Sun CEO: Volume will drive value

Finally back on the growth track, Sun Microsystems wants to provide infrastructure to support consumer-driven services, and Asia is a key market, says CEO Jonathan Schwartz.
Written by Eileen Yu, Senior Contributing Editor on

MENLO PARK, CA.--First perpetuate the volume, then provide the value--that is the key equation in Sun Microsystems' growth strategy moving forward, say top company executives.

Sun Microsystems CEO and President Jonathan Schwartz believes volume is being driven by the increasing number of people hooking on to the Internet from across the globe, and the resulting growing demand for new media content and services such as social networking sites and mobile services.

Speaking at the company's inaugural Asia-Pacific Executive Summit, held this week at Sun's Menlo Park campus in Calif., United States, Schwartz noted that a "massive buildout is underway", where the Internet is increasingly populated with new users and new devices, in turn fueling demand for Web 2.0, user-created content and services. The executive summit gathers journalists and analysts from the Asia-Pacific region with the aim to provide an update of Sun's performance, business strategy and product roadmap.

Sun's proposition is that "volume will drive value", and the IT vendor wants to sell the infrastructure and services needed to support the value portion of this equation. Describing Sun as "a systems company", Schwartz added that its collection of servers, storage, software and microelectronics products, as well as its services and data center businesses, have been well-positioned to meet this demand for value.

The company's fundamental thesis is to encourage a "non-economic set of activities" on the Internet, he said.

Schwartz explained: "We want more businesses to connect online. And as more citizens, businesses and machines and devices come online, as that occurs, value will be created for someone. We believe the innovation that we create power a lot of these [non-economic] activities.

"The more we get people to connect online and the more we can bring individuals online, whether it is simply to communicate with one another or do business, the larger the infrastructure opportunity is generated," he said.

"If we can get millions of people to download Solaris, we will create a broader data center opportunity [for Sun]... If we can get billions of people to travel around with a mobile Java device, not only does that generate a small amount of revenue for Sun, it generates billions of dollars of infrastructure opportunity [for Sun] in the world of telecommunications carriers," he added.

To achieve this vision, Schwartz said that Sun first needs to help perpetuate volume and ensure it is visible as a viable brand in the era of new media--one that is driven largely by consumer technology.

The more familiar people are with a brand, the more likely they are to adopt that company's technology, he said.

Sun's aggressive drive to make its products open source and freely available, including Java, Solaris and its Niagara chip architecture, is a huge part of Schwartz's bid to ensure the company's technology is as pervasive as possible.

Execution matters
Rajnish Arora, Asia-Pacific director of enterprise systems and workstations at IDC, said the challenge for Sun is in its ability to better execute in order to capture the value piece--created through volume--such that this part of the equation will not go to its competition.

"Sun's premise is that the volume will be driven out of Java and OpenSolaris, but Windows, Linux and other operating platforms are not going to go away anytime in the foreseeable future," Arora explained, in an interview with ZDNet Asia. "So, Sun will need to address non-Java and non-Solaris customer initiatives as well to create a much broader addressable market."

One key market the company is looking to expand is Asia.

With 65 percent of the world's population currently living in Asia, this region will become an increasingly important segment of Sun's strategy, particularly in terms of growing volume, Schwartz said. The Asia-Pacific region, including Japan, Korea, Australia and New Zealand, currently accounts for 17 percent of Sun's overall revenue.

While he would give no concrete targets about how much this portion should increase, Schwartz threw up a figure of 40 percent by 2012 and suggested that this projection is not impossible to achieve.

Lionel Lim, president of Sun Asia South and Greater China, said Asia, by its sheer population size, represents an enormous growth opportunity and a base from which Sun can propagate volume in terms of technology adoption.

Lim added that there are more than 450 million Internet users and more 950 million mobile users in the Asia-Pacific region by the end of this year, and this figure is projected to hit 1.5 billion by 2010.

Schwartz said Sun expects Asia to be its fastest-growing region simply because of the huge number of people who are getting online.

The company's revenue in the region grew by 11 percent, with the various markets achieving between "mid-single digit to 40 percent growth" in the company's last fiscal year ended Jun. 30, 2007. Sun's Asia-Pacific business covers Japan, Korea, Australia, New Zealand, Greater China, India and Asia South.

Lim added that the company intends to "get our rightful share [of the market]", and it is doing so by working with governments, pushing its open source strategy and eco-technology and enlisting partners--components that are in line with Sun's global strategy.

According to Ian Brown, senior analyst of IT services, Ovum, alliances similar to the recent agreement with IBM means more support for Solaris because another platform vendor has legitimized Sun's claim to provide an important OS that ISVs should support and take seriously.

But whether it will reap the same rewards from its new partnership with Google remains to be seen.

