Exit McNealy: New Era For Sun?

UPDATED: Late last Friday, Sun Microsystems CEO and co-founder Scott McNealy called up the board of directors and announced his plans to step down from the top spot of the company co-founded 23 years ago, choosing as his successor another Sun veteran, company president and COO Jonathan Schwartz. McNealy stays on at Sun as chairman.

Schwartz has been president and chief operating officer since April 2004. He came to Sun in 1996 when Sun acquired Lighthouse Design, where he was CEO. Prior to his elevation to the company presidency, Schwartz had been executive vice president of software, senior vice president of corporate strategy and planning and vice president, Ventures Fund.

McNealy has been under pressure to step down for a while. In 2003, Merrill Lynch warned the company to shape up or suffer the same fate as Data General and DEC. At one point last year, McNealy considered taking the company private.

In a conference call today with press and analysts, McNealy said now was the time for him to step aside and Schwartz had always been his first choice. “I’ve been working pretty hard to get him into this role for some time,” he said. “This was my decision that was supported by the board. It was my recommendation that I’ve been developing over the last six or seven years.”

But we all know what they say about the best laid plans. McNealy may have been grooming Schwartz to be his successor for several years, but the dot com implosion early in the decade could have scuttled all of that. Sun went through many consecutive quarters of losses and a share of its stock is now worth about the same as a Starbucks venti coffee.

Still, Sun wasn’t about to look outside the firm for a turn-around specialist, said Rob Enderle, principle analyst with the Enderle Group, in San Jose, Calif. “Getting a turnaround guy would be Scott admitting he screwed up, and that’s just not in his DNA,” he said. “It’s a status quo thing, not signaling a real change. The company still seems to be in search of a direction.”

Gartner analyst Martin Reynolds shares this sentiment. “They have good stuff, a lot of great technology, [but] they just seem stuck, like they are waiting for 1999 to come again,” he said.

McNealy said he wasn’t going to pass on the leadership baton when things weren’t stabilized, but feels now they have, despite the $217 million quarterly loss the company just posted. However, sales were up, as were gross margins. The losses were in large part due to $87 million in acquisition charges, $57 million in stock-based compensation charges and $36 million of restructuring charges.

“The time is right to do it now. All the demand indicators are showing that we’ve got a huge market opportunity ahead of us, and I get a chance to do what I think I can do better, and that’s travel the world, talk to heads of state, talk to the U.S. government and open those doors,” said McNealy. He called himself the “chief evangelist” for Sun and said he expected to spend a lot more time on an airplane in the future.

For his part, Schwartz said not much will change. “Here’s our vision: the network is the computer. Our view is the marketplace will continue to adopt networking hardware … we will continue to value intellectual property as a key differentiator,” he said.

Sun would conduct internal reviews and he would not rule out more layoffs, but he said the main target was to get new customers because growth in the Internet would always continue. “We’re not worrying about demand, we’re worried about intercepting that demand,” he said.

That kind of growth is exactly what Sun needs, said Reynolds. “All these companies are dependent on getting new customers, not just their existing ones,” he said. “They’ve done some cut backs. They are in a business where they have to invest in R&D, but also the business has to move with them. They have to get people moving to Solaris.”

Enderle is taking a wait-and-see approach. “It’s very hard for someone like Scott, a founder, to release control, so we’ll see how much if anything changes,” he said. “So now Schwartz has to be the turnaround man, and I’m not sure someone who has been there as long as he has can do that effectively.”

David Needle, internetnews.com’s West Coast Bureau Chief, contributed to this article..

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