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Sun's chiefs on the hot seat

Scott McNealy sees glory days ahead for new CEO Jonathan Schwartz, who's made a steady ascent.

Scott McNealy, chairman of Sun Microsystems, could have waited for the server and software company to show more evidence of recovery before handing the chief executive role over to Jonathan Schwartz.

But McNealy thought the time was right for the change, and Sun's board agreed to it in a meeting Friday. Thus ended McNealy's 22-year tenure as CEO of the Santa Clara, Calif., company.

For years, investors have put pressure on McNealy to get Sun's financial house in order and so boost its share price, especially after the dot-com bust. The Sun co-founder argues that now the job's mostly done and that it's time for Schwartz to reap the benefit.

Schwartz has steadily ascended the ladder at Sun since it bought his company, Lighthouse Design, in 1996. In 2000, he was named vice president of corporate strategy. In 2002, he rose to executive vice president of software. The biggest step was his taking up the roles of president and chief operating officer in 2004.

The two Sun leaders discussed the executive changes with CNET News.com's Stephen Shankland a few hours after Schwartz's promotion was announced.

Q: Scott, if things are going so swimmingly, you could have waited another couple of quarters, perhaps, and stepped down in triumph and glory. So why right now?
McNealy: Because the only responsible thing is to let the new guy get all the triumph and glory. My legacy is going to be written four years from now, when, as the largest individual shareholder, I'm sitting on a big chunk of stocks, sitting as chairman of the board, and talking about what a great job I did hand-picking and hand-developing and stewarding and coaching Jonathan through one of the greatest growth areas in the history of the company. And as chief of evangelism, I'm going to take most of the credit for the big sales wins anyhow.

(Jonathan) has worked hard to get the company stabilized and get it all worked out. I don't need any more glory. I'm very comfortable in the legacy of what I've done in the first 24 years here at Sun. I think I'm going to be even more comfortable with the next 24-year legacy.

Q: You've said you wanted to wait until you had the "Galaxy" x86 servers out, the "Niagara" UltraSparc T1-based servers out, and you had Solaris open-sourced. Is there anything else you wish you'd accomplished before stepping down as CEO?
McNealy: When Jonathan and I sat down, I said these are the things I want to get done. We wanted to have the open-source database strategy worked out. We got the StorageTek and SeeBeyond stuff worked out. There were some reorgs. The only thing that was kind of new was the FAS 123R (stock option expense accounting) and purchase price accounting and amortization of goodwill and all the rest of it. That kind of threw monkey wrenches into the numbers.

Now it's just a question of a few minor tweaks to the strategies, some strong execution and some creativity that I think Jonathan brings around getting developers to enlist, and to convert the huge communities that we've built into a recurring revenue subscription model.

Q: So, Jonathan, only minor tweaks to the strategy. Are we going to see the "same song, second verse" in the Schwartz era?
Schwartz: My view on the market opportunity we're sitting in front of us is pretty simple. It's the network is the computer.

It's been true for the past 20 years; it's going to be even more true for the next 20 years. I'm not worried about demand; I'm worried about making sure that Sun intercepts that demand. It's going to happen in some pretty unconventional ways--whether it's with free software downloads or free try-and-buy servers coming off the Web.

The only responsible thing is to let the new guy get all the triumph and glory.
--Scott McNealy

We're in a somewhat unique industry, in the sense that demands for network computing are not going to go down, for as long as we are on the planet. None of us are going to be smaller consumers of network innovations or network services next year. We're all going to be larger consumers. Not even the oil industry can count on that demand profile, because they're going to worry about fuel cells and ethanol and a bunch of alternatives. I'm not worried about the alternative Internet emerging and our being placed out of it.

So, same strategy, second verse? Obviously the strategy today versus 10 years ago may have had the same theme--the network is the computer--but the road map is a pretty different beast.

Q: Scott, you don't strike me as person who necessarily wants to be surrounded by yes-men--perhaps somebody who wants to be challenged when talking to your executives. Can you guys give me some examples of where you've actually disagreed over a strategy or tactics?
Schwartz: I think I wanted to invite an environmental activist to one of our product launches, and Scott really put his foot down. Other than that, I can't think of a single instance...

McNealy: You won, though.

Schwartz: I did win that one.

Q: So you guys haven't had any significant disagreements that you can remember? I thought there was this dynamic of constantly challenging each other.
McNealy: With previous senior execs, I've had enormous amounts of disagreement and argument, and it creates a very dysfunctional (environment). With Jonathan, it's funny, I'll write one code word to him, and it is like writing five paragraphs with somebody else. We are clearly not "separated at birth"; but you know, it is very, very comfortable. Jonathan is one of the few guys that can have a nonemotional argument about an issue. There's no ego issue around, "I am smarter than you."

Schwartz: There's always been a pretty aggressive debate between myself, Scott and Greg (Papadopoulos, former chief technology officer and now head of Sun research and development). We are always arguing all sides and all facets of an argument.