"It would be great for Sun to get StarOffice as the default office applications package on Google, but will they really be able to pull it off?" Brown questioned. "And how will they make money out of it?" And that, he said, is the perennial question about Sun's software.

"To date, StarOffice is one of those acquisitions that Sun has failed to do anything with--maybe it should just sell the lot to Google for the company to develop? In the meantime, except for StarOffice aficionados, I would think the availability of StarOffice will just pass most Google users by."

Brown noted that Sun, in the past, has largely been unable--though not for the lack of ideas and products--to turn software into a big money spinner in a way that IBM, for example, has done.

"[Sun] can push software, and clearly there's already a huge awareness of Java in the region, and they can attempt to monetize this through support and educational services, but I don't think they have the scale in their services business to turn this into a huge volume business," he said.

Resurfacing from its past
Analysts believe though, that Sun is "crawling back to health" after a tumultuous past five years.

In the space of a year, between 2001 and 2002, Sun went from a US$18.25 billion to a US$12.5 billion company, Brown said. "But the speed with which it has been able to get back to health over the past five years has been dictated by decisions it took in the early 2000's," he added.

"Sun chose to ignore the market... It was late in adopting the x64 processor architecture, and it thought it could fight off the Linux assault on Solaris with its proprietary Sparc/Solaris platform," London-based Brown said in an e-mail interview.

"When it finally came to its senses, it reinstated development of Solaris x86 in 2003 and introduced an x64 product range in 2005, after having to buy the company--Kealia--that designed it."

Arora noted that the key to Sun's success in the systems business is again about execution excellence. "For example, how is Sun aligning itself with key ISVs (independent software vendors) driving customer spending in key vertical markets such as banking, insurance, manufacturing and retail segments," he said.

The IDC analyst underscored the need for Sun to "do a lot more to gain mindshare and market share across public sector customers", particularly in key emerging markets of India and China, to become the platform vendor of choice among this clientele.

"Sun's key challenge in the short- to mid-term will be time to market and speed of execution," he explained. "For instance, it only just released its first Intel-based servers earlier this year but a majority of Intel x86 processor-based products will not be available until the fourth quarter of 2007."

"The technology market is rapidly growing and evolving, and Sun will need to quickly adapt itself to stay ahead of the competition," he added. "To execute better, it needs to move things out quickly, and educate its sales force team to position Sun as a systems vendor."

Arora noted that Sun is definitely in a much stronger position today than it was two years ago, due to a much more comprehensive suite of competitive offerings such as the APL (Advanced Product Line) and Niagara II processor-based systems.

Brown agreed. Three or four years back, Sun just did not have the products the market wanted, he added, noting that the vendor is now getting its product roadmap right.

"It has an x64 product line, though it doesn't sell anything like the numbers of x64 servers Hewlett-Packard, Dell Computer or IBM sell, and its Solaris operating system fully supports x64 systems so you can run it on HP, Dell, IBM or Sun servers," Brown said. He added that there is also growing ISV support for its Solaris x86, and Sun has a rejuvenated range of Sparc servers based on Niagara processors.

Arora said: "Sun is much clearer now in terms of its intention to drive a multi-vendor platform. It is important for Sun to have a Linux and Windows OS strategy for x86 servers because the two operating systems account for more than 85 percent of total shipments [in this market segment]."

"Sun will be significantly challenged in the short- to mid term to quickly succeed in the x86 server space without having an Windows and Linux strategy," he said.

Brown added that a product roadmap alone is not enough to help Sun back to profitability, which was why the company needed to cut costs through layoffs, shake up the management and reappraised some of its pet ideas such as utility computing.

"The change of CEO from McNealy to Schwartz allowed some breathing space and the chance for the new man to introduce new strategies without accusations of U-turns [in strategy]," the Ovum analyst explained. "It's not an easy climb back and Sun will stumble and fall--it's only had three profitable quarters in its 2007 fiscal year, after five consecutive quarters of losses and its revenues were effectively flat for the year as its product mix changes from high-value to volume servers."

Brown said: "[But] it is re-building the business, there's genuine enthusiasm in the company around its products, and there's a sense they've regained some of the old spark of inventiveness.

"They're not out of the water yet: three consecutive quarters of profits are not enough, especially when they're not accompanied by growth," he said, noting that he is not convinced yet that Sun's open source strategy is anything more than a "me-too" strategy.

Brown added that the company is not winning new customers at the same rate that Linux distributor Red Hat is. And while Sun may see numerous downloads for its open source products, he questioned whether many of these are large enterprises that would actually invest in a lucrative support contract to deploy an open source environment.

He added that there is no doubt Sun is earning kudos for its initiatives in open source, but whether it has been able to develop these into money-making ventures has yet to be proven.

Eileen Yu of ZDNet Asia reported from Menlo Park, California, United States.

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