McNealy: Schwartz Ready to Take Over as CEO

News Analysis: Sun's leaders say the change of CEO reflects the company's success, while some customers have different reactions.

According to Scott McNealy, his decision to step down as CEO of Sun Microsystems after 22 years was driven by a combination of seeing the company begin to stabilize after several years of fluctuating financial results, and having the right person, Jonathan Schwartz, ready to take over.

McNealy, who helped found the Santa Clara, Calif., company 24 years ago, announced April 24 during Suns quarterly earnings call that he would no longer serve as CEO, and would hand the reins over to Schwartz, who had been the companys president and chief operating officer.

Schwartz, who first came to Sun in 1996, will keep the title of president, and McNealy will remain chairman of the board of directors.

"Twenty-two years Ive been running this joint, and Ive loved doing it," McNealy said during a conference call with reporters and analysts. Over the past few years, McNealy said, he and Schwartz have worked so closely together that they can "finish each others sentences."

He approved the choice of Schwartz as CEO, saying, "Hes got something thats very, very rare, and thats courage."

McNealy said he informed the board of directors of his decision on April 21, and adamantly maintained that it was his choice.

"This was my decision that was supported by the board," he said.

Reports had been circulating for weeks that McNealy would soon be leaving the CEO slot, particularly as Sun continued to show lackluster financial results.

"Suns institutional investors have to be among the most patient in the world," said Charles King, an analyst with Pund-IT Research, in Hayward, Calif. "Some must have been looking for a new spark of leadership to pull the company out of the doldrums and put it into something resembling the glory days."

McNealy and Schwartz maintained during the conference calls that Sun is heading back in that direction. Pointing to a host of new initiatives launched over the past few years—including getting into the x86 market with a line of Galaxy servers running Advanced Micro Devices Opteron chips, open-source pushes with Suns Solaris operating system and new multicore UltraSPARC T1 processor architecture, and the rollout of the Sun Grid project—both men said Sun was passing the stabilization stage and is now turning toward growth.

It was those projects and others, such as improving the relationship with Microsoft, which convinced McNealy it was time to step down, he said. "Most important was that the [product] quality and customer satisfaction situation got fixed," he said. "Its now stable and pushing growth. The timing fit to a T and it was my call."

In his new role with Sun, McNealy will work to open markets globally for the company. In addition, McNealy will serve as chairman of Sun Federal, which works exclusively with the U.S. government, and is based in McLean, Va.

Sun on April 24 announced a quarterly loss of $217 million, but officials said the 21 percent growth in revenue showed the company was on the right track. For example, Schwartz said Suns Galaxy systems are showing an annual run rate of about $400 million.

Schwartz outlined a number of steps he plans to take over the next 90 days, including undertaking comprehensive assessments of Suns R&D projects, marketing initiatives, corporate resources and financial plans. He also announced that Chief Technology Officer Greg Papadopoulos will now become executive vice president of R&D, overseeing Suns $2 billion in R&D investments.

The goal, Schwartz said, is to find growth avenues for the company.

"Were very … focused on a comprehensive review of growth opportunities," he said. "This is not a comprehensive review of shrinking opportunities. … Were looking to see how we can grow over the next 10 years."

McNealy said he and other Sun officials 10 years ago targeted Schwartz as having executive material, and have moved him around through seven positions in the company. His performance in each spot proved them right, McNealy said.

/zimages/2/28571.gifClick here to read more about new Sun Microsystems CEO Jonathan Schwartz and his previously stated agenda for the company.

Others said they saw the choice as simply a safe one. "Hes an inside guy," Pund-ITs Charles King said. "He knows the company inside and out. Hes a very strong Sun advocate."

Schwartz also was a choice that is acceptable to Sun employees, King said. "When a company hits the ropes—particularly a tech company—you dont want to make a choice that will upset people and send the talent out the doors," he said.

A point in Schwartzs favor was that a number of former longtime Sun employees—such as co-founder Andy Bechtolsheim and Chief Financial Officer Michael Lehman—have returned to the company since Schwartz took over as president, King said.

