Sun Vs. The Heavyweights: Does It Have A Shot?

You could call it a watershed event in Sun Microsystems Inc.'s nine-year history of pulling elaborate April Fool's Day pranks on its executives. This year, Sun engineers managed to shoehorn co-founder Andreas V. Bechtolsheim's blue Porsche Carrera cabriolet into his corner office. Inside the car sat an aquarium with live sharks circling a bubbling Sun workstation.

The scene offered an apt, if unintentional, reminder of the treacherous future Sun faces. For years, the Mountain View (Calif.) company has strived to bust out of the $10 billion market it leads: networks of sophisticated workstations for engineers and scientists. Even as that market was blasting off in the 1980s, and Sun along with it, Chief Executive Scott G. McNealy often spoke of a larger goal: making Sun a major force in today's $100 billion commercial computing market. Businesses, he argued, would someday wake up and see how they can save money and work smarter by shifting from mainframes to desktop machines.

McNealy's prediction is coming true: Sun is breaking out of its engineering niche and selling workstations to all sorts of businesses. But as it moves into the commercial market, Sun enters waters where much bigger fish swim--lunkers such as IBM, Hewlett-Packard, and Digital Equipment. As a consequence, Sun now faces the battle of its life.

Not only are the industry giants ferociously defending their businesses in minis and mainframes, they're mastering Sun's game of workstations and networks. Some have even pulled ahead of Sun in cramming more power into desktop machines. And more players are joining the fray. For example, IBM and Apple Computer next year plan to ship workstation-class personal computers based on the PowerPC chip that Motorola is building with IBM.

But the deadliest threat of all is the coming wave of computers using Intel Corp.'s Pentium microprocessor and Microsoft Corp.'s Windows NT software. That combo will finally lift PCs into the same performance range as Sun's best workstations--and still run thousands of Windows-compatible programs. If the Intel-Microsoft duo sweeps workstations and networks the way it has PCs, Sun's prospects could be bleak.

TWO FRONTS. Sun is no sitting duck, though. It has a two-pronged counterattack under way. First, it's about to ship a version of its Solaris operating system for PCs, hoping to lure sophisticated commercial customers and software developers into its camp. The claimed advantage over Windows NT: years of shake-down in high-pressure, networked applications. "It's going to be a long time before Windows NT can deliver what Sun delivers today," says International Data Corp. analyst David Smith.

The second thrust is a software torpedo called WABI (Windows Application Binary Interface). Introduced May 5, the program is designed to make most Windows-compatible programs run unaltered on Sun and other Unix computers. Sun hopes that many other suppliers, also alarmed by Microsoft's growing dominance in desktop computing, will rally around WABI and make it a standard. If it works, Windows compatibility will no longer be Microsoft's trump.

In trademark fashion, McNealy brushes off Sun's many challenges with a wave of his hand. His competitors, he says, are "at their weakest ever," and Microsoft Windows is just "frosting on a road apple." Further, McNealy insists, "we're doing all the right things," from staying lean to refreshing Sun's entire product line. Indeed, a profitable company with sales expected to grow 20%, to $4.3 billion, in the fiscal year ending June 30, that outsells its next three rivals combined, and that hoards $1.1 billion in cash isn't in immediate peril.

Yet, McNealy and his executives realize Sun is extremely vulnerable right now and can't afford any slip-up. The company is only just recovering from the last hiccup--a costly one-year delay in shipping a workstation family based on a new microprocessor called SuperSparc. While the company worked to complete the ambitious design, it lost $2 million a week in profits, estimates Chief Financial Officer Kevin C. Melia. The workstations finally began shipping recently, but net income for fiscal 1993, ending next month, is expected to fall 12%, to $153 million--the second consecutive profit decline. In turn, Sun's stock has sunk 31%, to 281 8, since January.

What's more, the SuperSparc machines still trail competing models from HP, IBM, and DEC in sheer speed, and even Sun concedes that it has lost some technical business to HP, its closest rival. In response, it's promising even faster chips, called UltraSparc, for 1995--a long way off and no sure thing, given past delays. In the meantime, it's designing computers that can harness more microprocessors in one box than most rival machines can. Analysts figure that such multiprocessing designs will dominate future computing.

Despite the setback, Sun is gathering momentum in the commercial market. About 26% of its sales are to commercial customers, company officials say. Federal Express uses them to monitor packages, and Northwest Airlines relies on Sun workstations for ticket accounting. Dunkin' Donuts Inc. stores will use Sun systems to control inventory. The workstations' main appeal over PCs: higher performance and more robust software. Charles Schwab & Co. plans to install as many as 4,000 Sun workstations to handle stock transactions.

ALREADY LEAN. But Sun has one more big hurdle to leap before it can compete with the new wave of $5,000-and-under PCs using Intel's Pentium chip and Windows NT. To compete, it will have to cut prices--most Sun models still sell for $10,000 and up--but it is already one of the industry's leanest manufacturers and has little fat to trim. Sun's operating margins are no higher than those of PC makers, partly because it has a direct sales force to call on big customers. Says market researcher Dataquest analyst Lisa Thorell: "The real wallop on the head will come from Compaq and Dell"--two leading PC makers. One solution may be to rely more on resellers to keep costs down. On May 3, Sun established a group that will funnel more business to its 1,000 resellers.

Still, McNealy's biggest job remains convincing customers that they can replace their IBMs and other mainframes with Sun systems--as Sun itself hopes to do by 1995. It's an uphill battle: Sun was distracted by the SuperSparc problem and lost marketing momentum. Admits McNealy: "Now it's time to go out and make some money and noise in the market." Otherwise, the company that made sushi out of its competitors for years may find the sharks closing in.

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