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Sun's Big Open-Source Bet

An astonishing thing has happened at Sun Microsystems. A company built on high margins from hardware sales is now turning upside down and going soft. The face of this transformation is the freshly minted CEO and former McKinsey consultant Jonathan Schwartz. Originally a numbers guy turned software evangelist, Schwartz is almost certainly committing Sun (SUNW) to a future with a business model centered on software -- open source software.

But the challenges are many. Sun historically has been a hardware company. Indeed, former Sun CEO (and current chairman) Scott McNealy is famous for once stating that software would someday be free. Little did he know that his successor would have to build a business model on that prediction.

Over the last 20 years, Sun and its brilliant research and development operation consistently delivered some of the biggest, baddest, fastest workstations and servers based on the UNIX operating system. They charged a premium for that performance. And when they built or acquired terrific software like Solaris and Java, it was seen by management as a loss leader to move more hardware.

UP A CREEK. Sun won on hardware in large part because it embraced open standards before its competitors did. Examples abound. But perhaps the key decision was its call in 1984 to make open its NFS (Network File System) technology for retrieving files across a network. That put a rocket under early sales of Sun workstations that came to dominate the UNIX desktop market. Openness differentiated Sun, customers liked that, and Sun seized its comparative advantage in the market.

Can open save Sun again? That is the challenge before Schwartz today. Many of my colleagues in the open-source community are cynical about Sun's commitment to open source. When the dot-com and telecom booms burst in 2000 and 2001, Sun's share price collapsed, too. Sun was late to move business from its proprietary hardware to systems built on Intel (INTC) architecture. At the same time, Sun missed the open-source Linux boat and has been paddling furiously to catch up ever since. Last year, Sun made its flagship operating system -- Solaris -- available as open source. Sort of.

You see, Sun wrote its own open-source license. It's a license that many in the open-source community don't like, and with good reason. Unlike with Linux, all the rights to any changes to the source code for Solaris go back to Sun. So any developers contributing to Solaris are literally working for Sun for free.

OPENNESS IN OPEN. In my experience, people will work for free when they see that work as contributing to the greater common good -- but not to the bottom line of a global computing vendor. This part of Sun's strategy escapes me. Time will tell if Schwartz can build a viable software ecosystem and vibrant development community around this approach. Linux works because thousands of developers willingly contribute code and thousands of vendors build solutions for customers around a truly open platform with the benefits -- and costs -- shared by all.

But open can mean more than access to source code. In many ways, Schwartz is a very open CEO, and I think he has made Sun interesting again. He's candid and open with customers. He does not appear to have sacred cows at the company. And he writes one of the most open, and interesting, executive blogs in IT.

As Schwartz shifts the company from a hardware to an open-source software business model -- moving from the sale of software licenses to subscription fees for "free software" -- Sun increasingly resembles the most successful open-source software company in the market today, Red Hat (RHAT). Red Hat shares are up more than 150% in the past year, triple the increase in Sun shares.

HOW ABOUT JAVA? Of course, Sun's cost structure will have to change as well. It's hard to be taken seriously as a software company when most of your revenue comes from hardware. Sun helped destroy Digital Equipment 20 years ago, when that company couldn't change its cost structure quickly enough and got consumed in its own DEC spiral.

Maybe it's time for Schwartz to double down on his open-software bet. He ought to consider selling off Sun's legacy SPARC processor line (after all, he doesn't want to get trapped in a DEC spiral either). The next move: take the AMD (AMD) Opteron server business offshore -- and voila, Sun truly becomes a software company.

Then Schwartz has an opportunity to dramatically change the software playing field and at the same time give back to the open-source community that's so critical to Sun's future success.

If open source is good for Solaris, isn't it time that Sun freed Java under an open-source license? And while you're at it, why not make your Microsoft Office clone, OpenOffice, truly open? Set it free, too. Liberated from Sun's ownership, OpenOffice could be the best hammer ever to break the Microsoft (MSFT) desktop monopoly. And that creates more business opportunities for Sun, the great new open-software company.

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