Analysis: Where did Sun go wrong?

One of Silicon Valley's biggest innovators faces a tough road alone after walking away from a deal with IBM

Just before the dot-com boom that spawned the meteoric rise of Sun Microsystems came careening to a halt, then-CEO Scott McNealy and President Ed Zander held a meeting where they discussed the future of their company.

At the time, Sun owed the fast-growing sales of its server hardware and position as an industry darling to the dot-com economy, "an unnatural period when they were considered a 'you must have this vendor' company," said Illuminata analyst Jonathan Eunice, recalling the meeting he attended in 2001.

Even as the boom that had allowed their business to flourish was about to end, the two executives did not appear to see anything amiss, Eunice said.

"It was a moment when everyone in the room knew that things weren't going to continue as good as they had been," he said. "But they were on stage saying, 'We don't see anything falling down.'" It was a "moment of blindness" for Sun, he said, one that came at a turning point when the company should have been making tough business decisions to ensure its longevity.

The years since that meeting in 2001 have not been kind to Sun. The company that had built up its business selling powerful Unix servers faced a dual threat in the form of x86 processors, which would spawn cheap but powerful servers that undermined its Sparc-based offerings, and the Linux OS, which would be embraced by IBM and Oracle and emerge as a potent, low-cost alternative to Sun's Solaris.

Those events were beyond Sun's control, of course, but while rivals like Hewlett-Packard and IBM reinforced their businesses by embracing the new technologies and building up their professional service arms, Sun's reaction was to hunker down. What followed, analysts and even some former Sun executives say, was a series of missteps that have left the company where it is today -- it has lost $1.9 billion over the last two quarters, with revenue down 9 percent to US$6.2 billion. Indeed, the company has had difficulty sustaining profitability since the dot-com bust. Moreover, negotiations to be acquired by IBM have apparently broken down, at least for the moment, leaving Sun in a weak and exposed position.

It has been an ignominious and somewhat mystifying downfall for a company that, for all its missteps, has been one of the greatest innovators in Silicon Valley history. From Java to Jini to utility computing and its slogan "the network is the computer," Sun has often shown an uncanny vision for identifying industry trends before they happened. In many instances it was, quite literally, ahead of its time.

"It's weird because Sun is probably the most innovative and forward-looking company of any that I've seen," said John Crupi, CTO of enterprise mashups company JackBe and a former CTO for Sun's Enterprise Web Services group. "They were really good at doing cool engineering things. The problem was, they never managed to move up the stack and package those things into solutions that really let you use the technology and solved people's problems."

Stephen Hultquist, an IT industry veteran and principal with Infinite Summit in Boulder, Colorado, agreed that Sun never suffered from a lack of innovation and vision. Where its executives faltered was in their ability to get beyond the vision and give customers what they wanted to run their business, he said.

"Any company that doesn't continuously focus on the real benefits to their customers -- both current and future -- will eventually lose the mindshare of those customers," Hultquist said. "Customers buy what makes sense for their success and satisfaction, not what is 'best' in some esoteric, technical way. If that wasn't the case, Microsoft would not be the powerhouse that it is."

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Elizabeth Montalbano

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