Update: McNealy steps aside as CEO of Sun

The long-time boss said Jonathan Schwartz has been chosen to take over as CEO effective immediately as he reported a $217-million loss

Jonathan Schwartz has been the heir apparent of Scott McNealy's at Sun Microsystems Inc. for some time, but many had doubts when he took over as president and chief operating officer of the struggling vendor in 2004 that he was the right man for the job.

"A couple of years back people said, 'Oh, he's a flash in the pan -- he won't do well reorganizing and managing the company through tough times'," said Laura Koetzle, vice president and research director for Forrester Research Inc.

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But in the two years since he ascended to the upper ranks of Sun, Schwartz has shown real mettle at kick-starting a turnaround with bold strategic moves and layoffs McNealy had long avoided that helped the company trim fat and cut costs, analysts said. Even if Sun is never again the technology giant it was during the heyday of the dot-com boom, it's likely to remain influential and to regain some of its old swagger and profitability under Schwartz, they said.

"I'm impressed, not just by his clarity of vision and general executive sharpness, but he has proven he can deal with tough situations managerially," Koetzle said.

Even so, all eyes and an ocean's worth of pressure will be on Schwartz to continue that kind of leadership now that he is chief executive officer as well as president at Sun, a move that was announced Monday. Sun cofounder and long-time helmsman McNealy will remain as chairman and take on a new position as chairman of Sun Federal, which serves government customers. Sun has no plans to fill the vacated COO position, according to spokeswoman Stephanie Von Allmen.

Many feel it's been Schwartz, not McNealy, who has been steering the ship through some of Sun's boldest moves in recent years. In addition to personnel cuts, they include product maneuvers such as open sourcing Solaris as the proprietary OS bowed to competitive heat from Linux, and creating a new per-user pricing structure for its Java Enterprise System software suite when competitors like IBM Corp. and BEA Systems Inc. trumped Sun in the Java software market.

At the same time, Schwartz also ensured Sun kept the portfolio of its core business -- hardware -- fresh and innovative. Under Schwartz's tenure as president and COO, the company invested in dual-core Opteron processors from Advanced Micro Devices Inc. to fill out its low-end product line, which was lacking for many years, as well as ensured Sun was ready to provide infrastructure for the growing crop of Web-based applications with its next-generation line of Niagra multithreaded processors.

"He's been calling a lot of the plays over the last couple of years," Jonathan Eunice, an Illuminata analyst, said of Schwartz. "This is his architecture, this is his strategy that Sun is playing. He has really put a lot of energy and new thinking into Sun."

"Succeed or fail, the new stuff Sun is trying, from becoming the world's biggest Opteron reseller, to Open Solaris, to the pricing they've done with the Enterprise Java System, is having an effect on the industry as a whole," Koetzle said. "They're forcing the industry to make changes it doesn’t want to make that are good for customers, and I applaud their bravery."

McNealy praised Schwartz's bravery in comments he made Monday after the management changes were announced

"We've got a great guy here -- a guy I've been trying to get into this role for quite a while now," McNealy said. "He and I can finish each other's sentences. We're very aligned strategically ... and he's got something that's very rare, and that's courage."

McNealy's comments support a general opinion among analysts that the management change was calculated. Though some critics have been calling for McNealy to step down for years, Forrester's Koetzle said this is probably the right time for him to leave the company he founded nearly 25 years ago in 1982.

"This is McNealy's company," she said. "He didn't want to be the one to leave when the chips were down. He wanted to leave his successor on a positive trajectory instead of, 'Here, I'm leaving you a mess to clean up'."

There have been signs of life at Sun lately, even before Monday's announcements. The stock price has been creeping up, and rose by about 8 percent in after-hours trading Monday when Wall Street reacted positively to the executive changes.

Sun, too, has shown its strategic savvy in the last year, aligning itself with industry heavyweight Google Inc., said Joe Wilcox, analyst with JupiterResearch. Though what will actually be delivered through the deal, which at this point is a vague technology partnership around the Java runtime, is still up in the air, he said it bodes well for Sun's success in the future to be paired with the industry and Wall Street darling.

"Sun still has the influence -- don't count them out yet," he said.

Known for being candid, intelligent and relentless when it comes to staying on message about Sun's strategy, Schwartz will continue to push a plan to provide network infrastructure, including hardware, software and professional services, for Web-based services that touch a range of devices, analysts said. The Google deal will likely play a pivotal role in that, they said.

True to character, Schwartz hit the ground running in his new position, already hinting at more changes to come at the company in a conference call following his appointment. He suggested that Sun might be mulling an acquisition in the open-source market in the near future in an effort to continue to grow its cache of open-source software.

"Are there acquisition opportunities out there? Absolutely," Schwartz said. "We will be one of the consolidators in the open-source industry."

Companies suggested by industry observers as possible acquisition targets for Sun are open-source database company MySQL AB and Linux vendor Novell Inc.

(Stephen Lawson and Robert McMillan in San Francisco contributed to this report.)

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