Sun Microsystems Falls Victim To Internet Bust And Strategy

SAN JOSE, Calif. (AP) -- It was the leading supplier of the computer servers that fueled the dot-com boom, the Silicon Valley star whose name was nearly synonymous with New Economy chic.

But after two years on the bleeding edge of the bust, Sun Microsystems Inc. has fallen victim to the commoditization of the computers that do corporate America's heavy lifting.

Sun is deep in identity crisis as its executives try to reinvent the company. There's been loose talk of Sun as a possible takeover target, and some analysts are wondering whether Sun will ever return to the days of strong revenue growth and record profits.

These days, even co-founder and CEO Scott McNealy's industry-famous tirades against rivals seem muted.

McNealy, who declined to make himself available for this article, is more likely to be talking about cutting costs--or how his sales team is now offering customers a "whole-system" approach. To many ears, such a strategy sounds strikingly similar to the mantras of International Business Machines Corp., Hewlett-Packard Co., and other competitors.

"If you've got to lag at any time, the best time when people aren't spending money," said Larry Singer, Sun's vice president of information systems strategy. "Yeah, we've got a little execution problem, but I think we've got it taken care of ... at the right time."

Last year, Sun's revenues fell 32 percent from a record $18.3 billion in 2001. Sales are down this year, too.

The obvious reason for Sun's fall is that it relied too much on the very companies that flamed out so spectacularly. And attempts to capture new markets have been hurt by the overall economic malaise.

But Sun's woes have been exacerbated by its slow reaction to fundamental changes in the industry, analysts say.

Sun's servers are being squeezed by the increasing power of so-called commodity chips from Intel Corp. and low-cost operating systems like Linux that only a few years ago could not approach the performance of the company's Sparc microprocessors and Unix-based Solaris operating system.

So when the Screen Actors Guild's health and pension fund decided to upgrade its servers earlier this year, the contract went to Hewlett-Packard, which offered competitively priced equipment that not only runs Linux but also works well with existing servers using multiple operating systems.

Only recently has Sun switched from publicly bashing Linux and Intel to launching low-cost Linux servers on Intel chips--a strategy that IBM and HP jumped on sooner.

Sun, meanwhile, is also continuing the expensive development of Sparc and Solaris.

"To date, Sun's strategy for switching to these commodities is not perceived as credible by users," according to the research firm Meta Group.

Sun is also spending millions pushing Java, a programming language that provides little in direct revenue to Sun but can be found in millions of cell phones, personal computers and other devices.

Its campaign, something like "Intel Inside" for Pentiums, included Christina Aguilera with a Java-enabled phone.

Sun says Java opens markets for its equipment, particularly since it's a keystone in Web services, in which computers communicate seamlessly with one another regardless of operating system.

HP, IBM and Microsoft also are heavily touting Web services.

"It seems like McNealy's kind of serving up the strategy du jour and because of that they've had some lack of conviction in what play they're going to call," said Jeff Benck, IBM's director of eServer marketing.

Still, it's hard to write off a company that has more than $5.5 billion in cash and marketable securities. Even in the depressed server market, it eked out a small profit in its most recent quarter.

And since March, its stock price has jumped 53 percent, though it's still far from the all-time high of $64 set in 2000.

According to the research firm IDC, Sun gained market share in three Unix server categories in the first quarter. It's also the leader in Unix shipments and tied with HP in server revenues.

"They still remain a server power, and they are still selling products," said Jean Bozman, an IDC analyst. "That's not nothing."

Though Sun is often criticized for being slow to jump on the consulting-business bandwagon, the company says it's merely taking a different tack: focusing on using its software to simplify complex systems. IBM, Singer says, uses an army of expensive consultants to mask the complexity.

Keith Horton, executive vice president of operations at TowneBank in Virginia, said he chose Sun over IBM in part because of its approach.

"Sun reminded us a lot of the old IBM, where you bought the hardware and system software and they came out and supported it," he said. "We have the technical expertise here ... We haven't needed a consulting staff to come in."

At Sun's headquarters, located at the site of an abandoned insane asylum in Santa Clara, Calif., morale is showing signs of a rebound from the low point of about six months ago--when layoffs by the thousands and the departures of key executives left remaining employees wondering whether Sun was moving in the wrong direction.

"There were people who were so discouraged ... there was a real cry for hearing the strategy from the executive team," said one employee, who spoke on condition of anonymity. After answers were given during a series of town hall-style meetings, much of the grumbling has abated, the worker said.

Sun still has to convince outsiders that it can both survive and thrive. It will take time for Sun's strategies--and an above-average R&D budget at 15 percent of revenue--to pay off.

Java also could pay off if Sun's $1 billion private antitrust lawsuit against Microsoft is won or settled favorably, though some consider the case a distraction.

Sun needs "a little less rhetoric about the guys in Redmond and a little more thinking about who the real competitors are," said Charles Rutstein, a Forrester analyst.