Sun Microsystems: Slowly Fading Away?

What happens when a high tech loses its way to achieving long-term growth and profitability? It slowly fades away. Sometimes it is because a company does not keep up with the latest generation of whatever they sell and they become a “has been.” However, a new variation on this theme has emerged to latch on to a new generation even if you can’t make money on it.

Is Sun Microsystems (JAVA) slowly fading away?

Its stock certainly has, having closed last Friday at the lowest level in more than a decade (adjusted for a 1-for-4 reverse stock split last year). JAVA is down over 72% year-to-date.  We are in a bear market so many high tech stocks are down substantially.  However, compared to IBM (IBM) and EMC (EMC) down approximately -13% and -37% [YTD] (see chart), Sun appears to be having a more challenged year (and decade, for that matter).

In the 1990s, Sun Microsystems established itself as a high tech titan by enabling the build-out of corporate networks and the Internet. It had, and still has, great hardware. During the last recession with Internet bubble bursting, many of Sun’s customers went out of business. It, however, enjoyed a significant presence in financial services that it leveraged until that market blew up in this recession. Having a significant block of customers hit hard in each recession, however, is not the only reason its shares and long-term fortunes are challenged.

As a side bar, it is interesting to compare two other high-tech titans both of which have had to re-invent themselves to weather competitive pressures and recessions themselves.

IBM has been counted out several times in its history. When the mainframe was supposed to be dying in the early 1990s and PCs were going to wipe them out, IBM responded by extending the mainframe franchise, getting into PCs and, most significantly, expanding into services. IBM expanded their services business by acquiring PwC Consulting. In recent years they have expanded, both organically and by acquisitions, into software. In the business intelligence space, their significant acquisitions were Ascential and Cognos (COGN). IBM has chosen not to fade away, but to expand out of the hardware business with consulting and services surpassing hardware in profits and growth. When it could not make money in PCs, it sold the business! Sometimes you need to honestly assess a business and jettison it if it does not advance your business rather than devoting resources into a losing cause.

EMC was also hit hard in the last recession, and over the years, it has faced many products that were labeled as EMC-killers. EMC chose to become a commodity vendor through both a hardware and software strategy. In hardware, it acquired a “lower-end” competitor enabling it to offer a broad range of storage products and thus defend its high-end franchise. In software it expanded though organic development but more significantly by acquisitions. Its initial round of software acquisitions extended its core competency of storage capabilities, but then it got into software applications that consumed storage rather than manage it with the notable acquisitions of Documentum and VMware (VMW). Both of these acquisitions were “outside of the box” thinking that has proved to be profitable.

IBM and EMC have both been primarily hardware vendors in their history and have broken out of those bounds. They both could have become commodity vendors and faded away but because they both thought outside the box, they did not.

Sun seems to want to be cool regardless of whether it makes business sense.

After posting disappointing quarterly earnings, Sun’s CEO Jonathan Schwartz said that the recession might be an opportunity for Sun since companies may examine using freely distributed "open source" software, which it promotes. It is true that the use of open source software [OSS] may increase, in tough economic times, but does that business really help Sun.

The company makes money if the customer buys a subscription, but how much revenue and profit can they generate from those customers? Sun bought MySQL for a $1 billion dollars (overpaying is another problem), but that company was not earning a profit despite sales of under $200 million and a millions of downloads. If Sun was a start-up with a much smaller organization then maybe it could generate enough profit from this business model to sustain itself, but can a company of Sun’s size really generate enough profit from their portfolio of open-source software [OSS]?

The other argument Sun uses is that OSS will generate profit when a Sun OSS customer decides to buy Sun hardware because it was using that OSS. Often, though, if a customer is looking at OSS because it doesn't want to spend money or it doesn't have money. Those customers are most likely going to buy the cheapest hardware they can get!

Cross-sell and up-sell are staples of retailers and financial services companies but that business model is yet to proven for a high-tech firm of Sun’s size to leverage from OSS.

I like Sun’s hardware and software, and I use Java and MySQL. However, it is not a question of whether the products are cool; but instead, the issue is whether Sun can leverage OSS to make enough revenue and profit to keep its business growing. 

As Neil Young said, "it's better to burn out than to fade away." It would be nice, though, if Sun followed another path and become a growing and profitable high-tech titan again.

Disclosure: None

Comments

[FrustratedRSO:]

The opportunity here is that SUN has learned that SOFTWARE is more of future than just Hardware alone. Instead of just selling all hardware, SUN has figured out that it needs to grow it's software business to about 50% of the company's revenues over the next few years.

