Sun Microsystems CEO Scott McNealy had to do a bit of clever score-keeping last week to declare the company on a two-in-a-row winning streak. When the company reported a loss of $174 million on revenue of $2.6 billion for its first fiscal quarter, after a profit the previous quarter, McNealy noted that, excluding certain charges, it should be seen as a slight profit with growing sales.

Sun's McNealy has changed the company to stay competitive. "It looks like we've been underestimated again," he says. Photo by Markham Johnson

"This year, we're focusing on profitability, growth, and getting back on offense," Sun's indefatigable CEO says. "While we still have some work to do, it looks like we've been underestimated again." In short, Sun has been standing its business model on its head--transforming its most-important commercial software into open source, embracing standard chipsets, converting rivals into partners, and tailoring subscription-style services. McNealy and Co. have been stewing over all these ideas for a year or longer, and over the next two months, customers will be able to judge how well they've delivered.

Next month, Sun is bringing out Solaris 10, an upgrade to its flagship Unix operating system that's more finely tuned for x86 microprocessors. This week, it's unveiling more pay-by-the-drink pricing options for grid computing. By year's end, it plans to finalize a sweeping plan to make its software available as open source, including a version of Solaris. And around the first of the year, it promises interoperability with Microsoft's identity-management and directory-services products.

By many accounts, the makeover is necessary for Sun's survival. The once-dominant company has struggled mightily in the last four years as customers flocked to lower-cost alternatives to its servers and software, and Sun has had only two profitable quarters in the last nine.

However, the yearlong expansions and modifications to its hardware, software, and services may renew some customers' faith. The "creative burst," as Steven Rubinow calls it, has Archipelago Holdings Inc. sticking to Sun-based systems and services, even as the electronic stock-exchange company evaluates alternatives. "Everyone in the world knows there's a competitive challenge for Sun," says Rubinow, Archipelago's chief technology officer. "But I give them a lot of points for creativity, which also gives me renewed confidence in their abilities longer term." In particular, Rubinow is interested in Opteron and improved versions of Solaris.

Sun's overhaul reaches into virtually every part of its core business. "Sun is doing a lot of things differently," says Gordon Haff, an analyst with research firm Illuminata. "Not all of them will pan out, but they've made fundamental changes."

In perhaps its boldest and riskiest move, the company plans to transform its proprietary software stack into open source that's available at no cost. In some ways, the move to open-source Solaris brings Sun full circle. In 1982, McNealy and colleagues founded Sun to sell a commercial version of a free Unix operating system. By putting a version of Solaris back into the public domain, Sun hopes to reinvigorate demand for its servers and broaden its ecosystem of Java developers.