Sun Microsystems: Redefining Business Model



Authors: Pradip Sinha,
Associate Consultant,
ICMR (IBS Center for Management Research).

Scott McNeally's attempt to redefine software business model is going to be crucial for survival of Sun; not to mention his own also. - Pradip Sinha

Long ago, Scott McNeally and his US-based company, Sun Microsystems added some dazzle to the boring software ads by coining slogans like "The network is the computer" and "We're the dot in dotcom." After a lull they are back. With their latest mantra $100 per employee, per year. It is not about pruning their operational cost. Rather, it's about the cost to customer, which they claim is much lower than what customers currently incur. Sounds interesting, but McNeally & Co. may find it difficult to convince customers and competitors.

Sun's latest strategy, which promises to cut costs and redefine the industry's business model, comes at a time when the company is facing serious problems. Over the last three years, after slowdown in technology spending globally, Sun, lost much of its market share and customers to its rivals. During this period, its revenues shrunk badly and stock price had fallen by 90%. The maker of the popular Java software is now about the same size it was in 1999. Scott McNeally, the company's chief architect and the only co-founder left is under immense pressure to fix Sun's woes. However, that is a difficult task.

Nonetheless, it would be a mistake to write off McNeally. Over the last 20 years, since the company was founded in 1982, it floundered two other times, and managed to sail safely on both the occasions. Can he do it this time?

Rising Against Odds

The company was depending solely on workstations till 1991. When it revealed its intention of take on the big names like IBM, HP, and Dell in servers (computers that handle centralized computing tasks like running a database), no one took them seriously. Yet, it proved itself. In 1995, when the company launched its Java programming language, critics again doubted its, success. Yet, it became the first ever Internet standard. When it made its desire to dethrone the Microsoft both public and critics laughed. Yet it succeeded to some extent; it is said that it was Sun's tirade against the Redmond tech that inspired the biggest antitrust lawsuit in the history of the technology industry. "One way or another, all those gambles helped make Sun one of the biggest success stories and McNeally one of the biggest business heroes of the 1990s," says Fortune1. True. But still there are not many takers for Sun's recent strategy of redefining the software business model by simplifying cost and removing complexity.

Going 'Soft'

In May, 2003 the company introduced competitive, low-cost servers that use Intel chips and Linux software from Red Hat and SuSE. With this the company aims to tackle rivals like Dell in low-end server market. However, the big news is its grand push into software territory, in a desire to take on biggies like IBM and HP. On September 16, 2003, the company unveiled a package of integrated software with simple, flat rate pricing, which could boost revenues and profits and more importantly, redefine the software industry's rules.

The drive into software business is not sudden for the company, which has been known for technological innovation and its R&D spending. With the burst of the dotcom boom, the company's sales and margins have been heading southward. At the same time, it was under attack from rivals, who were squeezing at both the high-end as well as low-end of the servers, its main stay. At the top-end of the server market, it faces challenge from IBM and HP while attacking at the low-end is the ferocious cost-cutter Dell. In the aftermath of the global tech downturn, beginning 2000, the company found it difficult selling what customers want low-cost computing based on open-source technologies. Sun got into the big league selling six-figure computer servers that run its own software. However, during the last couple of years, the customers' preference shifted in favor of cheaper servers, costing $2,000 to $10,000 that run on Intel chips and low-cost Linux software. While McNeally & Co. shunned Intel and Linux, competitors took their market share and customers away. Now with the new strategy the company wants to rectify that mistake.

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