McNealy takes the hits and a back seat at Sun

Brash, optimistic and pugnacious, Scott McNealy will always be identified with Silicon Valley’s great period of exuberant expansion.

This week, however, a more muted Mr McNealy was on display, as the co-founder of Sun Microsystems took a step away from centre stage.

“We clearly got mis-positioned in the marketplace,” he conceded in an interview, after announcing that he would step down as chief executive officer in favour of Sun’s number two, Jonathan Schwartz.

“I’ll take the hits for where we went wrong.”

Among the mistakes to which Mr McNealy confessed: Sun over-expanded during the boom years, and waited too long to launch its Solaris computer operating system on low-cost servers that run the standardized X86 chips made by Advanced Micro Devices and Intel.

The latter mistake helped to open the door to the Linux open-source operating system, which has become a popular choice for customers looking to escape the high prices of proprietary servers made by companies like Sun.

There was one other fault, though, that might sum up the company’s eclipse – the sin of hubris.

Sun under Mr McNealy developed an arrogance during the boom years that appeared to blind it to the new realities of the tech world after the bust.

“We lost focus on the customer from a quality and service perspective,” the Sun chairman said this week.

While Mr McNealy has been more prepared to concede his failings, however, one thing is not about to change.

Sun still plans to plough money into the high-tech products that it believes will set it apart, even though that led it to spend 16 per cent of its revenues on research and development last year, a higher figure than most of its rivals. “We will continue to value intellectual property as the key differentiator,” said Mr Schwartz.

Squeezing a better return out of that investment in a tech market that is now dominated by low-cost, standardised products will be the new CEO’s biggest challenge.

Mr Schwartz at least starts out with what is generally seen as a better product line-up than Sun has had for some time. Revenues from the company’s new AMD-powered servers are running at an annualised rate of $400m and growing fast, the company said.

High-end servers based on its multi-core UltraSparc chips have also had good reviews in the tech world.

The key now, according to Mr Schwartz, is to increase sales volume.

One promising sign is that in the latest quarter the company said that sales of its core products had turned up again in the US – something few on Wall Street had expected.

Investors, however, are more likely to dwell in the short term on the need to cut costs further.

Mr Schwartz said this week that he would be sharing an office from now on with Mike Lehman, who returned to the company this year as chief financial officer – an apparent nod to the need for tighter discipline on expenses.

Sun has already gone some way to trimming its R&D as it focuses on fewer, bigger bets.

However, it still maintains a wide range of products not directly related to its core server business, including the Sun Ray, a “thin client” computer and StarOffice, an open-source productivity software package – a throwback to Mr McNealy’s long period of antagonism with Microsoft.

While claiming that he needs only to “refine” Sun’s existing business model, Mr Schwartz has already given hints that deeper changes may be needed, for instance to reduce its heavy sales and marketing costs.

“The internet is a better discovery mechanism [for finding customers] than any sales rep,” he said.

Sun has already converted Solaris into an open-source product – something it says has led to 5m free downloads of the software.

Yet trying to compete on the same terms as Linux implies that much bigger reductions in costs – and workforce – may lie ahead.

At least Mr McNealy, who oversaw Sun’s rise, will not be the one who has to make the tough choices.