These are momentous times for Sun Microsystems. Earlier this month, the systems and software giant struck perhaps the unlikeliest partnership in the history of the IT industry, a 10-year interoperability and royalty agreement with its former nemesis, Microsoft. It also secured an equally surprising, and no less dramatic, $1.6 billion settlement with its old rival, bringing to an end years of legal disputes about Microsoft’s allegedly unfair business practices and its controversial treatment of Sun’s Java technology.
But mixed in with that atmosphere of bonhomie and forgiveness were some clear signals of where Sun wants to be in the future and how it intends to chart a course there.
First, with hardware sales in the doldrums, the company warned as it shook hands with Microsoft of huge losses and the axing of 3,300 jobs – 9% of its workforce. There was also more than a hint that CEO and founder Scott McNealy is again willing to share some of the power at the top of the company, by promoting Jonathan Schwartz, previously the head of its software business, to the long vacant positions of president and chief operating officer.
Sun’s critics on Wall Street had been desperate for the company to take some dramatic steps to halt the slump in sales and profits that have beset the company ever since the dot-com crash. But few expected Sun to deliver on all fronts at once. And while the Microsoft deal grabbed the headlines, now that the dust has settled, attention is turning to Schwartz and his priorities for Sun.
The move is highly significant, say Sun followers, for two main reasons: first, because it confirms what many have been thinking for some time, that Sun is investing a growing proportion of its time and resources in software; and second, because Schwartz represents the latest potential successor to McNealy.
The last incumbent of the COO’s role, Ed Zander, now the CEO of Motorola, left in 2002 after it became clear that McNealy was not willing to let go. The thought of McNealy sharing major responsibilities with Schwartz, a relatively inexperienced 38-year-old, would have been unthinkable a few quarters ago. But these are truly unusual times for Sun.
Neil Macehiter, an Ovum analyst, says that Schwartz may be unproven at this level but his promotion is to be welcomed. “Schwartz is someone who understands software, and what’s more he has already proved with the development of Solaris 10 [a security-hardened version of Sun’s Unix-based operating system] and the Java Enterprise and Desktop System offerings that he can shake things up,” he says. “He now has sales and marketing reporting to him, which is important. We hope that he can take the Sun that emerges from these announcements and reinvigorate it.”
Whatever else he has in mind, it seems certain that Schwartz will seek to place Linux closer to the centre of Sun’s strategy. In the server sector, for instance, Sun is still often perceived as a supplier of proprietary hardware based on its Sparc chipset and Solaris operating system platform, despite having begrudgingly sold Linux boxes for almost as long as the other major systems vendors.
Perhaps it is his trademark ponytail, but Schwartz has the look of someone who might do a more credible job than McNealy of communicating Sun’s Linux strategy to its customers. As Ovum’s Macehiter pointed out, Schwartz is credited with devising the clever new licensing model for open source desktops and applications, known as the Java Desktop System, whereby organisations pay a flat fee of around $100 per employee.
The Microsoft deal and Schwartz’s promotion notwithstanding, however, Sun is still under pressure. Its revenues, which peaked in 2001 at $18.3 billion, were down at $11.4 billion in 2003 and if anything, things have got worse in 2004.
On the day of the Microsoft agreement, Sun disclosed to analysts that its sales for the third quarter will be around $2.6 billion; analysts had been expecting $2.8 billion. And it is likely most of the job cuts will come on the hardware side.
Something bold was called for, and something bold has been delivered. Suddenly, Sun appears to be looking forward rather than over its shoulder.