What's the Matter With Sun?

Last November, people at Sun Microsystems -- senior people -- had to keep reminding themselves, again and again, that the company had more than $6 billion in the bank. Their mantra was, Everything will be fine. But when they looked around at everything that was happening at Sun, both inside and outside the company, it wasn't just bad: It was awful and very, very scary.

Count the ways. There was the telecommunications meltdown, with companies reorganizing under Chapter 11, being acquired, consolidating, or simply disappearing from the face of the corporate earth. There was the ongoing devastation of the dotcom collapse and its aftershocks. There was the just-like-that stoppage of corporate capital expenditures, which was most acutely felt in the information-technology category. And then there was September 11, which froze everything. All of those developments aligned to form a kind of perfect storm to punish Sun Microsystems.

You could also see it in the numbers. In the second quarter of 2000, which ended in December of that year, Sun earned more than $420 million. In the second quarter of 2001, which ended last December, Sun lost more than $430 million. What made it all the more difficult was that in the new environment, Sun was its own fiercest competitor.

Many of those melted-down telecoms and dotcoms ran on Sun servers, powered by Sun's UltraSparc chips. When those companies went belly-up, what followed were a thousand auctions of Sun servers, selling off at 15 to 20 cents on the dollar, sometimes less. Companies such as General Electric and Wells Fargo came in and snatched them up by the truckload. They were getting eight almost brand-new, high-end Sun servers for the price of a new one. And Sun was duty bound to honor those service contracts. What else, really, could they do?

To make matters worse, the competitive environment went from a kind of Cold War balance of power, with Microsoft and Intel on one side and Sun on the other, to a six-front unconventional war. Just like that. And a key component of the new form of conflict was price discipline: the ability to maintain premium prices for premium products. Sun was getting killed on price.

There was also the technology-advantage issue. As Boston Globe technology writer Hiawatha Bray wrote in an excellent assessment of the company's future prospects, Sun's servers are premium products because they are powered by Sun's UltraSparc chip, which "processes data 64 bits at a time, compared to the 32-bit Intel Pentium. That makes the Sun chip far better suited to working with large amounts of data in corporate databases or scientific supercomputing tasks."

Not anymore. Both Intel and Advanced Micro Devices have launched 64-bit chips, known as Itanium and Hammer, respectively. Both companies are selling those chips at a lower price point than that of the UltraSparc chip. And both companies are working with Microsoft and Red Hat engineers to develop chips that optimize the performance of Windows XP, Windows NT, and the Linux operating systems. Those chips will soon be available for servers made by Compaq, Dell, Hewlett-Packard, and IBM -- all of which will greatly enhance the capabilities of Microsoft's .Net Web-services initiative and strengthen the hand of IBM's computer services. Microsoft's .Net competes directly with Sun ONE, which is Sun's own Web-services initiative. IBM's computer-services division has locked in as the industry standard. And we haven't even gotten to IBM's Regatta server, which offers a direct challenge to Sun at the high end of the server market. Add it all up (and here's the really bad news, although this isn't nearly all of it): Sun is a company under siege.

What to do? The first order of business at Sun is to stop doing stupid things. The stupidest thing that it does is to obsess about Microsoft. You can't have a cup of coffee with anyone in Sun's senior management group who won't, within five minutes, start whining about Microsoft this and Microsoft that.

Last March, Sun filed a massive lawsuit against Microsoft, which essentially piggybacked off the government's antitrust suit and which was largely instigated by the lobbying efforts of Sun and those in its orbit. It is a fact that Microsoft has been judged to be a monopolist. And its competitors complain that its corporate conduct is often ruthlessly and needlessly vicious.

But the antitrust case has reached its settlement, and corporate clients don't really care. They just want information technology to be interoperable, seamless, and less expensive. When they hear Sun complaining about Microsoft, and when they read about Sun suing Microsoft, the message they get is that Sun cares more about Microsoft than the business of improving information technology. Microsoft doesn't go into the offices of corporate America and whine about Linux or about any other tech company, such as IBM or Sun. Microsoft people talk about their products and the benefits they provide.