However, not all former Sun executives are convinced about Schwartz or Suns current strategy.

Peter Yared, founder and CEO of San Francisco-based ActiveGrid, said he was "astounded" by the announcement, saying Schwartz has had the ability to make whatever changes he has wanted over the last couple of years and yet there has been no real improvement in Suns revenue.

Yared, who was CTO at NetDynamics when it was acquired by Sun in 1998, became chief technologist for Suns application server division before becoming chief technologist for Network Identity and leaving in 2003 to start ActiveGrid. He said he is also confused about Suns product strategy and vision.

"From what he says, he thinks that the products are going great," Yared said. "If you step back, the industry trend is clear: Everyone wants to run what Google and Yahoo and Amazon run—Linux and/or LAMP [Linux, Apache, MySQL and PHP/Python/Perl] on commodity x86 machines. Dells x86 machines fit into this trend. Oracle is moving into applications because of this trend. IBM has endorsed PHP because of this trend. Cisco is selling a lot of load balancers and gigabit Ethernet networking gear because of this trend.

"Yet Sun is still building SPARCs vs. x86, Solaris vs. Linux, and Java vs. LAMP. Everyone but Sun has gotten with the program, and Sun needs to step up. All Sun is doing is hedging with AMD Galaxy servers that they sell at a loss while the market passes them by."

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Michael Hodges, manager of system services at the University of Hawaii and a longtime Sun customer, presented another view, saying he was pleased with the change.

"The changeover is good for Sun," Hodges said, in Honolulu. "Schwartz needs to turn Sun into a service company that happens to be able to provide great hardware and software too. It isnt making much money on either, but both combined give Sun powerful control over its ability to provide services."

For too long, Sun suffered under McNealys penchant for going to battle rather than making alliances, Hodges said.

"I associate Scott with arrogant CEOs like [Oracle CEO Larry] Ellison and [Microsoft Chairman and Chief Software Architect Bill] Gates. I think that the We can do it all; go it alone arrogance is in part what has cost Sun dearly in revenue and stemmed the arrival of new customers.

"Late, but at long last, Sun has made peace with Microsoft and is working toward interoperability with Outlook and the Sun middleware stack, and Sun is embracing Linux and x86 and more than anything presenting the customer with as much choice as possible and then offering to be the integrator and provide services. That is very important to us."

Hodges said Suns strength now lies with its hardware.

"At this point the Sun hardware product line is probably underappreciated by potential customers requiring enterprise-quality, yet relatively inexpensive solutions," he said. "Suns middleware product line strikes me as showing promise, but not yet [being] overwhelmingly compelling."

Schwartz said he expects Suns Galaxy systems to see continued growth. The company will add a blade server and eight-socket system to the lineup this year.

"Our biggest challenge is that many of our customers still dont know that we have x64 servers," Schwartz said.

Along with the Galaxy systems, Sun also is pushing in new directions with its RISC-based servers. The company two years ago announced it was partnering with Fujitsu to continue developing a traditional SPARC line of servers while freeing up R&D funds to enable Sun to pursue other projects. The new servers, powered by Fujitsus upcoming dual-core SPARC64 "Olympus" chip and dubbed the Advanced Product Line, will start rolling out later in 2006.

Sun in the fall of 2005 launched its UltraSPARC T1 chip, which features up to eight cores, each of which can run up to four instruction threads simultaneously. In addition, Sun in April taped out the next-generation chip, the T2, which is due to appear in servers in 2007. Sun also is working on another RISC chip, code-named Rock, scheduled for release in 2008.

Suns leadership change mirrors what other large technology companies have done: Gates stepped aside at Microsoft, giving the CEO reins over to Steve Ballmer, while in 2004, Michael Dell left the CEO post at his namesake company, remaining as chairman while giving control over to longtime second-in-command Kevin Rollins. Rollins handles the day-to-day operations for the computer maker, while Dell focuses more on strategy, though both still work closely with one another.

Senior Editor Peter Galli contributed to this report.

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