Understanding the Changes We're Driving

Please see the Safe Harbor Statement at the bottom of this page.

By now you've all seen the press release we issued today, outlining a plan approved by Sun's board of directors - in which we'll be lowering cost, accelerating profitability, and as a part of both, implementing a workforce reduction of up to 5,000 employees. At the outset, I know these changes will be tough for many employees, but I'm also convinced they'll yield a more valuable company for customers, shareholders and our remaining employees, one that's leaner and more efficient.

We've also provided insight into Sun's operating income goals for 2007, and a framework for thinking about our performance beyond that point. We've also changed elements of our corporate governance - these actions are designed to make Sun a more transparent organization, and one more responsive to long-term shareholders, and simpler to understand.

I'd like to review the thought processes that led to these decisions, and provide color on our going forward market focus and R&D priorities.

Just after last quarter's earnings call, I initiated a top to bottom review of our markets, our R&D portfolio, and our overall corporate resourcing. You've already seen management and organizational changes resulting from that work, reported in the past few weeks.

At a top level, these reviews were focused on simplifying Sun - making choices to clarify our priorities, speed up our progress, and drive the transparency that gives all of you more insight into where we're headed. It's been similar actions, over the years, that have enabled us to expand gross margins and deliver top line growth. But these are all points along a path, a path we're now accelerating.

So first, I'll address Sun's market focus.

Our industry is littered with companies that try to be all things to all people. That's not Sun.

In my first 30 days as CEO, I've spent a great deal of time with leaders from among our global customers – and having just completed our most successful JavaOne conference ever, with our most strategic constituency, the Java and Solaris developer communities.

I've heard a consistent message - the internet's growing at an incredible rate - and for many of our customers, the network has become core to how they engage their markets and create competitive advantage. Those are our key customers, those that see network computing as a vital element of their strategy, those pushing the limits of scale and load, and those that see IT innovation as anything but a cost center.

As we began nearly two years ago, we will continue to simplify our coverage models, adding expertise where we can grow value and share. As you've seen in Gartner Dataquest's recent Worldwide Server report, Sun did just this, gaining share with both UltraSPARC systems and x64 systems against our leading competitor/partners. We absolutely believe we can continue to grow as we focus our field and partnering resources on the right opportunities.

We will focus on those companies, from startups to global players, that see network computing as their principal route to market, principal vehicle to differentiate, and principal competitive weapon. We expect to focus our coverage in these accounts, while streamlining our efforts to extend our coverage with the world's most attractive partner community. And to be clear, we are adding coverage and technical specialists, while continuing to reduce redundant or duplicative functions. The market isn't shrinking, nor will our field presence, channel focus or partnering efforts.

Next, I'd like to focus on our research and development priorities.

As many of you are aware, Sun has one of the strongest R&D organizations in the world - one we've sustained while our competitors have cut - leaving us with an operating system and microprocessor platform which makes our competitors begin to appear as partners. We have some demonstrable technology advantages... energy efficiency, operating systems innovation, dramatic gains in developer adoption. That's certainly the cornerstone of our recovery.

And with those assets, we serve two constituencies – developers, who create content for the network, and deployers, who purchase and operate software and hardware infrastructure in the world's datacenters. I will continue to stress that revenue for Sun is a lagging indicator of the adoption of our core developer platforms – both of which we are reinforcing with today's actions.

We will decrease some non-core R&D, and specifically duplicative or redundant infrastructure and management processes, but we are expecting to increase our focus on developers, and on investments in Java innovation, and the open source Solaris operating system. The adoption of those technologies will continue to define large revenue opportunities for us in companies like eBay, Motorola, General Motors and American Express – all of whom, by making decisions long ago to leverage Java and Solaris, have become very significant customers - in software, in systems, in storage and services.

