Sun CEO Jonathan Schwartz absorbed a flurry of jabs and a few left hooks from Gartner analysts Paul McGuckin and Daryl Plummer during an interview this morning at Gartner Symposium. Basically the analysts want Schwartz to show them the money. Sun invests $2 billion in R&D in open technologies like Java and Solaris, but has not been profitable for multiple quarters. What will it take for Sun to be profitable and when, they asked.
Gartner analysts Paul McGuckin and Daryl Plummer and Sun CEO Jonathan Schwartz
Schwartz responded that Sun is well positioned to reap the rewards of its R&D investment and to intercept enough of the growing demand for infrastructure and services, which he said, in one of new standard phrases, “will never go down for as long as we are on earth.” The amount of digital content flowing onto the Web proves that Sun has a market, he added. However, it's not by any means an exclusive market.
He pointed to the number of developers at JavaOne (about 20,000) and a rush of customers coming back to Sun as leading indicators on the road to profitability. “Developers are the best leading indicator of where revenue is coming from,” Schwartz said. “We have to be exquisitely sensitive to that.” Exquisitely sensitive?
He also said that his new team represents the strongest, smartest, most effective group of people in Sun’s history (every new CEO says that about their team). He cited the Niagara (UltraSparc T1) free trial program, in which 60 percent of the participants were from outside Sun’s installed base. Similarly, the vast majority of Solaris downloads are on non-Sparc systems. He gave an example of a quad-core Opteron system with 24 terabytes of storage running Solaris and the ZFS files system as a product of R&D that has economics that "no one can match."
Sun's core customers, he said, are not those for which IT is a competitive weapon, but those for which IT is the competitive weapon, citing internet services, telecom and financial services and customers including General Electric, eBay, Federal Express and Salesforce.com.
The Gartner analysts parried, looking for a connection between Java developers and revenue generation. Schwartz struck back describing Sun’s business model, with two fundamental constituents. First, developers, who don’t buy things, but join things, referring to Java as a social movement of radical change and creative destruction, and secondly, buyers, who have the money. The buyers need infrastructure and developers create products that make Sun’s platforms and technologies more attractive to buyers.
That said, Plummer asked what ties the one billion handsets with Java and 5 million downloads of Open Solaris to becoming profitable.
Schwartz countered that “demand for what Sun builds is an explicit derivative of what’s going on the network.” He mentioned a bank in Brazil going from 5 to 20 million online users as an opportunity for Sun to deliver more of it modular infrastructure. Telecoms going from a billion to 10 billion handsets, with telemetry, monitoring and 3D games will require lots of infrastructure. Java devices are driving demand for modular infrastructure, he said.
"Java is the Internet," Schwartz proclaimed. "It represents the notion that any device on network will not be passive, but an active participant. Java on a handset interacts with business, creates social applications and interacts with society." He went on to say that "the day you adopt Java, Sun is relevant to you," despite the fact that Java cannot be tied to Sun in any exclusive or proprietary way.
Revenue, Schwartz said, is a lagging indicator. He is focused once again on developers, who he said will define the future of the data center.
Java developers may be part of defining the next generation data center, but that's no guarantee that Sun will intercept the demand for infrastructure. For that matter, given Sun's technologies are open and mostly open sourced, what is it that will differentiate Sun from IBM, HP and other non-Windows infrastructure competitors.
During a press conference following the interview, which he described playfully as an inquisition, Schwartz further explained on Sun’s notion of infrastructure. “What Sun will deliver to enterprises is system innovations--all the components working together. We bring it to enterprise pre-assembled, leveraging open source software and open standards. We are unique…the only company with an operating system, middleware, provisioning engine and hardware, both storage and computing. Customers don’t want to roll their own data center. We put customer in position where they can make choices.”
IBM and HP are also working on grids and data centers in a box, and the reality is that most data centers are a hodgepodge of equipment and integration is the big issue of the day. Schwartz acknowledged that reality, and maintained that Sun's investment in R&D will pay off in the long run.
"We will not get our fair share for showing up," Schwartz said. "We will have R&D...the innovators who create unique intellectual property have the best opportunity to go after the marketplace." He said that the companies that follow conventional wisdom, dropping prices in hopes that business improves, will have a tough time. He took comfort that every big company that does well in commodity market, such as oil and gas, banking and telecom, have huge R&D budgets. "If you can do that, you can tap into markets as commodity 24 x 7 with perpetual global demand," Schwartz said.
Gartner's McGuckin isn't yet convinced that Sun will succeed in intercepting a huge share of demand for infrastructure. "Sun's not in any jeopardy, but in terms of prosperity, I still can't see the scenario," he told me.
Schwartz is currently three weeks into a twelve week review of all aspects of Sun's business, how to best grow the top line and bottom line earnings. It will be most interesting to see how those R&D dollars are allocated. The new CEO is going have to show Wall Street the money, quarter by quarter, and prove that Sun can intercept significant demand. And, showing the money would be one of the biggest boosters for customer and employee confidence.