McNealy's Dilemma At Sun Microsystems

Sun Microsystems Chairman, CEO and President Scott McNealy has gotten a lot of unsolicited advice during the past year.

Analysts have advised him to drastically restructure his financially faltering company by, among other things, cutting staff and spinning off its Java business. More strident critics have even called for McNealy to admit defeat and step down from the company he co-founded and has presided over since 1985, a company most agree would not have its legendary chutzpah without him.

Some solution providers have noted this activity with real alarm.

"The bottom line is Sun needs to become profitable again, badly," said Marc Maselli, president of Back Bay Technologies, a Needham, Mass.-based solution provider that provides services around Sun software. "As a partner, I need to see them have uptake so they're profitable and we're profitable."

Others say that while they are optimistic Sun will eventually rebound financially, they are considering taking some of their investment out of the company and placing it in other vendors such as IBM and Hewlett-Packard, which are showing more profitability.When asked how long he could wait before forging new partner relationships with Sun's competitors, Sun ONE VAR Council co-chair Rob Mock, president and CEO of Brighton, Mich.-based solution provider Dewpoint, said, "That is a question I wrestle with all the time."

John Varel, president of Los Gatos, Calif.-based Sun VAR FusionStorm, which provides servers, storage, networking and services, said his firm would consider partnering with Sun rivals if the situation deteriorates further. "I don't wake up saying, 'When do I jump ship?' But we speak monthly with IBM and HP to see what their new releases are."

In the face of concerns like these, McNealy, who likes to joke about the negative publicity generated from all that free advice, is sticking to his guns, blasting away at his critics while defending his strategy to continue funding R&D and building out Sun's product portfolio despite the lack of a yearly profit since fiscal 2001. "I think we've done a pretty good job of taking a lot of the excess capacity out of the system and getting the company right-sized in a way that did not destroy our long-term future," McNealy said in a recent interview with CRN.

McNealy points to a Sun product onslaught over the next two or three years "that has no letup, that has no holes, that has no air pockets." He adds: "I have not met one customer who's said, 'Oh, stop hurting me with all this innovation.' "

Sun, Santa Clara, Calif., and its critics will soon learn if that onslaught can pay off as the vendor finally prepares to roll out its new software initiatives, new server and desktop products, and new partnerships and strategies aimed at helping Sun and its partners implement low-cost IT solutions.Just last week at its NC03Q4 quarterly product update in Berlin and San Francisco, Sun fortified its strategy with announcements about new hardware, competitive product pricing and a key partnership with EDS to bolster its software strategy.

McNealy insists customers and partners should be more concerned with this flurry of recent product and partner activity than with Sun's profit, or lack thereof. He also pooh-poohed industry rumors predicting Sun's demise or possible acquisition by a vendor such as Fujitsu or IBM, saying that such speculation was created by Sun's competitors to generate more interest in their own products.

"The big issue [for Sun] isn't relevance," McNealy said. "The big issue isn't even profitability or revenue growth. The big issue is every customer looks at us and says, 'Man, you've got to get this [product] story out.' All of these people you're getting all of this negative stuff from are people who are our competitors, who are wishful-thinking. But if you get a couple of beers in them, they're scared to death of what we're going to do."

Scott Zahl, vice president of the Sun Business Unit at distributor GE Access, Westminster, Colo., had another take on the negative press that has plagued Sun all year.

"The bad press is mainly from a group of analysts with an obsession on Sun's business model and its cost structure," Zahl said. "Certainly, partners are aware the articles are out there, because end users and CIOs are aware. [Solution providers] have to be aware of this and know how to respond."Conspiracy theories aside, it's hard to ignore the fact that in the two years since Sun has posted a yearly profit, a number of key Sun VARs, such as Avcom, GoBosh and Cat Technologies, have gone out of business or been acquired.

But fortunately for Sun, it's not all doom and gloom. There are reports that at least some parts of its business, including some key partner initiatives, are experiencing growth.

Several new VARs have recently joined Sun's partner community. These include Alliance Technology Group, Hanover, Md., which took on Sun for its Storage Elite sales program a few months ago and now resells the vendor's entire product line; and Argenta Technologies Group, Longwood, Fla., which was formed in mid-2003 by newcomers to the channel who acquired the commercial and education business of Sun solution provider AISG.

Sun's professional services business, Sun Services, also continues to be a bright spot for the company, said Pat Sueltz, executive vice president of the business unit. She said Sun Services had 4 percent growth year over year for Sun's first fiscal quarter 2004, ended Oct. 31, 2003.

Bill Cate, director of Sun's U.S. iForce program office, said the support services revenue going through the channel has increased by 40 percent since January, a direct result of Sun Services working more closely with Sun's partner organization to ensure that solution providers are included in as many deals as possible.John Olynick, CEO of Basis, an Emeryville, Calif.-based provider of hardware, storage, networking and services, corroborated Cate's claim. "Our services side [with Sun] is strong," he said. "We're getting strong revenues and 50 percent of our profits from services, both on the professional services and enterprise services businesses."

Sun Services also is becoming more partner-friendly and has made extensive efforts to resolve conflict with solution providers through what it calls the Authorized Sales and Referral Program Plus, Sueltz said.

Indeed, Jim Guinn, national practice director at Houston-based solution provider Consultants Choice, which had been experiencing channel conflict with Sun Services in the field as recently as two months ago, said he has seen a turnaround in how Sun Services deals with solution providers.

Now, Guinn said, his "frustrated feeling from two months ago [is] completely gone."

Furthermore, a plan introduced this summer allowing Tech Data to enable its VARs to resell one- and two-way Sun servers also is generating interest among partners, according to Joe Serra, president of software and systems product marketing at the Clearwater, Fla.-based distributor. He said Tech Data has already recruited 106 new solution providers at the base "registered" level to Sun, and 22 at the Authorized Volume Reseller (AVR) level, which requires iForce certification from Sun. Another 22 to 24 solution providers are in the AVR pipeline, he said.Sun's software strategy is getting its share of attention as well. Sun has already signed up 1,200 preregistered customers for the Java Desktop System (JDS) through a program introduced in August after a particularly vicious Blaster worm attacked Windows, a Sun spokeswoman said. Sun also has inked a deal with a Chinese consortium to license JDS as a possible standard for providing desktop software in China.

"Right now if I had to lay odds, the dominos are falling in Sun's favor," said Consultants Choice's Guinn.

That sentiment is echoed by other Sun partners, who said they believe that the worst is over for Sun and that McNealy's plan to continue investing in R&D and branching out with new products in new markets will prove to be the right course of action.

Basis' Olynick said he believes Sun is back on track and will rise again once the economy improves.

"As long as Sun maintains their commitment to spending money on R&D, they will survive and will be ready when the market comes back," he said. "I know that's been a hard decision for Scott [McNealy] to stick to. But he's held fast to that and that's the right decision."Yet even Sun's channel defenders say there's a limit to what they can endure. "The channel in general needs to ask itself, 'Why should we invest more if Sun can't establish its fiscal viability in the form of earnings?' " said Dewpoint's Mock.

Still, Mock said he is content to stand by and see if Sun can start making money before he makes any final decisions.

The question is, though, how long will solution providers wait?