As the world's largest free and open source company, we expect to monetize a portion of what we freely distribute through service and support contracts, along with traditional software licensing; and through volume as well as enterprise systems and storage sales. We expect the internet marketplace to grow, and we expect our core intellectual property, for developers and deployers, to give us a significant competitive advantage against those without comparable assets. Simplicity, scale, automation and security will continue to be our differentiators.

You will see in today's actions that we will be simplifying our product line, and reducing duplicative R&D – to help you interpret that, we will build all products at Sun from Java, Solaris, StorageTek and from our newly unified SPARC and x64 SunFire platforms. I'd like to briefly point to three products that represent the future of such systems innovations. The recently unveiled Niagara servers, the StorageTek Titanium archive platform; and lastly, an upcoming extension to our NAS offerings, code named Thumper.

Having anticipated today's datacenter focus on green computing, Sun began investing years ago in energy efficiency - as a result, our Niagara servers now operate at less than half to a fifth the power draw of our competition (potentially qualifying our customers for carbon credits). As I mentioned earlier, many of you saw the share gains Gartner reported for Sun last week – we believe we can continue to grow share, having recently taped out an even more energy efficient follow on to Niagara - we are adding support for Linux and BSD operating systems on our SPARC platforms, opening new markets for the same platform investment supporting Solaris, leveraging the same R&D over a broader opportunity.

Secondly, the StorageTek T10000 is the highest scale and security archive offering in the marketplace – it's leveraged by an array of customers, from governments to on-line portals, and many of the world's largest institutions. But you've all heard disaster stories from banks or media companies that have "lost their tapes," revealing what was supposed to be protected consumer information. As a part of Sun, we were able to leverage our systems innovation to add high security encryption to these systems, largely eliminating the risk of losing data. Integrating our StorageTek platforms with Sun's market leading Solaris and Java Enterprise offerings allows us to solve a spectrum of business problems our storage only competitors cannot. This innovation was a matter of linking existing technologies - and will be a focus area while we reduce other proprietary approaches. And again, StorageTek systems will be built atop SunFire servers running Solaris, while maintaining their mainframe heritage and interoperability. Leveraging the same R&D over a broader opportunity.

Finally, and arguably the best example of the alignment of Sun's systems innovation is a project we'll be announcing in late June - code name Thumper. Thumper is a SunFire server, running Solaris and its 128-bit ZFS file system, that packs 24 Terabytes of storage into a miniature package - allowing Solaris and Java applications to run directly on the storage device at breathtaking speed and price points. It's a perfect example of combining our software and hardware expertise, with an existing supply chain, to deliver a broader market, greater margins, and new customers - leveraging common IP, over a broader opportunity. We'll be announcing complete details at the end of June.

To repeat, we will be simplifying our product line, our supply chain, our development and management processes – while retaining a focus on open source innovation, horizontal scalability and security, and on service automation around our Network.com Grid. All while we continue to seamlessly interoperate with existing systems, from mainframes to Microsoft Windows.

As I stated above, we've improved gross margins over the past couple of years - we will seek to generate more value from our R&D going forward.

Finally, I'd like to leave you with a couple notes on Transparency and Business Focus

You will hear me and Sun's Chief Financial Officer, Mike Lehman, begin to make projections of our going forward business – we have an increasing confidence in the stability of that business, and as we continue to see growth in our core developer offerings, we have increasing line of sight into new markets and customer opportunities. We will reflect that clarity and transparency to the best of our ability.

Today's changes will result in a significant reduction in non-core or redundant R&D, field and corporate resourcing – with significant synergies arising from the acceleration of acquisition integrations into Sun. Again, we expect these changes to have little to no impact on customers, and instead to create more opportunities for business partners and suppliers to join with Sun in serving the global market.

We have believed for the 24 years of our existence in a singular vision – the network is the computer. That vision remains unchanged, and if anything, today's refinements to our market focus, our R&D portfolio, and to our overall business model, drive us even closer to fulfilling it.

