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McNealy: Microsoft integration work slow going

The job of linking products from Sun Microsystems and Microsoft is "more complicated" than envisioned, Sun's CEO says.

ORLANDO, Fla.--The integration of Microsoft and Sun Microsystems technology is progressing, but it is more complex than envisioned, according to Scott McNealy, Sun's chief executive.

The companies' integration project, headed by Microsoft's Bill Gates and Sun's Greg Papadopoulos, is "way more complicated and detailed and extensive than I thought they were going to do," McNealy said.

McNealy made his comments during a press gathering held Monday at an industry conference sponsored by market research firm Gartner.

The integration work is an outgrowth of a landmark $2 billion legal settlement and technology agreement announced earlier this year by the two companies.

The work "is going well, but Bill and Greg are kind of stalling, not in a negative sense, but in the sense that they want to make sure they got it all right," McNealy said. "And they understand this is going to be one of the most scrutinized explanations of a roadmap and integration effort."

The companies were expected to offer a progress report this month, McNealy said. "I think they weren't quite ready to go show off their handiwork yet, so I hope (for one before the end of the year)," he said, adding that he and Microsoft CEO Steve Ballmer "are all over them" to deliver.

McNealy confirmed that the companies are focusing on linking their respective directory servers, Microsoft's Active Directory and Sun's Java Enterprise LDAP Directory, to provide single sign-on capabilities for companies using both servers. "It is one of many projects, but it's probably the earliest to bear fruit. I think they are going to put me and Steve on stage for (an announcement) sometime after the new year," he said.

Sun's CEO is hoping to convince top technology executives that Sun--which has struggled in recent years--is a safe bet. Sun last week reported a loss of $174 million on revenue of $2.6 billion for its fiscal fourth quarter, after reporting a profit in the previous quarter. The company beat analyst targets, but revenue was lighter than expected and Sun made 200 more layoffs than its previously announced 3,300.

One of McNealy's top priorities is providing more on-demand and subscription-based services. The company already provides hosted storage and use of its development tools on a software-as-a-service basis. Last month, Sun introduced a plan offering its customers grid computing for $1 per processor, per hour.

"The call plans, or subscription models, are the most interesting aspect (for Sun looking forward)," McNealy said. "The model works," McNealy told a gathering of more than 5,000 conference attendees here later on Monday. He said the company's dollar-based pricing for its services "is like stealing" for customers. "You don't have to own the data center, and if you don't want it, we just shut off the IP (Internet Protocol) connection," he said.

Desktop hosting next?
McNealy said that Sun plans to offer desktop hosting at some point, though he did not specify when. "We want to host and run your desktop on the N1 grid and let you view it with Java card authentication at so many dollars per desktop per month," he said.

Currently, Sun has 345,000 customers for its Java Desktop System, its bundle of desktop software licensed to customers for a single annual fee. McNealy said about one-third of Sun's business is from recurring revenues, such as those generated by subscription plans.

"The bigger that number gets, the happier I am, because then I go into the quarter with most of the business done, as opposed to having to do it in the last week, because then you are under huge discount pressure and all of the rest of it."

On Monday, Sun said it had signed a deal to provide its Java Enterprise System to Orange SA, the mobile communications arm of France Telecom. Sun said the company will use the software to replace existing systems that service more than 22,000 employees. Terms of the deal were not announced.

McNealy said one of the challenges for Sun in offering subscription services--in addition to figuring out how to make money--is convincing customers to make the leap from owning a data center to using pay-per-use services.

"You have to get people comfortable with the fact that your money is safer in the bank than it is in your mattress," he quipped.

Another obstacle to converting customers to on-demand, or hosted, setups is that some may wind up with unused hardware and software. "What do they do with the beast they already have?" McNealy asked.

McNealy, as might be expected, said he sees a bright future for other technology makers investing in on-demand strategies. "Every new startup is going to go to this immediately, as opposed to doing a software lab or writing some proprietary environment," he said.

In the long run, McNealy said, he hopes Sun gets out of the business of offering services itself, and instead recruits partners to offer services. For instance, the company on Monday announced that it had entered a deal with consulting firm EDS. Sun will provide technology for EDS's outsourced IT infrastructure services.

One trouble spot for Sun will be convincing the company's many sales partners, its so-called value-added resellers, that there's a profit in selling subscription-based services as opposed to hardware and software. "This is a tough transition for folks. We'll compensate our channel partners for keeping people on subscriptions," McNealy said.

And as for concerns that a dollar-based pricing for services will cannibalize Sun's business, McNealy said: "That's been a 23-year issue for Sun. I'd rather we do it than other folks. Cannibalizing your own is better than having them cannibalize you, believe me."