CEO Schwartz: Industry Moving Toward Sun

By eweek  |  Posted 2006-09-08

CEO Schwartz: Industry Moving Toward Sun

Sun Microsystems is feeling something that it hasnt felt in several years: momentum. In the second quarter of 2006, the Santa Clara, Calif., company saw server revenue gains of 15.5 percent—the only top-tier OEM to see revenue growth—and moved past Dell to take the No. 3 spot among global systems vendors, according to market researcher IDC, in Framingham, Mass. Sun also is making strides in the storage space, recently rolling out its "Thumper" server/storage hybrid.

Internally, the company continues to undergo radical change. Sun announced in May a plan to slash its work force by 13 percent—about 5,000 jobs—and founder and longtime CEO Scott McNealy handed over the reins to Jonathan Schwartz.

On Sept. 13, Schwartz and other Sun executives will be in New York talking to Wall Street analysts about the companys future plans and giving them the message that, after several disappointing years, its back on track.

Schwartz spoke with eWEEK Senior Editor Jeffrey Burt about the changes at Sun, its products and its future.

Can you give us your thoughts on your first 100 days or so in charge of Sun?

The first thing that we did was I and the new team pulled together a really exhaustive analysis of all of our [R&D] activities, our market allocations—so, how we put our sales force and marketing dollars to work—and then just the overall cost structure of the company, so what we could put together was our best view on how we achieve some measurable and discreet targets, which we then turned around in the first 45 days and articulated to the street.

What we said was, we want to grow the company, we want to grow the profitability of the company and we want to drive to four points of operating margin—basically four points of profit—in the fourth quarter of this fiscal year.

Longer term, we actually said we think the market is heating up and coming our way. To that end, we articulated a longer-term objective of hitting 10 percentage points of operating profit and, again, trying to put some meat on the bones. Back when we made the restructuring announcement, I think it was interesting to people, but really became kind of declarative to them when the IDC numbers came out and showed just demonstrable, irrefutable share gains in a [server] market in which our competitors were really suffering.

That was just amplified by some discreet share gains on the storage side, and again, I dont think most of the analyst community really knows how to count some of the emerging trends yet, but weve seen demonstrable and irrefutable evidence that Solaris as well is growing, and again, for us, thats the flywheel in our business and thats whats creating all these new and emerging opportunities, both in the development community as well as in the IT and deployment community.

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So we made some pretty sweeping changes inside of Sun, driving new alignments, driving real systems innovation. Systems for us is the intersection of computers and storage devices and software platforms and service platforms.

As we drive towards that evolution in our business, we really see the market turning towards those who offer whole systems and not just a cheap box or a piece of free software or a storage disk. They really want the problem solved and we think we are someone uniquely qualified to go solve the problem. And again, now weve got some data behind that. Its not just our articulating a captivating vision of the future.

In making the changes over the past three months, had you anticipated being able to leapfrog over Dell for the No. 3 spot so quickly?

If you go back and read our press releases, what we have been saying is the adoption of Solaris is the leading indicator of our server business. By all means, we knew a year ago we were gaining steam on IBM, [Hewlett-Packard] and Dell, but no one believed us when we said that the adoption of Solaris was the perfect leading indicator.

When Q4 turned around, we were probably surprised at the magnitude of the distance we put between ourselves and the competition, but again, we knew that Solaris was giving us access to customers that either wanted to move away from their proprietary Unix architectures, or wanted to move away from vendors who could only come in and say, hey, Ive got a really cheap price for you.

Again, we continued to hear of that momentum in the marketplace, and not just only from our server customers, but also from our storage customers.

To be honest, I was a little surprised at the strength of adoption of the Niagara platform. For the first time, weve exceeded $100 million in one quarter. I was asked by a Wall Street analyst … who said, That was only one deal, wasnt it? That was Google buying $100 million of Niagara. And I said, No, those were trial units. And to understand the magnitude of the momentum we have in the marketplace, no ones going in with large-scale deployments of Niagara. So with $100 million in business, we were just planting the seeds in the field.

