Sun CEO will announce thousands of layoffs this Thursday

Sun Microsystems (SUNW) will announce on Thursday a large round of layoffs in a bid to cut about one-half billion dollars in annual costs as it transforms itself into a broad based computer software and services company.

Jonathan Schwartz, CEO of Sun, will make the announcement to staff and investors, said a Sun source. The cuts are expected but the timing was not known.

On May 31, Sun said it would have to cut 4,000 to 5,000 staff over the coming six months. This represents about 11 to 13 per cent of its global workforce of 37,500. Sun said the layoffs would provide cost savings of between $480m and $590m annually by its fourth fiscal quarter 2007. The layoffs will be the first under Sun's new CEO Jonathan Schwartz, who recently replaced co-founder Scott McNealy.

Sun's culture makes layoffs a very difficult decision and one that its long serving top executives would rather avoid. Sun's software business model is based on charging a monthly license fee per user for support services and maintenance. Scott McNealy, co-founder of Sun, stepped down as CEO in April after 22 years as the company's top executive. Ed Zander, former president of Sun, and now CEO of Motorola, left Sun in 2002 and said in an interview that managing Sun during the downturn was very challenging.

Sun's culture is accustomed to very fast growth, it is used to hiring thousands of staff rather than laying them off. During the boom years of Internet 1.0, Sun's hardware business was growing at 40 per cent plus annually. The margins on its SPARC-based servers were among the most lucrative in the industry. Sun used to boast in its marketing literature that it put the "dot" in dotcom because of its huge customer base in Telco markets and among Internet startups.

This close association with the growth of the Internet hit the company hard during the dotcom bust. It had to cut people and change its strategy. It now has a broader based revenue model that focuses on IT solutions, which includes hardware, software and IT services.

This is a model IBM adopted under its former CEO Lou Gerstner in the mid-1990s. And it's a model that Sun rival Hewlett-Packard also adopted. Although the business models are similar, Sun, HP, and IBM have large differences in their business focus. One thing they now all have in common is that they have embraced open source software and open industry hardware and software platforms.

Sun, however, is a late entrant to open source markets. This week it celebrated its one year anniversary of the release of an open-source version of the Solaris operating system.

Tom Goguen, vice president of marketing for Sun's Solaris group said, "I'm very pleased with the adoption rate of open Solaris with more than 5m licenses. I'm not saying all are in production, but it is more than Red Hat, or any other Linux distribution. And I'm very happy with revenues from this group."

Tom Goguen: 'Pleased with the adoption rate of open Solaris'

Mr Goguen said he was prepared to release the financial numbers for his business group on Monday evening at a press event but Sun's lawyers stopped him at the eleventh hour. He said he conferred with Sun CEO Jonathan Schwartz who gave him the green light, and he said he hoped to release those numbers very soon.

Sun's embrace of open source--by releasing an open source version of Solaris--took time because there were many legal and trademark issues, said Mr. Goguen. Its open source push includes open source middleware, related components such as virtualization, and web services applications.

Sun's software business model is based on charging a monthly license fee per user for support services and maintenance. Its other revenues come from hardware and IT services.

Advanced Micro Devices' Opteron server microprocessor has become a key part of Sun's revamped server line, providing users with substantial savings on electric power. Electric power consumption has become the single most limiting factor in the expansion of many computing facilities.

Some data center centers are at the limit of their allocated power consumption. By installing low power consuming servers they can increase their processing power plus save millions of dollars in annual operating costs.

These new product lines could help rebuild revenues and profits, but Sun will have to prove that it can compete against Hewlett-Packard, IBM and others, to provide data centers with fast servers running on less electric power, plus provide advanced data center management tools to reduce IT labor costs.

Sun's strategy also includes computer grids as a future significant revenue source. It is building and operating computer grids and offering hosted services for scientific applications. It hopes others will follow its example and build large data centers using its hardware and software.

Sun says Google is among licensees for its software and it claims 85 per cent of Fortune 100 companies have also registered as licensees.