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Sun pushing for a profitable Java

The company has to make JavaSoft a profitable division, but it faces a bumpy road full of powerful allies, tough rivals, and a standards battle.

After two-plus years of playing evangelist, Sun Microsystems (SUNW) is trying to turn Java into a moneymaking proposition. But can the company's JavaSoft division turn a profit, avoid running afoul of powerful allies, and remain the keeper of the Java flame?

Much of the criticism of Java in the past two years has centered around the See special coverage: 
Java chaos language-cum-platform's immaturity. It just doesn't do enough to run a business, critics have said. But proponents say that is changing as more features come out this year, especially on the server side. And the digitization of everything from cable television to automobiles is opening up new markets for small, highly customized computing programs.

Now, eight years after its inception, Java might be grown up enough to reap some rewards for its parents.

The JavaSoft division, which analysts say accounts for a drop in Sun's $10 billion-per-year financial bucket, is facing a crucial year in which the pressure is on to show financial results.

"Sun has been clear that they're not satisfied with JavaSoft as a subsidiary with neat technology but no earnings," said Doug Van Dorsten, a financial analyst with Hambrecht & Quist.

Van Dorsten estimates that JavaSoft brings in between $50 million and $100 million per year with roughly no profits or losses. Sun does not disclose financial details of its divisions, and a company representative declined to comment on Van Dorsten's estimates.

So where to look for profits? Licensing its intellectual property is one area. Another is selling applications for corporate networks and servers. JavaSoft has exclusive licensing rights, of course, but it will have to compete with its powerful allies in the application business.

"There's not much money to be made in writing applications for the browser. I mean, how many sports tickers do we need?" said David Gee, IBM's program director of Java marketing. "But in terms of writing applications for the networked world, there's an enormous opportunity."

Netscape Communications' recent decision to give away its browsers to match rival Microsoft's strategy has bolstered that "zero-dollar" attitude about the desktop. Furthermore, the desktop client market is practically saturated. There are no new licensees on the horizon, and little chance to renew or renegotiate those licenses for a couple of years.

So where are the other avenues, and can JavaSoft mine them fast enough to please Sun's corporate bean counters?

To fatten its bottom line, JavaSoft will look to a licensing model that pays the company unit-based royalties instead of fees up front. Such licenses will apply only to companies that want to build Java "virtual machines"--software engines that make the Java language understandable to the native operating system.

For example, the deal recently announced to license all parts of the Java platform to Motorola will put money in Sun's coffers for every device Motorola ships with Java. If Motorola decides to build--or "embed," in industry parlance--Java into its pagers, cell phones, and many other hardware devices, Sun could reap a rich harvest. One analyst applauds the shift.

"Sun is starting to target its Java investment into areas that will make a profit," said Philip Rueppel, principal at investment research firm Alex.Brown. "It's all part of master plan, and we're just seeing evidence that it's taking place."

Such per-unit royalty arrangements are standard in the embedded consumer electronics market, analysts say, and that market is poised to explode.

"There is absolutely going to be an enormous market for embedded system software for 32-bit chips," Hambrecht & Quist's Van Dorsten said. "If Sun starts licensing Java to a unit base that already is billions a year, that's quite interesting."

Sun will announce more licensing deals with consumer electronics companies between now and the JavaOne conference at the end of March, a company spokeswoman said. As with the Motorola deal, financial details of the announcements were not disclosed.

Consumer electronics makers may be accustomed to paying per-unit royalties, but that system would alienate software application developers--especially the smaller ones that have rallied religiously behind the language (which is freely available without a license from Sun's Web site).

"If that structure were extended to software, where a small developer like myself had to worry about paying 3 cents per unit, that might be a burden," said Stephen Gower, president of Javaquarium.

JavaSoft insisted it would never charge software developers per-unit royalties.

Licensing isn't the only vein JavaSoft wants to tap. It will roll out several products and services at JavaOne that could pit it against its allies.

"We're absolutely going to compete with them," IBM's Gee said. He added that the companies will especially go head to head on the server side, where IBM is developing Java "beans"--reusable components for developing applications--for customized business software.

But JavaSoft downplays any conflict. Although it already has a commercially available Web server, JavaSoft was less forthright about open competition. Unlike the Web server, upcoming products are not likely to compete in established markets, a spokeswoman said.

For example, Sun will sell a Java "starter kit" on CD-ROM with the Java Development Kit and a host of utilities to help businesses install Java on their networks. Pricing has not been announced.

The company also will announce it is for hire as a Java consultant to businesses that want specialized Java code. For example, if an appliance company or industry group wants an API (application programming interface) for programming dishwashers, JavaSoft would help design one for a fee. However, these consulting services aren't expected to be a major part of the fiscal plan, a spokeswoman insisted.

"This is not going to create a huge division, and we're not expecting a huge demand," said Sun's Lisa Poulson. "Maybe we'll do one or two [projects] a year, but this is not our chief strategy for being profitable."

The company also denies that its push toward profitability conflicts with its mission to be the neutral "keeper" of the Java technology if it becomes a recognized standard. Despite objections led by Microsoft, the International Organization for Standardization last year approved Sun's role as the Java shepherd (or "approved submitter"), a role that had never been granted to a for-profit company before. As the submitter, Sun must now lobby the ISO to accept Java as a standard, a process that will likely take the entire year and again will require a little help from Sun's friends.

"The fact that we're a global business and much more established gives us an international reach that Sun doesn't have," IBM spokeswoman Judy Radlinsky said.

IBM's role in the ISO proceedings as well as its commitment to Java products--Gee says IBM has 2,500 people working on Java (compared to JavaSoft's staff of 800)--have raised some eyebrows among industry observers. Many see Big Blue stepping up to be the flagship Java company, especially now that Netscape Communications has dropped much of its Java development.

"IBM is the best market counterweight Sun has to offset Microsoft's corrupting Java influence," said Rick Fleischman, a former marketing manager in Netscape's development tool division.

The crisis at Netscape also has prompted Sun and IBM to step in and save the "Javagator," a pure-Java Navigator browser that Netscape has been developing for the network computer market. Both IBM and Sun are trying to get their network computer hardware off the ground, and an instantly recognizable piece of software such as Navigator would be a boost to their sales efforts.

A Netscape spokesman acknowledged recently that the intercession of IBM and Sun "was the determining factor" when the company was deciding last month which projects would stay and which would go.

How Sun and IBM will prop up the Javagator project remains unclear, although sources close to the discussions say it could come in the form of "technical" help or "business" help. That could mean programming expertise, funding, or marketing muscle, sources said.

Other collaborative efforts such as the "Porting and Tuning Center," which ensures that everyone with a Java virtual machine has the latest releases of Java technology, don't contribute to the bottom line. So where to turn? To a certain extent, JavaSoft is hemmed in by its own parent. Sun already has a software division that makes Java applications such as the Java Studio development tool.

So if the division isn't going to make money from applications, which when done right return a high margin of profit, it will have to rely on a licensing boom in consumer electronics and other devices, as well as its consulting expertise. Both of these businesses are low margin. Given that Sun is accustomed to living well on sales of its high-margin server hardware, JavaSoft's business model may test a lot of people's patience.