The education of Jonathan Schwartz

Q&AAfter his first year on the job, Sun's CEO says that the company is relevant again but that there are still problems to fix.
Written by Stephen Shankland, Contributor
After just over a year as chief executive, Jonathan Schwartz is moving into a new phase as the leader of Sun Microsystems.

Much of his opening months was spent emerging from the shadow of the highly visible Scott McNealy, boosted by Schwartz's high-profile blog. Now that the introductory period is over, Schwartz is working to show that the Silicon Valley stalwart can regain its former stature.

As Schwartz points out, Sun's stock has risen 28 percent in the year since he took over as CEO, though he credits his predecessor for the improvement. But the company has its challenges. A strong close to 2006 was followed by a spotty, if still profitable, opening to 2007, with revenue of $3.28 billion and net income of $67 million.

Schwartz is bringing his software imprint to the company, aggressively embracing the free and open-source programming movement, preferably with the upcoming version 3 of the General Public License (GPL). He's even trying to rebuild Sun's lackluster storage business by engaging with programmers interested in storage software. In a perfect Schwartz world, all customer interactions would begin with a conversation about Sun's Solaris operating system.

During Sun's JavaOne software conference earlier this month, Schwartz spoke with CNET News.com about his first year and the future of Sun.

Q: What's your own assessment of how well you've done the first year?
Schwartz: Well, it partially depends on what axis we're measuring our progress with. One that I care about the most, the long-term creation of value for our developers and shareholders, actually gave us pretty high marks. The one thing we've done indisputably is reestablished our technical relevance. The global success of JavaOne, which will probably have (had) our broadest, largest attendance ever, proves that we are very much central to the evolution of network computing.

I'm not going to give myself a letter grade. The single best grade for my management team's performance is our share price.

The success of the OpenSolaris community--the fact that we have been able to drive nearly 8 million downloads in the past two years and 70 percent of those have been onto HP, Dell and IBM hardware--is a validation of our focus.

Secondarily, looking at our financial metrics, I feel pretty good. We have expanded gross margins, we've grown the top line (revenue), we generated a GAAP profit two quarters early. There's a lot more to do. We're a $14 billion company in what looks like a $2 trillion marketplace, and it seems like we've got some more growing to do. We can always be more efficient than we are right now and we've still got some work to do there.

Would you give yourself an A, B, C, D or F?
Schwartz: I'm not going to give myself a letter grade. The single best grade for my management team's performance is our share price. It's gone up. We're having such a different interaction today with customers and partners. You have to remember two or three years ago it was not a pretty picture. We had a lot of folks who were writing us off or counting us out. No one today is writing us off or counting us out.

A lot of your financial recovery has been in part because you bought a lot of revenue by acquiring StorageTek and you recovered somewhat at least in your bread-and-butter server business. What about all these other projects--Solaris and open-source software in general, storage, the Sun Grid?
Schwartz: First of all, the growth that we've posted this year has been pure organic growth. It's been more than a year since we acquired StorageTek. Second, gross margin is a derivative of the operational efficiency as much as it is the products we're building and the value we're delivering.

I would claim the single most important element in the resurgence of Sun has not been the rise not of our server business, but the rise of our Solaris business.

We will continue to invest on the edges of innovation. But at $13 billion to $14 billion in scale, to have a material impact on Sun, you're going to have $1.3 billion or $1.4 billion of revenue. That's not going to happen from any new initiative necessarily in a quarter or two or three. I would claim the single most important element in the resurgence of Sun has not been the rise not of our server business, but the rise of our Solaris business. Solaris is now firmly established as the definition of scale and security and robust Web-scale operation.

We still have some work to do--I'm still not pleased with how accessible it is to new developers or the number of college kids that are running it, but in terms of its position in the enterprise, that at this point is unassailable.

You derive some services revenue from software. Can you break out how much you get from Solaris?
Schwartz: This is a complex problem. (Suppose) I ship a (Sun Fire X4500) "Thumper" into the marketplace--it's a two-socket server that runs Solaris that has 24 terabytes of storage in it. We record that as storage revenue. Is there a reason I shouldn't record that as a server? And by the way, it runs Solaris, so shouldn't I record it as a software product? And by the way when we start giving it away for free and simply charging 4,000 bucks a month to service it, then how would I characterize it?

When are you going to do that?
Schwartz: Did I just preannounce that? I hope I didn't. That's not currently in the plan, but it is absolutely where the market is headed.

How do you assess the financial effect of the open-source moves? I know you count downloads and you pay attention to who's blogging about what. I'm trying to tie that to the bottom line and the top line.
Schwartz: Every telco (telecommunications company) I know loses money on their handsets, and yet no one ever says to a telco, "Shut down that business, it's losing money," because every telco knows you subsidize the handset to gain a user.

If we held a JavaOne and no one showed up, I'd probably short the stock.

We have to look at the market in terms of what's it worth to get developers to adopt a platform. If we held a JavaOne and no one showed up, I'd probably short the stock, but when you have a developer event and the world shows up, that must mean we're doing something right. In my view that means we're continuing to enhance the relevance of Sun to the planet.

But again, how do you tie that to the top and bottom line?
Schwartz: Yes, I can tie it together with an economic model, and we have very sophisticated metrics that we track across all this stuff. Can I tell you exactly what an incremental download of Java into Brazil is worth? I guarantee you that whatever it is today, it won't be as great as it will be five years from now, but I can't give you an exact dollar amount.

You've had trouble regaining currency among the start-ups who favored you in the dot-com era. Why?
Schwartz: We lost sight of the developer community toward the latter part of the 1990s, and we made a very bad decision about our commitment to Solaris (running on non-Sun) hardware, which we have now completely recovered. Probably we weren't paying attention to the open-source community with Java as closely as we should have been. We weren't paying attention to the smallest companies in the world; we were paying attention to the largest companies in the world.

