New Sun unit plans technology partnerships

The OEM, or original equipment manufacturer, unit will be led by Joe Heel, a senior vice president who joined Sun five months ago from management consulting firm McKinsey.

In an interview Tuesday, Heel said that he plans to increase OEM sales through centralizing and expanding the business. "We have a number of initiatives we think will help to grow that substantially," Heel said. "We do believe OEMs...will become an increasing portion of Sun's revenue."

Joe Heel, OEM chief,
Sun Microsystems

In OEM deals, one company supplies technology to another. For example, through OEM relationships, Johnson Controls supplies seats to automakers, Hitachi Data Systems supplies Sun with high-end storage systems, and Sun supplies tape drives to Hewlett-Packard.

Such deals generated $1.8 billion during Sun's last fiscal year--13 percent of the Santa Clara, Calif.-based company's annualized revenue.

Although Sun has stopped its years-long revenue slide, it has yet to return to consistent growth and profitability. The OEM business is the latest effort at the company to tap into a burgeoning industry; other efforts include refurbished server lines and the Sun grid computing service.

Last week, Sun President Jonathan Schwartz underlined the importance of OEM business to Sun at the company's annual summit meeting with financial and technology analysts.

"That business reports to me directly and is focused on selling picks to the miners," Schwartz said. "There are a lot of folks out in the marketplace who are trying to build next-generation infrastructure. What they figured out is they could do it with a general-purpose server running a general-purpose operating system."

And of course, Sun is in it for the money. "Whether those are systems suppliers or medical equipment companies or factory automation technologies or the like, we see a growing amount of OEM opportunity opening up in front of us," Schwartz said.

Chief Executive Scott McNealy added that revenue from OEM deals tends to be "very sticky"--in other words, it has desirable staying power. That's important for the company, which is trying to increase the amount of revenue it can count on to recur year after year.

Sun already has several significant OEM deals, McNealy said. "Our big OEMs tend to be network equipment providers like the Lucents and Nortels. We OEM Java to Motorola and Nokia. We OEM Java to set-top box manufacturers. We OEM boards to government defense contractors. We OEM to medical instrument business," he said.

Initial focus on telecommunications
About half the OEM division's revenue comes from products sold to telecommunications companies such as Alcatel, and that area will be an early focus, Heel said.

Sun plans to integrate its own hardware and software into a single product designed for the telecommunications industry. In addition, it is in discussions with several network equipment providers to set up a consortium that could use a standardized collection of hardware and software from Sun, Heel said. "They would share the platform we would develop together. It would cut their development costs," he said. He declined to name the partners, but said they are among the top five suppliers of telecommunications gear.

Although Sun will integrate products, the work stops short of making Sun into a full-fledged systems integrator. ""The boundaries are set by the customer," Heel said, and Sun won't step on partners' toes in the areas they want to add value and thereby derive profit.

Sun plans two more integrated products, he said. Though he declined to share specifics, he said health care and mobile phone handsets are areas to watch.