McNealy, who co-founded Sun with Andy Bechtolsheim, Vinod Khosla and Bill Joy in 1982, grew the company to a peak market capitalization of $200 billion in 2000 during the dot-com boom. But when the bubble burst, many of Sun's customers went bust or stopped spending, and the company hit hard times. Growth at the company slowed almost to a halt, and investors blamed McNealy for resisting layoffs and failing to adapt the business to take advantage of low-cost technologies.
Amid pressure to make changes, McNealyand handpicked his successor, 41-year-old Jonathan Schwartz, Sun's former chief operating officer. Since the changing of the guard at Sun, the company has made sweeping changes that have boosted sales and .
Sun was long criticized as a company that benefited from many open-source projects without giving back in kind. But under its new leadership, the company has dramatically shifted course. Over the past 18 months, the company has made its Solaris operating system, Java language and even SPARC processors.
CNET News.com caught up with McNealy when he stopped in New York City recently on his way home to California after one of his many overseas trips. The outspoken chairman spoke candidly about a variety of topics, from the company's decision to make its technology available to the open-source community to Sun's plans for the mobile market to education and activist investors. Below is an edited transcript of the discussion.
Was it a difficult decision for Sun to open up Java, Solaris and the Sparc technology to the open-source community?
McNealy: I know the conventional wisdom lately is that we are just starting to open up our software. But we've been offering open-source software since 1982, so the answer is "no." We started out as an open-source company from the time that Bill Joy developed the Berkeley Unix software. Then there was our work with TCP/IP, NFS and OpenOffice. We donated three times as much code as any other company before we even open-sourced the Java architecture.
Now there's no question that some of our technology got encumbered during the go-go years of the dot-com boom when we were just trying to add functionality as fast as we could. We've since gone back and unencumbered a lot of stuff that got encumbered. But I don't think that has ever been a change in our strategy.
What should have been a harder decision was to encumber our software in the first place. But the decision to unencumber it, and open-source it was never hard.
Has Sun already started to reap the benefits of opening up this technology to the open-source community?
McNealy: Yes, it's showing up with stronger gross margins, improved profitability, better growth, happier customers, and happier employees. We've been able to leverage our R&D and improve security in the products. Also, it's resulted in better quality and better performance of the products. These are all good things. I'm not quite sure there have been any negatives other than I think we're going to face more patent trolls. People like Kodak have already come after us on Java. And . As we open-source these technologies, the older, tired or insecure technology companies are going to try to use the patent hammer against the open-source community. That might be a downside, but we've got $6 billion of cash and we're willing to take the hit.
Do you think the patent system is broken?
McNealy: That's funny. Do you think breathing is good? Of course everything can be improved. Is the patent system perfect? No. Do I think patents should go away? No, but that's a much longer conversation.
There was a story published in a . What was that all about?
McNealy: I absolutely never said that. It's a total inaccuracy. We have gone back to the newspaper to straighten it out. I didn't even come close to saying that.
But are you working on something that will rival Apple's iPhone?
McNealy: As soon as we have it, we'll announce it. It's a secret.
What role do you see Sun playing in the mobile market?
McNealy: We're actually providing the most ubiquitous programming environment out there with Java. It's on 90-plus percent of new phones going out the door. That means more than 90 percent of them are Java-enabled. There's got to be close to a billion Java devices shipped every year. We also launched , which is the first Java open-source complete phone stack that can be adopted by any handset manufacturer or carrier who wants to customize and build a Java phone stack. It's open-source so people can contribute code. And we think we can build a community for Java phones, like we've done with Open Solaris and Open Sparc.
Sun has not had much luck in getting the world to scrap PCs in favor of thin clients. Do you still think the thin client will prevail?
McNealy: Our Sun Ray thin client grew, year over year for the full year ended in June, 98 percent. It came out of the year in the fourth quarter growing at 102 percent. It might just be the fastest-growing product we have inside of Sun.
Earlier this month, Jonathan Schwartz said he plans to reorganize certain business units and combine Sun's storage and server product organizations into a new group called the Sun Systems. Does this mean anything about the health of the storage business unit?
