Now, Sun is trying to fight back. Its efforts will determine whether the company ends up relegated to a small niche of high-end computing--the fate that befell Silicon Graphics--or continues its ability to steer the industry with profitable new ideas.
Evidence of Sun's comeback plans will emerge this week at the SunNetwork conference in San Francisco. On Wednesday, Sun will detail its to use Linux to attack Microsoft's desktop-computer stronghold, and on Thursday, it will describe its plan to gather servers and storage systems into a single pool of computing power.
Some are confident Sun is getting back its game.
"I think the pendulum has swung way too far toward the pessimistic side," said Gartner analyst Paul McGucken, who has seen Sun fight back from the brink before. One telling example is that despite two years of sustained troubles, Sun managed to keep HP and IBM from wrenching away its Unix server seller crown, and indeed is recapturing market share.
Hatching new plans
As it did with Java, Sun is once again finding a way to benefit from disgruntlement over Microsoft's dominance. It spawned the to let Web surfers and site operators forgo Microsoft's Passport authentication system and still enjoy enter-data-once, jump-from-site-to-site usability.
Sun quicklyLiberty support from many prestigious companies--including United Airlines, General Motors, Fidelity Investments, Visa, Bank of America, Nokia, Cisco Systems, Sprint and Vodafone. Now Sun is talking about why partners flocked to Liberty: They were the ones who suggested the project in the first place.
"Visa called us and told us to do it," McNealy said in a recent interview.
Sun says it is working on a sequel to Liberty, though it's being cagey with the details. This time the anti-Microsoft angle is in digital rights management, the mechanism that controls the copying and use of proprietary data such as music or video files. Microsoft has its own digital rights managementbuilt into Windows.
"We've seen a lot of success with Liberty and have been in touch with the media industry about developing a platform-, content-, vendor-neutral standard like Liberty," Jonathan Schwartz, Sun's executive vice president for software, told CNET News.com.
Sun is more prepared to talk about its Linux desktop effort. At least initially, the campaign will be directed not at the millions of average computer users but at corporations that dictate what software employees will use--for example, call centers with hundreds of telephone operators, Schwartz said. Sun employees themselves will use Linux desktops.
But Sun has tried before, with little success, to penetrate this market. It failed to encourage much adoption of "thin clients" such as its Sun Ray products that rely on a central server to do most processing tasks.
The N1 plan to link servers and storage devices is closer to Sun's areas of expertise and its traditional customer base that uses expensive, crash-resistant hardware. HP's Utility Data Center and IBM's "eLiza" autonomic computing initiatives have similarities to N1, but Sun hopes to make its effort stand out through its existing relationships with other computing companies.
To make N1 a reality, according to a source familiar with the plan, Sun is working on partnerships with networking giant Cisco Systems; software companies such as Oracle, i2, BMC, PeopleSoft and SAP; and "system integrators" such as Cap Gemini Ernst & Young that build customer computer systems. Sun declined to comment on the partnerships.
The pressure is on
The pessimism about Sun isn't groundless. The biggest strain on Sun's business today is diminished profit margins. In its most recent quarter, $3.4 billion in revenue carried the company temporarily back into , but Sun's margins declined where it had led analysts to believe they would increase.
Without profits, Sun can't afford the research and development efforts needed to keep its in-house designs competitive with those produced by IBM's legions of engineers and with those stemming from the Intel-Microsoft alliance.
Investor skepticism is deep: Sun's stock closed Friday at $3.11, its lowest price since 1996.
"In today's world, Microsoft has a viable product out there that competes."
But most of the threat comes from outside Sun--chiefly from the software power of Microsoft and the hardware power of IBM, Dell Computer and Hewlett-Packard.
Intel servers and the Windows and Linux operating systems that commonly run on those systems are steadily encroaching on Sun's turf.
PolyMedica subsidiary Liberty Medical, which supplies diabetic and respiratory care supplies, happily uses Windows. It's using 16-processor Unisys Windows servers for order processing and for monitoring information such as how many orders have been shipped in a given period of time, PolyMedica CIO George Narr said.
"If I were a huge billion-dollar corporation five years ago, Sun would be the way to go. In today's world, Microsoft has a viable product out there that competes," Narr said.
