Sun looks to Wall Street in comeback bid
Long given up for dead (or dying), Sun is turning its own business on its head by offering to integrate many different systems.
"What happened three years ago is that you became bitter and cynical," he said to the executives from the financial-services industry, which has long been Sun's bread and butter. Sun once was widely respected as a technology innovator that powered Wall Street and other parts of corporate America with computers and operating system software. Now the company has the challenge of convincing customers that it has not grown lazy and ineffective in middle age and that it remains relevant in a rapidly changing industry.
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Schwartz, who was named president and chief operating officer in April by Scott G. McNealy, a Sun co-founder, is betting that he has a plan that will bring customers back on board.
On Tuesday, that strategy will get its first major test in New York. In a "Take Back Wall Street" campaign, Schwartz plans to introduce the latest version of Sun's Solaris operating system, which he hopes can convince Wall Street firms that Sun's technology remains relevant to their huge data centers. While it will be a challenge, industry executives and analysts say it is not an impossible sell. Sun, based in Santa Clara, Calif., is still widely perceived to be a technology leader, despite having laid off 11,800 employees--27 percent of its former work force--and sustaining a collapse of its stock, to less than $4 from over $60 in 2000.
And Schwartz, a longtime software entrepreneur who joined Sun Microsystems when it acquired his company in 1996, is taking bold steps in an effort to save Sun.
After years of clinging to its own proprietary hardware standard based on Sparc microprocessors, Sun is now moving its Solaris software into the mainstream: the market for big network server computers based on the so-called x86 series of processors standardized by the chipmaker Intel and its rival Advanced Micro Devices.
Freeing Solaris from its reliance on Sun's Sparc chips makes it available on computers from more than 200 manufacturers. That, in turn, can enable Solaris to compete more effectively against the increasingly popular Linux operating system, which is distributed by a variety of companies and is used to power a growing number of corporate data centers. (The new Solaris will be able to run Linux applications, further enhancing its potential appeal.)
Schwartz is also relying on the company's historic detente with Microsoft earlier this year, in which the two companies agreed to coordinate their products. The first results from the joint effort, expected before the end of the year, will interconnect Microsoft's computer network sign-on system, known as Passport, and Sun's, known as Liberty Alliance.
Software is not the only play. Sun is also counting on the recent return of one of its four founders, Andreas Bechtolsheim, to build computers to win back a meaningful performance edge that the company has allowed to erode.
More than any other factor, though, it will be the success or failure of Solaris 10--the new operating system being shown to Wall Street this week--that could determine whether Sun can return to anything resembling its former glory. Analysts and first customers of the new software say the product represents a generational shift for Sun, offering a variety of technology features not available under Linux or Windows.
Key functions include a performance-monitoring system called D-Trace that makes it easy to see how programs are functioning during normal business operations, and to identify any bottlenecks and work around them to make the programs run faster. Another new feature, Containers, is meant to let corporate users crowd programs more efficiently onto a single computer.
A file storage system called ZFS organizes information in a modular fashion that removes many of the data limits of a file-based system and is designed to offer better data protection. ZFS is particularly impressive, analysts note, because a similar feature has proved a thorny technical challenge for Microsoft and is one of the reasons it has delayed introduction of its Longhorn version of Windows.
One early customer of Solaris 10 has been the Philadelphia Stock Exchange. In July, the exchange started using an electronic options trading system based on Solaris 10, which runs on the Sun servers that were already in place. "Solaris was key for us," said William H. Morgan, the chief information officer of the exchange. "We needed a significant increase in system capacity, and the new software let us scale up without changing our computing environment."
While it will take many more customers like the exchange for Schwartz to prove his strategy, there are already indications that the battered computer maker is showing signs of revival.
In recent weeks, the company's stock price has bumped up as much as 23 percent, buoyed in part by market research reports from IDC and Gartner that Sun increased server shipments during the second quarter, more than IBM, Hewlett-Packard or Dell. Sun shares closed at $3.94 on Friday, still a long way from their peak in 2000.
Sun, which emerged from a Stanford University computer design project and was founded as a company in 1982, had already become a corporate computing mainstay before the Internet boom. But it grew explosively during the dot-com era, on the strength of brisk sales of its powerful server computers to telecommunications and Internet companies eager to expand their network capabilities. But with the dot-com collapse, Sun went into a precipitous decline. Its annual revenue fell to $11 billion last year, compared with $18 billion in 2001, and it only recently returned to profitability.
