Q&A With Sun's Scott McNealy

Determined as ever, Sun Microsystems Chairman, President and CEO Scott McNealy continues his crusade to turn around Sun. In the last quarter, the company reported a $125 million loss on sales of $2.89 billion, which represents a 13.9 percent increase in revenue over the prior quarter. Sun, Santa Clara, Calif., also launched a series of new product initiatives and actually managed to increase gross margins by 1.7 percent. In an interview with CRN Editor-In-Chief Michael Vizard, McNealy provides an update on Sun's key initiatives for 2004 and a few well-aimed shots at IBM, Dell and Hewlett-Packard.

CRN: In 2003, you made a major commitment to the channel. How are your channel efforts progressing?
McNealy: I know the resellers are very happy. I'm back in charge now. We are not going to grow the direct-sales force. We're going to leverage our partners and drive revenue through the channel. That's one of the reasons our low end is growing and we're able to drive leads. Our Java Enterprise System [JES] for 1,000 users and under is something our sales force can't touch so we're giving the channel some exclusivity. That's a new thing for Sun. And someday, we're going to launch a product that is exclusively available through the channel. In the past, the more successful we got, the more we got talked into hiring head count to go direct. There was a statement made inside of Sun once that said our biggest expense item was discounts to the channel. And that was just wrong. It was a wrong-sided view. It took no account for the value provided by our partners and all the opportunity costs we would incur in bringing all those people on board Sun. So it wasn't that I ever lost my channel religion, it's more like I didn't go to church enough.

CRN: There's an old adage that says, 'Customers date their hardware vendors and marry their software vendors.' With JES, you're tightly bundling software with the hardware system. How effective has that sales effort been?
McNealy: We don't really have to change the purchasing culture. It's changing automatically. The good news is that more computing cycles are being consumed by service providers. Those types of customers want to avoid heterogeneity and inconsistency. We don't have to change the behavior of those types of customers.

CRN: So is it your argument that customers should do less customization of systems?
McNealy: That's one of the vectors driving people to the legions of IBM Global Services folks. Once you're custom, you're custom. Once you're screwed, you're screwed. You're never going to get a competitive advantage by doing Oracle applications better than the next crew. We're all just making huge mistakes that way. The only way to win is by running Oracle applications cheaper than the next guy.

CRN: How difficult is it to compete with Dell using the bundled JES model?
McNealy: When a customer buys Dell, you have to remember they then have to pay $1,500 to Red Hat and then pay money to Veritas and so on. They wind up with a $3,000 server with about $12,000 worth of software on it. I'm selling the equivalent of that $15,000 system for $6,000. For us, it's 100 percent gross margin on the software and for the customer it's a too-good-to-be-true Happy Meal.CRN: One of your stated goals is increase storage sales as a percentage of sales. Given the competition in the storage market, can you really make that happen?
McNealy: If we do Happy Meal pricing, we can do it. If we run systems and storage as two separate groups, we won't. If we leverage them together, we can offer Happy Meal pricing to the customer.

CRN: Given falling prices, why do you think margins for Sun are holding up?
McNealy: I don't know why margins are holding other than the fact that innovation does prop up margins. We are making sure we have a whole new product line to sell. There are also a lot of new revenue sources for us now in government, international, retail and health care. But I'll tell you one thing, it isn't because IBM is backing off. IBM is offering some of our customers free equipment, so we're definitely not operating under the consent decree anymore.

CRN: What's your take on the industry movement to on-demand computing models that IBM is credited with pioneering?

McNealy: We actually provide a utility model around our N1 architecture and a subscription model such as $100 per employee, per year. We're actually providing the utility model of pay-as-you-go. I don't understand where IBM's pay-as-you-go model is. IBM's model is demanding as opposed to being on demand. There are no bodies attached to our services model. IBM's on-demand model is people on demand. We're actually trying to get customers to buy a subscription. We provide them with a Web services stack and power by the hour.

CRN: Most recently, Sun signed a pact to adopt processors for AMD. What does does Sun need to support Athlon in addition to Intel and SPARC processors?
McNealy: We're doing 32-bit Intel, 64-bit Opteron from AMD and we've got four big bets on SPARC with the UltraSPARC III, the UltraSPARC III , the UltraSPARC IV and the UltraSPARC IV . Coming later we have the Niagra and Rock SPARC projects. In the old days, if you wrote an application to SPARC/Solaris, you had to completely recertify it if you ported it to Solaris/X86. Today, if you write that application to the JES Web services environment properly, there should be no need for certification. This allows us to protect our customers' investment in the application. I don't want to build processors for the edge of the network when we can use Intel. I don't want to build a desktop chip when I can use Athlon from AMD. But I do want to protect my SPARC mainframe base, if you will. So now we can do more and focus on SPARC. Also, with Opteron, you will need multiprocessing. We're going to take that up to an eight-way system and above for Solaris. Long term, we expect that Opteron will be heavily weighted to Solaris. We're only going to a fairly simple thing with the Intel X86 architecture.

CRN: Ever given any thought to merging with AMD?
McNealy: AMD needs more volume than what they can get from Sun. Would Microsoft support AMD processors if they came from Sun? Would IBM buy chips from Sun? You have to think those types of things through.CRN: Sun also recently acquired Kealia, a company founded by Andy Bechtolsheim, one of the original Sun co-founders. Bechtolsheim was also founder of Granite Systems, a company that pioneered Fast Ethernet technology that was acquired by Cisco. Why is Bechtolsheim return to Sun significant?
McNealy: Kealia was building media server products and some interesting storage and server products. Andy is the greatest single-board computer designer I have ever seen. There was never anything like him before Sun got started. And there was never anything like him since. It's nice to have him back in the computer industry and out of the switching industry.

CRN: Sun has been preaching the value of Linux and Java on the desktop for a while now. Do you think people are responding to your message here?

McNealy: Sometimes I wonder if I'm wacko. We're not making as much progress as I think we could. Why are we still having viruses attack our systems? There has not been one Java virus and we have the perfect authentication service. Our thinking is that that the only thing you need on your desktop is an authentication system.

CRN: In your opinion, what will define competition in the future?
McNealy: The consolidation in the industry is over. HP is practically completely done. IBM, Sun, Intel and Microsoft are the players. Name me one thing that HP has invented in the computer business for the enterprise. HP is a channel, an integrator and a printer company. IBM, Sun, Intel and Microsoft are the major competitors in terms of real research and development.

Article appears courtesy of CRN.