Go figure, the rumor mill finally got one right. Unlike speculation that Oracle was buying JBoss, for example, last Thursday’s Wall Street Journal article by Don Clark and Christopher Lawton was right on the money. While I happened to discuss the news at the time with a couple of folks from Sun, I didn’t pay it much mind because in this industry speculation is wrong more often than not.
My first hint that something was actually in the works came Monday afternoon, when I was contacted twice by Sun’s AR team (thanks, Melissa and Jennifer) to invite me to a special analyst call immediately following the announcement. That’s not routine, so I was pretty sure what the news was. A few hours later, and it was fact: Sun’s Scott McNealy was being replaced as CEO by Jonathan Schwartz, with McNealy continuing on within Sun as Chairman. Given the volume of questions I’ve received on the topic, a Q&A seems to be in order.
Q: Is this news a surprise?
A: Only in its timing, I suppose. As has been covered, people have been speculating about McNealy relinquishing the reins for years; particularly since the fortunes of Sun declined so precipitously following the dot com implosion.
Q: Why do you think now is the time for him to step down?
A: Well, Shankland quotes McNealy as saying, “The only responsible thing is to let the new guy get all the triumph and glory,” implying that a turn around is just around the corner. Perhaps that’s true, or perhaps – as the financial analyst types believe – it’s overly optimistic, but I think it’s unquestionably true that the company is on sounder footing than its been in years.
Q: What makes you say that?
A: The rise and fall of Sun within the context of the internet bubble has been well documented, so it’s no secret to anyone that the years following that massive build out have been a time of corporate distress for the firm that coined the phrase “The Network is the Computer.” That period is characterized by a series of significant missteps; the desertion of the x86 business from the hardware and software angles, the decline of its flagship operating system Solaris (dubbed Slow-laris by some internal performance reviews), some ill considered and/or executed acquisitions (Cobalt, Kiva, NetDynamics, etc), and I could go on, but you probably get the idea. Things looked a bit bleak.
But within the past couple of years, things have changed. The x86 story, for example, is night and day different. Not only is John Fowler’s group selling a $100M of Opteron gear per quarter, Solaris has returned to the platform that it once scorned. Not only that, but it’s been open sourced, and as previously discussed seems well on the way to building a sustainable and sizable community. The software story otherwise is not perfect, but is consolidated and in much better shape than it was when the application server was a mishmash of Kiva, NetDynamics and Netscape code. So Sun’s in better shape, in my view, than they have been for a couple of years.
Q: What do you think this change means for Sun?
A: The way I’ve been putting it to reporters the past few days is this: Sun’s an organization in transition, and this move is a key part of that transition. Where once Sun was content to sell fewer, higher cost machines to a select audience, they are now actively seeking ways to court higher volume audiences at a lower pricepoint. While the lessons that Linux teaches about low cost hardware and software took a while to sink in, they’ve clearly been taken to heart. Favoring volume over margin, it would seem, is a core tenet of Jonathan’s.
This is evident in many of the strategies that he’s championed in his days at Sun – the per-employee pricing of the Java Enterprise System, the hardware try and buy program, the open sourcing of Solaris. These strategies reduce barriers to entry for potential Sun customers – at the expense of immediate revenue, in many cases – in an attempt to drive longer term volume revenue opportunities. And while this volume play has proven unpopular in some quarters – Wall Street, for one – I think it’s been a net positive for Sun generally – but more on that later.
It could and has been argued that this transformation was already taking place, and with the powers previously granted to Schwartz a change such as this wasn’t necessary, but I don’t agree. McNealy deserves credit for taking Sun to its dot com peak, blame for foundering it, and then credit for recognizing that a new phase in Sun’s existence calls for new leadership. The old guard, after all, wasn’t too keen on some of Schwartz’ radical ideas and stalled them where possible. Some reshuffling had already occured, and I’d be surprised if we don’t see more in the weeks and months ahead.
Q: That’s a great segue to the next question, which is what do you think will change?
A: Well, if you believe Sun, not much will change. Jonathan says here of McNealy, “We’re different people, but we have the same values.” But if you believe the financial analysts, who point to the transition along with the return of former CFO Michael Lehman as omens of great change, Sun’s in for a fairly massive bloodletting. In my opinion, the truth is likely somewhere in between.
I do think that Jonathan will be doing some housecleaning, in an attempt to focus on both the people and technologies that are determined to be strategic – the resources that have permitted the type of transformation Friend of RedMonk Stephe Walli describes here. Those who are wedded to the way that Sun used to do things, for example, are probably in jeopardy. Is it also possible that some of the folks that were untouchable under McNealy’s reign will have their wings clipped a bit under Jonathan’s? Probably. And in case anyone’s wondering, I think that’s potentially a Very Good Thing.
But do I think that Jonathan is about have a Saul-on-the-road-to-Damascus style conversion to the Church of Wall Street, and cut a quarter of his employees loose as some of the acolytes from that particular church are calling for? I doubt it. I find that tremendously unlikely, at least until further returns are in on some of their current initiatives.
Q: Do you think they should make massive layoffs – would that be beneficial in the longer term?
A: Frankly, I’m not qualified to answer the question because I do not track the finances in enough detail. The numbers aren’t good, clearly, so Wall Street has some cause for complaint, but at this point, no, I don’t think layoffs are the answer. Some pruning might be in order, but I would not dramatically scale back my employee base, first because some of the strategies underway cannot be fairly judged, and second because morale is just now recovering from the last few years.
Q: What other changes do you expect to see?
A: I’m expecting to see some of Jonathan’s strategies ripple out further into Sun; try and buy, open source, etc. All of these I expect to be driven further and deeper into Sun’s business, for better or for worse, depending on your opinion of the strategy.
Q: What do you think the feeling is towards Jonathan and this change from a rank and file perception?
A: Well, as with any management type, in private you’ll hear good and bad things. But the general consensus seems to be positive. Sun advocate, but non-employee, Ben Rockwood, for example, was fairly enthusiastic in his welcome. Many of the other Sun folks I’ve had the opportunity to speak with, while being appreciative of McNealy, do feel that a change was necessary. Perhaps more importantly, they’re nearly unanimous in their approval of Jonathan taking over the wheel. How that goodwill holds up over the next few months will depend in large part, I suspect, in whether or not he can get Sun back into the black after achieving – at a cost – the goal of growth. Ask any athlete and they’ll tell you that everything’s easier when you’re winning.
Q: Do you have any suggestions for Jonathan in his new role?
A: Two, actually. First, patch things up with Eclipse. This is not about abandoning NetBeans; if the belief on the Sun side is that NetBeans can complete a turnaround similar to Solaris, then by all means continue to invest. I don’t subscribe to that notion at the present time, but stranger things have happened. But if the real goal here is addressing a volume market, then Sun must find ways to strategically leverage the Eclipse community, because that’s where the volume lies at present. Make it clear that business – not politics – should drive technological investments; if a line of business sees an opportunity within the Eclipse community, they can and should pursue it. There are many within Sun that have the chance to build on Eclipse and better compete, but are concerned – rightly or wrongly – that supporting Eclipse will draw the kind of attention nobody wants. That needs to change.
As for the second, it’s already been delivered: there are some island hopping opportunties out there. Now’s the time to go after them, before someone else does. If you’re game, James has already picked your team.
Disclaimer: Sun, for those who are not aware, is a RedMonk client. So is Eclipse.