MESSAGE
| DATE | 2003-09-18 |
| FROM | From: "Inker, Evan"
|
| SUBJECT | Subject: [hangout] Will a New Software Strategy Lift the Dark Clouds Over Sun?
|
Ruben,
It seems like someone overheard our conversation last night....
FAST FORWARD
Will a New Software Strategy Lift the Dark Clouds Over Sun?
Scott McNealy and company are trying to change the business model for
software and in the process revive Sun's prospects.
FORTUNE
Wednesday, September 17, 2003
By David Kirkpatrick
Sun refuses to give up. A new software strategy announced Tuesday represents
a dramatic departure both for the company and the entire industry.
Regardless of whether it succeeds for Sun, it's something anyone who pays
attention to software has to understand. I spoke to Sun software boss
Jonathan Schwartz about it on Monday afternoon.
The basics of Sun's announcement have been widely reported, but they include
offering customers, for $100 per employee per year, something it is calling
its Java Enterprise System. This includes a full suite of software for
running a business, especially a large one. The suite includes Sun's Solaris
operating system, of course, along with an applications server, a full
e-mail and messaging system, a directory (necessary for managing all the
users and locations on any network), authentication technology using Java,
and portal software for running websites for both internal and external
customers.
That is essentially all the software infrastructure a company needs, on top
of which it can deploy applications like SAP, PeopleSoft, or highly specific
homegrown programs. As for the price, it is not only radically lower than
what is typically offered by infrastructure software providers today, but
the pricing structure itself is radically simplified. Says Schwartz: "If IBM
charges you $30,000 per CPU for an applications server, and we charge $100
per employee, then you can save tens of millions of dollars if you're a big
company."
When I spoke to Schwartz he was speaking in superlatives. "This is the
demise of the middleware industry," was his first bit of likely hyperbole.
It went on from there. "We plan to take a $20 billion market and turn it
into a $3 billion market," said Schwartz. "But in so doing I think we will
gain a significant amount of share against those who are trying to sell
hand-tooled middleware." You've got to hand it to this guy-he's glib. "The
next wave in software is not about directories or e-mail," he adds. "That
was the last wave. Our pricing puts an exclamation point at the end of that
sentence. Commoditization is the perfect word. Dell has made great theater
of the fact that the hardware is commoditized. We think they are half right.
The whole system is commoditized." All this sounds good but disregards the
fact that Sun, at present, is an also-ran in enterprise software.
Still, this is a gutsy move. Marketing and selling enterprise software is a
complex business, and the industry's practices-including Sun's up until
now-have historically thrived on that fact to enhance margins. For example,
every type of software has been priced according to a different variable.
Directories have been licensed by the entry, identity systems by the
identity (which is different than an entry), e-mail systems by the mailbox,
portal software by the number of processors on which the portal is running,
and file systems by the amount of storage connected to them. It is not
uncommon, points out Schwartz, for software companies seeking to pump up
revenue at the end of a quarter to make a surprise auditing visit to a
customer, hoping to find a need for additional licenses which will give a
quick boost to revenue. Sun now dispenses with all that.
Sun will charge simply-based on filings a company makes to the SEC, at least
for public companies. And to make the pricing even more attractive, Sun
won't charge anything additional if a company uses the Internet to deliver
services based on this software to its customers or business
partners-another major departure from typical industry practice. For
example, a company can authenticate outsiders, or even grant them mailboxes
in its e-mail system, for no additional cost.
The software will run not only on Sun's own proprietary computers, but on
Intel-based systems as well. That is a huge-and risky-move for Sun. The
lion's share of the company's revenues are tied in some way to the sale of
hardware. Those revenues are likely to sink further as Sun lowers its prices
and moves toward generic Intel hardware to avoid being rendered irrelevant
by the likes of Dell and Hewlett-Packard. There's no way that Sun will reap
enough software revenue anytime soon to offset what it will likely lose in
hardware.
But does Sun want to become a software company? I put the question to
Schwartz. After a bit of waffling, he answered: "We are definitely led by
software and services, and not by boxes. But last time I looked you can't
execute software without hardware."
The big architectural argument Sun is making with this strategy is that, as
software infrastructure becomes commoditized, it makes more sense for
companies to buy an integrated package that just gets the job done. That way
they can spend their real effort building distinct applications that run on
top of the basic package and offer competitive differentiation. Schwartz
bragged several times in our call about the fact that Gartner rates most of
the components in Sun's package best of breed. That's critical, because no
matter how clever the pricing, customers aren't going to buy unless it's
high quality.
Cheaper software is clearly something customers want. "The one acronym I've
heard from enterprises across the planet is TCO," Schwartz says, referring
to the total cost of ownership of computer systems. "But that term has
grown. Now [TCO stands for] take consultants out, take complexity out, take
chance out, or as one customer said to me-take coronaries out." Like I said,
glib. However, if a company has already purchased, say, IBM's WebSphere
middleware package, they may hesitate to start over again.
At the center of the new system is authentication based around Java, the
software Sun originated which is now used widely with little revenue benefit
for Sun. The system is written in Java, of course. And all the company's new
infrastructure presumes and facilitates use of so-called Java smart cards to
secure the system and protect individuals online. (For more on how business
is dealing with the problems of security, viruses, and spam, see my story
"Taking Back the Net"
www.fortune.com/fortune/techatwork/articles/1,15704,485825,00.html in the
new issue of FORTUNE.)
Sun also announced new pricing for PC desktop software-$50 per employee per
year if the customer also uses the Java Enterprise System-which includes the
Linux operating system and a full suite of software that mimics Microsoft
Office. That is another radical move, but one whose success is even more
unknown given that this type of platform is still relatively rare in
business. I wouldn't rule out its having an impact, however. Meanwhile, Sun
also intends to announce this week new lower pricing for servers.
This is all strong stuff. It's powerful rhetoric from a company that has a
lot to prove in software. But it's also a strong vision if Sun can really
execute on it. The great thing for Sun is that even though sales have
dropped in recent years it still has relationships with just about every
enterprise that matters, which it can build upon with the new strategy. The
move will almost certainly force competitors to, if not lower their prices,
at least do a better job of rationalizing them to customers. These next few
months will be very interesting in the software business. Sun aims to
commoditize the software business, but it would take a lot-a whole lot-for
the entrenched software providers like IBM, BEA, and especially Microsoft to
even think about anything close to "commoditized" pricing.
In the last year or so I've wavered several times between expecting Sun to
thrive again and writing them off. At least this new move shows how scrappy
these guys remain. I'm creeping back toward the optimists' camp.
***
David Kirkpatrick is senior editor for Internet and technology.
Questions? Comments? E-mail them to me at dkirkpatrick-at-fortunemail.com.
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