Sun shines on silver anniversary

Despite recent troubles, the company remains a technological force with independent streak

Oct. 18, 2000, might go unnoticed in the long history of Sun Microsystems, but it marked a critical moment in the history of a company that celebrates its 25th anniversary this week.

On that day, an upbeat Scott McNealy spoke with analysts and unveiled his company's eye-popping first quarter earnings ($510 million on revenue of $5 billion -- an 88 percent increase over the same quarter in 1999). Looking forward, McNealy saw nothing but roses in Sun's future. Systems using the company's new UltraSPARC III processor had gone on sale in the preceding quarter, and McNealy predicted they'd be big hits in Sun's enterprise customer base, "offering unprecedented levels of uptime, reliability and quality." 

It wasn't to be. Even as he talked up Sun's future that day, the company he helped found 18 years earlier was slipping, unnoticed, into a challenging new era that would shake it to its core, shake him from his perch as CEO, and challenge the very assumptions and strategies that had turned Sun into a Silicon Valley legend and Wall Street darling.

[See also a Slideshow: "25 years of Sun" | PDF: "Timeline of Sun's achievements"]

Over the next 12 months, as the air spilled out of a dotcom bubble that had fueled so much of Sun's growth, the company's stock would lose 80 percent of its value. Exactly one year later, McNealy would face the same analysts to announce first quarter revenues that were 43 percent lower than in 2000 and a net loss of $158 million. 

And the news from Sun wouldn't improve for a long, long time as the company struggled in the years that followed to find a recipe for success while sticking doggedly to homegrown technologies like SPARC and its Solaris operating system. During one dark stretch, the company recorded 10 consecutive quarterly losses -- a blow that would fell many, lesser firms.

Instead, Sun said last week that it is on track for a second consecutive profitable quarter after the company posted net income of $126 million on revenues of $3.566 billion for the quarter ending Dec. 31, 2006, ending a streak of five consecutive money-losing quarters.

"They're in better shape recently than they were for much of last year," said Rob Enderle, principal analyst at Enderle Group. The company had been on a slow spiral downward for about five years but has begun to right the ship by focusing on its hardware line, open-sourcing Java and Solaris, and regaining ground in the all-important server market that it had lost to Dell, IBM, and HP more than five years ago, Enderle said.

The return to profitability is sweet victory for a company that began as a brash competitor in the technical workstation space, survived the crucible of the dotcom collapse, and now is poised to regain its status as an innovative technology giant just as it celebrates its 25th anniversary this month.

Founded in late-February 1982 by hardware designer Andreas Bechtolsheim along with entrepreneurs Scott McNealy and Vinod Khosla and software guru Bill Joy, Sun sharpened its teeth in the early days by besting bigger, more established firms like Apollo Computer (later part of HP) in the lucrative market for enterprise workstations.

An engineer's engineering company to the core, Sun was an early backer of innovative technologies like NFS (Network File System), Java, which started as an internal project by early Sun employee James Gosling in 1991, and open source. That openness to new technologies, coupled with a scrappy corporate culture under hockey enthusiast CEO McNealy, helped Sun thrive throughout the 1990s as a foe of companies like IBM, Microsoft, and HP, even as the advent of personal computers running Intel processors and Microsoft's Windows operating system ate into the enterprise workstation market.

The rise of Windows on Intel systems, or "Wintel," was a one-two punch for Sun in the enterprise. At marquee customers like GM, which has been using Sun systems for about 10 to 15 years, Sun workstations long ago gave way to Wintel PCs, said CTO Fred Killeen. "Historically, we would use Sun workstations, less now. The big part of [the switch to Wintel] is the end users now have a common platform that supports all their desktop applications as well as the CAD and CAE applications," Killeen said.

Sun responded to the threat with characteristic pluck: disparaging Microsoft and looking to counter it with technologies like Java and OpenOffice. While those efforts did succeed in taking Microsoft down a notch, they did not do much for Sun, Enderle said.

But as the 1990s boom revved up to a spectacular collapse at the turn of the millennium, the combative attitude that helped Sun face down bigger rivals blinded it to a changing business environment, allowing competitors to build leads in such areas as Web services standardization and push non-Sun technologies like Intel chips and the Windows OS. 

Ironically, Sun's previous flag-waving for Solaris and SPARC while momentum mounted for Intel and Linux may have blinded Sun to the need for reform within its own product line and placed the company in the position of appearing as a proprietary systems vendor -- a cruel fate for a company that had always prided itself on being open and based on industry standards.

Co-founder Andy Bechtolsheim said that the rise of Intel and Sun's not having an x86 system contributed to his decision to leave the company in 1995.

"I was getting worried that the cost performance of those systems was catching up with the SPARC architecture," said Bechtolsheim, who has since returned to Sun as chief architect of industry standard products.

But, historically, Sun has always shown a willingness to bend to industry whims, even if it means somebody else's work shares -- or takes -- the spotlight from Sun's own prized technologies. And that willingness to embrace change, backed by new CEO Jonathan Schwartz, who took over from McNealy in April 2006, has enabled Sun to pull up and out of its extended nosedive.

These days, Sun is offering Intel systems, just like Bechtolsheim suggested in the 1990s, while it continues to back SPARC. "It's the mainstream of the company. In fact, it's growing again," he said.

Sun is repositioning itself strategically as well. Under Schwartz's leadership, the company's focus has shifted from Sun's own proprietary Solaris Unix OS and SPARC RISC hardware to an open-source Solaris and the inclusion of Intel-powered computers on the Sun price list. Sun also offers systems powered by Intel-compatible AMD chips; Sun previously had sold some Intel systems prior to its agreement with AMD in 2003.

Taken together with Sun's decision to open-source Java in November 2006 and the agreement, last month, to offer Intel systems, Sun is demonstrating a resolve and then resignation that have allowed the company to survive other existential challenges, such as the 1993 decision to accommodate the Motif user interface after remaining steadfast in support of its own Open Look graphical interface.

"Open-source software has a compelling advantage because the potential customers know there's a difference in openness with open software [as opposed to] any kind of closed software," Bechtolsheim said. Berkeley Unix, used in the original Sun workstations, was essentially the industry's first open-source OS, he said. Besides, Bechtolsheim says, there is money to be made in open source through selling support and through sales of the company's hardware.

 At GM, Sun may not be a presence on the desktop, but it's still a significant presence in the data center, where Sun servers run back-end applications," said Killeen.

 Sun software ranging from Solaris to the Sun Java Enterprise System also populates GM. Sun, Killeen said, noting that Sun has been a very good partner for a long time.

As Sun moves forward, it continues to face obstacles.

Java, once revolutionary, now competes with a multitude of scripting languages that are considered the easier choice for Web application development. These include, ironically, the similarly named JavaScript language and PHP (Hypertext Preprocessor).

And Sun is maintaining an independent streak as one of the few large vendors not participating in the Eclipse Foundation for open-source tooling and instead promotes its own rival NetBeans initiative. 

While smaller than IBM and less influential than Microsoft, Sun, with its talented arsenal of technologists like Java founder James Gosling, remains a potent force. Just as the company once battled Apollo, Sun can be counted on as a prominent counterpoint to what its rivals are doing, even while Sun cooperates with its opponents when deemed practical.

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