Opinion

posted on 11 July 2008 08:35

Sun's market capitalization has fallen to $7.64 billion with shares down to $9.77 as the market waits for its Q4'08 and full fiscal year 2008 results. The company seems mired in a limbo with a strategy that has wrung some profit out of its operations but with a product strategy radically different from its peers, the open sourcing of its software and some of its hardware intellectual property (IP).

<sup>I had a friend was a big baseball player
back in high school
He could throw that speedball by you
Make you look like a fool boy
Saw him the other night at this roadside bar
I was walking in, he was walking out
We went back inside sat down had a few drinks
but all he kept talking about was ...

Glory days.</sup>

When Sun reported an unexpected Q3 loss for the Jan-to-end-March quarter, Q3 in its fy08, the shares tanked, falling from $16.33 on May 1 to $12.64 on May 2. Since then they have steadily declined to the current $9.77 value, so losing 40 percent of their value and taking the company's market capitalization from $12.73 billion down to today's level.

The shares and investors are waiting for the full year results, due on August 1st. The company appears to be already reducing its head count according to reports and employee blogs. Thirty to 65 percent of the marketing department may be hitting the exit. Some 212 positions went in Broomfield and Louisville, part of a 1,500-2,500 headcount reduction initiated after the Q3 loss.

A local paper, the Broomfield Enterprise, reports a Sun spokesperson this: "Sun has announced the need to reduce overall spending in its fiscal year 2009, including a reduction in headcount," Sun officials wrote in a letter to the Colorado Department of Labor and Employment. "Sun has identified and continues to identify which employees will be impacted."

Sun officials also noted that the company has "preliminary information that additional employees will be terminated sometime between Dec. 23 and Jan. 5, 2009."

In fiscal 2007 the company made a profit of $473 million on revenue of $13.875 billion, a 3.41 percent return. This can be contrasted with NetApp which reported revenues for its 2008 fiscal year of $3.3 billion and net income of $309.74 million, representing a 9.36 percent return, almost three times better.

Sun has been struggling for a long, long time, with a string of net losses: 2003 -$3.384 billion; 2004 -$388 million; 2005 -$107 million; 2006: -$864 million, until the 2007 profit. This was wrung out of Sun by CEO Jonathan Schwartz (pictured below), appointed in April, 2006, who slimmed down the company to its present 30,000 or so employees, improved its operations, and centered its software on the current open source, developer-led strategy.

The company has under-performed compared to the stock market. It is a company in transition, from a Unix-based proprietary server and storage hardware supplier with a flourishing but not greatly profitable Java software business, to a mixed proprietary and industry-standard hardware server, storage and networking switch business with software become more open source by the day.

You can't, obviously, sell open source software. You hope that corporations and public sector bodies employ or buy from developers that build applications using it and then buy your hardware and services to run those apps. So Sun regularly trumpets hugely impressive download and adoption numbers for its Open Solaris and allied system software code. It develops hardware, based on industry standard components that runs the developer apps and its open source software, like the ZFS filesystem, better than anyone else's.

But there is no lock-in. The hardware, like its X4500 Thumper system, can be outstanding, and would make a start-up start dreaming of an IPO at once, but Sun is no start-up however entrepreneurial the developers are inside its systems unit. It is a company that has shrunk revenue and profit drastically since the super-hyped dot com years but has not recovered to a basis of sustained and dependable profitability.

People look at Sun and ask, 'How would Mark Hurd of HP have run the company?' Would he have focussed on stripping out the software IP value and giving it away? How would EMC's Joe Tucci have run Sun? We can guess both he and Hurd would have cut the headcount right down to the 25,000 level or less and then they would have focussed on selling and developing the profitable products and de-emphasising the rest.

But McNealy, up until his resignation from CEO in 2006, and Schwartz since then have not done that. They have shown tremendous loyalty to the workforce and inspired them to hold fast to the network is the computer idea and take up the open source banner. But... but .... turning Sun's software business into a Redhat-like operation hoping to drag hardware sales in its wake is looking less and less like a win:win strategy and more and more like getting rid of the cream and leaving low-value skimmed milk behind.

These views may be rebutted utterly; Sun's MySQL purchase could indeed earn it millions of dollars but might it not, conceivably, be a case of pouring good money after bad rather than winning the lottery?

How many developer downloads of Open Solaris, ZFS, MySQL, etc. does Sun need before the hardware sales pickup? One hundred million? Half a billion? Billions? Are there enough developers out there? Is there enough time for Sun to capture developers from other software environments and then have their employers and customers buy Sun kit and service?

On the storage side Sun has demonstrated an ability and a wish to strip cost out of storage, culminating in its latest JBOD announcement. These things have to sell in large numbers to make a profit, a substantial profit. While competitors are saying buy a one-stop-shop product from us Sun is saying to resellers, system integrators and customers who wish to integrate themselves, buy components from us and build your NAS, your SAN, your VTL, your BI system for much lower cost equivalent competing products from EMC, NetApp, HP, etc.

Will this developer-focussed pull-through strategy work?

There are customers doing amazing things with the Sun products ... there aren't so far enough of them though. There are also a host of missed storage boats. It is not Sun profiting greatly from deduplication - that's Data Domain , or iSCSI - that's NetApp, Dell and LeftHand, or scale out storage - that's DataDirect, Isilon and others, or utility storage - that's 3PAR, Compellent and Pillar.

Concerning storage the undoubted big new win is Thumper. The StorageTek tape-based business is stable and doing well. A potential big win is the SSD-enhanced server line but Sun surely has to do more than enhance its open source system software such as MySQL and ZFS to take advantage of it. ZFS could be hugely influential but it's not driving much profit elsewhere.

Sun just isn't making the storage running outside of Thumper and ZFS. Cheap JBODs are good news but are they really game changing? There are always cheaper ones and people will say a JBOD is a JBOD is a JBOD.

There's no question but that Schwartz dominates his company. Does he inspire it from top to bottom though? There's little doubt that if Sun reports a loss for fy08 then its whole future is in question. Rumours of CEO-level recruitment searches are appearing.

It was not a good idea for Sun to lose its chief salesman, Don Grantham, on June 2nd; he took a walk to HP, becoming its chief sales officer. HP clearly doesn't think his work at Sun was responsible for Sun's poor results.

Sun today is an attempt at a reinvention of past glories focussing on open source software distribution to drag hardware sales in their wake. But the glory days have not returned and there are fears, with the stock price showing these fears, that they never will.

Let's hope they are wrong, let's hope that Sun has got it right - really!

^{Now I think I'm going down to the well tonight
and I'm going to drink till I get my fill
And I hope when I get old I don't sit around thinking about it
but I probably will
Yeah, just sitting back trying to recapture
a little of the glory of, well time slips away
and leaves you with nothing mister but
boring stories of glory days}

^{[Chris Mellor.]}

^{[Glory Days lyrics from here.]}

 Note. Read a sometimes intense commentary thread about Sun's situation here.