_________________________________________________________________________

Safe Harbor Statement

This blog contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, regarding the future results and performance of Sun Microsystems, Inc., including statements regarding Sun's growth plan, Sun's return to profitability, future growth, areas of future investment, the competitive advantage that results from Sun's intellectual property and the monetization of such intellectual property, the attributes of and benefits to be derived from future products, continued gains in market share and synergies to be derived from acquisition integrations. These forward-looking statements involve risks and uncertainties and actual results could differ materially from those predicted in any such forward-looking statements. Factors that could cause actual results to differ materially from those contained in Sun's projections and forward-looking statements include: failure to achieve expected cost savings within the expected time frames; increased competition; failure to rapidly and successfully develop and introduce new products; Sun's reliance on single-source suppliers; risks associated with Sun's ability to purchase a sufficient amount of components to meet demand; inventory risks; risks associated with Sun's international customers and operations; delays in product development or customer acceptance and implementation of new products and technologies; Sun's dependence on significant customers and specific industries; Sun's dependence on channel partners; risks associated with Sun's tape products; and failure to successfully integrate acquired companies. Please also refer to Sun's periodic reports that are filed from time to time with the Securities and Exchange Commission, including Sun's Annual Report on Form 10-K for the fiscal year ended June 30, 2005 and Sun's Quarterly Reports on Form 10-Q for the fiscal quarters ended September 25, 2005, December 25, 2005 and March 26, 2006. Sun assumes no obligation to, and does not currently intend to, update these forward-looking statements.

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Posted on 02:35PM May 31, 2006 | Comments[31]

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Share... (Gaining)

For those that missed it, definitely worth reading:

Sun Gains Share in Q1.

Innovation takes longer to deliver than a simple price cut, but if Q1 is an indicator of things to come, has more lasting value as a competitive weapon. For our customers and our shareholders. To be perfectly clear, lowering price is a tactic at Sun, not a strategy.

I was asked yesterday why we're gaining share - I said three reasons:

1. Solaris and Java are gaining momentum
No one can possibly dispute the impact free and open source software is having on the world - as the OpenSolaris and OpenJava communities continue to expand, as downloads and adoption increase, so does awareness of Sun's (and other open source community member) offerings and the total revenue opportunity. We gain share when customers deploy apps built on our platforms at a rate exceeding others. When our customers grow faster, so does our share - of licensed software, services on free software, servers and storage.

2. Galaxy, Niagara and Panther*
This one's more obvious - customers prefer our products when they're faster, draw less power and take up less space than the competition. World records help. But it's the total equation at this point - the "performance at any price" mentality is fading fast: just ask a Web 2.0(TM) startup what portion of their operating expense goes to electricity - you'll be stunned.

3. Sales and Service Execution
I was talking to a customer yesterday, one of our largest, and asked "how are we doing for you?" I presupposed the answer would surround our product roadmap, given how much time we'd spent getting them up to speed on where we're headed. The response had nothing to do with our products - their CIO just said, "your team is doing great for us, we love doing business with them."

When it gets right down to it, especially for our largest customers, people buy from people.

So congratulations, folks - well done, across the board.

______________

* those are code names for internal server projects, and I just earned myself some hate mail from the product groups that want me to stop using project names...

Posted on 02:21PM May 27, 2006 | Comments[20]

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Busy Week...

Last week was a busy week - with JavaOne, and a flood of customers in town.

I started the week previewing the week's announcements at the NetBeans tools community gathering. Here's a little known secret: I used to run developer tools for Sun - and as I said then, and I'll say now, you need only two documents to understand a technology company's corporate strategy: their end-user tools roadmap, and their sales force comp plan. Given that the former is public knowledge, inquiring minds can wonder about the latter.

This is my JavaOne keynote - which was a ton of fun. We broke a bunch of attendance records, with something near 15,000 attendees in the room (my favorite comment came from a reporter I spoke to after the event, who said: "I was amazed at the number of languages being spoken in the audience!"). Great buzz, tons of new stuff (capped off with a real-time Java roadrace after Scott's keynote). Another reporter said, "it's like a social movement." Well, yes.

