Sun's Bid To Rule The Web
Late last June, Sun Microsystems Inc. President Edward Zander got the kind of call every tech executive dreads. After eBay Inc. suffered a 22-hour outage of its Web site and a spate of smaller crashes, CEO Margaret Whitman called to tell Zander that the problem was a bug in Sun's top-of-the-line server. Sun would learn something just as startling over the next few days of round-the-clock meetings with eBay: The Internet upstart didn't have a clue about running a $1 million-plus computer. The company hadn't provided sufficient air conditioning to keep the machine cool. And even though there had been a software problem with the machine for which Sun had issued a patch many months before, eBay had simply neglected to install it. The list went on--fueling the sentiment, as one Sun manager put it, that "selling computers to some of these dot-coms is like giving a gun to a 5-year-old."
That's when Zander realized things could get much worse. For most dot-coms, starting their business on a Sun server is almost a given. Already, more than 40% of the servers found in the computing centers that house most Web sites are Sun's, and that market is expected to boom as everyone from new Net companies to the click-and-mortar crowd set up shop online. "It suddenly hit me," says Zander. "How many future eBays are buying their first computer from us this very minute?" Adds Sun CEO Scott G. McNealy: "It was our Pentium moment," comparing the eBay incident to the lesson Intel Corp. learned in 1994 after the chip giant angered customers by initially trying to downplay a bug in its new Pentium chip. "That's when we realized it wasn't eBay's fault," says McNealy. "It was our fault."
McNealy and Zander didn't need another wake-up call. Since then, the two have been tearing apart Sun and rebuilding it in an effort to make the Net as reliable as the telephone system. Just as AT&T became Ma Bell, providing that always available dial tone, Sun is shooting for no less than Ma Web, the supplier of super-reliable Web tone. To do that, Sun is moving far beyond Web servers to providing many of the technologies required to make this possible: storage products, a vast array of e-business software, and consultants that not only supply all the gear but also hold customers' hands every step of the way.
Safe bet. If the duo can pull it off, Sun could emerge as the King of the Net--every bit as dominant as Big Blue in its mainframe heyday or Microsoft Corp. in the PC era. Just as high-tech managers used to say, "No one gets fired for choosing IBM," Zander aims to have the same said of Sun. "I want to be the safe bet for companies that need the most innovative technology," he says.
Sun hopes to go down in the history books as that rare company with the vision to change an industry and the ability to cash in on that vision. Since it was founded in 1982, Sun has promoted the notion that "the network is the computer," a view of computing where the action isn't on desktop PCs but on big central servers where computing can be doled out in easy-to-use chunks, wherever and whenever desired. With the explosion of the Internet and rapid deployment of high-bandwidth networks, Sun's vision finally is becoming a reality. "McNealy held out for the pot of gold," says Bill Raduchel, a former Sun executive who is now chief technologist at America Online Inc. "It took a decade to play out, but now the pot of gold is here."
That's why Sun has been on a tear. In the most recent quarter, revenue climbed 35%--more than any other computer company, including PC darling Dell Computer Corp., which grew 30%. Sun is growing faster than at any time since 1991, when it was one-fifth the size it is today. And with gross profit margins of 52%, it is the most profitable computer maker in all of techdom.
McNealy vows this is just the beginning. Known for having the strategic vision, slickest sales reps, and hottest new products--but not the best service--Sun has made reliability the top priority. That means pumping up the services business and overhauling the way the company designs and sells its products. In the past year, Sun has reduced the number of configurations it sells from thousands by pushing customers to choose from under 200 models. And now, managers and sales reps are compensated largely on customer satisfaction. What's more, McNealy, a sometime golfing buddy of General Electric Co. Chairman John F. Welch, has become a convert of GE's Six Sigma quality program that builds in checks to make sure customers' operations stay up and running. By far, the boldest element of McNealy's plan is software. Sun is trying to define and dominate a new category of software that combines many of today's e-business software segments, including e-mail, e-commerce portals, and programs for serving up Web pages and wireless applications. The idea: Wrap a suite of applications into one fail-safe whole available on any Sun server. On July 17, iPlanet, Sun's Net software joint venture formed with AOL last year, unveiled the new suite, along with an audacious goal: Within 18 months, the company expects to hit the $1 billion mark in e-commerce software sales, according to Margaret Breya, iPlanet's vice-president of marketing. By 2005, she says Sun could have a $5 billion to $10 billion software business. Other executives, however, say it may take a buying binge to get there.
