Sun Opens a Door, Sells Windows

As CEO Schwartz moves further away from former CEO McNealy's stance on Microsoft, the two companies announce an expanded partnership

It can now be stated plainly: Sun Microsystems (JAVA) has officially lost its old-time religion. Thanks to an expansion of its three-year-old alliance with one-time nemesis Microsoft (MSFT), Sun will now resell and install Windows on its x86-based servers. In other words, the company that was famous for its scrappy David vs. Goliath war with the forces of Wintel will sell servers built around Intel chips and Windows software. That's a long way from the days when former Sun Chief Executive Scott McNealy proclaimed: "It's mankind against Microsoft."

But that doesn't mean the company has become agnostic. Rather, the Sept. 12 move was the ultimate expression of Sun's new religion—one that in some ways is just as risky. If Sun was once defined largely by who its rivals were, it's now partnering with many of them in an effort to ensure as many customers as possible have the option of buying its technologies.

The new Microsoft deal follows alliances with IBM (IBM) and Intel (INTC), which Sun is trusting to resell its Solaris server software for customers who want it. It's another aspect of Chief Executive Jonathan Schwartz's plan to drive adoption of Sun technologies as broadly as possible. The linchpin of the scheme: The 2005 plan to give away the battle-tested Solaris, Sun's crown jewel, for free. As a result of these efforts, "We can do business with 100% of the marketplace now. That's not something we could have said a few years ago," Schwartz told BusinessWeek in a recent interview.

Expanded Alliance, Not Sales

By itself, the expanded alliance with Microsoft is no huge leap from the landmark deal the companies struck in 2004. Since then, the companies have quietly collaborated on a number of fronts—such as creating ways for Web services built on Microsoft's .Net Framework to work with those built around Sun's Java technology. Also, Sun has let customers run Windows on its servers that use x86 chips from Intel and Advanced Micro Devices (AMD). While Windows still won't run on Sun servers built on SPARC chips—the source of most of Sun's sales—Sun will now preinstall Windows Server 2003 itself. The current deal does not give Sun rights to resell Microsoft's upcoming version of the software, Windows Server 2008, but sources say that such an agreement is likely in the future.

Very likely, none of this will amount to much in new sales for Microsoft. After all, every corporate technology buyer already uses Windows and knows how to buy Wintel machines from Dell (DELL), Hewlett-Packard (HPQ), and others. But executives from Sun and Microsoft say the new deal will let them more effectively serve the many customers that use both Solaris and Windows—typically with Solaris running the huge databases and complex programs that undergird corporate IT and e-commerce operations and Windows for less mission-critical jobs.

The Pros and Cons of Interoperability

In particular, the companies say they'll focus on customers who are trying to take advantage of virtualization technology, which lets companies boost the utilization rates of their servers by letting a single machine handle a variety of applications that in past years might have been assigned to dedicated machines. By melding their own flavors of virtualization, one server could handle both Windows and Solaris-based programs using this approach. "One hundred percent of Sun's customers use both Solaris and Windows," says Sun Executive Vice-President John Fowler. "We have an opportunity to extend our technology leadership in this critical area with customers that we share."

But such interoperability also has its risks. For example, it could make it easier for customers to migrate jobs now done on Sun gear to cheaper Windows alternatives. And Sun's server rivals will surely try to convince customers that Sun, one of tech's proudest innovators since it was founded in 1982, must no longer be creating much of value from its $2 billion per annum research-and-development budget. If Sun has fallen so low that it must rely on distributing outside technologies to maintain sales, why not go with a company with more efficient distribution capability?

Sun's Sunny Day?

So what's in it for Sun? For one thing, volume. That's critical right about now. Having hit profit goals laid out earlier in the year, the main concern of many investors now is whether Sun can pump up its revenue growth. Fowler notes that Sun's sales of x86 machines have risen for seven straight quarters. Reselling Windows could only help maintain that momentum, especially after Sun brings out new versions of its Galaxy line of servers.

Analysts say selling Wintel PCs will do little for Sun's bottom line. While volume enables Sun to spread fixed costs over greater revenue, the margins on each Windows PC will likely be minimal, says Roger Kay of Endpoint Technologies Associates. "Margins aren't what they used to be in the server business," he says, and Sun lacks the economies of scale to take on the likes of Dell and HP at their own game.

But the real win could be farther out in the future. Schwartz's reason for hooking up with Microsoft, Intel, IBM, and others is to remove incompatibility as a reason for existing customers to drop Sun—and to make it easier for prospective customers to give Sun a try.

New Products on the Horizon

Increasingly, that will include new kinds of Sun products. In a recent interview, Schwartz said that a major focus for the company will be creating new products on top of Solaris—not just servers. The first example is Thumper, a large-scale storage device that's built around Solaris and ZFS, another open-source program for managing files.

The product, which sells for $50,000 and carries 65% gross margins, is being used by AT&T (T), eBay (EBAY), and others to help store the never-ending tide of Internet traffic. Schwartz says the product is on track to hit $100 million in sales this year. "If it were a private company, we'd be preparing to go public right now," says Schwartz. And he hints that the company may soon unveil a Solaris-based networking product as well.

Over time, Schwartz is betting that Sun can pull all these products together to provide a Solaris-based underpinning for entire data centers, expanding on Sun's role in recent years as primarily a server specialist. Rather than cobble together cheaper alternatives for the various components of these operations, Schwartz is betting such Solaris-based operations will be more capable, and more cost-effective, than those built on Windows or any other kind of software.

If the company can make that vision a reality, today's move to be more in sync with the current standard can only help Sun expand its opportunities. But if Sun doesn't deliver the technical goods, it will make it all the easier for loyal customers to jump ship should they finally lose faith.

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