The problem with Sun
Sun's business model does not work and it hasn't worked for a long time. Moreover, open source, MySQL, StorageTek, and SaaS (software as a service) will not fix it. What will?
Sun's business model does not work and it hasn't worked for a long time. Moreover, open source, MySQL, StorageTek, and SaaS (software as a service) will not fix it. Here's why, but first, a little background.
My interest in Sun began in 1999 when I had dinner with Mel Friedman, then president of Sun's microelectronics group. He was looking for a marketing VP and I was looking for a job.
At the time, Sun had essentially one customer for its UltraSparc chips, and that was Sun. I assumed the company wanted to take its chips into the merchant market, thus the interest in me. That, as it turns out, was an erroneous assumption.
The dinner became officially bizarre when Mel told me he had no interest in merchandising his products externally. Nothing I said could change his mind. That was when the waiter opened a bottle of chardonnay and served our salads.
The next hour consisted primarily of awkward silence.
Not much has changed in nine years. Let's dispense with all the financial analysis and technical gobbledgook and get right down to business.
Here's the problem:
The company spends way too much on too many things that are not productized outside of the company's legacy systems business. The argument that proprietary chips and software provide differentiation for its servers falls short if the margin premium customers are willing to pay for that differentiation doesn't compensate for all the R&D expense. That is indeed the case.
Unfortunately, open source and all that other stuff can't fix the problem. The reason is scale. Ironically, the company's legacy systems business--which incidentally accounts for substantially all of the company's product and services revenue--is both too big and too small.
It's too small to justify all the expense of its current vertically integrated model. And it's too big for open source and the other new initiatives to have a material effect anytime soon.
With its current financial model, Sun is constantly on the edge of profitability. When times are good, as in the past four or five quarters, it squeaks by with lackluster profits. When the economy turns sour, as in the past quarter, the company swings into the red.
What Sun needs to do is restructure to a financially viable business model.
Enough with the current death by a thousand cuts restructuring strategy. They were up to Restructuring Plan VI in the latest 10K, which I guess would make Jonathan Schwartz's recently announced layoffs Restructuring Plan VII.
Sun needs to cut and cut deep. But that's no simple matter. Its proprietary architecture is so well-integrated it's not clear exactly how to cut without killing the company.
And Schwartz--tech's 12th highest paid CEO, according to the latest Forbes list--is very much into keeping his job. I assume the board of directors feels much the same way. So dismantling the company isn't an option while these folks are running things.
Still, the company's stock--already depressed when Schwartz took over as chief in April of 2006--is down 36 percent in the two years since.
So what happens next?
Well, the company will limp along with one restructuring plan after another until shareholders get aggressive with the board. And then the company will be a prime candidate for a private equity buyout. I bet the likes of Blackstone, Silverlake, or TPG would love to get their hands on this company.
A buzzword or two and a bunch of restructuring plans may placate the Sun faithful for a while, but it's going to take a lot more than starry-eyed optimism to reignite Sun.