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That's One Way To Reinvent A Company


By Peter Burrows Jonathan I. Schwartz has lots of big ideas. Here's one of them: He thinks his computer company, Sun Microsystems Inc. (JAVA), is not all that different from, say, the publisher of this magazine. Both are in the business of selling intellectual property--one in the form of technology, the other in the form of articles. And at the end of the day, all that matters is getting as many people as possible to use their stuff. In Sun's case, more people using the company's operating system for servers means more software developers writing programs for it, and that, ideally, leads to more companies that feel compelled to buy machines from Sun that use its software, and sign contracts to have them serviced.

That explains why two years ago Schwartz pushed Sun to give away copies of its crown jewel, the Solaris operating system. Same for the blueprints to some of its SPARC microprocessors, less than a year later. And last November, Sun did the same with Java, the ubiquitous Net software it created more than a decade ago. In each case, Sun is not only making its software free but also handing over its code to developers so that anyone can suggest and benefit from improvements. "There's value in volume, even if you're not paid for it," Schwartz likes to say.

This kind of thinking leads to some very unusual behavior for a CEO. Schwartz, 42, will tell you he's less interested in reaching a few hundred chief information officers (the people who actually buy things from Sun) than he is in impressing a teenager who might use the Java on his phone to bring up a game or a social network. And it explains why most nights Schwartz is tapping out thoughts on a personal blog (blogs.sun.com/jonathan) rather than hopping a red-eye to meet and greet corporate customers. "Our industry is going from one in which decisions are made on golf courses to one in which decisions are made by populations at large," he says. "I wish I had a better golf game, but I don't. It's just not who I am."

But one very important population--Sun's investors--has yet to be convinced these big ideas will pay off. Schwartz has halted Sun's years-long financial decline. His cost-cutting and operational improvements turned an $864 million loss for 2006 into a $473 million profit in the year ending in June. But Sun's stock is bumping along at about 5.75 a share, compared with 5 when Schwartz took over in April, 2006. Growth is anemic: Sales are expected to rise less than 3% this quarter, compared with a 12% increase for Hewlett-Packard (HPQ) and 6% for IBM (IBM). Even with $14 billion in annual sales, Sun is hardly much of a mover or shaker in Silicon Valley these days.

So why are so many eyes, both within techdom and beyond, following Schwartz' mission to return Sun to relevance? For one thing, he's a walking test case for a management style born of the Web Age. Also, if he can reestabish Sun as a credible trendsetter, it would make for one of the Valley's more spectacular comebacks. Sun once held a singular place in the world of tech. It burst on the scene in the early 1980s with computer workstations packing so much punch at such low prices that it doomed giants like Digital Equipment Corp. In a sense, Sun became the first Internet company, contributing fundamental technologies to bring life to its motto: "The network is the computer."

'PISS AND VINEGAR'

Sun's fab four of founders--the combative Scott G. McNealy, software genius Bill Joy, venture capitalist Vinod Khosla, and hardware maven Andreas Bechtol-sheim (who returned to Sun in 2004 after a nine-year hiatus)--rivaled the brains behind such earlier Valley legends as Intel Corp (INTC). Sun rose to become the world's fourth-largest computer maker, but then management let its gear get too pricey and misread a fundamental turn toward cheaper technologies such as Intel chips and the Linux operating system. McNealy refused to pull back on Sun's hefty research and development budget, even as sales plunged from $18.2 billion in 2000 to $11 billion in 2005. From 2003 through 2006, as most of the Valley was pulling out of the Net bust, Sun lost $4.7 billion.

Another reason to watch: Whether he succeeds or fails, Schwartz is likely to make a splash. This is a man who clearly wants to be noticed. Once, when Schwartz was a young entrepreneur trying to persuade Steve Jobs to promote and support the use of software from his company, Lighthouse Design, a staffer at Jobs' NeXT Computer misspelled his name in a "don't call us, we'll call you" e-mail. Schwartz responded by banging out the misspelled characters, over and over, in bigger and bigger type, until the letters were an inch high.

Schwartz succeeded in persuading Jobs to work with him, but a feud over pricing grew so fierce that for a while the pair could communicate only through NeXT developer-relations manager Chris MacAskill. "He's full of piss and vinegar. Dealing with him made Steve's head explode," MacAskill recalls.

In the years after Sun bought Lighthouse in 1996, Schwartz remained an agitator. He raced through nine jobs in his first eight years at the company, becoming increasingly vocal about the changes he and many others wanted to see, even while building a base of close allies. Many Sun managers bailed out as McNealy failed to act. Schwartz stayed and argued for cost-cutting, giving away Solaris, and making a concerted push to sell cheaper Intel-based systems. "He was a proponent of the obvious to anyone outside of Sun, but he was one of the only ones inside the company that would stand up and say it," says Peter Yared, a software executive who left Sun in 2003. Schwartz tried to talk Yared out of leaving, saying: "You think I want to work with a bunch of middle-aged guys that play golf? Let's change this place."

McNealy saw in Schwartz a bold leader who, despite their disagreements over tactics, shared his network-centric philosophy. Yet the contrast between the two couldn't be more stark. McNealy, who remains as chairman and talks with Schwartz daily, is a scratch golfer and pickup hockey player who still thrives on schmoozing with big customers. Schwartz, who has been married since 1999 and has two children, is more likely to be seen jogging in his Noe Valley neighborhood in San Francisco, attending school events, or dining out at swanky restaurants. Schwartz says he doesn't own an iPod, but the man is consumed with the Net.

