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Sun Write-Off Means It Has More To Prove

Buyers and investors worry about the company's ability to compete
Sun Microsystems Inc.'s financial bombshell last week set off yet another round of can-it-survive speculation among investors and business-technology buyers. People from both groups are laying down their bets.

Sun, with arguably the most-scalable Unix server as its flagship product, said it would write off more than a billion dollars from its fiscal 2003 fourth quarter ended June 30. The noncash charge is tied to tax benefits that the company says it won't collect. Sun also predicted it will report a loss for its first quarter of fiscal 2004, ended last week.

Sun blamed "intense market and competitive dynamics" for the poor quarter. Commodity computing is eating away at Sun's high-performance Solaris operating system and UltraSparc chip.

Merrill Lynch equity analyst Steven Milunovich said in a report that Sun should lay off another 5,000 to 7,000 people, abandon Java, UltraSparc, and other areas, and accept its role as a niche player specializing in mission-critical computing. "On its current course, we believe Sun is likely to suffer further share and financial losses, become irrelevant to most users, and eventually be acquired for its installed base," said Milunovich in the report. A Sun spokesman says Milunovich has been saying similar things for years, and Java and Sparc are far too integral to Sun's strategies. (For another viewpoint, see William Schaff's Taking Stock column, "Sun Struggles To Remain Relevant.")

It's customers who will actually shape Sun's future, and they're voting every day on Sun's ability to compete. Jeffrey Barocass, senior director of application services at Precision Response Corp., still oversees a combination of Linux-, Solaris-, and Windows-based servers that help run its call-center outsourcing business. But the license ran out last spring on its Sun E10,000 server running the client database, and updating the maintenance contract would have cost $200,000. Barocass replaced it with a four-node Dell cluster running Red Hat Linux Advanced Server 2.1 and Oracle9i, eliminating the E10,000 single point of failure and lowering the cost.

Barocass says Sun has lowered prices but hasn't shown it's serious about competing with Dell in commodity products, such as offering Linux on a four-way Intel-based server. "I can't imagine it ever being successful in this field," he says. "Sun was always the big boy on the block, and it's an attitude that doesn't bode well for Sun."

MasterCard International Inc. continually re-evaluates its infrastructure, which relies mostly on Sun systems for the Unix side of the house. So far, the credit-card company is sticking with Sun. "Once you have people trained on a particular technology, there's some reticence to change," says Sam Alkhalaf, MasterCard's senior VP of technology. "If a swap-out makes sense, it would be considered." So far, Sun passes muster regarding the ability to work with other server vendors and partnering with third-party vendors, Alkhalaf says.

One such vendor likes the fact that Sun doesn't have its own consulting business, unlike Hewlett-Packard and IBM. Services company SchlumbergerSema Ltd. signed up with Sun a few days after the system vendor's financial news. "We think Sun has an active role in utility computing because of its willingness to work with the system integrators," says Stephen Holmes, global marketing manager for data-center outsourcing at SchlumbergerSema.

There are three main areas of concern about Sun, according to Vernon Turner, an IDC analyst. The write-off suggests the company has lower expectations for the future; that ups the chance of a hostile takeover; and Sun is going to have trouble holding on to its best and brightest people. "I'm not saying put a fork into Sun," Turner says, "but it has more challenges now than in the past."