Commentary: McNealy's Greatests Hits -- And Misses

Sun's outgoing CEO shaped the Internet Economy, but his company hasn't thrived there

No one on Wall Street shed tears when Scott G. McNealy announced he was stepping down as CEO of Sun Microsystems Inc. (SUNW ) on Apr. 24. The stock zoomed 8%, to its highest level in more than a year. McNealy's hand-picked replacement, Jonathan Schwartz, offered admiring comments. Otherwise, few tributes were made to one of tech's most influential and charismatic characters -- just lots of talk about Sun's bloated costs and weak server sales.

That's unfortunate. McNealy is the rare executive who shaped an era. He envisioned and set the tone for the Internet Economy, and his stubbornness -- and over-the-top showmanship -- cleared the way for some amazing accomplishments. The problem is, having helped built that world, McNealy never figured out how to thrive in it.

When he began proclaiming that "the network is the computer" back in the mid-1980s, McNealy helped marshal the energies of thousands of startup companies -- at a time when IBM and Microsoft (MSFT ) were making great strides in locking customers into using their mainframes and PC operating software. His key point was that the greatest value comes not from what can be done with a particular machine but from what happens when all manner of devices can tap each other's smarts.

It wasn't just a slogan. Consider how many things we take for granted today that flowed from Sun innovations. Its NFS technology, developed back in 1984, let computers grab files over a network rather than just from a hard drive. Sun pushed for the now-ubiquitous "http" protocol, creating a standard for sharing information over the Web. In the late-1990s, its Java technology became a standard for creating content accessible to all brands of hardware. Many of McNealy's prognostications that seemed ludicrous -- say, that software would one day be free -- are now largely true. When's the last time you paid for a Google (GOOG ) search?

To some degree, McNealy's philosophy was a product of necessity. "I'm not sure Sun had any other choice" than to adopt a one-for-all credo to win a seat at the table with IBM and Microsoft, concedes Sun Director James Barksdale. "Look who they were fighting." And if anyone enjoyed a good fight, it was McNealy. He blasted away at Microsoft in particular with an endless supply of snarky gibes, referring to the Seattle giant's virus-prone Outlook mail program as "Look Out." Or to make his point that Microsoft innovates by buying up competitors: "R&D and M&A are the same thing over there."

But the scrappy underdog act quickly wears thin when you're missing the mark. And once the Internet boom went bust, McNealy was too often wrong. His refusal to field cheaper computers based on off-the-shelf parts and Linux software as opposed to Sun's own technologies cost the company dearly. So did his determination not to scale back Sun's sweeping R&D ambitions -- at 15% of sales this year, its spending is more than twice IBM's rate -- even over the objections of his management team. That tunnel vision, in part, cost Sun its No. 2 exec, current Motorola (MOT ) CEO Edward J. Zander.

Schwartz gets the job knowing that he may well need a backhoe rather than a shovel to dig his way back to profitability. McNealy says he initiated the succession move. But Barksdale says there was a "joint meeting of the minds" with the board: "One of the great things about capitalism is you can always look at the stock price. It tells you what the market thinks of your story, and in some ways what customers think of your story." The verdict? Sun's stock rests at 5, down from a high of 64 in 2000.

With some sign of improvement in the latest quarter, McNealy may indeed have set the stage for a return to growth, as he claims. He insists he will remain plugged in, as chairman and as a kind of supersalesman. That could complicate things for the new CEO. Or maybe in this new role McNealy will help Sun finally cash in on the innovations he so stubbornly protected -- and polish his own legacy in the process.

By Peter Burrows

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