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Sun Micro Fights Back After Caustic Report
Lisa DiCarlo, 05.12.03, 11:20 AM ET
NEW YORK - Sun Microsystems is spitting nails over a biting report from Meta Group, a market research and consulting firm, that suggested, among other things, that Sun's customers should rethink doing business with the company in the long term, and that Chief Executive Scott McNealy should be replaced.
Time will tell if Sun's (nasdaq: SUNW - news - people ) business will be affected by the report, which was distributed last month. In a move the company says is unrelated to the report, Sun has hired a polling agency to question chief information officers to gauge their perception of independent analyst firms, including whether they follow those firms' advice.
Meta's report, titled "Sun is the next Digital unless...," speculates that Sun's technical advantages--its Solaris operating system and Sparc semiconductors--are eroding as commodity hardware and software, such as Intel (nyse: INTC - news - people ) chips and Linux software, become more popular. It concluded that Sun has a weak software and Web services strategy, and that the company has failed to acknowledge the seriousness of the situation.
The report states, "To regain competitiveness, Sun must de-emphasize Sparc/Solaris and bet its future on Intel, Linux and Web services. Unfortunately, McNealy seems unable to drive such fundamental transformation. At this point, the only thing that will save Sun from becoming the next Digital Equipment is a near-death experience and a CEO from the outside."
While many industry watchers have questioned Sun's strategy and its ability to compete with rivals, this is the first direct suggestion that McNealy, who co-founded Sun in 1982, should be replaced. He has seen the value of his stake in the company decline along with Sun shares, which are down 42% over 52 weeks, to $3.88. In late April, McNealy sold 1.6 million Sun shares, which were granted as options a decade ago. Even after the sale, McNealy still owns 56 million shares.
"We fundamentally disagree with their analysis of Sun," says Sun spokesman Andy Lark. "It's not even remotely accurate or fair."
Further, Lark says Sun "has never spent a great deal of money with Meta so that's probably a factor in this, [although] we wouldn't go so far as to suggest a tangible link between spending and the report."
Nick Gall, the primary author of the Meta report, did not return phone calls.
For better or worse, customers do put credence into research because it is perceived as being independent. "There's no question that customers take into consideration the opinion of analysts. It's of concern how much customers regard their view," says Lark.
But independence is not one of the great hallmarks of analysis in the tech industry. Last June, Boston-based Aberdeen Group was the subject of a damning Wall Street Journal story in which the firm's president, Tom Willmott, acknowledged sometimes publishing glowing reports when paid to do so. The article stated, too, that Intel paid Aberdeen to write a critical report about its main competitor, Advanced Micro Devices (nyse: AMD - news - people ).
Analyst firms such as Meta, Aberdeen, International Data and Gartner walk a fine line with the companies they cover. On the one hand, analysts conduct independent research that is often quoted by national news publications. On the other hand, analysts are often paid by these companies to consult on projects like, say, a new product launch.
Lark speculated that Meta is purposefully publishing inflammatory reports for the sake of being controversial--and to make a name for itself. Indeed, Meta's bottom line on Sun is somewhat jarring. "We believe [Sun] has the wrong business model long term [and that] IT organizations should reassess their commitments to Sun for Web servers, application servers and database platforms."
Whatever the cause of the report, Sun cannot afford to lose sales. Revenue through the first nine months of its 2003 fiscal year, which ends in June, is $8.4 billion compared with $9 billion a year ago. Conventional wisdom on Sun right now seems to be that it's being squeezed by Dell Computer (nasdaq: DELL - news - people ) and others at the low end, as well as feeling pressure from IBM (nyse: IBM - news - people ) and Hewlett-Packard (nyse: HPQ - news - people ) at the high end.
Lark says McNealy is aware of the report but has not spoken to Meta about it. "We are used to taking negative commentary, but [not all analyst firms are] perceived equally."
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