New hopes from Sun's idea factory

Can Sun recover the financial health it lost when the dot-com bubble burst? In a two-part series, CNET looks at whether it's on the right track.

Scott McNealy, Sun Microsystems' sharp-tongued chief executive, isn't known as a touchy-feely sort.

But when Andreas Bechtolsheim, Sun's first employee and the creative force behind many of the Silicon Valley giant's early workstation computers, joined McNealy on a stage in San Francisco in early 2004 and announced he was returning to the fold after nine years away, McNealy gave him a big, happy hug.

"It's one of the most exciting days I've had in a long, long time--in 22 years of Sun Microsystems," an effusive McNealy declared.

Indeed, it was a defining moment in the company's five-year effort to recover the prestige and financial health it lost when the dot-com bubble burst. While it's way too soon to say Sun is back on track, the return of Bechtolsheim, aggressive improvements in products and a healthy dose of humility among Sun's executives mean the troubled company and its investors have more cause for optimism than they've had in years.


What's new:
Sun is in the midst of an effort to recover the prestige and financial health it lost when the dot-com bubble burst.

Bottom line:
In a two-part series, CNET takes a look at the new products and plans that could get Sun back on track, and explains why some other areas may not be so easy to fix.

Sun is hardly out of the woods, but McNealy and outspoken President Jonathan Schwartz may finally have a map that could lead them into the clear.

More stories on Sun

Sun engineers are creating two new lines of servers almost from scratch, while a radical new family of the company's own Sparc processors could add new interest in the Silicon Valley giant's traditional server line. If that's not what customers want, Sun has started selling its first serious machines based on mainstream x86 chips--with Bechtolsheim leading the project.

On the software front--long a weak spot for the company that invented Java software technology--Sun has begun retooling for a world where open-source software is common. Instead of fighting a trend that has deeply hurt sales of Sun's own Solaris operating system, McNealy & Co. are finally embracing it by offering an open-source version of their flagship operating system and promising all its other software will follow suit.

Sun is also building alliances with rivals such as IBM and Microsoft and spending billions of dollars on aggressive--if risky--acquisitions such as that of storage equipment maker Storage Technology.

At the very least, Sun has managed to generate a little positive buzz thanks to a partnership announced two weeks ago with Google, which is run by another Sun alumnus, Eric Schmidt. Though the announcement was big on concepts and short on details, Wall Street loved it. Sun's stock jumped 7 percent the day the deal was announced.

Sun's business

To truly start growing again, however, Sun needs to generate a lot more than buzz. It still must turn around market share losses, convince customers its servers aren't overpriced relics and find takers for server software that hasn't been terribly popular. And some initiatives, such as its OpenSolaris project and its

All the while, it will face near-constant price pressure in its core business selling servers.

A good turn?
There's a mood change, ever so slow, starting to take place around Sun. In a 10-author report released in September, the influential analyst firm Gartner upgraded Sun from "caution" to "promising" based on financial improvements, strong technology, innovative pricing and good relationships with programmers.

If a turnaround is imminent, it's been a long time coming. At its peak, Sun revenue grew 60 percent year-over-year to more than $5 billion in the third quarter of 2000, while net income grew 85 percent to $510 million.

But Sun was slow to respond when the tech bust stripped it of many customers. On top of that, new technology trends such as x86 processors and Linux overtook Sun's once-glamorous product lines. Sun's product quality slipped, McNealy has acknowledged. Revenue plunged, profitability evaporated. More than 13,000 have been cut through five large layoffs since 2001.

In its most recent quarter, ended June 30, Sun revenue slid 4 percent to $2.98 billion--that's 41 percent from its peak--while the company edged above break-even in profitability with net income of $50 million.

At the same time, Sun has lost share in its most important market--servers running the Unix operating system. In the second quarter of 2005, Sun's Unix server sales dropped 7.4 percent to $1.38 billion, while second-place Hewlett-Packard grew 6.3 percent to

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