And while insiders say McNealy can't bear the huge egos of power brokers at events like the Davos conference, Schwartz enthuses about his good fortune to have met people like New York Times (NYT) publisher Arthur O. Sulzberger Jr. and Luiz In?cio Lula da Silva, the President of Brazil. Acquaintances say that what some may see in Schwartz as arrogance is more a case of intellectual honesty in one who just can't back off a debate about his (or another's) business. Says McNealy: "I like the No. 4 buzz cut from Supercuts. With [Schwartz], it's a ponytail. I do fine in the Pentagon, and he's great with developers. We got it all covered."

While CEO, McNealy kept Sun in the news with his ceaseless trash-talking about Intel and Microsoft Corp. (MSFT), famously referring to the software giant's executive team as "Ballmer and Butthead." Schwartz, on the other hand, studiously avoids talking about the competition, calling it "a waste of branding opportunity." He has worked hard to strike up alliances with McNealy's former nemeses. In January, he signed a deal to create and jointly sell servers based on Sun's Solaris software and Intel's chips. In August, IBM announced it would sell Solaris on some of its machines. Analysts believe Schwartz may soon strike a deal with Dell Inc. (DELL) "I must say, one of the more pleasant aspects of the new relationship is that I haven't read anything abusive from Scott in a long time," says Intel CEO Paul S. Otellini.

MINIMAL COACHING

Schwartz did manage to cause a minor ruckus with his recent decision to change Sun's stock symbol from SUNW to JAVA. Sun's shares are consistently among the most actively traded. Schwartz insists the change will help focus billions of people on the steaming-cup-of-coffee logo that shows up on their cell phones and other gadgets. "The number of people who know Java swamps the number of people who know Sun," he argued in a blog post predicting the negative feedback. But many of the 364 comments to that post derided the move as a sales ploy--made even more pointless by the fact that Java hasn't been a sexy technology topic since the late '90s.

Not everyone was convinced Schwartz was cut out for the corner office. He came in exuding a brainy confidence that irked those who were more concerned about the lack of grand accomplishments on his r?sum?. Also, Schwartz showed signs of drinking the dot-com Kool-Aid. He bought so much stock on margin during the Net boom that the company had to grant him $4 million in loans in 2001 and '02 to help him pay off the margin calls, according to public filings. "I felt he needed a BS detector," says one former Sun executive who left in 2005 when it was clear Schwartz was destined to replace McNealy. "He's very charming and very smart, [but] I don't feel the depth and substance yet."

Schwartz points to Sun's hard-won progress. As for the suggestion by some that his opinionated style borders on arrogance, he responds: "Decisiveness in someone 10 years younger than you looks like arrogance. But it's hard for me to hear that people think that." McNealy says Schwartz' toughest challenge within the company is to recreate the "loyalty and passion" McNealy enjoyed as one of Sun's founders. "The only thing I've coached him on is getting in front of enough customers and employees, so they're ready when you call on them for some afterburner work," he says. "Blogs are helpful, but you have to be there in flesh and blood."

Where Schwartz and his critics agree is that Sun's comeback requires more software developers and corporations to adopt Solaris. That boosts the odds that companies will buy machines that run it--servers account for 46% of Sun revenues--or at least Solaris support contracts to get upgrades, phone help, and the like.

For the first time in years, there does seem to be some movement. According to Evans Data, the percentage of developers working with Solaris rose to 3.4% this spring, from 1.8% the year before. There's anecdotal evidence of gains as well. Hot Web 2.0 companies such as Ning, Linked-In, and Twitter are using Solaris. Sun is even making a comeback at some engineering schools, where Solaris ruled in the late 1990s. Last year, the company briefly considered offering a job to every graduate from the University of California at Berkeley computer science program. It decided not to but still wound up hiring most of the 59 grads. "We were like: 'Hey, maybe we're hot again," says Schwartz.

Where McNealy was dismissive of Linux, Schwartz has tried to woo the millions of developers and users of the open-source code. Sun is working on a version of Solaris called Project Indiana that would update the clunky look and feel with something more like the friendlier interface of Linux. Says Peter T. Brown, executive director of the Free Software Foundation, an advocacy group that has helped marshal the efforts of Linux developers: "There's lots of interest in Solaris. It could certainly gain some traction."

FREE DOWNLOADS GALORE

The question is, how much? Sun points out that Solaris has been downloaded nearly 11 million times from its Web site. But only 36,000 of those downloads in 2006 led to paid service contracts, says market researcher IDC. That compares with 1.1 million contracts for purveyors of the "free" Linux operating system distributed by Red Hat Inc. (RHT) and other companies. "I downloaded [Solaris] three times just last week" to check out new features or for reinstallation, notes longtime software analyst Dan Kusnetzky. "A download is not a useful measure."

Also, most of those downloads were made on Dell, HP, and IBM computers built around chips from Intel and Advanced Micro Devices Inc (AMD). To really cash in, Sun needs to persuade those folks to buy its machines, preferably the more profitable ones based on its SPARC chips. In all likelihood, not many will. That puts pressure on Sun to come up with new tricks to maintain its lofty margins. One way is to extend Solaris from servers to other kinds of machines. Sales of a Solaris-based storage device called Thumper jumped from zero to $100 million in the past six months. But that's a drop in the bucket for a $14 billion-a-year company.

This leads critics to conclude that Schwartz's moves may be too little, too late. If Sun had moved aggressively to give away Solaris in the mid-1990s, they say, it might have forestalled the rise of Linux and Windows. Now Schwartz has to contend with the suggestion by competitors that Sun's days are past. "It's like back in high school, when I'd throw these big parties and I'd think I was so cool, only no one would come," says Jim Zemlin, director of the Linux Foundation, a consortium devoted to the growth of the rival software system. "I believe Jonathan is a very smart guy, but I think that's where they are."

Burrows is a senior writer for BusinessWeek, based in Silicon Valley


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