Interview: Sun Microsystems CEO Scott McNealy

Sun Chairman and CEO Scott McNealy spoke before Sun's annual partner conference Monday, at a time when the vendor has just signed a historic pact with Microsoft, made upper-level management and restructuring changes, and seen several key executives depart the company. McNealy and his cohorts at Sun, Santa Clara, Calif., also are under the most intense pressure yet from Wall Street and partners to turn a profit, after announcing another quarter of declining sales -- the company's 12th consecutive -- when it reported fiscal 2004 third-quarter earnings last week. At the Sun iForce Partner Summit in San Diego, McNealy fielded questions from CRN Senior Editor Elizabeth Montalbano about how Sun plans to grow its business in the midst of the current company environment, and how Sun plans to leverage its partners in the process.

CRN: What is the biggest message Sun is sending to partners at the conference this year?
McNealy: I just think we've actually been following up on what we committed to a year ago. We're moving a higher percentage of our business to the partners. I was just talking to [Sun distributor] MOCA and they've had eight straight quarters of sequential growth in revenue. It's a very strong commitment that the way we're going to grow this business is through the partner model, not through hiring 4,000 to 5,000 employees in the field per quarter like we were doing at the peak of the bubble.

CRN: Do you have percentages for how much you will grow the business through the channel?
McNealy: We're going to continue to go direct to the big service providers and the OEMs. But we're going to move a greater percentage of the business to the channel. I don't want to get specific because then you're going to hold me to it.

CRN: Did you look outside of the company for the president and COO position or was [former Software EVP] Jonathan Schwartz just the natural choice for the job?

McNealy: I look outside the company every day. We have a very extensive and well-thought-out and well-considered and tightly managed executive review process with a depth charge on every job inside the company. So at any step along the way we're ready to move. You obviously heard about the tragedy at McDonald's (whose CEO died suddenly Monday) this morning, but they were ready to step in immediately and I think every company has to be ready to step in as needs change or as personnel changes to go step into those new [roles]. We have a very deep bench at Sun Microsystems, and we feel pretty good about that. We've worked hard to go do that.

CRN: Jonathan Schwartz talks a lot about more services-based pricing where Sun will give hardware away for free in exchange for subscriptions to certain services. On Sun's third-quarter earnings call last week, analysts seemed skeptical about how long it might take to derive revenue from subscription pricing, which you've already started with your Java software. Can you shed some light on how Sun will derive revenue from more than just hardware, which is still where a lot of it is coming from?
McNealy: The right and interesting model is ACS [a Sun partner] in Dallas [that] has a joint offering with Sun that is based around Sun power units. What they do is use their floor tiles and they staff the data center. We put our infrastructure in there, and by the way it's Intel, AMD and/or Sparc, it's Linux and/or Solaris, and it's [Java Enterprise System] and/or other components... . It's our equipment, Sun owns it, Sun operates it, in an ACS-managed data center, and we've created the Sun Power Units. We went in and we filled that first data center we set up on our nickel, on the ACS and Sun nickel. Three customers signed up and filled the thing up. So now we're building a second one and I just signed off on a capital acquisition request for more capital to go into the second one. I've got a list of about a dozen customers that we're bidding out Sun Power Units to in a true utility computing model. This is reselling Sun Power Units.CRN: Define "Sun Power Units."
McNealy: It's a unit of measure of compute of a [system]. Now [for] different customers, we might price vector power units different than terabyte power units versus Mps power units or SAP power units. But right now we just came up with a fairly simple unit of measure for access to a Web services infrastructure. The customer likes it because they get a true utility model. They don't have to assemble anything, they don't have to own or operate anything. They get a service level agreement, and they get it at a true utility model. So if they back down on a particular quarter of usage, their numbers go down. They crank it up, it's there and ready to go. To me that's reselling a service as opposed to ACS as a Sun reseller. They're reselling power units as opposed to assets.

CRN: Do you plan to do more of those with other partners?
McNealy: We plan on doing lots of new things in lots of ways. $100 per employee per year for JES is one. JDS at $50 per employee [is another]. You're going to see some Solaris pricing subscription models that are very, very interesting, stay tuned. You're going to see more Sun Power Unit kinds of things where we wholesale to our channel partners services, network services, whether it be to a phone or to an end user or to a whatever. It's a very, very different model. It blows up a lot of how the world operated in the old days.

CRN: So, in that sense, hardware is "free" to a certain extent?
McNealy: We'll still sell it a la carte. I'll still sell you the crank shaft, or the piston ring or the stem valve or the inner tube if you want to go buy those pieces. And we'll still price them more aggressively than the competition. The real total cost of ownership will be blow away when you can do $100 per employee per year or buy a Sun Power Unit per quarter or whatever. That's where the really effective pricing models drive companies.

CRN: IBM Software Group executive Steve Mills today said... McNealy: Was he bashing us again?

CRN: Well, he said that Sun has been more adversely affected by Linux than anyone. Some people see the Sun-Microsoft deal not only as a play against IBM, but also as a play against Linux. Could you comment on that?

McNealy: This [deal] was all about advantaging our customers who all have Microsoft product and who all want better, more aggressive and more certified interoperability with the Microsoft environment. Steve Mills can fantasize all he wants about what this [deal with Microsoft] means, but what it means is our customers have a uniquely advantaged interoperability position between Sun and Microsoft products both ways.
I've met some competitors that are very upset by this, but I have yet to meet a customer who's upset about this. And I challenge you to find a customer that's upset by this. They might be skeptical, but not upset. That's the worst I can find is someone that's skeptical that Steve Ballmer and I [can work together]. I sent an email to Steve last week, I got a response back in 10 minutes saying, "I'm on vacation out of the country, I'll talk to you Tuesday." I'm talking to him tomorrow at 5:30. We are in regular conversations about how we take this to the next level, and then the next level and then the next level. We are both thrilled to death at the customer response to this. We don't comment on them, but you might wonder whether we're thrilled to death about our competitor response to this.0