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Commentary: Sun takes hit from economic slowdown

Sun Microsystems is feeling the impact of Net companies that are scaling back on spending and forced to rely on actual profits rather than IPOs and venture capital.

Sun Microsystems's warning came at the end of another bad day on the stock market for technology shares.

In its conference call Thursday, Sun

See news story:
Sun stock withstands warning
blamed its expected shortfall in sales and earnings for its third-quarter results on sharp cutbacks in computer equipment investments in the U.S. market. Looking beyond the current quarter, Sun's executives indicated ongoing lack of confidence about the spending plans of its major customers.

Storage vendor EMC, meanwhile, adjusted its growth expectations downward, on the heels of storage networking supplier Brocade Communications Systems announcing a reduced earnings forecast late Wednesday. These two announcements indicated that the storage sector, which many had thought would be insulated from the economic slowdown because of the rapidly rising demand for storage capacity and applications, will in fact take a hit.

These announcements reinforce the verdict that the technology sector is absolutely not recession-proof. Any economic slowdown will affect the entire tech sector--not just the "dot-bomb" sector. Since the beginning of September, Sun's stock price has declined by more than two-thirds, as the market has perceived that Sun, along with the rest of the high-tech sector, has fallen off the growth pace that it has sustained over the last few years.

We have maintained for months now that there was excess server capacity in most of our clients' environments. Unix and Windows NT/2000 servers are generally operated at less than 50 percent capacity. This could easily be pushed to 65 percent to 70 percent capacity. Some server consolidation--especially of Web site or e-mail platforms--can also be accomplished.

We expect Sun and other high-tech companies squeezed by the current slowdown--such as EMC, Cisco Systems and Nortel Networks--to retrench and attempt to improve their bottom-line results by cutting back spending over the rest of this year. Indeed, Nortel has already announced significant layoffs. However, the outlook for a resumption of robust top-line revenue growth is less certain.

From boom to bust
That Sun is being hit hard by the current slowdown--and specifically the "dot-bust" that has followed the long dot-com boom--comes as no surprise. Sun, along with companies like IBM, Oracle, Cisco and EMC, was one of the big gorillas of the boom in high-tech stocks. The economic impact of the dot-bust has moved rapidly up the food chain to larger high-tech companies. Sun and others are feeling the impact of Internet companies rapidly scaling back their spending, as these companies are forced to rely on actual revenue and profits rather than IPOs and venture capital for their funding.

In addition, traditional companies that rapidly beefed up their Internet-related spending in recent years to compete with the upstart dot-coms are no longer feeling the same pressure to buy infrastructure and aggressively launch new e-initiatives. In fact, many of these entrenched companies have completed their initial surges in Internet-related spending to position themselves in the e-business economy, and are recalibrating their efforts.

Beyond the e-business arena, enterprises in all industries are reacting to the changed economic climate by applying more scrutiny and caution in making large investments in all types of high-tech initiatives. Once the economic winds start to blow chilly, it doesn't matter what companies previously indicated that they will spend. They will get cautious and shift course in a hurry.

Sun and other Unix vendors such as IBM and Hewlett-Packard are particularly exposed to the dot-com downturn because their rapid growth in recent years has been fueled by companies launching high-end e-business applications--such as those from BroadVision, Siebel, Commerce One and Ariba--on high-end Unix boxes. Sun, Oracle and others have adroitly exploited this environment to sustain their high growth rates. With the loud popping of the dot-com speculative bubble, companies are now more wary about making substantial investments in high-end e-business hardware and software.

The appeal of Wintel
Sun and other semiproprietary Unix vendors are also battling the long-term trend toward increased uptake of "Wintel" solutions for high-end applications, as Windows 2000 solutions prove their effectiveness, and Microsoft's edge in ISV application software is felt. The marketing appeal of "commodity" Wintel solutions--from Dell Computer, Compaq Computer, IBM, HP and so on--is also based on the promise of lower prices. However, it must be noted that this potential price advantage is often outweighed by other cost factors that are part of the total cost of acquiring, launching and managing the technology.

There is much more to any server implementation than the hardware and the operating system. Companies need to focus on non-hardware issues like managing their people and the skill sets in their organization and the complexity of the applications to be integrated. Those items can have a decisive impact on the total cost of ownership.

Additionally, in an integrated world any technology investment is effectively a decision about how an enterprise's previous technology investments will be "fed" or used. Therefore, the impact of any new technology on the enterprise's infrastructure already in place must be a key factor in buying decisions.

The good news for consumers is that the pressure on vendors to sustain their sales momentum will frequently result in a "fire sale" mentality during the next six to nine months. People who need to make IT investments in the next year should be sure to obtain favorable prices, because vendors will be anxious to sell.

During this period of IT retrenchment, we also advise IT organizations to sharpen their focus on issues not directly related to major hardware and software buying decisions. By improving their processes, planning cycles, and alignment with business goals, IT organizations will best position their enterprises to improve their competitive posture and be ready to fully exploit the next cycle of more robust economic growth.

Meta Group analysts Dale Kutnick, Peter Burris, David Cearley, Val Sribar and William Zachmann contributed to this report.

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