bumped
up as much as 23 percent, buoyed in part by market research
reports from IDC and Gartner that Sun increased server shipments
during the second quarter, more than I.B.M., Hewlett-Packard or Dell.
Sun shares closed at $3.94 on Friday,
still a long way from their peak in 2000.
Sun, which emerged from a Stanford University computer design
project and was founded as a company in 1982, had already become a corporate
computing mainstay before the Internet boom. But it grew explosively
during the dot-com era, on the strength of brisk sales of its powerful server
computers to telecommunications and Internet companies eager
to expand their network capabilities. But with the dot-com collapse, Sun went into
a precipitous decline. Its annual revenue fell to $11 billion last year,
compared with $18 billion in 2001, and it only recently returned to
profitability.
The fall was so swift that many analysts and customers still view
Mr. Schwartz's effort as a lost cause. Yet, compared with many turnaround
efforts, in which hired guns come in long after a company's original
founders are gone, Sun retains two of its four co-founders.
At 49, Mr. McNealy, Sun's chairman and chief executive, still exudes
a striking passion for the company he helped found. And he dismisses
criticism that by picking Mr. Schwartz to be his second-in-command
he has erred by choosing someone too similar to himself in demeanor and
charisma.
"That's like saying there's something wrong with a 747 because
two of its engines are exactly the same," Mr. McNealy said. "Jonathan is a very
good pure manager, and most of all, he has courage."
Still wearing the ponytail he has had since he was a liberal arts
major at Wesleyan in the 1980's, Mr. Schwartz came to Sun by way of Lighthouse
Design, a small start-up he help found in the late 1980's with a
group of college friends. A business strategist, Mr. Schwartz is a contrast to the
man he succeeded, Edward J. Zander, who ran Sun as the ultimate
computer salesman. Mr. Zander left in 2002, later becoming chief executive of
Motorola.
Mr. Schwartz "just likes building businesses," said Walter Smith,
a friend who met Mr. Schwartz in 1983 during his freshman year of college. "He's
the kind of guy who reads Business Week for fun."
Mr. Schwartz's management style is based on a Silicon Valley
worldview that retains the sensibilities of a hacker's pure passion for power of
computing, as well as a refusal to tolerate the mediocre.
Last year, not long after taking over as Sun's head of software,
Mr. Schwartz brought his staff members together at the company's campus in Menlo
Park to review more than 100 of Sun's crucial software applications,
people who were in the meeting recall. After looking at the first 20, however,
Mr. Schwartz threw up his hands in frustration at what he perceived
as substandard work, and said bluntly, "Shoot me now!"
Now, running the entire company, Mr. Schwartz is gambling
that Sun can thrive again by refusing to ape its principal competitors, which are
increasingly selling commodity hardware and software to business
customers and seeking profits either through ultraefficient operations or the
sale of services. "The only way to survive in a commodity market is
with technology," he told the Wall Street executives last week. "We are
redoubling our investment in research and development."
Mr. Schwartz sees his technology ace card in Mr. Bechtolsheim.
As a Stanford graduate student, Mr. Bechtolsheim designed the prototype of what
would become the first Sun workstation. He became one of Silicon Valley's
legendary designers and has created and sold several successful
companies since he left Sun for the first time in 1995.
In the meeting with the Wall Street executives last week (all technology
executives from an investment bank who allowed a reporter in the room on
the condition that they not be identified), Mr. Bechtolsheim stood dressed
in jeans and a sweat shirt. He showed the executives a prototype of one
of the new server computers he is creating - a single-rack machine with
up to eight processors that he said would have more computing power than
a 10-rack Sun server today. So revered is Mr. Bechtolsheim in technology
circles that the visitors sat entranced.
Mr. Schwartz took the floor next. Dressed in a tailored suit, he spoke comfortably without notes.
"We can be very disruptive with simple price models," he told the visitors.
He noted that in the 1990's, Wall Street analysts told Sun it should
abandon the Sun operating system in favor of new technology coming from
Microsoft.
"We didn't and it was a very unpopular decision," he said. "But it
was a $100 billion correct bet," adding that by continuing to offer its own operating
system, Sun thrived in the dot-com era. Now, he said, the world
was again telling Sun to give up on its operating system, and this time move to
Linux. But Sun is basing its future on Solaris.
One of the executives was not convinced, noting that the path of
least resistance for his bank was to stick with a homogenous computer
environment provided by Microsoft or based on Linux.
Unfazed, Mr. Schwartz asked his audience to keep an open mind.
Solaris 10, he told them, can run faster than Linux on computers based on either
the x86 industry standard or the Sun Sparc hardware standard.
"Sun can win on performance, and we think we can win based on the lowest total
cost of ownership."
Mr. McNealy acknowledges that Sun missed the deeper implication
of the rise of the World Wide Web, which moved the center of gravity in the
computing world from large, monolithic computing systems to a
profusion of smaller, independent processors. But because Sun was not the only
company to miss the shift, it is in the hunt to design computing systems for the new world.
"If the world hadn't changed, it would be enormously difficult for them,"
said Mark D. Stahlman, a financial analyst at Caris & Company, a New
York-based investment firm. "In a new situation, the compelling requirement
is to reinvent yourself."
And Sun heads into that world with more than one million Solaris
customer licenses, a more than adequate base from which to launch the
company's newest software technology - if it can convince most of
those customers, and new ones, to tag along.
That customer base, and the tradition and opportunity it represents,
is at the heart of why he has stayed at Sun, Mr. Schwartz said, saying he has
had several opportunities to leave.
"When I came to Sun in 1996, it was at its heart a good company,"
he said. "We cultivated the most interesting technologies, we took on the titans
and we showed no fear. That legacy is why I've stuck around."
Copyright 2004 The New York Times Company
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