The other interesting thing is, whats going to happen when those seeds begin to sprout?

Was that $100 million primarily selling into your installed base?

Sixty percent of our try-and-buy units were going to new customers, so the majority were new customers of those trial units. I was with one customer yesterday who said he just replaced five IBM xSeries boxes with the Niagara platform. Were seeing vendors moving away from box-only solutions, whether theyre x86 or as well as SPARC, and … weve also seen a very aggressive adoption among the PA-RISC community now that HP, for all intents and purposes, has abandoned them.

When you look at the SPARC platform for Sun, how do you envision it evolving, especially in light of your other projects, such as Opteron and Niagara? For example, you recently took the "Serrano" [low-end UltraSPARC IIIi+] chip off the board, deciding instead to focus your energies on Niagara. What does this say about your plans for the evolution of the traditional SPARC line?

The reason we moved away from the chips that werent doing well is because we basically saw such a massive uptake in Niagara. Our view was, Why distract ourselves with stuff that isnt going to be revolutionary? To understand the magnitude of growth, we went from zero to $110 million in six months. So I am thrilled with the idea that we are going to move away from just incremental innovation and move toward revolutionary innovation when you see that kind of growth across the board.

On the high end, I think were definitely seeing growth. And again, HP shrank because they end-of-lifed [PA-RISC]. IBM shrank with [Power5] and P5+, and we gained share not only with the low end with Niagara, but also in the high end with UltraSPARC IV+.

We are ganging up our resources inside Sun on the winners. We are actively disinvesting in those areas that we dont think are going to yield the kind of growth that we want to see. Single-digit growth is nice; double-digit growth is a lot better. And weve got a lot of it.

What other areas are you looking to disinvest from?

Id rather focus on where were investing. We are increasing our investment in the Solaris platform and in our engagement with the developer. We are increasing our investment in the open-source and open community engagements, and thats on hardware as well as software. Again, Niagara is available through open source now. If you go to … Theres no other non-x86 chip out there that has the breadth of Linux support that SPARC does now.

We are actively disinvesting in proprietary technology, and in closed-source software development. [We are] actively looking to disinvest in areas that dont, for example, leverage Solaris in their core. There were a lot of systems inside of Sun that were running an alternative operating system or were not running our server infrastructure.

To me, another good example of that is were going to disinvest in building our own proprietary storage. Were going to continue to rely on Hitachi and, potentially, EMC. We just announced a new product called Thumper. Were going to be pouring a huge amount of resources and effort into driving Thumper across the world, because to me, the future is about NAS [network-attached storage] and tape. Its the bookends of the market that are really going to show a lot of the value. SANs [storage area networks] play a very important role in the marketplace, but the real growth youre going to see is going to be on the bookends.

Why are we doing that? Because it allows us to really leverage being a systems company. … We can build almost anything out of [Solaris running on a Sun Fire system] from blades to rack-mounts to workgroup to SMP [symmetric multiprocessing] systems to horizontally scaled systems, storage and servers. Plus its all about systems integration, where you bring all that to bear.

As we go forward, you should expect to see much, much more coordinated innovation. You will see the evolution of security technologies not only in Solaris, but in the Niagara chip and in our StorageTek tape offerings. They will coordinate. Why? Because I dont know about you, but Ive got customers who care about secure software, about secure servers and secure storage, but what they really care about is security. So we want to be able to present to them an umbrella platform for innovation and not just point products.

What Im seeing in the market is that the growth margin in point products is just plummeting. Whether its free software or a one-way x86 server, nobodys going to make money on the components. The only companies that are going to make money are those that lash it all together in a solution that the customer finds appealing.

Next Page: Possible partnerships for Sun.

Possible Partnerships for Sun

You mentioned a possible partnership with EMC. Is that something thats in the works?

We have a very strong partnership today around virtualization with VMware, and we are a Tier 1 OS support platform for the VMware team. And were the only Unix that has that distinction. VMware doesnt support HP-UX or AIX [IBMs Unix variant]. So what were really seeing is a split in the marketplace away from proprietary Unix, and its the open-source Unix and the open-source community in general [that are] really giving us opportunities, and the VMware example is a good one.

