Friday June 02, 2006

Thinking about the elephant in the room

So, 5000 layoffs. Negative press. What are we to make of this?

I guess the main problem, when you strip away all the commentary from Wall Street analysts (whores with MBAs), is that we are in a commodity business. Sun derived about half of its 2005 net revenue from server sales, and servers are now regarded as a commodity.

I have an MBA myself, and the textbook strategy when you are in a commodity business is twofold:

1) Cut costs in an attempt to become the lowest cost provider;

2) Differentiate your product so that it is no longer regarded as a commodity.

The Wall Street guys have a disturbing tendency to concentrate on the first solution. This is natural, since it yields the quickest results, much like wearing a short skirt on Sunset Boulevard, the sort of strategy they can understand.

The second solution is more difficult, but pays much bigger dividends in the long run. Actually, we have been pursuing it for some time. Power-saving servers, multi-threaded chips, these are key components of the strategy of differentiating our servers. But as a software guy, I have to argue that our software is the biggest differentiator. Solaris is the best operating system on the planet, and all the other components that we are now bundling with it are further differentiators.

This is a big thing that Wall Street doesn't get. They say we are "giving away" Solaris and the rest of the stack. Huh? Come again? We are not "giving it away." We are just collecting for it in increased server sales, and by -- in effect --  leasing it out over time. You've been able to get a free trial copy of Oracle for years, and I don't see the Street complaining about that.

Yeah, 5000 layoffs is tough. But it has a valid reason. It's doing a little bit of the lower-cost strategy in order to buy more time for the product differentiation strategy to work. You can only raise the skirt so far. They know that on Sunset Boulevard -- why don't they know it on Wall Street?