From Briefing.com:
11:26 ET
Sun Microsystems (SUNW): $4.99 +0.13 (+2.7%) And so it has finally come to this: Free and open software from a major vendor. Sun announced today that the next version of Solaris, the "Sun version" of Unix for Intel processor systems, will not only be free, but the source code will be completely open. The idea is radical and presents a competitive challenge not only to Microsoft (MSFT), but to other "alternative" operating system vendors, like Red Hat (RHAT).
Sun used to compete on the basis of having a "better" solution: for a while it was faster processing in the "workstation" era (in the late 80s and early 90s), then it was "better networking" in the mid-90s (their slogan was "The Network is the Computer"), then it was having a better programming language for the internet era with Java. In fact, in the early days of the Internet, Sun servers running Solaris were the choice for most web sites (including Briefing.com in 1996/1997). However, Sun's dominance soon faded as Microsoft adapted everything to be internet-focused. Since the collapse of the internet technology frenzy in 2000, Sun has only been able to "stay afloat" competitively, with modest, but continual downward trends in revenue and losses in three out of four quarters every year. The writing has been on the wall for some time: with proprietary approaches, Sun stands little chance of betting Microsoft in establishing industry standards (even though Microsoft's industry "standard" solutions are really proprietary also). The importance of industry standards is clear: when you set an industry standard, even though it is open, users migrate to purchasing that vendor's tools productions and platform products that conform to the standard. There is a certainty of "things working together" that makes this approach wise for most independent software developers.
So, apparently, the strategic thinking at Sun has changed from trying to compete with Microsoft head-to-head to seeking out Microsoft's soft-underbelly. By making the operating system open and free, it means that independent software vendors can have as much visibility into the inner workings of the operating system as a staff programmer at Sun. This will be the complete opposite of how Microsoft shares information with independent developers. At the core of this strategy is an attempt to persuade the programming staffs at large enterprises that working with Solaris will enable them to build their customized applications in a faster, more efficient way. The ability to exploit open source code for the operating system means that the platform software can actually be "stripped down" to only the essentials needed in a particular business application. Operating systems are "multi-purpose" currently. With many features in other choices like Windows NT unneeded, the ability to streamline operating system functions to only those needed could increase performance and reduce complexity for many enterprise solutions.
Although free certainly is appealing, we think the openness is the real competitive advantage. Enterprises will pay Sun for maintenance and support services, but also for customization services. The driving force in enterprises today is "customization" of enterprise systems: taking industry products and weaving them together to achieve the IT system specific for that particular enterprise. IBM figured this out seven years ago and now derives more than 50% of its revenue from custom software development and consulting services. Sun can do the same thing and this brilliant shift in strategy is likely to revive the company.
The only problem with this shift is that the market does not value a company with a service business model any where near as highly as a technology model. With service delivered mostly by humans, a scalable business model is difficult. The shift may well save Sun from a long, slow decline (like that of the minicomputer vendors 15 years ago), but it probably won't turn the company into an earnings powerhouse with high forward PEs.
The real "market impact" of this strategic shift is the competitive pressure it will place on Microsoft and others. In particular, Red Hat will find it extremely hard to compete against Sun in the enterprise space. The future for Red Hat had been expanding into larger networks in corporate enterprises over time, as a real alternative to costly and closed Microsoft solutions and also installed Sun solutions. Sun already has a strong, but weakening presence in the enterprise space. Now, instead of replacing costly Solaris systems with Red Hat Unix systems, enterprises are far more likely to replace them with free Solaris systems. In the final analysis, this move should be seen as further confirmation of the maturation of the enterprise technology space. Platforms and tools are becoming commodities (even free commodities!) and value will accrue at the application level. The investable action from Sun's announcement today is not long-Sun or short-Red Hat. It is to figure out who Microsoft will acquire to gain a presence at the application level. - Robert V. Green rvgreen@briefing.com |