McNealy: And he switches back and forth. He'll switch back, and then I'll take his side, and then he'll take (the other). We're just trying to sort the issues out. We all think out loud a lot, but it isn't really arguing.

Schwartz: There have been acquisitions in which I'll call up Scott and say, "We've got to go get this done," and he'll tell me I'm an idiot. Then he'll call me back and say, "We've got to get this done," and I'll tell him he's an idiot. It's an active dialogue, but that is part of the decision-making process at Sun. Sun is not a place where you come to work, and you walk into your boss's office, he or she tells you what exactly to go do, and you just get it done. Sun is a place that's built on debate, built on transparency and built on dialogue. The fact that our e-mail addresses are open to everybody--not just inside Sun, but in the marketplace--means (we) want the input.

Sun is a place that's built on debate, built on transparency and built on dialogue.
--Jonathan Schwartz

McNealy: If you go and ask folks about the last four years and how well the team has worked together--you know, we used to spend our leadership conferences trying to work on teamwork and conflict resolution and all the rest of it. It's just not a topic I need to even bring up anymore.

Q: Back when Ed Zander left as COO and president, Sun lasted about two years before you got a new COO, which was Jonathan. Now that Jonathan is CEO, is that too much for one guy? Do you envision having a COO to help you at some point?
Schwartz: The title is president and CEO, and there is no COO. There is plenty of operational discipline all across my staff, and all throughout Sun, so, I have no intention of having a COO.

Q: And how about the executive vice president of software position?
Schwartz: Right now, I'm the acting EVP of software. Obviously that's not sustainable in the long run, although I'm finding I'm getting along with my boss really well in that role. (Laughter.) We are able to drive a tremendous amount of organizational change with complete alignment and support from the acting EVP of software.

We are continuing to talk to folks out in the industry, and we've seen a pretty significant outpouring of interest, but we've got lots of good candidates internally.

We are a big leadership factory. We build people here who can go do bigger and better things. We are not just building R&D; we are building the capability and leaderships to take that R&D and go change the world.

Q: But are you going to keep those leaders in house, as opposed to running Motorola or Autodesk or other places?
Schwartz: I think it's certainly in our best interest to.

McNealy: We've got them coming back in droves--Andy Bechtolsheim and

Schwartz: We're one of the few places in the world that's going to put a couple of billion dollars in fundamental research and development to work. If you're an engineer or you're a technologist, you want to come to a place that appreciates technology and engineering. This is one of the places that you go do it.

Q: Since this is the end of an era, Scott, what do you think is the biggest single piece of your legacy?
McNealy: I would probably say opening the interfaces and driving the whole community development process has been my biggest legacy.

Sun was the Red Hat of Berkeley Unix. We took TCP/IP (the networking standard used by the Internet) and beat LAN Manager and Token Ring and IPX from Novell and all the rest. NFS (Network File System) we open-sourced. The whole Java community process is probably one of the greatest community development innovations. CDDL (the Community Development and Distribution License), OpenOffice.org, OpenSolaris.org--all of those things are all part of what we call "sharing."

We are the one computer company that's really taught the rest of the technology world how to share.
--Scott McNealy

We are the one computer company that's really taught the rest of the technology world how to share and are actually challenging those who don't share. As Jonathan says, it's an instrument of social change as well as economic and technical change. The whole Internet and networking requires the sharing of protocols and interoperability.

It's a little Al Gore-ish to say we invented community development and an open interface, but if you go back to 1982...the first computer we ever shipped had TCP/IP. When we started Sun, the Wall Street gang didn't want to fund us, because we didn't have lock-in. Now you can't get funded if you do have proprietary lock-in. That was the big change.

Q: You guys talk a good game. Everybody finds your vision compelling, but it hasn't always been that profitable for you, particularly in the last few years. What's different now that means this is going to catch on and make you guys some money, where it hasn't in the last few years?
McNealy: First of all, it ain't over. We've got $4.4 billion of cash. We're in it for the long haul. We're 17 straight years cash-flow positive from operations. Don't let the GAAP (generally accepted accounting principles) numbers fool you: We generated $190-some million in cash from operations last quarter on a 6 cents loss--go figure. Can you tell me how we keep doing that every quarter?

We are sneaky successful in the worst of times and wildly successful in the best of times. I think the next five years are going to be a lot better than the last five years, but that's up to Jonathan to make happen.

Schwartz: Bear in mind what our starting point is: around $17 billion in market cap, a $13 billion (annual revenue run rate) company with one of the largest R&D budgets in the world, facing a market that will never shrink for as long as we are on the planet. There's no other industry in the world that can look forward and see as much untapped demand as we can.

We are going to go make sure we intercept as much of that demand as possible. We've gone from zero to 5 million Solaris licenses in 12 months--just imagine what the next two to three years are going to look like. The margins are healthy, the revenue is growing. We've got to orient ourselves for growth. Next year, we keep our costs in line and we'll go grow some recurring earnings that will definitely get people more interested.