Can Sun Microsystems Break Through The Clouds?

For Sun Microsystems Inc., the recent World Cup was a golden opportunity to strut its stuff. More than 1,100 of Sun's engineering workstations and other computers, networked across the country, handled everything from logistics and security to recording the game scores and statistics. Sun couldn't resist bragging. So in one advertisement, it outlined "the special challenge of running a business that says KICK ME."

Sun should know: Kicking the onetime highflier has been the favorite sport for customers and Wall Street analysts. With good reason. Over the past two years, Sun has missed deadlines for new machines, lost the performance lead, and shipped some buggy software. The result: Sun's sales growth fell from 20% in fiscal 1993 to 9% in fiscal 1994, ended June 30. Its stock is trading at around 22, down from nearly 31 in March.

ATTACKING. Rivals are getting in their licks, too. Hewlett-Packard Co. and Silicon Graphics Inc. have stolen some of Sun's traditional engineering customers with speedier machines. And ultrafast personal computers--powered by Pentium microprocessors from Intel Corp. or PowerPC chips from IBM, Apple Computer, and Motorola--are attacking from below.

Suddenly, the workstation market Sun dominates looks less promising. Until two years ago, workstations were the fastest-growing market segment and these powerful desktop machines seemed destined to take center stage in corporate networks. It hasn't happened. Last year, workstation sales grew 7%, to $10.5 billion, as PC sales jumped 15%, to $73.7 billion, says market researcher Dataquest Inc.

All this adds up to whopping growing pains for what has been one of computerdom's brashest and most influential forces. As Sun's go-go momentum has slowed and its forays into PC markets and software for PCs haven't panned out, even Chief Executive Scott G. McNealy has toned down his notorious rhetoric. Focusing on Sun's challenges, he no longer dismisses rivals such as Compaq Computer Corp. with one-liners such as "big hat, no cattle."

Not that McNealy is moping--or has reason to. Buoyed by strong sales of new workstations and server computers to run networks, fiscal 1994 profits rebounded 25%, to $196 million, from a weak 1993, on sales of $4.7 billion. Sun retains a commanding 37% share of the still-healthy workstation market and has a massive base of customers. And its newest raison d'tre--selling the hardware and software for entire corporate networks--is a logical next step.

Indeed, McNealy thinks he has hit on a strategy that will restore Sun's momentum by riding two emerging computer-industry waves: "downsizing" and "upsizing." Many corporations are downsizing off multimillion-dollar mainframes and onto cheaper, flexible networks of smaller machines. At the same time, small departments and branch offices are upsizing from flimsy PC networks anchored by souped-up PCs. Sun's weapons: dirt-cheap workstations, midsize servers to run PC networks, and "enterprise" servers that gang up to 20 microprocessors to handle financial reporting, inventory, and other mainframe-scale jobs.

Of course, McNealy isn't ignoring flashier opportunities: Sun has formed a new unit to chase Information Superhighway business, and on July 11 it announced a joint venture with France's Thomson Consumer Electronics to build interactive-services setups to let cable and phone companies offer such services as home shopping and virtual classrooms. But, McNealy stresses, Sun's focus is business applications: While other computer makers announce cable set-top boxes and "Beavis and Butt-head on demand," he says, "we're building the corporate Information Superhighway."

If so, the company is off to a promising start. Sales of its midsize "database servers," which hold data for networks of workstations and PCs, nearly tripled last year, to $485 million, says Dataquest. Minneapolis-based catalog retailer Fingerhut Cos. avoided having to buy a new mainframe by adding two Sun servers to run customer service and order-

taking. The most high-profile win stems from a 1993 alliance with mainframe maker Amdahl Corp. In May, Charles Schwab & Co. tapped the team for up to 5,000 workstations and 100 servers to run 204 branches.

NEW TARGETS. But attracting more big customers will require nothing less than a wholesale change in how Sun does business. Traditionally, it has sold mostly to technical customers, who don't require much hand-holding. Its salespeople were notorious for saying sayonara after the sale, says Alex Newman, executive director of the independent Sun User Group. That practice won't do in Sun's new target markets, where such companies as IBM have worked closely with customers for decades and Sun is relatively unknown. "Moving to the commercial market attacks competitors where they're strong," says Goldman, Sachs & Co. analyst Barry F. Willman.

Improving customer service and support is now a top priority. And that's where J. Phillip Samper, the new head of Sun's hardware unit, could make a very big difference. A balding, 59-year-old veteran of 28 years at Eastman Kodak Co., Samper knows Sun's target corporate customers much better than his thirty-something colleagues--and plans to beef up marketing and advertising to tell them the Sun story. "He brings a commercial view to Sun," says Dennis Walsh, chief information officer of New Orleans-based Entergy Corp., a $6 billion electric utility.

Meanwhile, McNealy now has Sun's service arm reporting directly to him and has boosted the customer-support staff to 2,000 employees. While employment in the rest of the 13,300-person company remains flat, the service group will grow 15% a year. Sun has also allied itself with Andersen Consulting, Electronic Data Systems, and others to help customers set up networks. Some customers like what they see, but Sun isn't satisfied yet. "The sales and service teams are too light," concedes SunService President Lawrence W. Hambly.

McNealy is also fine-tuning a 1991 reorganization that broke Sun into autonomous "planets," each with its own sales force. "It presented a very disjointed picture, especially to commercial customers," says former SunService manager Jay Friedman, now director of research at Prognostics Inc., a Menlo Park (Calif.) customer-survey company. In July, McNealy folded four software units into SunSoft, the operating-system arm.

While all this has been going on, Sun has been addressing lingering technology problems, too. Its Sparc chips have been late and underpowered--to the point that some Intel-based PCs outperform some low-end Suns. McNealy concedes Sparc's flagging performance, but he promises that new "UltraSparc" chips, due early next year, will turn the ratings around. But Sun faces long-term challenges in the chip department. Because it has failed to get other high-volume computer makers to use its design, it may be difficult for Sun's chipmaking partners--Texas Instruments Inc. and Fujitsu Ltd.--to fund the design and manufacturing to match Intel and the PowerPC partners.

Chips aren't the only problem area. When Sun revamped its Solaris operating system two years ago, old applications crashed or didn't run at all. The bugs are fixed, but many customers still haven't moved to the new version. Bugs also crippled Wabi, a program to run Windows programs on Unix. Another Solaris version for PCs has failed to catch on. All that turned off potential customers. The Alberta Cancer Board, a nonprofit health agency in Edmonton and longtime customer, has switched to Microsoft's Windows for desktop machines.

Still, for all the glitches and challenges, Sun has held its ground. Even if it doesn't always have the fastest workstations, they're good enough for most customers and they're priced right. Last March, Sun cut workstation tags as much as 50%, which helped fourth-quarter sales. Even so, Sun still has gross margins of 41%, vs. 25% for PC makers. Says International Data Corp. analyst David Card: "They're doing better than they get credit for." And, if McNealy can get his "rightsizing" strategy working, Sun could regain lost momentum. Who knows? Maybe then somebody will take the "Kick Me" sign off its back.

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