Suns Eclipse

A few days after Sept. 11, Ed Zander was sitting in a conference room at Sun Microsystems stately Santa Clara, Calif., campus trying to make sense of things. Not just the terrorist attacks that had destroyed Suns offices in the World Trade Center, caused the death of a prominent Sun executive and made employees fearful of traveling on business, though that would be quite enough for any company president to cope with.

Zander was also trying to describe the market miasma that two months earlier forced Sun to report its first quarterly financial loss in 12 years.

"Its like the perfect storm, " said Zander, an energetic yet no-nonsense speaker, trying to explain the combination of unprecedented events that had led to the downturn in Internet spending - and the subsequent decline in the fortunes of the company whose servers run more Web sites than any others.

The question now is whether the company that liked to say it put the "dot" in dot-com is in a death spiral, doomed to go the way of those very dot-coms that fueled its growth. Or can Sun successfully shift its focus away from its relentless battle with Microsoft to also compete against giants like IBM on fronts new - Java, Linux, Web services, digital IDs and the like - and old, such as servers and middleware.

Indeed, Sun CEO Scott McNealy now seems bent on taking on IBM, the biggest information technology company in the world, employing the same disparaging tactics against its products that he has for years used in his battle against Microsoft, the worlds largest independent software company.

McNealy himself has called his provocative comments part of "an air war" to position Sun as an uncompromising battler in the industry, while simultaneously fighting "a ground war" on the hardware front.

With $6 billion in the bank, Mike Lehman, the companys chief financial officer, said Sun "is quite capable of managing through these difficult times." Financially speaking, Wall Street analysts agree - with some reservations.

"We believe the worst of the news is likely now behind the company, but that catalyst will be weighted toward the timing of a pick up in IT spending, which remains unclear," said Kimberly Alexy of Prudential Securities.

Bear, Stearns & Co., JP Morgan H&Q and Prudential Securities, among others, have recast their financial models and expect Sun to break even or return to profitability by the middle of 2002.

To make sure it meets that deadline, the company announced on Oct. 5 that it would lay off 9 percent of its 43,000 employees, or 3,900 workers. The first major layoff in Suns 19-year history was part of an attempt to cut operating costs $125 million to $150 million per quarter.

Suns storm began with the dot-com bust, when the companys biggest customers - dot-coms, financial services firms and telecommunications companies gearing up for the great Internet network build-out - went bust. Sun saw the sales of its high-powered systems drop 20 percent in the fourth quarter of 2001, which ended June 30.

Couple that with a greater than expected decline in spending in Asia and Europe - international sales account for nearly half of Suns revenue - and the tightening of IT budgets because of overspending on Y2K, Zander said, and its not hard to understand why the company was compelled to warn analysts in late August that it would also miss revenue estimates for its fiscal 2002 first quarter, which ended Sept. 30. Those numbers will be reported Thursday.

"The thing just over-heated," Zander says of the Internet "boom" that led to skyrocketing revenue in 1999 and early 2000. "As quick as this whole thing got exaggerated on the upside, it was just as quick and exaggerated on the downside."

While the "perfect storm" of October 1991 battered the Atlantic seaboard for just seven days, the market forces battering Sun may last much longer. Adding to the damage: the Sept. 11 attacks. In the weeks following the terrorist strikes, "our business nearly ground to halt," Lehman said on Oct. 5, when announcing the company wouldnt meet even the revised revenue numbers analysts were expecting after the August warning call.

But its not only the downturn in the economy that Sun has to worry about. In the arena are Hewlett-Packard/Compaq Computer, IBM and Microsoft, fierce competitors that are looking for revenue growth opportunities - preferably at Suns expense.

The Battleground: Customers

The battleground for high-end servers, and related middleware, is superheated because such systems are what drive increasingly complex customer Web sites and operations - areas in which Sun is trying to catch up to the very giants - IBM and HP/Compaq, for example - that are chipping into its server market.