Weve got more to do with EMC. I think we see the market quite similarly. And at the end of the day, they also believe in innovation. We have a lot in common with them.

So you see the possibility that the partnership with EMC will go beyond VMware and into storage.

Were the No. 1 platform for EMC storage today. … So I think theres all kinds of opportunity in the marketplace.

Youve talked a lot about Niagara and SPARC development. Where do the Galaxy systems fit in with your overall plan?

Its very definitely at the core. … A fast general-purpose system displaces all kinds of custom hardware. AMD has been tremendously successful in the marketplace, and I believe weve played a very strong role in that. We think theres lots of innovation to come, but the customers going to be able to make the choice at the point of purchase—do I want to put a SPARC chip in this or an AMD chip in this? But for the most part, the systems will otherwise be identical. Well still have the same mechanicals, the same supply chain, the same standard interfaces, the same software platforms—its going to be up to the customer to choose.

Intel seems to have made somewhat of a comeback with its "summer of servers." Are you concerned at all that your AMD-only [x86] product line might be limiting to you?

Intels made some really interesting press announcements, but at the end of the day, we want to build what customers want to buy, and what weve heard consistently from customers—and this is not from Intel or AMD—is they prefer SPARC and they prefer Opteron. And the numbers bear that out. … Given the share gains, I think thats pretty much irrefutable.

Going forward, we want to continue to listen to customers and present them with the choices they require, and if Intel is able to get themselves back into the game, by all means wed be interested in looking forward. But again, were going to pretty much stay focused on what customers are telling us, and what theyve told us—and theyve spent their dollars to prove the point, AMD has made tremendous share gains over the past few years—is thats where they think the markets headed.

With SPARC and Opteron, we can present customers with a lot of choice, but thats not to forestall any future choice. Were pro-customer, were not anti-vendor.

How much of an advance do you expect Niagara 2 to be over Niagara?

It will be epic. … This is not an incremental innovation. This is a doubling in thread count, a massive improvement in memory bandwidth [and] overall performance numbers that are just staggering, so we expect it to be very disruptive.

I had a very interesting conversation with an executive in our sales team not too long ago who was yelling at me over the phone because he had such a huge performance advantage over some of our competitors that he thought wed made a tragic mistake in under-pricing Niagara. He said, Dont you understand what a big advantage we have? Why cant you up-price this thing? If all I do is sell this to my own customers, my revenue might go down. And I said, Well, you just made the point. Dont spend all your time selling it to our customers, try selling it to other peoples customers.

Its selling into the PA-RISC install base that [was] for all intents and purposes abandoned. Selling to the Power install base because the Power6 transition doesnt look like its happening anytime soon. Selling into the legacy Xeon marketplace because customers can see a 10-to-1 compression in their power footprints and their data center space consumption. I think the markets really opening up in front of us. <

When do you expect Niagara to become a multiple processor architecture?

I dont think weve articulated a date. … We have Niagara 2 systems up and running today, and they are wicked fast. And the good news is, all the portfolio of applications that are out there running Solaris today, they just run [on Niagara 2]. No new work. A lot of peers in the marketplace seem to want to introduce the next new generation chip set, but then they always break the application binaries, which ISVs hate, because they have to go back and hit the reset button and rebuild their systems.

One of the great things about Sun—one of our little secret weapons—is that customers dont have to do any work to get our new upgrade. Thats why were seeing such a big adoption of Solaris 10, and frankly such a big adoption of [UltraSPARC] IV+ and Niagara systems.

That will now start to apply to our storage systems as well, with Thumper as really the first foray into that space, and that will begin to spawn a whole series and breadth of NAS offerings.

As well, youll see Solaris start to play a much more prominent role in the traditional archiving and tape offerings.

What are you seeing regarding trends in corporate buying? Some analysts believe its beginning to slow.