I got a chance to talk with Ed Zander, CEO of Motorola (go buy a RED phone!); and two of the world's most vocal advocates of free and open source software, Mark Shuttleworth (the guy behind Ubuntu/Debian GNU/Linux who flew up from DebConf just for this event), and Marc Fleury (CEO, JBoss, Inc. - the company bringing Red Hat into the Java community). Definitely watch the video - you'll see the symbolic passing of the pickle to Rich Green, Sun's newly minted (but refreshingly familiar) Executive Vice President, Software.

After JavaOne, I spoke with Darrell Plummer and Paul McGuckin from Gartner at their conference (video here). David Berlind, as usual, had a thoughtful analysis of the hour. Frankly, I was a little disappointed in their questioning, as well - it seemed like so many of their questions had been hashed out in blogs and user generated analysis.

But all in all, a really great week - we're now making serious progress on open sourcing Java (and despite the cynics, using a GPL license is very much *on* the table), while focusing the debate on what matters most: not access to lines of code (that's already widely available), but ensuring compatibility. Compatibility is what brought a record number of people to JavaOne this year (making it the world's largest free software conference), it's what's behind nearly 3 billion+ Java enabled devices. And for those that missed the subtlety, that compatibility is what creates the market Sun, and others, can monetize with network innovations, from software to hardware and services.

Seems like an obvious connection to me...

[update: fixed broken link]

Posted on 02:30PM May 23, 2006 | Comments[10]

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Java, and Survival of the Most Adaptable

Change is a constant at Sun. So long as the market's changing - or so long as we can change the market - we're going to evolve. As Darwin said, it's not the strongest organisms that win, it's the most adaptable.

To that end, today we announced a series of changes designed to prepare us for the next wave of system challenges and market opportunities. I want to thank Mark Canepa for years of extraordinary commitment and devotion to Sun, and welcome John Fowler (who will lead Sun's Systems businesses) and David Yen (who will lead Sun's Storage businesses) to their new roles.

Speaking of changes, tomorrow morning, I get to deliver my favorite speech of the year, my keynote at Java One. I get to do so wearing my fancy new title, "Chief Java Evangelist," a title I now share with our Chairman.

I'm still amazed when I hear folks wondering how Sun monetizes Java. So at the risk of repetition, I'd like to share a few thoughts.

When Thomas Edison first introduced the lightbulb, he held patents he tried to wield against potential competitors - he wanted to own the client (the bulb) and the server (the dynamo). He failed. Standards emerged around voltage and plugs, and GE Energy (formerly, Edison General Electric), to this day, remains one of the most profitable and interesting businesses around. How big would the power business be today if you could only buy bulbs and appliances from one company? A far sight smaller, I'd imagine. Standards grew markets and value.

Then there was the civil war era in the US, when locomotive companies all had their own railroad widths and shapes - designed only to work with their rail cars and steam engines. How'd they fare? They failed, standards emerged that unified railways and rail lines, and that era created massive wealth, connecting economies within economies. Standards grew markets and value.

To get to the impact on a global scale, you should really read Mark Levinson's The Box. Which talks to the extraordinary impact the standard shipping container had on global commerce. No, I'm not joking. It democratized global commerce. And it ain't even done.

So if you want to know how I feel about Java, my view is it's changing the world - standardizing the plugs and rail gauges and containers used by global internet players. Its momentum, in my view, is unstoppable. What's that worth to Sun? Give it your best shot. When I do, I say most of our revenue is derived from Java. Just like most of Verizon's revenue comes from handsets. Even though the economics of the handset look baffling (but I dare you to recommend to Verizon that they stop selling them). Those that believe free software or service yields lower revenue don't understand the economics or dynamics of the software industry. Think Google or Yahoo!, not Maytag.