Believe me, we had our near-death experience.

When the fish are jumping in the boat and you're focused on building the biggest boat in the world, you don't tend to focus as much as much on navigation as you ought to. Believe me, we had our near-death experience. We're very focused on navigation. We know what customers we care about, we know the trends we care about and we're going to make sure that we don't have that experience again.

How much of Sun's recovery is due to the prior administration under Scott McNealy and how much is your doing?
Schwartz: We were just named to be one of the five most ethical businesses in the world. Is that me or is that the guy that used to have my office? When we get that award 20 years from now, I want to take credit for it. How much of our resurgence is a result of my specific activities in the last four months? Little to none. Most of it is a result of the team that we have, the leaders, the innovation, the pipelines, our commitment to R&D. Frankly, that is mostly a derivative of the guy who was sitting in my chair for 25 years before he passed it on to me.

You're a visionary kind of guy. Is worrying about operational efficiency a tedious slog?
Schwartz: What I communicate and what I do all day long are very, very different things. Bear in mind I share my office with Mike Lehman, our chief financial officer. He has the plush chair with a view, and I have the metal chair with a small table. I write my blog in my spare time, not in work hours--that's why the post always ends up there at 1 a.m. Our customers and our developers remain interested in Sun, and our shareholders need to be interested in Sun, but that's a very different set of priorities.

In Don MacAskill's blog on (photo-sharing site) SmugMug, he complained about how he has to reengage with you guys every time he wants a buy another server.
Schwartz: Do you think I'm focused on fixing that?

I've a suspicion, yes.
Schwartz: It doesn't have to lot to do with vision and it does have a lot to do with frame contracts that allow somebody to buy over a period of time for fixed price. If you're CitiGroup or if you're JPMorgan Chase or Deutsche Bank or Federal Express or NTT DoCoMo or the government of the Philippines, we're actually pretty easy to do business with. The problem is we're miserable at making it easy for small companies to do business with Sun. That's my fault, and I'm going to go fix that.

You have this very publicly stated goal of 4 percent operating margin in the final quarter of your fiscal year, which is right now...What are the consequences--and likewise with the 10 percent goal for fiscal 2009--if you don't meet that?
Schwartz: We don't set guidelines unless we plan on meeting (them). We're setting guidelines to give people a sense of how we're prioritizing activities. I'm setting compensation schemes internally around those guidelines, so that shareholders know that we're holding ourselves accountable. More realistically we're not focused on figuring out ways to punish people for not hitting their objectives, but we're figuring ways to get them the tools and the resources they need to go to meet those objectives.

As you try to go from your $14 billion annual revenue toward the $2 trillion in annual information technology spending, do you have too many irons in the fire?
Schwartz: If you look at what we've been doing to get more efficient on the R&D side, we are moving everything to a common license, moving everything to a common community infrastructure. We are moving everything to a common set of mechanisms to deliver software platforms and engage the marketplace.

I don't want to be the public face of Sun. I want our innovation and the people who work here to be the public face of Sun.

If you look at our hardware platforms, we are reducing the number of form factors. If you want to pick Intel, AMD or Sparc you can do so with the same infrastructure, the same frames, the same racks, the same power systems, the same thermals. We're building things around a uniform definition of what the future holds and what we are going to present to the marketplace.

You said you're converging to a common open-source license, the GPL?
Schwartz: We are very hopeful that the GPL 3 will give us the opportunity to converge on a uniform license that gives safety and assurance to the developer community as well as safety and assurance to the commercial community that might worry about the impact of open-source, because one company out there wants to tell the world it's unsafe. So we, along with the open-source community, believe that software will be freely available and it will be just as safe and robust and sturdy and secure in open-source form. We would like to make it simpler and easier for both developers and customers to interact with us.

Do you see yourself as the embodiment of Sun? Obviously, to a certain extent you're the public representative of the company.
Schwartz: I don't want to be the public face of Sun. I want our innovation and the people who work here to be the public face of Sun. One of the few things I get to do as CEO is set the culture of the organization. I've been in the midst of an interesting exercise recently to establish a leadership brand for Sun.

A Sun leader has courage, and courage is the courage to innovate, the courage to collaborate, the courage to act with integrity--because that actually does take some courage--and the courage to do so with pace. You've got to be willing to brook the criticism and the critique from those who don't see the world the way you do. When people look back at who is Sun, they are not looking me; they are looking at 35,000 people.

In Silicon Valley, there is an image of the cowboy CEO, with the personality, the high profile--Larry Ellison, Scott McNealy, Steve Jobs. Do you think that's dangerous?
Schwartz: I don't like that.

I hesitate to suggest that you might be slipping into that category, partly because of your visibility. Don't take it with disrespect, but you're a loudmouth. You talk about things, you jump into conversations, you try to provoke people into engaging in some kind of conversation.
Schwartz: I don't mind being a communicator on behalf of Sun. I just don't want people to mistake the idea that I am why we're being successful, because I am not. What I see in a lot of other big-personality CEOs is they are the ones who make all the decisions, and as a result of them, business runs well. The reason I don't like that is just from a risk-management perspective, what if they got hit by a bus or put in jail or they drowned off their yacht?

I don't think that's necessarily what customers want or what shareholders want. I want to do a good job of building a leadership culture at Sun. There are a lot of people who have blogs at Sun, and I don't want there to be one voice to the marketplace, but I want that somewhere in that cacophony to be a very clear and consistent message: here is what we're all about, here is what we can do and here is how we are going to march forward.

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