October 4, 2003

Sun won't set yet

- by John O'Sullivan -
Eric Raymond has earned my respect many times over. Lately, he has been indispensable in exposing SCO's deceit. So it's with respect that I say that despite his many talents, he is no business analyst. This week he said that Sun Microsystems had crossed the line from troubled to doomed. I'm sorry, but it takes an awfully long time to sink a ship the size of Sun. And it is far from clear at this point that the company is suffering more than an acute mid-life crisis exacerbated by a severe post-bubble hangover.

As evidence of its sad state, Raymond mentioned the departure of talent from Sun, its recent spectacular quarterly loss, and its downgrade by Moody's. The billion dollar loss it declared a few days ago represented non-cash charges. Its projected break-even for this quarter was estimated by analysts at around $3 billion in revenue. The same analysts expected revenue to come in about $2.98 billion. Not exactly a hemorrhage.

Mr. Raymond was correct, however in pointing out that Sun has failed either realize significant economic value from Java, or articulate a strategy to protect its hardware margins in the future. This failure is certainly Scott McNealy's. His statement that Sun has no Linux strategy is an admission of personal defeat. But rather than signify impending implosion, the bad news from Moody's is more likely to precipitate an executive house-cleaning.

The financial markets are unforgiving, and they want to see a path forward. The present regime at Sun hasn't provided one. But the markets have yet to digest the import of recent events. Predictions of doom are based on the assumption that present market trends will continue. However, the trends are about to change. There are four factors that will become important in the next 12 months and shake up the existing order.

A pent-up demand for corporate desktop PCs. The last upgrade cycle happened ahead of Y2K more than four years ago.

The new maturity of the Linux desktop. The Munich deal was a true harbinger, and the Korean government's announcement that it was moving largely to Linux desktops over the next few years provides confirmation.

The release of the Athlon 64. Intel has missed the "64 bits on the desktop" boat. So has Microsoft. Neither is in a position to ship a suitable product. Their competitors are shipping now.

Sun's professed intention to gut the middleware market. If it make even a marginal penetration, it will catalyze an industry-wide price downdraft. This will sap resources from Microsoft, but also from IBM and to a lesser extent HP. Competition in the server market from IBM and HP was the stated reason for most of the recent analyst downgrades.

Commoditization is certainly in the cards, but not necessarily in a way that hurts Sun. Despite its devotion to Solaris (and who expected anything else?), Sun has not closed its avenues for adapting to a more open market. McNealy can say anything he wants about Linux and Sun's intentions, but the company's fortunes have more to do with its ability to ship boxes than the pronouncements of McNealy or any group of analysts.

Under the circumstances, predictions of doom are unrealistic. Sun is in much better shape today than IBM when Lou Gerstner arrived, or Apple when Gil Amelio left. Sun is arguably better off than other high-tech companies like Palm or Kodak. That doesn't mean Sun isn't in trouble. But less talented companies have come back from worse.

John O'Sullivan takes care of sales, marketing and product management
at Hotsprings Inc., a Toronto
company creating open source applications and development tools. Hotsprings
technology was acquired from Hotline Communications, developer of Hotline
Connect and a pioneer of P2P applications.

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