Sun Microsystems is a pioneering tech company that is having trouble getting any respect.
A Forbes article on Thursday notes that the company's market cap has dropped below $3 billion: "The company has become so toxic that no one dares to swallow it."
As Sun CEO Jonathan Schwartz likes to say, the Forbes writers "over-rotate." But Sun has fallen further and harder on Wall Street than its main competitors over the last few years and months. Schwartz has bravely pushed Sun down the path of open source and created demand for its hardware and service via free software, but the big payoff has been slow in materializing. Add in the crumbling economy, and Sun has no choice but to take cost out of its business model.
This morning, Sun revealed that it is taking the headcount reduction route to profitability, letting go of 15 percent to 18 percent (up to 6,000 employees) of its global workforce and taking a charge of $500 million to $600 million over the next year. The headcount reduction will reduce annual expenses by $700 million to $800 million.
The economic reality is that 2009 isn't going to be a good year for the tech industry. Sun is facing reality with the cuts. Other tech companies will follow with headcount reductions too. This week, IDC cut its 2009 growth rate for spending on tech by enterprise companies worldwide from 5.9 percent to 2.6 percent. The U.S. growth rate for next year was revised from 4.2 percent to 0.9 percent.
In the Forbes article, various analysts who cover Sun suggest ways, in addition to headcount reduction, that the company could become more profitable. Among the suggestions: selling the Sparc microprocessor business to Fujitsu, spinning out the Java language group, dropping the low-end hardware business, and selling more customized servers to cloud computing providers.
In an e-mail response Thursday night to my query about the Forbes article--and just hours prior to announcing the layoffs--Schwartz gave his take on the substance of the Forbes piece:
Various analysts have told me our revenue was $299 million last
quarter (it was $2.9 billion), that we should lay off 50,000 employees
(that would be more than 100% of our employees), that no "real"
companies use open source (I guess Google and GE don't count), that
we're losing customers in droves (we gained customers last quarter),
that we're losing cash (we generated more than $150m last quarter),
that Niagara/SPARC is a niche (it was a billion dollar a year
business, growing 80% last quarter), that we're losing share on x86
(our biggest competitor was down 18% last quarter, but we grew more
than 4%), and that we lost $1.7 billion in cash last quarter (no - we
impaired a goodwill asset, just like CNET's parent company, CBS, wrote down
$14 billion - it's an accounting change).
So, I'm a tad skeptical of folks looking for sensational column
inches... we're very comfortable we're on the right path. We had more
than 1,000 requests for our new ZFS-based Storage platforms just a day
after launch. And we're deluged with requests from big customers
wanting to talk about open source adoption as a vehicle to reduce
proprietary licensing fees.
But with even larger companies pre-announcing 15% revenue declines,
it's evident the whole industry's got some challenges. I understand
everyone's worried, but sensationalism belongs on grocery store
checkout counters, not in the business press.
Schwartz is waiting for the world to change, to move to more of a cloud computing model where Sun can power millions of data centers with its hardware, software, and services. This model requires that Sun get more than a fair share of the market compared with competitors like IBM, Hewlett-Packard, Dell and eventually Google. Open-source, free software is Sun's disruptive element. Schwartz maintains that free software brings the marginal cost to acquire a customer to zero and helps drive revenue.