Sun's Hail Mary pass
Replacing Scott McNealy with Jonathan Schwartz signals that Sun Microsystems is at last ready for radical change.
By replacing longtime chief executive Scott McNealy Monday afternoon with its president, Jonathan Schwartz, Sun's board signaled that it's embracing the company's radical change in business model—and may want management to go faster.
"He's got something that's very rare, which is courage," said McNealy of his successor, in a conference call on Monday.
Schwartz will need it. Faced with a prolonged drought in hardware revenues since the dot-com boom came to an end, Sun has been trying to shift emphasis to its Solaris operating system, Java programming language and pay-per-use computing services.
On the outside, the crewcut McNealy may look like more of a suit than the long-haired Schwartz, who has been known for shaking up the industry on his blog. (He once suggested in a blog post that Sun could buy Linux distributor Novell to make things difficult for IBM (Research).)
But Schwartz may well be more suited to make the hard decisions Sun needs now. In a recent research report, Sanford C. Bernstein analyst Toni Sacconaghi estimated that Sun needs to cut 10,000 to 12,000 jobs – 27 percent of its workforce of 39,000 – to get its costs in line with the rest of the industry. Many believe McNealy has resisted making such cuts. Schwartz, a former consultant at McKinsey & Co. before he joined Sun in 1996, can crunch numbers with the best of them.
One challenge Schwartz faces: Narrowing down the number of big bets Sun is placing. "One thing no one ever said to me was 'Stop innovating,'" McNealy told Business 2.0 in an interview published in February. But Sun is currently competing with Intel (Research) on chips; Dell (Research), Hewlett-Packard (Research) and IBM on servers; and Microsoft (Research), Novell and Red Hat in software. Investing in so many areas of research and development simultaneously may simply be beyond the company's financial capacity.
In the conference call, Schwartz announced his first task would be to review all of Sun's $2 billion in annual R&D spending.
If Schwartz is likely to favor any area, it's software, a business he ran at Sun before becoming president. Sun's Java is increasingly popular on cell phones, and it continues to be a mainstay of enterprise computing. But Sun has never profited from it as much as many believe it should have. Sun is now selling its lines of desktop and enterprise software under the Java brand, hoping to get a marketing boost from Java's popularity.
Under Schwartz, Sun also began experimenting with selling pay-as-you-go computing, where customers rent capacity on servers that Sun operates. Sun recently started offering the service to any U.S. resident with a PayPal account.
Still, Sun gets the bulk of its revenues from hardware—and it will be very difficult to replace those revenues with software and services. In an initiative Schwartz recently touted on his blog, Sun recently offered to give away its servers to customers who agreed to try it out and publish the results of their testing.
The giveaway may prove to be a clever marketing tactic—but it's also a tacit recognition of how cheap servers have gotten as hardware prices continue to fall. Free is just another word for nothing left to lose. For Sun, appointing Schwartz may be the corporate equivalent of a Hail Mary pass.
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