The Windows stakes are higher now with the arrival of Intel's Itanium chip. It was years late and a hard sell because it requires that software written for Pentium or Xeon processors be reworked to run well on Itanium. But the new chip, with its eventual ability to address more than a billion times more memory than most of today's high-end servers, is a serious contender. Intel also can use the technology developed for manufacturing its mainstream processors to lower the cost of its Itanium line.
The second-generation Itanium 2 successor is showing some promise after its predecessor flopped. A warning shot across Sun's bow was the speed test.last week that an NEC server with 32 Itanium 2 processors running Windows .Net Server 2003 and Microsoft's SQL Server database achieved the fifth-highest ranking to date on a high-end server
Windows still lags
But there's more to persuading customers than raw performance. Microsoft needs to improve Windows' ability to split different jobs into different domains, as well as its support for coping with hardware failures without crashing.
"We're running our business here. Right now all that is Unix. It serves us well."
Windows isn't yet up to high-end tasks, agrees Colgate-Palmolive Chief Information Officer Ed Toban, who leads an IT staff of 900 and who recentlyglobal business operations from Sun Unix servers to IBM Unix servers.
"We're running our business here. Right now all that is Unix. It serves us well," Toban said. "If you're stepping out of the traditional data center and talking about Internet servers, then you can open that view a little bit."
And Sun's customer loyalty counts, too. Questerra uses Sun servers and storage for its 80-person company that sells geographic analysis services for insurance companies and others. "A lot of our developers have deep Sun background," said area vice president Patrick Kurks.
Desert Sky Software, which has used servers from numerous companies and which hosts servers running Sandia National Laboratories projects, refuses to use Windows after earlier projects left a bad taste in its mouth.
"Until I have seen something that would suggest the issues I had with them have changed, I would not" consider Microsoft, Desert Sky President Luke Holton said.
IBM, though, unlike Microsoft in this area with Windows, has experience in spades with huge customers, and it's managed, with Unix servers based on its Power4 processor, to win back much of the respect it lost over the years.
"Power4 from IBM hit its mark, unlike (Sun's) UltraSparc III, which was at least a year late," said Kevin Krewell, senior editor of the Microprocessor Report industry newsletter.
"IBM is coming on vastly strong," Illuminata analyst Jonathan Eunice said. And while Sun ridicules IBM's Global Services division as an army of money-sucking consultants, "IGS is big and successful for a reason: Many customers want someone else to be responsible for parts of information technology," he said.
But IBM hasn't dethroned Sun.
Ups and downs
Sun has begun recovering sales lost to IBM in 2001.
During the Internet years, Sun's success drove its market share ever closer to IBM's, for years the company with the most server sales. In the first quarter of 2002, just as the Internet mania began to collapse, Sun had 18 percent market share to IBM's 21 percent, according to research firm IDC.
The surge was especially remarkable given some of the lows Sun experienced earlier in the decade.
In the mid-1990s, Sun servers "were not very well designed, and Windows was becoming more of a competitive threat on the server," McGucken said. Sun found its escape buying a 64-processor server from Cray that vaulted Sun from the periphery to data center accounts at the heart of corporate computing operations.
But IBM aggression, along with sales of used Sun equipment and a slow transition to new UltraSparc III-based Sun servers, hit Sun hard. In the second half 2001, its share slipped to less than 12 percent while IBM's grew past 34 percent.
In 2002, though, Sun has reversed those losses, reaching 17 percent share in the second quarter with sales of $1.7 billion, third place after $2.9 billion for IBM and $2.9 billion for the combined HP-Compaq, IDC said.
Sun will have to keep its products competitive if it is to sustain its current recovery, though.
"The pressures on Sun, which will be significant, will take two to three years to become serious even if Sun does not react," Giga Information Group analyst Richard Fichera said in a report this month. Eventually, however, Linux and Intel-based servers could erode Sun profit margins.
Along the way, Fichera believes, Sun will have to survive by becoming a software company that relies on others' hardware. "We fully expect that at some point in the not-too-distant future, regardless of continuing improvements to its underlying Sparc processor technology, Sun will be forced to consider incorporating its proven intellectual property...into Intel-based systems," Fichera said.
But the fact remains that, for now, Sun remains top dog in the Unix server category--the biggest slice of the overall server market--despite intense discounts and strong technology from IBM.
"IBM threw everything at us," said Robert Youngjohns, Sun'sexecutive vice president of sales. "But we're still here."