Old Sun management once stalled Project Orion

Former execs were risk-averse to Sun's server software pricing. That pricing is now central to company strategy.

Stephen Shankland Former Principal Writer
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Stephen Shankland
4 min read
MENLO PARK, Calif.--Project Orion, Sun Microsystems' strategy of charging server software at $140 per employee per year, was a novelty when it arrived in late 2003. But if Sun President Jonathan Schwartz had had his way, the pricing scheme would have arrived several years earlier.

The reason it didn't catch on sooner: Sun's overcautious senior managers, said CEO Scott McNealy during an interview with reporters here Friday. But those managers who had insisted on a standard business model, such as that employed by IBM and BEA Systems, have been replaced.

The Java server-software business models that worked for Sun's competitors didn't bring Sun the same profits. And, McNealy said, executives who supported that approach would have been too timid to aggressively push Sun's UltraSparc T1 "Niagara"-based servers.

Schwartz estimated that he first pitched the Orion idea in 1999 or 2000--maybe even earlier--as a way to bypass complicated pricing schemes such as charging by the number of server processors, e-mail mailboxes, username-password pairs or gigabyte of storage. The price is based on the total number of employees a company has, regardless of how many employees or customers use it. Sun has more than 1.1 million subscribers so far.

"Simplicity is everything," Schwartz said.

Sun tried the sales approach of IBM and BEA, but the company was "too late" with its products to make it work, McNealy said.

Schwartz filed for a patent on Project Orion pricing, which emerged in 2003 as a product called the Java Enterprise System.

Sun has begun giving away JES elements for free, as it has with its Solaris operating system, and plans to make it all open-source software as well. The idea is to make money by selling support, McNealy said.

"We think that service subscriptions will become a very interesting number," he said.

Giving products away for free--which Sun also does with its UltraSparc T1 on a 60-day trial basis--is an aggressive strategy. But for Sun, there's no other kind, McNealy said.

"Our view is if you don't have a controversial strategy, you don't have a chance in making a profit. Otherwise you have nothing to differentiate" from your competitors, McNealy said.

One of those controversial projects McNealy and Schwartz touted at the event is the Sun Grid, a collection of servers that Sun lets customers use for $1 per processor per hour. The Sun Grid launch has been hampered by difficulties, but Sun believes that customers ultimately won't want to operate their own computing data centers, just as they don't want to operate their own phone systems.

Sun has yet to launch its "retail grid," in which ordinary customers can sign up to use the computers using a credit card or PayPal. The reason? "Security, security, security, security, and expert control," Schwartz said. Government regulators wanted Sun Grid customers to provide notarized proof of identity to ensure that there were no nefarious uses of the processing power, he said, which hardly is the model of an instantly available computing resource.

Sun wants not to be involved in a retail grid, but eventually to sell just its wholesale grid to companies that provide their own services and manage their own customers.

Blaming Wall Street
Sun has had financial difficulties--quarterly revenue declines chief among them. But McNealy laid some of the blame on Wall Street analysts and financial rules--specifically the Generally Accepted Accounting Principles.

Sun steadily increases the amount of cash and marketable securities in the bank each year, but McNealy said Sun is "struggling to tell that story because cash and GAAP profits seem to be a diverging thing in accounting today."

And, McNealy said, Wall Street's dissatisfaction that Sun's stock price today is somewhat above $4 when it was north of $60 during Internet bubble years is ridiculous because Sun's valuation then was ridiculous.

"Five years ago we were selling at five times revenues," and yet Wall Street analysts recommended people buy Sun stock. But to justify that valuation, Sun would have to have zero expenses, zero cost of goods sold, zero taxes, a dividend equal to the company's entire earnings, no taxes paid on dividends, and capital costs of zero.

"Each and every one is wacko," McNealy said of the financial assumptions. "Yet every analyst, when we were at 60 bucks, had us as a raging buy."

Investors need to recognize that the stock price was disconnected from reality, McNealy added.

"People thought they earned that money through the speculation that was going on," McNealy said. "When it went away, they were like, 'What went wrong? What did you do? Why don't you have a Google valuation?' Only a few are cursed with a Google valuation. I don't want that one."