A New Technology Bet
A New Technology Bet Even before the Sept. 11 attacks, Sun was losing market share in its chosen competitive arena: high-end Unix servers.Likewise, HPs high-end share went from 11.4 percent in 2000, remained steady at 11.4 percent in the first quarter of 2001, then rose to 14.9 percent in the second quarter, according to IDC. Why the jump? A year ago the company launched its own high-end machine, SuperDome. While HP wouldnt release numbers, John Wiltschut, strategic program manager for Unix systems, said HPs server revenue is up 37 percent this year, "due mainly to SuperDome." What was even more surprising, however, given Suns dominance, was Silicon Graphics Inc.s rise from about 9 percent in 2000 to 9.8 percent in the first quarter of 2001 and 10.6 percent in the second quarter. The bottom line: All of its competitors grew as Sun started its slide toward red ink. To shore up its position, Sun developed the Sun Fire 15K, the follow-on to the Enterprise 10000. Announced two weeks after the terrorist strikes, the Sun Fire 15K can house up to 106 UltraSparc III processors and deliver 750-megahertz and 900-MHz performance. Like an IBM mainframe and the Enterprise 10000, it can be partitioned into submachines yielding several discrete servers. "One of the positive fundamental elements in Suns long-term outlook is the companys product strength," JP Morgan & Co. analyst Daniel Kunstler told investors the day the layoffs were announced. The emphasis is on "long-term." Some of Suns new technology, like the Sun Fire, "is so far more advanced than its predecessors that it is simply a lot to expect Suns customers to be particularly aggressive in the current weak environment," Kunstler added. "Under normal circumstances, Sun could have expected momentum to kick in much more promptly. . . . Sun and others that contribute novel and useful technology will encounter a receptive market. Just not right now." But standing in the way of Suns ambitions for the Sun Fire is IBM. A week after Suns launch, IBM announced a server code-named Regatta, subsequently dubbed the p690 eServer, that is powered by a maximum of 32 new-generation chips, the Power 4. Its a threat Sun is taking seriously, especially since its Sun Fire wont be available in large numbers until the end of the year. At the Sun Fire announcement, McNealy was already making disparaging comments about the yet-to-be introduced Regatta, repeatedly mispronouncing it "Regretta," and suggesting it wouldnt be all IBM claimed in terms of application performance. Further evidence of Suns nervousness: On the day of IBMs announcement, John Loiacono, Suns chief marketing officer, and Steve MacKay, Suns chief strategy officer, called their own teleconference devoted to pooh-poohing the IBM p690 - an unprecedented move in high-end server competition. "We didnt see anywhere near the reliability, availability or serviceability that we announced," Loiacono said, citing Suns ability to hot-swap components on its Sun Fire server. "The overt enmity toward IBM that appears in the Sun Fire announcements reflects elemental changes at the high end of the server market," said Charles King, server analyst of Segaza Group (formerly Zona Research). "Where Sun once reigned alone and supreme, it is now being battered by strong offerings from IBM . . . and HP." For his part, Zander said Sun is braced to weather both the financial and competitive storms of the year ahead. The company, he said, will do what it has done throughout its history: invest in research and development and deliver on the product roadmap it has laid out. Financial analysts remain supportive - at least for now. "Coming out of this downturn, we will see the leaders emerging stronger and extending their lead over the laggards," Bear Stearns analyst Andrew Neff told investors earlier this month. "While the demand slowdown still carries uncertainty and risk for Suns business volumes, Sun remains one of the best computing companies in the market space with a new and refreshed product line." The question is whether customers agree.
Unix servers constitute a $29 billion annual market, with Sun owning 47.1 percent of the lucrative high-end Unix market in 2000, according to IDC. In the first quarter of 2001, though, its share slipped to 40.7 percent. In the second quarter, it dropped to 38.8 percent, while IBMs share went from 18.8 percent in 2000 up to 20.4 percent in the first quarter and 20.3 percent in the second quarter, said Jean Bozman, an IDC research director.