Scott G. McNealy looks mighty calm for a man running a company whose stock has cratered. In the past two years, shares in Sun Microsystems Inc. (SUNW ) have plunged from $64 to a lowly $3.28. A cool $195.1 billion in market cap has evaporated. Subtract Sun's cash from the equation, and investors value the company at barely $1.63 per share, less than they'd pay for a slice of pizza. Now, from the coffee bars to the research and development labs of Silicon Valley, the buzz is that Sun, long a symbol of ingenuity and dynamism, is looking more and more like a relic of a free-spending era that's long gone.
McNealy, Sun's chairman and chief executive, says he's not fazed. Throughout Sun's 20-year history, he has grappled with crises before, struggling to convince skeptical investors, customers, and employees that Sun could transform itself. Each time, he pulled it off. In the early 1990s, tech pundits said Sun should ditch its workstation business and jump on the cheap Intel-Microsoft Windows bandwagon. McNealy wouldn't listen. He went the other direction and built bigger and more powerful machines, setting up Sun to take advantage of the Internet boom. These days, the
48-year-old CEO, dressed in his trademark jeans and sneakers, says matter-of-factly that he understands why investors are treating his stock so poorly. "We're not making money."
Worse, sales have taken a nosedive, down 32%, to $12.5 billion, from a high of $18.3 billion two years ago, as net losses over the past five quarters, excluding special charges, have mounted to $307 million. In the past two years, gross profit margins have skidded by 20%. Top managers, including highly regarded President Edward J. Zander, have jumped ship. And yet McNealy clings tightly to the formula that has worked for him before. It calls for stubbornness, hard work, and faith that the research and innovation that have kept Sun at the head of the industry through the years will come to the rescue.
There's no time to waste. A fearsome posse of competitors, from Dell Computer (DELL ) to Microsoft (MSFT ) and Intel (INTC ), is battering its way into Sun's core market for computer servers, selling low-cost machines at a fraction of Sun's price. A few years ago, servers powered by Microsoft Windows software and Intel chips couldn't perform in the same league with Sun. Now they can. Worse, Linux' open-source software is making inroads into McNealy's market. It's created by legions of volunteers, and it's free--a price that's hard to beat. McNealy finds himself selling the tech equivalent of a Mercedes (DCX ) in a market of Honda buyers. "Sun will need to reinvent its business model," says Henry W. Chesbrough, a management professor at Harvard Business School.
Try saying that to McNealy. He maintains there's a home for Sun at the very top of the industry, safely above the Linux- and Microsoft-powered hoi polloi. He fiercely resists the notion that Sun's sophisticated servers could ever follow the brutal course of a commodity market. At the mention of the word "commodity," McNealy's eyes flash, and the Harvard alum growls that "a hammer is a commodity, a nail is a commodity. A computer is not a commodity."
But if those $4,000 boxes rolling off the assembly lines at Dell Computer Corp. aren't technically commodities, they behave very much like them, pummeling prices in Sun's core business. Consider Sun customer E*Trade Group Inc. (ET ). In August, the $1.3 billion online financial-services company finished yanking out 60 Sun servers that cost $250,000 apiece and replaced them with 80 Intel-powered Dell servers running Linux that cost just $4,000 each. That took a huge bite out of expenses, including a one-time depreciation of the Sun gear and big maintenance fees. The savings so far: Nearly $13 million--and the company expects to shave another $11 million annually from its $220 million tech budget. "It wasn't a hard decision," says Joshua S. Levine, chief technology officer at E*Trade. And here's the really painful part: When the Intel-powered machines break, E*Trade doesn't bother calling a repairman. It just junks the server and plugs in a new one.
McNealy is battling disposable computers. And even when he looks away from the cheap Dells, he finds little relief. In the pricey side of the business, IBM (IBM ), with its horde of consultants, is swooping into Corporate America offering the ultimate in no-headache computing: It will take over the entire burden of running corporate computer systems for clients. Says Microsoft Corp. Chairman William H. Gates III: "In terms of products that meet the market's needs, [McNealy's] in tough shape."
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By Jim Kerstetter in Menlo Park, Calif., with Jay Greene in Seattle and bureau reports