Weve seen no evidence of slowing whatever globally. What weve seen is a slowing of system purchases from vendors who are end-of-lifing their platforms. You should expect to see HPs PA-RISC customers slow down, as they did last quarter, because they end-of-lifed it. … If you announce that youre going to kill something in the marketplace, people just arent going to buy as much of it.

On the Dell side, I think weve seen a slowing of point-product purchases. A slowing of customers saying, Oh, procurement is in charge, when all they care about is a cheap box. And now I think were moving toward IT leaders being in charge, because also procurement was able to go to a white box vendor—you now find yourself trying to support 17 different service processors and 14 different drive manufacturers because procurement was able to build your data center out of the cheapest parts available. But now youve been saddled with the operational costs of running it and that absolutely dwarfs the purchase price.

I think were seeing a movement in the pendulum away from procurement as the architect of the data center toward IT leaders and technologists architecting data centers.

I think thats representative of a split in the marketplace. Customers are really turning into those for whom procurement will forever be in charge and customers for whom architects and business innovators will be in charge. There are a lot of companies out there who make their living selling to customers for whom procurement is in charge. Those folks just care about the cheapest possible box once a month, or the cheapest possible printers or the cheapest possible PCs. Thats not our core market. Our core market are those network operators or service providers who make money off of innovation in the data center.

Theres the traditional enterprise and the emerging next-generation service operators. My advice to a customer looking at [CRM (customer relationship management)] solutions is, rather than exploring how you can architect your own, why dont you go to So guess who were going to be focusing our time on? Were going to do our best to try and be the worlds best vendor and partner to

But that means were going to stay out of trying to sell to flower shops and shopping malls or dentists offices, [all] of whom, by the way, purchase a tremendous amount of IT in aggregate, but over the long term, theyll stop buying IT, theyll start buying services from companies like eBay and Yahoo and, who are Suns customers.

All that said, if you hang out on Wall Street … those are companies the make their living on the basis of technology advantage, and our technology and our road map deliver competitive advantage to those folks. Thats why theyre interested.

Whats going to be your message to Wall Street, given the amount of success Sun has had in the past with it?

The message is going to be a very simple one, which is, were still listening. Were there to give folks an update on the innovation and the technology road map and were here to say, "Thank you for the feedback youve given us historically, and were still open for business and were still looking for the next wave and weve got eyes and ears open and we want to know what we can do better."

Sun executives have said the plan is to open-source the entire software stack. Can you give us more specifics as far as timelines and frameworks?

As soon as humanely possible. Im not just being glib as I say that. I want you to know why it takes time for us to open-source software. We are not dragging our feet in the least. If anything, I have our legal teams working day and night to get this stuff done, but at the end of the day, I must be able to tell a customer, I will indemnify you for the technology you use to run your hospital. I will indemnify you for the technology you will use to run your carrier fleet or to run your bank network.

I cannot deliver to customers technology I cannot indemnify. …[Do] you remember when BlackBerry was being sued, or more recently when EchoStar was being sued for the usage of Tivo? They actually threatened to turn off peoples Tivo systems. I cant risk that disruption to the customer base, so what we do at Sun is we indemnify our users when they use our products. Im not going to open-source any technology, or introduce any product in to the marketplace, that I cannot protect at that level.

I know a lot of other vendors who have kind of skipped over that and said it doesnt matter. Thats not our customer base. So I want to be sure that for every product we deliver—whether it is Java or Solaris or any element of our microprocessor code—that we will open-source all of our products, we will open-source them under OSI-approved licenses, we will work with the community to establish the most effective governance and cooperative development model, and then at the end of the day, I will protect our customers.

Can you give us an idea about what software is next in line?

The Java platform seems like its kind of topical. Were looking at engaging with the community to pick the right license. Theres all kinds of choice we have in front of us. … Were going to continue looking at what the right options are.

The net of all this to Sun? The market is definitely growing. We can see the opportunity is definitely growing. The world is not going to consumer fewer network infrastructures next year than they did this year. The whole world is tipping toward the Internet. To me, that means the whole world is tipping toward Sun.

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