A Little Sunshine

I’ve been meaning to post on Sun’s latest earnings, but have been delinquent.  It is harder to poke fun in light of their thousands of pending job cuts, but my post speaks to the root cause of Sun’s predicament: software.

I have often questioned Sun’s software strategy (here and here), going back to the fixation on Java as a competitive weapon as opposed to making it a good business, to McNealy’s “software is a feature of hardware” delusion to the “free, but we make it up on volume” philosophy that seems to be their current software strategy.

Despite repeated and lengthy lectures on the topic from CEO Jonathan Schwartz (who evidently is not among those losing their jobs), there just isn’t any discernable sign of a “virtuous cycle” to their software strategy, much less any financial evidence of it “expanding Sun’s market opportunity in the corresponding datacenters”.  If anything, there is evidence their software strategy is destroying their traditional datacenter revenue.

You can get the explanation from Schwartz, but honestly I find this to be at least as illuminating (and way more entertaining):

I have challenged Sun over the years to back up their software rhetoric by breaking out their software revenues.  Well, they finally did cast a little sunlight on their software business in their most recent financials.  It has garnered very little attention (hat tip to the Wall Street pro who pointed it out to me).  So allow me to commend Sun (feel free to pause and enjoy this rare event) for breaking these out, even if it is probably preparatory to the breaking up of Sun.  Here are the numbers for their most recent and previous fiscal years:

	FY07	FY08	Growth
Java	$219m	$220m	1%
MySQL/Infrastructure	$198m	$208m	5%
Solaris, Management, Virtualization	$221m	$216m	-2%
Total	$639m	$644m	1%

Software is less than 5% of Sun’s overall revenues.  And the absolute numbers are smaller than I would have guessed, especially the Java number.  For all the noise about Java, it is only a $220 million business?  I wonder what the trend line looks like over the last ten years.  Was it ever an appreciably larger business?  Obviously, there are others making much, much more on the back of Java.  Not much seems to have come from all those app server acquisitions (which I’m not sure I can even name any more, but there were multiple nine figure acquisitions).

It is also interesting to compare to other current software businesses.  Overall, Sun’s total software revenues are roughly the size of Red Hat, but the Solaris line item obviously is about a third the size and shrinking.  HP’s software business is over four times as big as Sun’s – that must rankle (HP = “House of Printers” to recall a memorable McNealy line).

Most embarrassing, the 1% annual growth was such outstanding performance as to put software into Sun’s portfolio of “growth” businesses.

So what happens next?  At one point today, if you netted out cash, Sun as a business was worth about $4 million (less with committed downsizing costs).  Maybe Fujitsu gets interested again as they unwind their Siemens partnership.  They would probably pay $4 million for SPARC.  But with the cash position, anyone could come along and cherry pick a very small asset out of Sun and walk away from the rest.  Maybe the econalypse (I am still looking for a good name for the “current economic situation” — leave any ideas in the comments) precludes this, but current Sun situation isn’t sustainable.