The downfall of Sun Microsystems

Dot-com bust, failure to embrace x86 processors ended Sun’s life as an independent company, analysts say

There are many reasons Sun wasn't able to survive as an independent company. Chief among these are Sun's hardware strategy and failure to execute after acquisitions.

Oracle's surprising $7.4 billion deal to purchase Sun this week gives Larry Ellison and crew a big stake in the hardware market as well as control over Java and other well-known open source technologies. But it also spells the end of an independent Sun Microsystems, one of Silicon Valley's most prominent companies.

How did it all come to this for Sun, often regarded as one of IT's great innovators during its 27-year lifespan? The dot-com crash at the start of this decade is frequently cited as the beginning of the end for Sun, and for good reason. Acquisition missteps and a failure to monetize key products such as Java also hastened Sun's descent.

"The dot-com bust hurt everybody but it's arguable that Sun was hurt most of all because it had profited so much in the run up to the boom in the first place, and hadn't grown its business out as deeply as IBM and some others had," says Pund-IT analyst Charles King.

Sun's Sparc servers with the Solaris operating system were snatched up by dot-com start-ups because of their stability and flexibility in deploying various applications at affordable prices, King says.

A timeline of Sun

"In the months following the bust, there was a huge amount of Sun product that was out on the street and it precluded the need for people to upgrade or purchase new equipment," King says.

Sun prized its Sparc architecture so much that it missed the industry-wide transition to x86 processors, analysts say. Sun actually did sell x86-based systems in the 1980s, but concentrated its efforts on Sparc for most of the 90s. In King's view, Sun treated x86 systems as nice toys, but not platforms that could be used to power a serious corporate data center. Sun did increase its presence in the x86 market in the years following the dot-com bust with AMD- and Intel-based servers, but it seems to have been too little, too late.

The biggest reason for Sun's downfall is "the inability to recognize the x86 open architecture, as opposed to what they were selling with the Sparc processors," says Enterprise Strategy Group analyst Brian Babineau.

Babineau also faults Sun for pursuing a "non-capitalistic strategy" by emphasizing open source, yet failing to monetize key products such as Java.

King and Babineau both point to failed acquisitions. King notes Sun's $2 billion purchase of Cobalt Networks, a server appliance vendor that was gobbled up by Sun in 2000 but never produced any real dividends for its owner.

Sun has attempted to compete in many different hardware and software markets, but is too often in third or fourth place, Babineau says. Sun bought MySQL for $1 billion in 2008, for example, challenging the database market where Oracle was already king. Sun also executed poorly in the storage market after purchasing the vendor StorageTek for $4.1 billion in 2005, Babineau says.

"There was just mismanagement," Babineau says. "They purchased so many different things over the years. It was panic and frantic at the end."

Following the dot-com crash, Sun's profits took an immediate dive. After reporting net income of $1.85 billion in fiscal 2000, that number was halved to $927 million in 2001. Sun lost $628 million in fiscal 2002 and a whopping $2.4 billion in fiscal 2003. It returned to profitability in fiscal 2007, but ultimately the company reported net losses in three of the four most recent quarters, and the sharks started circling, in a manner of speaking. IBM offered $7 billion to buy Sun, only to be rebuffed. Several analysts doubted that Sun could find another buyer after rejecting IBM, but then Oracle came calling.

One reason Sun couldn't go on in its present form is that the company had a core group of loyal customers but wasn't able to win many new accounts, King says. And for many years, when Sun's customers wanted a reliable x86 platform they had to turn to Sun's competitors.

"The history of the Valley is littered with the dried husks of companies that had great technology but didn't understand the dynamics of the commercial market they were trying to compete in," King says.

That's not to say Oracle won't be able to gain success with Sun's technology. While Sun has failed to maintain profitability, the company did pull in more than $3 billion in revenue in the most recent quarter.

Oracle is touting Java and Solaris as two key software assets that will help Oracle and Sun turn a larger profit than they could separately. Oracle, which is expected to significantly reduce Sun's expenses, predicted that Sun will bring $1.5 billion in operating profit in its first year as part of the combined company.  

"Java is one of the computer industry's best-known brands and most widely deployed technologies, and it is the most important software Oracle has ever acquired," Oracle said in a statement announcing the acquisition. "The Sun Solaris operating system is the leading platform for the Oracle database, Oracle's largest business, and has been for a long time. With the acquisition of Sun, Oracle can optimize the Oracle database for some of the unique, high-end features of Solaris."

With Oracle seemingly most excited about Sun's software platforms, Babineau speculates that Oracle might ultimately sell off the hardware business. Other analysts, such as Forrester Research's James Kobielus, say Oracle should leverage its new hardware capabilities with data warehousing appliances that integrate MySQL and other Oracle databases into Sun servers.

On the whole, Oracle's announcement of the purchase was "remarkably devoid of detail," King says, so it's tough to say what the combined company will look like one or two years from now. Oracle and Sun had such tight partnerships already that dramatic changes may be the exception rather than the rule, he says.

"Frankly Oracle and Sun have worked very closely for the better part of two decades and I don't really see what the companies will be able to do as a single organization that they haven't already done as close strategic innovative partners," King says.

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