Put it all together, and Sun is designing its own take on an old trend: vertical integration, in which it sells software, hardware, and services as one--just like telecom equipment makers Lucent Technologies or Nortel Networks Corp. do with their phone switches. "The computing model of tomorrow is the telecom model of today," says Masood Jabbar, Sun's senior vice-president of sales. How does Sun fit in? It plans to make the "big frigging Webtone switches," as McNealy calls them--the powerful servers that can whisk billions of bits around the Net, along with the software that manages Web pages, dishes up data, and executes transactions. "The world's moving in our direction at 8 gazillion miles per hour. Our biggest problem is just trying to keep up," says McNealy.
That's why he has lit a bonfire under Sun. After the eBay incident, Zander called a meeting of all managers and read them the riot act. Late last summer, his staff identified 14 key initiatives, such as new processes for conducting customer audits, with one of Zander's top vice-presidents in charge of each. And on July 1, McNealy reorganized Sun, combining fiercely independent sales operations within product units into one single sales organization. Now, customers see one sales rep for their entire business, instead of being bombarded by reps from different divisions. And McNealy has created a Customer Advocacy Organization to make sure all divisions are putting reliability and customer satisfaction first. Division president Mel Friedman, for instance, has authority to request the redesign of any Sun product for suspected glitches. Says Breya: "It's about Sun growing up."
As we all know, though, growing up is hard to do. For Sun to shake off its upstart ways, it will have to make the shift from an engineering-driven company to a full-service company. That means mastering software sales, a historic weakness, and building up consulting to help companies design their e-businesses around Sun gear. And it must do all this while holding off heavyweights such as IBM and Hewlett-Packard. The stalwarts may have been slow to grok the Net, but they have a legacy of ultra-dependable products that could be a major advantage. "Sun rode the wave of dot-coms, but those companies have different needs now. And taking care of those needs is IBM's and HP's forte, not Sun's," says Bruce L. Chovnick, senior vice-president at Network Solutions, a Web registry company that recently ditched a Sun high-end server for a mainframe from IBM.
McNealy will have to stare down other challengers, as well. At a time when servers based on Sun's new UltraSparc3 chip are a few months late, longtime PC industry rivals are massing for yet another assault on the server market. Using Microsoft's four-month-old Windows 2000 program or the free Linux operating system, PC makers will continue to chip away at the market for less powerful servers--especially after Intel brings out its new IA-64 chips, due by yearend. "Customers are willing to pay high prices and go with the safe bet [Sun] in these early days of the Net. But ultimately, we'll be able to redefine the economics of the Internet," says Compaq Computer Corp. CEO Michael D. Capellas. Adds International Data Corp. analyst Jean S. Bozman: "Everyone is shooting at Sun, there's no question about it."
The company with the most ammunition is Microsoft. On June 22, Microsoft announced its version of Sun's Webtone scheme--an initiative dubbed .net that is designed to make the Web much easier to use. In it, unrelated Web sites, Net services, and traditional Windows software programs can be linked together to do useful things--say, to get your bank's Web site to transfer money to your e-broker, who buys a stock and then records the trade to your Microsoft Money program on your PC. Such complexity requires software expertise, snorts Microsoft CEO Steve A. Ballmer, "and Sun's not really a software company." Counters Sun chief scientist Bill Joy: "I've been writing about network-based computing for 20 years. Microsoft embraced it last week."
