Bearish on Sun

By Andrew Binstock

June 1, 2002 —

A series of generally disappointing moves was announced by Sun Microsystems Inc. in late April. The changes involved software strategy and departures of key personnel. I'll get into them in a moment, but first I want to discuss Sun's overall situation.

You recall that Sun emerged years ago as a high-powered workstation vendor (which is why its Nasdaq symbol is still SUNW). It successfully maintained a ferocious competition in the workstation market against Hewlett-Packard, IBM and Silicon Graphics (SGI). However, the arrival of high-powered, dual-processing Intel workstations and reliable-enough operating systems from Microsoft flushed Sun and most of the other Unix vendors from the workstation market.

SGI's fate, in particular, was telling. The company's products were the cream of the workstation offerings and inspired a cultlike devotion in customers, especially in the media and graphics industries. As Intel and Sun eroded the bottom of the workstation market out from under SGI, they chased the vendor up to the very highest point of the pyramid. Once there, SGI had no place to go. Everyone who wanted an SGI workstation had one. And many who had them began to upgrade to less-expensive boxes from Intel and Sun. SGI suffered a terrible fall from which it never recovered.

At this juncture, Sun moved into servers while keeping a hand in the workstation market. The core focus, however, was the big boxes. Here the competition was much larger business units at HP and IBM. Despite such opposition, Sun made considerable headway in the server market due to timing: The Internet bubble was forming, Sun jumped on it, and Sun's competitors were slow to respond. As a result, Sun's marketing could claim it was the inspiration for the Web and the Internet with such slogans as "We put the dot in dot-com," whose exact meaning is still unclear to me years later. In addition, Sun rode the wave of Java-a wonderful product that powered much of the software development of the last few years. As a result, Sun rose and fell in perfect synchronization with the Internet bubble. And so the question now is: How does Sun rise again?

Sun's current server story rides on two rails: Internet servers and database servers running Oracle. All else is noise. To speak of, Sun makes no money selling software (tools, operating systems, Java contribute next to nothing). Early in the downturn, Sun miscalculated by touting servers with 100+ processors and mainframelike features such as application partitioning. This move fared poorly. Companies in a recession were not about to buy big iron. And certainly if they were, it would be IBM's, not Sun's. IBM's long history of reliability in mainframes and its incomparable reputation for service mean that Sun could not then and will not in the future be able to make headway at the high end of the market.

Sun then refocused on the middle tier, where it fights with HP and, again, IBM-two very competent, well-liked competitors. For Sun to get business here beyond what it will naturally pick up from the HP merger mess, it will need to define some added value. This will be hard. Sun's reputation in this market is not good. Its past cockiness is part of the problem, as is a bungled response to serious memory problems on its servers last year.

Meanwhile at the low end, Sun tried to hold off Intel by rolling out a low-end line of Linux appliances. It must roil Sun terribly to sell Intel boxes. Moreover, competing with Dell, Compaq/HP and again IBM by selling PCs with non-Sun processors and non-Sun Unix is just not going to be a strategy Sun will put its heart into. The move is purely defensive.

Earlier this year, Sun announced a new initiative: enterprise storage. It competes with IBM (the theme here is hard to ignore) and two other well-entrenched competitors: EMC and Hitachi. I trust I need not explain my views on its prospects in storage.

In sum, the market's high end is held in a death grip by IBM. The low end is being devoured by Intel vendors. The middle tier where Sun is now jammed is occupied by larger rivals (HP and IBM) that are more conversant with the IT audience.

And, then, the final week of April saw the resignation of the company's COO, Ed Zander, and its CFO, Michael Lehman. It also saw the stock's price drop to a four-year low.

Sun's market predicament and lack of coherent hardware strategy require a distinctly pessimistic assessment. But what about its software strategy? We'll examine that in the next issue.

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