Consider miamidade.gov, the 6-month-old site of the Miami-Dade County government in Florida. Based on an IBM hosted pSeries server, the site allows local residents to pay motor vehicle fees, request a building inspection, pay parking tickets or submit occupational license fees. They may also search the property appraisers database and, someday soon, theyll be able to pay their property taxes online.

From March 1 to June 30, the site was host to 1,200 small financial transactions; in the next quarter, the number leapt to 8,200, said Judi Zito, manager of online services. The volume of the transactions is expected to grow later this year as Miami-Dade adds IBMs Payment Manager application to the EzGov applications and WebSphere application server already on the site.

The IBM server and middleware "has made our site much more dynamic," Zito said. The local governments previous site, built in 1996, offered static information.

To compete against IBM, Sun is not only upgrading its hardware, but also its iPlanet middleware - including an iPlanet application server that now rivals IBMs WebSphere, an iPlanet Web Server and iPlanet Directory Server. Sun has also launched an Xpert series of e-commerce applications.

To round out its product line, Sun last December purchased for $2 billion Cobalt Networks, a maker of Linux server appliances and one of the few profitable dot-coms. Steve MacKay, Suns chief strategy officer, said Cobalt was worth the price because it could bolster the thin server and server appliance rung of Suns product ladder, where Sun had no offering.

On other fronts, Sun sped to make its embedded Java available on programmable cell phones and claims that Java phones will outsell Windows PCs within 12 to 18 months. Sun also leads a broad coalition of partners with its Java Community Process, which defines and builds additional Java technologies to make the cross-platform language suitable for a wide variety of devices, from servers to handhelds.

Sun is attempting to duplicate this coalition-building experience with the recently announced Liberty Alliance Project, a 33-member group that is proposing a digital ID platform to counter Microsofts Passport initiative. And in another reaction to Microsofts technology direction, Sun earlier this year launched Open Net Environment (ONE) - an answer to Microsoft .Net that is mainly a marketing program with which Sun can promote its tools for building Web services.

These and other projects reflect Suns aim to remain a key contributor to the growth of Internet computing. Indeed, Zander said part of the reason Suns revenue growth is so affected by the current economic downturn - while competitors like IBM seem relatively stable in their growth - is because, "we participated in the Internet and they did not."

Taking on the role of alternative to market leaders has played well. Suns rise as the leading Unix vendor coincided with its hang-tough approach to competing with Microsoft, starting four years ago when it filed suit in federal District Court over Microsofts changes to the Java programming language.

When Microsoft was the enemy, sniping at its moves and delivering mocking Top 10 lists won appreciative audiences. Now that IBM is the target, McNealy is trying some of the same tactics. "Your choice is an unfettered monopoly [Microsoft], a convicted monopolist [IBM] or us," he told listeners Sept. 25 at the rollout of the Sun Fire 15K server.

McNealy may also score a hit when he criticizes IBMs multiple platforms and operating systems as generating complexity and revenue for IBMs Global Services division. "If you have a wallet, IBM will darken the sky with Global Services," he said.

But IBMs standing in the industry is different from Microsofts, and some of McNealys jibes may fall on deaf ears. Future customers are likely to be more interested in benchmark results for the respective servers.

Meanwhile, IBM representatives point out that one of the operating systems it supports is Linux, the popular open source code server system on which Sun has yet to articulate a clear position.

"Im a strong Linux supporter. I believe in it as an operating system for development," said Zander last month. But he added, "I also dont believe theres one Linux," meaning that customers may find it difficult to support the OS because incompatible versions may exist.

Linux advocates said Sun is conflicted over support for the open source code operating system out of fear that it will one day challenge its own Solaris OS. "Sun will support Linux to the extent they have to," said Ed Broderick, a Robert Frances Group analyst. Like IBM, Sun has affinity software that enables Linux applications to run on Solaris servers. "Their support will be, Oh yeah, me too. "