Sniping aside, Sun faces even more software challenges. Throw into the mix programs such as Napster that make it easy to link files directly from PC to PC, altogether bypassing huge servers, and some analysts think McNealy & Co. could face a resurgence of powerful PCs that can store and move data around the Net. That could put a squeeze on server profits. Sanford C. Bernstein & Co. analyst Toni Sacconaghi thinks profit margins for Sun's servers could fall from the mid-50s to the low-30s within three years. So it's crucial that Sun crank up sales of hugely profitable software and storage products, with gross profit margins of 80% and 60%, respectively.
Only then can Sun continue to fund its $2 billion research-and-development effort and keep spending at an industry-leading rate of 10% of revenue. If it can't, Sun may find itself boxed into a high-end corner of the computer industry, adding to the list of once proud computer companies such as Digital Equipment Corp. that have been whittled away by PC makers.
Sun has managed to outfox the doomsayers before. In the early 1990s, when profits collapsed for the technical workstations that brought in 90% of the company's revenue, McNealy bet the next big opportunity would be servers. He poured billions into developing technologies such as the Solaris operating system. Now, servers and related gear bring in roughly 80% of Sun's $11.7 billion in sales. Even more remarkable is Sun's assault on the high-end server market once dominated by IBM mainframes. While the market for $1 million-plus servers shrank 17.8% last year, to $11.4 billion, Sun's revenue has rocketed 28% because of runaway sales of its e10,000 Starfire machine, according to IDC.
Unlike high-tech dynasties such as IBM or Microsoft, Sun's grand plan is not based on locking customers into its own proprietary technology. IBM and Microsoft modulated the flow of new technology in the mainframe and PC eras largely by maintaining control of technical interfaces that others would need to create compatible programs and peripherals. But Sun wants to dominate Internet-style--that is, by doing as much innovation as possible, licensing leading-edge work as the standard for others, and then racing to stay ahead.
That puts the pressure on Sun's big thinkers, like Joy (page EB 42). For starters, Joy and Sun's other technologists have coined the term "Net Effects" to describe the challenge of keeping up with spiraling demand as a billion people use the Net more often, from more devices, and in different ways over the next few years. To keep pace, Sun's servers will have to accelerate in power at a rate at least 100 times faster than Moore's Law, which holds that chips double in speed every 18 months, says Sun chief technologist Greg Popadopolous. Sun is working on two tracks--massive single machines with millions of microprocessors, as well as distributed computing schemes so the computing load can be divvied up between smaller machines linked by high-speed networks.
Sun also is betting it can leapfrog the competition by giving customers the essential software they need to run their e-businesses in one neat, foolproof package. Today, companies face a blizzard of offerings--application servers to host and handle e-mail, Web servers to manage and send out Web pages, and portal programs on which to give the sites a unique look and feel. While these stand-alone software products may deliver the latest bells and whistles, it costs a fortune in consulting fees to make them work together.
Sun's approach is different. iPlanet packs snazzy programs into a suite known as the Internet Service Deployment Platform. Don't be fooled by the clunky name. Using this suite, customers can get up and running quickly because Sun has made sure the software works in sync. With the price starting at $500,000, Sun isn't looking to undercut the competition. Instead, customers will save on installation. "This could cut my development time by 30%," says Norbert Nowicki, a senior partner with Computer Sciences Corp., an El Segundo (Calif.) computer services consultancy.
Sun isn't the only company offering such a suite. Oracle, IBM, and Microsoft do, as well. But none of those companies is the dominant provider of the computers on which the software must run. "Sun isn't just dragging the software along anymore," says Goldman, Sachs & Co. analyst Laura Conigliaro. "It can be a serious driver of new business." Especially with partner AOL using the software suite internally and promoting it to its Net customers. "AOL is customer No. 1 for iPlanet," says David Gang, an AOL executive who recently became iPlanet's executive vice-president. "If we can build products that satisfy AOL, it should work for everyone else."
