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The Honolulu Advertiser
Posted on: Tuesday, December 31, 2002

Sun plans daring comeback strategy

By Jon Swartz
USA Today

Despite claims that his company is sinking, Scott McNealy, chairman and CEO of Sun Microsystems, says Sun "is on the verge of great things." Sun has lost ground in recent years to rivals such as IBM and Dell.

Bloomberg News Service

SAN FRANCISCO — While critics and rivals snipe that his company, Sun Microsystems, is sinking, Scott McNealy maintains his Captain Courageous demeanor.

"If I didn't think this company was aimed the right way, someone should fire me," the shoot-from-the-lip McNealy says.

McNealy, who co-founded the company, says Sun will be a leader in building computers and software for the super-efficient networks of the future. But while McNealy looks to a grand future, industry analysts say Sun is in danger of becoming an also-ran.

"Sun is far from dead, but it looks pretty sick," says analyst Rob Enderle of tech consulting firm Giga Information Group.

Perhaps no high-tech company benefited — and suffered — more from the tech boom and bust than Sun, underscoring how rapidly a company's fortunes can change in volatile industries.

Founded in 1982, Sun went public two years later and topped $1 billion in revenue by 1988 — the quickest of any computer company to reach that milestone.

But then the dot-com bubble burst and a rash of telecom companies and Internet service providers folded, depriving Sun of customers. The result: Sun's fiscal 2002 revenue of $12.5 billion was off 32 percent from 2001. It lost $587 million in fiscal 2002 vs. a $925 million profit in 2001 and a $1.9 billion profit in 2000.

The company best known for supplying beefy computer servers that power many a company backroom is losing market share to Dell Computer on the low end and slugging it out with IBM on the high end. Profit margins are down 20 percent from two years ago. It is cutting 20 percent of its 43,000 workers.

The challenges facing Sun are most evident at customers such as CBS SportsLine.com. In the past year, it junked 40 Sun servers that cost $50,000 each and replaced them with 70 Intel-powered Dell servers running the Linux operating system that cost $5,000 each.

At the heart of Sun's comeback plan is a grand software project called N1, in which complex computer networks run and repair themselves without costly human overseers.

Sun would benefit from bigger server and software sales as companies relied more and more on computer networks. IBM and HP are hard at work on similar ideas.

"My theory is the more controversial the strategy, the better the opportunity for profit," says McNealy, 48. "I always feel the company is on the verge of great things despite the negativity."

It also doesn't hurt that Sun has a hefty $5.2 billion in cash and respected technology. It expects a profitable quarter ending in March 2003. And it is spending $70 million on a worldwide ad blitz.

"In these brutal times, you need a no-holds-barred, decisive type like Scott — not some thumb sucker who hunkers down," says Jack Welch, the former General Electric CEO, whom McNealy considers his mentor. "Scott has the passion, focus and vision to pull it off."