Thursday, April 08, 2004

Economist.com | Face value

Economist.com | Face value "Linux, however, is hurting Sun far more than Microsoft. Solaris is similar to Linux, which makes it very easy for customers to switch from one to the other. Migrating from Windows to Linux is a much more fiddly process. As a result, the technology bosses of companies, whose budgets have been tight since the dotcom bust, are ditching Sun's computer systems, the equivalent of Ferraris, for cheaper boxes from Dell, Hewlett-Packard or IBM that run Linux, the equivalent of Fiats.
Sun, in other words, is the main loser. Its revenues have shrunk, year-on-year, for 12 quarters in a row, and it has been making losses since 2002. Buried under the headlines about the love-in with Microsoft on April 2nd was Sun's announcement that the latest quarter's losses are likely to be $750m-810m—worse than expected—and that it is laying off 9% of its employees. Whereas its new friend, Microsoft, remains, in effect, a monopoly on the desktop and continues to reap monopoly rents, Sun is fighting for its very survival, or at least its independence. (Indeed, there has been talk that the new friendship may be a prelude to Microsoft buying Sun, though this seems unlikely.)
All dressed up and nowhere to go
This is the backdrop to Mr McNealy's sporadic, and admittedly entertaining, antics. In 2002, he mounted a stage dressed from head to toe as a penguin (the Linux mascot). He was hoping to convince investors that Sun had now embraced Linux. It does now ship some cheap Linux servers, but this is surely a token gesture, for sales of low-end boxes cannibalise Sun's core high-end business. Now it is Red Wings jerseys. There will be more.
These photo-ops, however, cannot change Mr McNealy's predicament. He must transform Sun radically, but into what sort of company? He has already cut over $1 billion in costs since the tech-bubble burst in 2000. And, after a series of top-level defections, he now has a new management team. The latest promotion, also on April 2nd, was that of Jonathan Schwartz, Sun's talented software visionary, to the number-two slot.
Mr Schwartz is thought to have persuaded Mr McNealy that Sun must become a software company. Mr Schwartz's dream is to sell deep-discount desktop computers at Wal-Mart, carrying Sun's office applications on top of a Linux operating system. But this would put Sun and Mr McNealy right back where they first ran into trouble, years ago: in Microsoft's way."
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