So for those in attendance tomorrow, thank you for joining us - at what's become the world's largest free and open source software developer conference. Believe me, there's a huge tent waiting for you - I just walked the main hall, and you could fit a few Space Shuttles in the place.

And somewhat off topic, a family member of mine once asked if I ever got nervous before keynotes - when I mentioned having nearly 20,000 folks in the audience this year, they nearly passed out. My response was simple - what's it like talking to your family about their accomplishments, no matter how big a family gathering? It's easy, it's what comes naturally, it's called being a member of a community, and feeling pride. Talking about what you know and love is like falling off a log (vs. rehearsing a keynote you don't care about, my worst nightmare - second only to extreme turbulence).

So I'll see you tomorrow morning, on-line, or in person. Like I said, it's my favorite part of the year, like spending time with family (and just wait until you see who joins the family tomorrow...).

Posted on 09:10AM May 15, 2006 | Comments[20]

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Announcing Greg Papadopoulos, CTO and EVP, R&D

Greg Papadopoulos (Sun's Chief Technology Officer) and I made a joint customer call recently, to the COO of one of the world's largest on-line companies. The customer made an interesting point - his job was getting more technical. A change from a few years ago, when his priority was big web traffic deals and traditional business development. The customer was a technologist to start, so he was in his comfort zone, but it had become increasingly obvious that the next generation of differentiation on the web was going to come from technology innovation - not just good BD or branding.

Now as you may have heard, I gave Greg a new title recently. In addition to being Sun's CTO, he's now Executive Vice President of Research and Development. Why's that important?

Well, Sun is a company built for engineers, by engineers. I know that probably rubs some folks the wrong way, who want to hear me say we're a "transformative value solutions" company (I can't keep a straight face saying it). But let's face it: value in information technology is coming down to how efficiently you can get something done. Whether it's building a 30 teraflop grid or a web services infrastructure; powering a Java handset or an entire datacenter. From what and who I see, the folks who measure that efficiency are getting more technical, not less.

When the tools are chosen or the RFP's are written, when the benchmarks are done or the operators take over, technologists are playing a more prominent role in our industry, not less. At least for our key customers, who live and die by technology (vs. those that should be shutting down their datacenters to buy network services from our core customers). Nick is right, IT Doesn't Matter to those for whom IT isn't a differentiator - but those aren't Sun's customers. Our customers live and die by IT.

So as a part of this change, the product group CTO's, the sentinels supporting the line executives who run our businesses, will also report to Greg. In the world of human resources, that's known as a "dual hard line" reporting structure. On the one hand, that's only a symbolic change.

On the other, it is a very clear indication of where we're heading. You cannot build a house by motivating sub-contractors with compelling visions of the future. That's why you hire an architect. Similarly, you can't build a network computing company without a chief architect to coordinate nearly $2 billion in R&D. And as a systems company, we now have a chief systems architect (and a fellow blogger).

This is also a signal inside and outside Sun: I am redoubling Sun's commitment to the primacy of the systems technologist, the systems innovator and the systems engineer. And not just in engineering - but across Sun as a system itself (more on that in a later blog). Our core customers, those who develop systems and services, who operate, administer - and pay for - them, need thought partners and system (not component) suppliers. Most business problems, in our world, have solutions rooted in innovation - and primarily technical innovation. That's our history, and our future.

I'm thrilled to have Greg assist me in driving focus and simplicity throughout Sun. From our great new developer tools, all the way up to identity enabled encrypted tape.

There are an ever smaller number of true systems innovators - those that can bring together the software, the hardware, the network and services layers, to form a coherent and compelling platform for the future of network computing. In your datacenter or in your pocket. We're committed to be exactly that: an innovator that delivers value as measured by those who live or die by innovation.

Please join me in congratulating Greg as he helps to define a new era of technical leadership at Sun.

___________

ps. For those interested, here's a Q&A I just did with Forbes. And yet more focus on the things that really matter (at least the Inquirer has a sense of humor).

Posted on 07:30AM May 06, 2006 | Comments[11]

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