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Sun's Tolliver: "It's Brutally Competitive"

Sun Microsystems (SUNW) can't seem to break through black clouds. Gone are the dot-com days when it ruled the world of computer servers. Back then, Internet, telecom, and financial companies were Sun's steady customers. But a slowing economy has lessened demand for its wares. Also, increased competition from rivals such as IBM, Dell, HP, and Microsoft has threatened to make Sun an also-ran in the computer business.

In the most recent quarter, ended Sept. 29, Sun had a net loss of $111 million (4 cents a share), vs. a loss of $180 million (6 cents a share) a year ago. Revenues fell 7% year-over-year, to $2.7 billion (see BW Online, 10/24/02, "Can Sun Get Hot Again?").

Sun has only recently made fundamental changes in its business model. It's now selling servers with the Linux operating system -- which programmers love because it isn't owned by any one software maker, the way Microsoft owns Windows, and can be easily manipulated and customized. Sun is also trying to sell more services, storage equipment, even hardware that runs on Intel processors. What's the strategy? On Oct. 21, BusinessWeek Online Reporter David Shook spoke with Mark Tolliver, Sun's chief strategic officer, about the turnaround efforts under way. Here are edited excerpts from their conversation:

Q: What is Sun's biggest challenge, the economy or the competition?

A: Certainly, the economic situation and, specifically, telecommunications. Telecom is our largest market, and buying has slowed dramatically. We supply a greater proportion of that industry's computer needs than for any other industry, particularly in the U.S. That industry buys everything from our smallest to largest servers, data storage, software, and services.

The situation in the telecom market is a primary reason Sun's revenues have been under pressure over the last four quarters. Plus, our second-largest customer is the financial-services industry, which, likewise has contracted, although not to such a large extent.

Q: So what is Sun doing?

A: As we speak, we're ramping up into industries such as retail, manufacturing, government, health care, life sciences, and education. These are areas where we've had a reasonable footprint, but nowhere near the penetration we've enjoyed in telecom and financial services. As we expand, we expect to see our business become a little more predictable because it will be diversified across so many industries.

Q: But those industries where you're looking to expand already have computer suppliers. What added value does Sun bring?

A: What people are investing in now is network computing -- large-scale computing facilities capable of delivering reliable, high-volume services over the Internet. Companies want everyone to be able to do business with them at low cost and high service levels by using the Web. That's what our company offers.

We don't build cameras and printers and everything else. We do network computing. Every computer our company has ever built since our inception has come with a network connector of the type we now call an Internet connection. If you want to do network computing, we're doing the hardware, the storage, the software, and the services for that technology. It's our singular focus.

Q: IBM, Hewlett-Packard, and Microsoft would say they're the leaders in network computing, too. So has it become a pricing war?

A: Clearly, it's a buyer's market in information technology today. We're not immune to that. It's brutally competitive.

Q: Sun's bread and butter has always been the high-end Unix servers, which also offer the highest profit margins. No coincidence there. When will customers start upgrading those systems?

A: The issue isn't so much upgrading, but how fast our customers are growing their own business, as measured by Web-based transactions they achieve or what new Web-based services they plan to offer.

It's not so much about what a 3-year-old Sun server is capable of doing, but how fast a company grows the percentage of business it does over the Internet. That's the most cost-effective way of doing transactions. It has been coming of age for a while now, but if your company is doing 1 million transactions a day, when do you get to 2 million or 5 million?

As companies move increasingly to the Web, there's an enormous opportunity to take costs out of the business. That, to us, is where network computing provides a solution. That's what will drive our business.

Q: You had three consecutive quarters in 2000 when Sun posted revenues of $5 billion-plus. Will you ever attain that level of revenue growth and profitability again?

A: You can look at the tech industry at large during that 1999-2000 period as pretty exceptional. There was an enormous level of capital flowing into the tech industry, as well as venture capital into the networking-startup space. Everyone needed network computing. Those were heady times.

I'm not going to predict an immediate return to that situation. It was a unique period. But does the world still need to drive costs down using network computing by moving business increasingly to the Web? That isn't stopping. It's just not fueled by huge venture-capital inflows and the proceeds of huge IPOs built on a promise. Rather, it's being fueled by real companies.

Q: How important will Linux be for Sun?

A: If you look at the number of small servers sold each year with just one or two processors in them, it's perhaps 3.5 million to 4 million. Many are sold with Microsoft software on them. Increasingly, a larger percentage -- although still a tiny share -- are sold with Linux. That's a market we hadn't really targeted prior to the introduction of our first Linux product three or four months ago.

The market for those small, 32-bit servers is newfound business for us. I think it's an opportunity for very rapid growth for Sun. It's tough to say what percentage of the business it will represent. I'll say a small percentage. But Linux has the potential to become significant over time.

Q: Will Sun remain the king in the Unix-based server market?

A: We believe we will. It's what we do. We have deep expertise, and we're maintaining a strong investment program for new products in that area. We have a terrific core franchise in the Unix server business.

Q: What company is a bigger threat to Sun -- IBM or Microsoft?

A: I look at these two companies differently. We developed the Java software programming language. We think of Microsoft as having the only other true alternative, from the standpoint of a software platform [in] .Net.

The market has narrowed down to two platforms, Java and .Net. It's a competition for the hearts and minds of the software-developer community. We've competed extraordinarily well on the basis of Java and its growth. As far as Microsoft, we will never take a company lightly that can put $3 billion in cash in the bank every quarter. But the fact is there are 2 million to 3 million developers today that use Java, far more than the number using .Net development tools.

IBM is a huge company that talks to the same companies and potential customers that we do. IBM proposes alternatives to the things we do on a tactical basis. But what differentiates our company is that we, despite our smaller size, are a company with more innovative ideas, Java being the classic example. We provide far richer insights into the future of network computing and the innovations that support it. IBM is everywhere. We bump up against them every day. The difference is that we do network computing all day, everyday.

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