The problem is there is 1 software rep for 5 states. He/she then has to cover 200 software products x thousands of customers. Until SUN invests here, they are doomed. However, management REFUSES to market. They are purposely against paying for advertising even though it works.

So SUN's inept sales managment headed by Cheryl the soccer mom thinks multi-vendor partners are the way to loyalty. Problem is the VARs are like door nobs, ever vendor gets a turn.

2008 Nov 06 08:58 AM

[mr mo jo risin:]

check out this crazy site. At the mtg yesterday Jon said he wants to do another stock split reversal. There goes another 80% of our stock

2008 Nov 06 09:40 AM

[User 292643:]

Sun builds some the best software in the business. Everyone seems to know this. Customers even pay a premium at times for their software! Advertising will help raise the visibility, partners can help as well. Just waiting for people to download their software, like it and then buy a subscription/support is just too slow. If you have great products you have to tell the world and gain market share quickly. In other words - INVEST IN YOURSELVES! Get off the hardware kick and focus on the software!

2008 Nov 06 09:53 AM

[Stu Pidasso:]

Sun's sales force are young, naive, order takers from their installed base. nothing more. Sun has no product roadmap that customers believe in. Sun cannot monetize Java and embraces all activities that don't drive revenue. Where is the board? Where are the stockholders voting on board membership? This is close to criminal.

2008 Nov 06 03:27 PM

[OnceSun:]

Yeah....have to admit...the board and leadership is not adapting. As an ex-Sun employee I think the products, technology and innovation remains solid.

Marketing and advertising has failed massively over the last 8 years.

Come on Scott....get the board moving and shift gears....the strategy of the last 5 years certainly isn't working.

2008 Nov 06 04:20 PM

[Frustrated ...:]

Working with the Sun sales force is like pulling teeth. Stu Pidasso's comment about order takers and installed base is spot on. Sun needs to expand into services and software to remain viable, but the sales reps only know how to talk about hardware feeds and speeds. The Intel and AMD boxes are over priced commodities. The SMP servers are screaming fast,but only if your software takes advantage of multi-threading.

The crown jewels from a product standpoint are the storage products, however the way Sun has structured its sales force they'll be lucky to increase their market share in this area. Best bet is to sell this division (with the development team and sales force in tact) and use the money to pursue software and services by retraining the sales force and leveraging their partners.

2008 Nov 07 09:57 AM

[BeachRider:]

As a customer of Sun, it is easy to see that the lower level people have not derived much benefit from whatever leadership they are getting. The key-staff turnover at Sun is dramatic this year. The company continues to drift with little apparent direction. They are bringing out technology, but implementation of those technologies runs into issues for which they are under-prepared. Their traditional core technologies (Solaris, Ultrasparc) have made incremental improvements, but JAVA is about much more than that.

2008 Nov 07 01:13 PM

[Alex Filonov:]

I liked Sun a lot. I invested in it long ago, lost some money. Still like products, but I'm afraid company is not going to survive in this economic environment. A pity, really. But management just doesn't know what to do.

2008 Nov 07 02:24 PM

[Frustrated ...:]

There are three things the company should do to help solve their problems:

1. Replace Schwartz with a competent CEO who will meet with and articulate Sun's strategy. I am told he believes he can Blog customers with that strategy and not be bothered with meeting face to face with them.
2. Replace or at least bring in new board members who will take action to right the ship. I am deeply concerned that they have become complacent since most of them have been on the board for many years.
3. Upgrade their sales force and pay them a lot of money for performance. To accomplish the above a change in Executive Sales Management will most likely be needed.

2008 Nov 07 08:35 PM

[bigmoney:]

It appears that Linux on x86 chips is getting all the luv. 64 bit Solaris on Sparc might be technically superior, but I think we are getting into the domain of good enough. Esp. considering that today's software can often scale linearly across a bunch of low end rack mount machines.

I think Sun's pain can be tied to Intel. Intel is putting out such good CPU's these days, that even Windows is attractive for server hardware. Back in the day, when Intel was putting out 486 and Pentium 90's, the RISC CPU performance was sufficiently impressive to help motivate people to learn and implement UNIX systems. Now they can buy quad-core 3GHz Wintel boxes with 3Gb/s SAS disk drives, and install SQL Server.

From an engineering perspective, MS Windows is still lousy at least compared to UNIX, but its got a low barrier to entry, because of its point and click interface, and this allows newbies to feel confident that they too can become well paid administrators in no time flat.

2008 Nov 08 08:44 PM