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Sun sees AOL deal as a way into software

Analysts wonder whether Sun's new e-commerce software effort will pay off as the company hopes.

Sun Microsystems' new venture with America Online represents another step in the hardware giant's efforts to become a bigger software player, but analysts question whether Sun can remake itself to a softer image.

The venture, announced yesterday, includes 1,000 former Netscape workers and a like number from Sun. The complex deal calls for Sun to pay AOL nearly $1.3 billion during three years--a significant bet to help reshape the company, bolster profits, and better compete with IBM, Compaq, and Hewlett Packard.

"It's middleware, and middleware helps sell hardware," said David Wu, equity analyst with ABN Amro who estimates that software today accounts less than 10 percent of Sun's $10 billion in revenues. Sun. "Don't let them fool you-they're still a hardware company."

Industry analyst firm Zona Research is likewise skeptical about Sun's software future.

"Sun is becoming a software company more than half a decade after it said it was becoming a software company," Zona noted this week in a commentary for clients. Zona also noted Sun's chief problem--what to do with overlapping product lines, specifically two application servers and two messaging servers.

For Sun, software has been on its mind since before the deal, which ABN Amro's Wu calls a "joint AOL-Sun takeover of Netscape," was signed.

Sun has been trying to boost its software business over the last four years, William Raduchel, Sun's chief strategy officer and a key negotiator on the deal, said in November.

Sun supplements software line
With its Netscape deal with America Online, Sun expands its applications line-up. But it still must sort out options on overlaps in browser, application servers, and messaging servers.

Netscape/AOL software

•  Web browsers: Navigator, Communicator

•  E-commerce software: CommerceXpert family, BuyerXpert, SellerXpert, CommerceXpert, Publishing Expert, BillerXpert, ECXpert

•  Enterprise software: Suite Spot, Directory Server, Messaging Server, Kiva Application Server, Enterprise Web server, Application Builder, FastTrack Web Server, Web Information Sharing

Sun software
•  Web browsers: HotJava, Beduin, others for small devices

•  Operating system: Solaris

•  Developer software: Java WorkShop, Sun Visual WorkShop for C++, Developer ToolBox,

•  Java software: Java Developer's Kit, picoJava core

•  Java software: Java Developer's Kit, picoJava core

•  Enterprise/management software: NetDynamics application server, Solstice SyMON system monitoring tool, Security products, Solstice Enterprise Manager, Solstice Intranet Management Products

Analysts say that to compete with IBM, Compaq, and HP, Sun must add not only software but also services revenue.

"The overall goal," said Zona's Martin Marshall, "is moving toward a model where instead of 10 percent of the business, software and services represent 30 percent of their business."

"This means a lot of billions of dollars to Sun if it can remake the corporate revenue model into 30 percent services and software," Marshall added. He sees the Netscape e-commerce software as key to that strategy.

"Sun is putting together an end-to-end capability to deliver e-commerce to companies," he added. "They have to put all the pieces together."

Alex Mou, who follows Sun for brokerage BancBoston Robertson Stephens, notes that software is far more profitable than hardware.

"All of Sun's acquisitions are software acquisitions, not hardware," Mou said. Last year, for example, Sun bought NetDynamics for its application server and Beduin for a Java-based browser for cellular phones. In July 1997, it bought network appliance software firm Diba.

Java has been the sexiest software for Sun to date, but analysts say it's still not making money. Emphasis on Java has clearly distracted Sun's other software efforts.

Details of the joint alliance with AOL for enterprise software are due to be outlined next week at a New York news conference, and this week Sun is trying to hone its strategy as to what it does with the redundant application server and email server software.

Scott Smith, an e-commerce analyst with Creative Analysis, thinks AOL and Sun need to clarify their strategy quickly, telling clients that the uncertainties "leave" the Netscape commerce line of applications hanging in a precarious state."

He added: "Small missteps or eager overreaching in an effort to build a larger could seriously endanger the future of the Netscape commerce applications line."

Chuck Shih, a former Netscape enterprise software employee and now an analyst with Gartner Group, predicts the outcome:

"Because Sun is running the show, we'll see Sun infrastructure and Netscape applications," said Shih, who also worries that Sun's hardware sales force may not be suited to sell application software. He figures Sun's app server and directory will prevail while Netscape's applications, especially in e-commerce, will win out.

But on the e-commerce side, Sun now has a real story to tell. It gets rights to sell Netscape's CommerceXpert family that includes procurement software for businesses, merchant software for selling to consumers, and publishing software for companies trying to sell online subscriptions and other information-based products.

"Nobody buys hardware if you don't have software that goes with it," said ABN Amro's Wu. "Software is necessary to sell hardware."