Sun's Problems Are Overhyped
How could McNealy, 46, be succeeded by someone nine years older?
FORTUNE, Monday, May 27, 2002
By David Kirkpatrick
To hear CEO Scott McNealy talk, the most notable news about Sun Microsystems lately is that it is gaining market share against IBM and Compaq in big servers. His evidence: Sun's sequential revenue grew slightly in this year's first quarter, while revenues of IBM's and Compaq's comparable divisions sank substantially.
But, Scott, I asked in our recent hourlong telephone conversation, what about all the executive defections? McNealy, playing dumb, treated the question as superfluous. To him, the media are overplaying the announcement that four key senior executives--heir apparent COO Ed Zander, CFO Michael Lehman, and the executives responsible for hardware and services--will depart on July 1. After all, how could anyone have thought that Zander (age 55) would succeed McNealy, who's only 46? "The biggest negative you can write about Sun is that we just had an orderly, organized, and proactive management succession," says McNealy. Well, that plus three consecutive money-losing quarters and the loss of much of its customer base.
In truth, McNealy does recognize those problems, and his reorganization plan--Sun's 13 top managers will now report directly to him--is designed to address them. Everyone will be deployed to build one product line, "the big friggin' webtone switch." (This move to focus intently on the BFWS, as we call it for convenience, reverses moves made in the 1990s to divide Sun into separate business units.) McNealy says BFWS delivers all the hardware, software, storage, and networking "metal-wrapped in a bunch of racks welded shut" that businesses and service providers will use to operate their networks.
My biggest concern about Sun is that its hardware business--which, however you slice it, generates a majority of Sun's revenues and profits--is at risk as Intel's commodity microprocessors get increasingly powerful. So McNealy went to work on me.
First, he points out that Sun's Solaris architecture works in machines with as many as 72 microprocessors operating together. Thus far, few Intel-based machines use more than eight. The Intel camp also remains limited to digesting 32 bits of digital data at a time, he says, while Sun's Solaris chips process 64-bit chunks. Intel is woefully behind schedule in its much touted 64-bit Itanium effort. McNealy says his sources tell him Intel has myriad problems with Itanium. (Intel says Itanium, which has been on the market almost a year, is getting "better and better"; the company points out that Intel powers 88% of servers worldwide.)
Nonetheless, McNealy predicts Intel will eventually drop Itanium and focus on a nascent effort to design a 64-bit chip based on the classic X86 architecture--the same one that underlies its Pentium 4. If he's right, Sun has a great future. Microsoft, which depends on Intel's innovations for its hardware, could be crippled in its efforts to promulgate a vision of high-end corporate computing that competes with Sun's. Increasingly, the battle for the biggest computing installations will be between Sun and IBM, and there's no reason Sun can't hold its own. Even if McNealy is wrong, Sun has a big head start in the enterprise market.
Back in January 2001, I had breakfast with Zander, who, stunned, told me that sales in the preceding quarter had "gone off a cliff--a cliff!" The fact is that almost every other technology business has suffered similar disasters. Compare Sun with its peers, and it seems its problems are probably overhyped.
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