The irony of McNealy's software approach is that he's stealing a page from the Microsoft playbook--a twist on Microsoft's "embrace and extend" strategy of absorbing fresh technologies into its Windows software. Instead, Sun wants to either bundle or weave Net software into its Solaris operating system. The process already has begun. While competition used to be fierce in the market for arcane directory software, where companies store their databases of employees, customers, and suppliers, now Sun dominates because it has embedded directory software into the latest version of Solaris. "This could be every bit as big as Oracle's [$7.4 billion database] business," says Mark Tolliver, general manager of iPlanet.
In recent months, the company has made a push into hot new areas, such as a wireless server that will go head-to-head with IBM and others, and e-commerce and e-marketplace applications that will compete with offerings from Commerce One, Oracle, and others. And while iPlanet doesn't have a product to rival red-hot programs like Vignette's software for managing Web pages, Sun may develop offerings in this niche or buy the pieces necessary to offer it. "With our stock where it is, we'd be remiss if we didn't look at this," says Jonathan Schwartz, recently named Sun vice-president for corporate strategy.
Storage Breakthrough. One area where Sun hasn't been able to get off the ground is storage. The company has made two failed attempts to introduce new products in the past three years. "This business takes focus, but storage was an afterthought for Sun," says Raduchel. No more. Sun claims it has made a breakthrough and has created a specialized sales and support organization to push it. Never mind lining up big cabinet-size storage racks tethered to servers--the way most storage farms operate. Instead, customers put Sun's new T3 storage boxes wherever makes the most sense--without having to be within close proximity to a server. An Internet service provider, for example, could put one in a Boston office to speed Red Sox scores to the locals--regardless of whether that site uses servers from Sun or a rival. "The upside for Sun in storage is immense," says Goldman's Conigliaro, who thinks Sun's $2 billion business will grow 25% a year for the next three years. Still, in that time frame, rival EMC Corp. is expected to shoot past the $15 billion mark.
When did Sun get so serious about growing up? Rumblings began in 1998, when Sun's brain trust began to sense that customers' needs for keeping their Web sites up and running were far outstripping Sun's knowhow. But for McNealy and Zander, the eBay incidents in mid-1999 underscored how fast those requirements were rising--and far behind Sun really was.
Sun sprang into action to solve eBay's problem, and within weeks, it worked out a plan with software partners Oracle and Veritas Software Corp. to stabilize eBay's server--even devising back-up systems that have kept eBay out of the news despite six or so crashes in recent months. "We were pushing Sun's products to places they'd never had to go," says eBay Chief Technology Officer Maynard Webb, who last fall nearly switched to IBM. "For Sun to still have our business is a testament to their ability to solve those issues."
Zander was worried it was more like dumb luck. He knew last-minute heroics would not be possible should eBay-like debacles become commonplace. So in early July, Zander assigned Vice-President John C. Shoemaker to come up with a set of initiatives to meet customer demand for rock-solid gear. By the end of August, after key areas for improvement were identified, Zander decided it was time to turn up the pressure inside Sun, calling for daily 8 a.m. meetings with the management team to discuss any problems at customer sites. "Scott and I decided to ruin everyone's morning," he says.
Now, all high-end systems must be pre-tested with the customer's software before they ship. Another team is making sure that all new products can be monitored remotely from one of Sun's data centers, finally bringing it up to speed with rivals such as EMC and IBM. Sun has also done two-day, lengthy audits of 75 top customers, sometimes issuing 100-page reports that recommend making changes such as adding a humidity sensor to ensure that atmospheric conditions are optimal for Sun equipment.
And McNealy has become a crusader for the new quality program, dubbed Sun Sigma. Now, Sun's top execs will get four days of training and will then lead teams that will get four weeks of training in Six Sigma-style practices. Any manager who doesn't lead such a team over the next 18 months, says Zander, can forget getting promoted to vice-president.
Why the hardball tactic? With 35,000 employees, Sun will have to start behaving less like a mob of high-tech freedom fighters and more like an icon of big management control. If McNealy can pull that off, then Sun might one day truly be worthy of the nickname Ma Web.
For a Q & A with Scott McNealy visit ebiz.businessweek.com.