McNealy dumps Tux, gets serious

There was no penguin suit this year. The tough times facing Sun called for something a little more serious when Scott McNealy addressed financial analysts this week.

SAN FRANCISCO – There was no penguin suit this year. The tough times facing Sun called for something a little more serious when Scott McNealy addressed financial analysts here this week.

McNealy, chairman, CEO and president of Sun, informed a critical analyst community that Sun will not change by mimicking the strategies of IBM, HP and Dell. This message was a far cry from that of last year’s conference, when McNealy took the stage in a penguin suit, looking like the Linux mascot Tux, and explained why Sun had indeed decided to go in the direction of rivals and ship Intel-based servers with Linux on top.

“We’re giving them more content and less entertainment this year,” McNealy said, during an interview this week, setting his normally unrelenting comic persona to the side for a moment. “We are giving them fewer predictions, just more understanding of what we are doing, trying to be a little more transparent about what our strategies are. Hopefully, they will appreciate it. I think we are turning some heads.”

Sun has been rocked by a tough hardware market and the evaporation of key telecommunications and network service provider customers. Revenue has tumbled from the $18.25 billion reported in 2001 down to the point where analysts are predicting a 2003 mark under $12 billion. Phrases such as “All-time high” have been replaced with “Returns to profitability” in company earnings statements.

These tough times have analysts scrutinizing Sun’s decision to stick with its own UltraSPARC processors and Solaris operating system, as servers running on Intel chips with the Linux operating system start creeping in on once-secure markets.

Yet even in casual conversation at the conference, several analysts detailed their reasons for confidence in the company and complimented McNealy on the eloquent way in which he laid out Sun’s strategy. However, the positive words largely faded as they questioned how long Sun can go on being different from the rest of the hardware world. They fear Sun may be spending too much on research and development as hardware becomes a commodity.

The bottom-line question from the analysts seems to be whether being different is the right way for Sun to avoid the death knell that has sounded for so many other hardware vendors.

Different is exactly what McNealy wants to be.

“You have to go where the puck is going to be and not where it is,” McNealy said. “If it’s going to take the puck a little time to get there, it doesn’t mean you go chase it. We often get there way too early, but that way is better than getting there too late.”

McNealy defended several of Sun’s decisions and its strategy based on the premise of being ahead of where the money will go. For example, Sun sells a type of thin client called Sun Ray that replaces a desktop PC with a quiet skeleton of a computer that connects to a server. Users can insert a smart card into the machine and access all their files no matter where they are in the world. This type of computing could be blissful for travelers who can reach their files in a hotel by carrying a card in a wallet instead of lugging around a laptop, according to McNealy.

Such a revolution in computing, however, will take time to bring to fruition, which means sales of the Sun Ray could continue to be slow for a few years.

On the other hand, Sun often benefits from being a technology leader, as happened with the quick adoption of its Java programming language.

“When we did Java, we had no idea it would happen that fast, and we thought it would happen on the desktop first, and that’s the last place it has happened,” McNealy said. “You can never pick it, but you throw it out there, open up the interfaces, allow partners to help and hope fun things will happen.”

Sometimes the company’s bets pay off only in part.

Sun has long been a champion of 64-bit processors that make it possible for servers to address vast pools of memory and churn through complex software applications. This focus on high-end processors helped Sun soar to the top of the most lucrative part of the server market, but also meant Sun missed out on the 32-bit space dominated by Intel.

“The 32-bit market surprised us,” McNealy said. “I can only admit that so many times. I think customers were surprised at how much 32-bit could handle.

“I don’t think that was any genius on Intel’s part,” he said. “They got dumb lucky by being slow to 64-bit. I don’t think this was some sort of strategy to say, ‘Hey, let them run off to do 64-bit.’ When did they announce (Itanium) – in 1907, right?”

Given Sun’s revenue woes and low stock price, it was striking how upbeat employees seemed overall at the analyst meeting. McNealy’s charisma appears to keep employees’ spirits high and their focus set on owning the future of the hardware market. Some expressed awe at the executive’s speech, citing his passion and confidence. These emotions seem to carry over to the product side and inspire workers to be proud of their technology.

The Sun chief makes an important point with his speeches, which are almost sermons to technology. His company, born in Silicon Valley, keeps alive the industry’s push to innovate. Other companies, such as HP, back down from competition on chips and turn their processor technology over to Intel, while Sun promises customers that it will make their lives easier through relentless research and development.

But times have changed, and Sun’s maverick approach hasn’t been paying off lately. Amid the company’s struggle to prosper and to keep hold of the markets it has dominated, analysts and employees may not have been amused to see McNealy dress up as a flightless bird.

So, the penguin suit has been put away, replaced by jeans and a sweater. Such simplicity, along with $6 haircuts, save the company time and money every quarter, McNealy joked.

Some of his closest aides don’t care much for his haircuts and have tried to persuade him to grow it out, but he refuses to give in. In the same way, he refuses to budge on business issues and remains adamant that Sun has a strong future ahead, regardless of what the financial picture is right now. The chuckles will not go away. They just need to be put to the side for a moment as Sun prepares for its next phase.

“I had to be a businessman this year,” he said.