The fall was so swift that many analysts and customers still view Schwartz's effort as a lost cause. Yet, compared with many turnaround efforts, in which hired guns come in long after a company's founders are gone, Sun retains two of its four co-founders.
At 49, McNealy, Sun's chairman and chief executive, still exudes a striking passion for the company he helped found. And he dismisses criticism that by picking Schwartz to be his second-in-command he has erred by choosing someone too similar to himself in demeanor and charisma.
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"That's like saying there's something wrong with a 747 because two of its engines are exactly the same," McNealy said. "Jonathan is a very good pure manager, and most of all, he has courage."
Still wearing the ponytail he has had since he was a liberal arts major at Wesleyan in the 1980s, Schwartz came to Sun by way of Lighthouse Design, a small start-up he help found in the late 1980s with a group of college friends. A business strategist, Schwartz is a contrast to the man he succeeded, Edward J. Zander, who ran Sun as the ultimate computer salesman. Zander left in 2002, later becoming chief executive of Motorola.
Schwartz "just likes building businesses," said Walter Smith, a friend who met Schwartz in 1983 during his freshman year of college. "He's the kind of guy who reads Business Week for fun."
Schwartz's management style is based on a Silicon Valley worldview that retains the sensibilities of a hacker's pure passion for power of computing, as well as a refusal to tolerate the mediocre.
Last year, not long after taking over as Sun's head of software, Schwartz brought his staff members together at the company's campus in Menlo Park to review more than 100 of Sun's crucial software applications, people who were in the meeting recall. After looking at the first 20, however, Schwartz threw up his hands in frustration at what he perceived as substandard work, and said bluntly, "Shoot me now!"
Now, running the entire company, Schwartz is gambling that Sun can thrive again by refusing to ape its principal competitors, which are increasingly selling commodity hardware and software to business customers and seeking profits either through ultraefficient operations or the sale of services. "The only way to survive in a commodity market is with technology," he told the Wall Street executives last week. "We are redoubling our investment in research and development."
Schwartz sees his technology ace card in Bechtolsheim. As a Stanford graduate student, Bechtolsheim designed the prototype of what would become the first Sun workstation. He became one of Silicon Valley's legendary designers and has created and sold several successful companies since he left Sun for the first time in 1995.
In the meeting with the Wall Street executives last week (all technology executives from an investment bank who allowed a reporter in the room on the condition that they not be identified), Bechtolsheim stood dressed in jeans and a sweat shirt. He showed the executives a prototype of one of the new server computers he is creating--a single-rack machine with up to eight processors that he said would have more computing power than a 10-rack Sun server today. So revered is Bechtolsheim in technology circles that the visitors sat entranced.
Schwartz took the floor next. Dressed in a tailored suit, he spoke comfortably without notes.
"We can be very disruptive with simple price models," he told the visitors.
He noted that in the 1990s, Wall Street analysts told Sun it should abandon the Sun operating system in favor of new technology coming from Microsoft.
"We didn't, and it was a very unpopular decision," he said. "But it was a $100 billion correct bet," adding that by continuing to offer its own operating system, Sun thrived in the dot-com era. Now, he said, the world was again telling Sun to give up on its operating system, and this time move to Linux. But Sun is basing its future on Solaris.
One of the executives was not convinced, noting that the path of least resistance for his bank was to stick with a homogenous computer environment provided by Microsoft or based on Linux.
Unfazed, Schwartz asked his audience to keep an open mind. Solaris 10, he told them, can run faster than Linux on computers based on either the x86 industry standard or the Sun Sparc hardware standard. "Sun can win on performance, and we think we can win based on the lowest total cost of ownership."
McNealy acknowledges that Sun missed the deeper implication of the rise of the World Wide Web, which moved the center of gravity in the computing world from large, monolithic computing systems to a profusion of smaller, independent processors. But because Sun was not the only company to miss the shift, it is in the hunt to design computing systems for the new world.
"If the world hadn't changed, it would be enormously difficult for them," said Mark D. Stahlman, a financial analyst at Caris & Company, a New York-based investment firm. "In a new situation, the compelling requirement is to reinvent yourself."
And Sun heads into that world with more than 1 million Solaris customer licenses, a more than adequate base from which to launch the company's newest software technology--if it can persuade most of those customers, and new ones, to tag along.
That customer base, and the tradition and opportunity it represents, is at the heart of why he has stayed at Sun, Schwartz said, saying he has had several opportunities to leave.
"When I came to Sun in 1996, it was at its heart a good company," he said. "We cultivated the most interesting technologies, we took on the titans and we showed no fear. That legacy is why I've stuck around."
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