McNealy: CEOs reorganize. It's what they do. It has nothing to do with what the organization is developing, selling, servicing and supporting. Everyone makes a big deal out of that. Sun has been very consistent about outfitting the data center. How we organize ourselves to go outfit the data center is fairly inconsequential. I know it makes for fun reading, but that's reading for people who don't have enough to do.
Jonathan will reorganize again. I guarantee it. I know, because I was in his seat for 22 years. I reorganized a lot, too. Reorganizations, typically for an organization that is not changing its product set, which we are not doing, typically have more to do with the players you have on your team than a shift in strategy. If you have good passers, you throw the ball a lot. If you have good runners and blockers, you run the ball a lot. How you organize and line up at the line of scrimmage, doesn't necessarily mean there is some kind of strategy shift.
It's been about 18 months since you left your post as CEO to become chairman. Is it hard for you to adjust to not being involved in the day-to-day running of the company?
McNealy: I am so jet-lagged. I am going to get home about 2 p.m. tomorrow afternoon and if I had to go home and run a staff meeting and do a weekend offsite, I couldn't do it. So it's actually harder for me to be chairman than it is to be CEO, not because of what I don't do, but because of what I am doing. There is no shortage of work and opportunity here to go spread the word and take care of our key customers.
The only thing that is hard is wondering why I didn't have a Scott when I was CEO. Jonathan is lucky. I was chairman, president and CEO for 22 years. So I never had an airplane crash dummy to go fly around and do all this stuff. I never had someone to take care of the speeches and all the rest of it, so he can go and focus on what the company is doing day to day.
But I have to say, he's doing an even better job than I did. Maybe because I was spread pretty thin. Maybe because he is a little more organized or a little tougher than I was.
You helped found Curriki.org an online community that uses wiki technology to help educators develop and distribute for free world-class educational materials to anyone who needs them. Other CEOs and former CEOs from large Silicon Valley companies like Cisco Systems and Intel have also started special programs to address educational concerns. Why all the attention on education now?
McNealy: We're all worried about our workforces. We've been trying to solve the education problem for years. I don't have the specific statistics, but in the U.S. we aren't doing that well globally in terms of education. So for us patriotic Americans, we want to fix that. For us citizens of Earth we want to eliminate the digital divide because that is eliminating the education divide.
Yes, I know, but what is different about today's initiatives for education than ones started in the past? Do you think in the past large companies were simply throwing money at the problem and now you're doing a better job of using technology and other resources to get involved in solving educational issues?
McNealy: I think what we are doing at Curriki.org and what others are doing are good and positive contributions to improving the educational system. I'm not going to throw stones at anyone. I will applaud anyone who has ideas, strategies and perspectives on things that can help solve these problems. So for anybody who wants to help, I say pile on.
Let's shift gears a bit here. Sun seems to have successfully transitioned its leadership over the last year and a half. But this isn't always easy for companies. In fact, it seems like there is a trend for so-called activist investors to step in and try to force changes. For example, Ralph Whitworth helped push out Sprint Nextel's CEO Gary Forsee and Carl Icahn has paved the way for Oracle to make an unsolicited $6.7 billion takeover offer for BEA Systems. What do you think of these so-called activist investors? Are they good for companies?
McNealy: I'm the largest individual shareholder in Sun, and I'm more active than Carl has ever been in his companies. I'm totally into activist shareholders.
Do you think folks like Carl Icahn are looking for more short-term returns instead of looking at what's best for companies in the long run?
McNealy: They are probably looking for a shorter-term return than I am. I am a fairly long-term holder. But we have a fairly significant investment from KKR, and I know George Roberts very well...and all the gang. These guys are very focused on the long-term. They're helping.
Is it more important for investors to be interested in the long term?
McNealy: It depends on what you want to go and do. I have taken a long-term view. Just look at all the other computer companies that started from 1970 to 1982? How many of them are left? I think we have done OK. We haven't done the best, but very few people can pull off a Google.