Sun's future uncertain after talks with IBM break down

Patrick Thibodeau looks at the landscape after the deal was scrapped

The next step for Sun Microsystems, after its apparent failure to reach an agreement with IBM on an acquisition, is to continue looking for a buyer, change its management — or just keep plugging along and pretend that nothing ever happened.

In terms of a sale, it's entirely possible that Sun could attract bids from Cisco Systems, which is trying to move into the server business; or Fujitsu, which makes servers based on Sun's Sparc technology; or even Hewlett-Packard, as part of its perpetual market-share battle with IBM.

Another option is overhauling Sun's management in response to the company's continuing revenue decline and the reported collapse of the talks with IBM. There are even rumours that CEO Jonathan Schwartz could be replaced by chairman and co-founder Scott McNealy, who stepped aside as CEO and was replaced by Schwartz four years ago this month.

But Schwartz was McNealy's protege, and the latter has publicly supported Sun's overall strategy under his successor.

Then, there's the pretend-nothing-happened-with-IBM approach. Sun continues to develop new products and is expected to release its 16-core Rock processor later this year — albeit more than 12 months behind the original shipment schedule.

The company has done well sales-wise with the line of servers based on its UltraSparc T2 processor, which is showing revenue growth, as well as with its x86-based systems. However, Sun isn't doing well enough, with revenues dropping nearly 11% in the last quarter and layoffs continuing under a restructuring plan announced in November.

The problem is that for now, no one really knows what Sun plans to do next. As such, what's to motivate corporate users to continue buying new hardware from the company?

Despite the current climate of uncertainty, some customers will keep investing in Sparc systems because they have a commitment to the Sun architecture and changing to other technologies would be difficult, says Nathan Brookwood, an analyst at Insight64 in California. He pointed out that the phase-out of HP's Alpha processor, acquired via that company's acquisition of Compaq Computers, lasted nearly a decade because of continuing demand from users.

But Rich Partridge, an analyst at Ideas International based in NewYork, says new customers in particular might hold back on making any purchase commitments to Sun until the company's future plans are more clearly defined.

Ditto for Judith Hurwitz of Hurwitz & Associates in Massachusetts: "In down markets, people run for safety," she says. "They want to go with companies they feel safe with."

Forrester Research analyst James Staten says that even before the acquisition talks with IBM began, many Sun users already were thinking about Linux and x86 servers as an alternative platform to Sparc machines running Solaris. Moving to a new platform "is a centre-of-mind question every three months among Sun customers," Staten claims.

And regarding the Rock processor, Staten says he isn't certain whether it will be able to compete against IBM's Power 6 processor or the latest Xeon server chips Intel released last week.

Even if that turns out to be the case, Sun's Sparc user base is likely to remain attractive to IBM or other vendors. "I think most people would agree their installed base of customers is a valuable asset," Brookwood says. And forcing those users to move to a new hardware architecture would only anger them, he added.

As for Schwartz, he has "a lot riding on showing growth [for Sun] or showing an exit strategy," Staten says. "And neither one has come through."

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