Did Sun's total package kill the IBM deal?
IBM operates in the real world of profit and loss
Forbes listed “Sun's Six Biggest Mistakes”, and while the sub-title “The company's high-end, high-margin business wasn't run by stupid people. They just acted that way.” has a great deal of truth to it, the 6 detailed mistakes are less than accurate. There are really only 4 reasons, as listed below.
1. Fixating On The High End
This depends on your definition of the high-end. If we use IDC definition of High-End, SUN did not focus on the high-end, it in fact de-focused from the high-end back in FY02 and the result was a market-share drop in that segment (Globally FY02=9.8%, FY05=6.8%, FY08=6.8%, in the US FY02=11.2%, FY08=6.4%). It re-focused in FY06 and as a result this has been growing. If we include the mid-range then the most you can say is SUN neither focused or de-focused. The market share has been stable. (Globally FY05=16.8%, FY08=20.1%) SUN's main focus from FY06 to today was in Volume (sub $25K). The problem was this failed. (Globally FY05=8.0%, FY08=7.4%) You could argue that the more senior management focused within SUN, the poorer the performance, which means a key issue with SUN was its senior management team. The real issue was a lack of focus in High-end and Mid-range to keep revenues up - while developing a new low-cost channel for volume products. I should note IBM's record in the Volume end is not good either - the real winner in the volume end has been HP where they have almost abandoned the high-end and Mid-range for Volume.
2. Embracing Commodity Hardware Too Late
The world is littered with failed companies who have embraced commodity hardware - Prime, Wang, Digital, data general. IBM on the other hand - like SUN - has not embraced commodity hardware and its doing ok. This is simply a strategy decision not a reason why you win or lose.
3. Too Few Layoffs, Too Often
Accurate
4. Missing The Web 2.0 Wave
Web 2.0 is really a marketing spin, it should be noted HP and IBM totally failed to take advantage of Web 1.0 - while SUN did – and look at IBM, HP and SUN today.
5. Overpaying For Acquisitions
Accurate.
6. Keeping Its Hardware Business
Hardware generates 95% of revenue and is highly profitable - Software generates 5% and - when including all costs - makes a large loss. If SUN abandoned its hardware business it would quickly fail. This is the comment really makes sense;
“IBM operates in the real world of profit and loss, and sources told The Reg categorically that IBM failed to get a satisfactory answer on which, if any, of Sun's software makes money.”
SUN has not been successful in making its software business work, primarily because it tried to sell software using its existing sales channel. SUN could of spun a separate multi-vendor software division with its own P&L and structured it like a real software company - that could work, but was never attempted. This was SUN's lost opportunity and the main reason why it never developed the software business it could of,
Summary:
The failure of the volume strategy at SUN is a result of a failure of senior management to develop a new low-cost sales channel.
I am certain that if you removed all the software related costs and revenue from SUN today, SUN would make a significant profit. If anything, the current software structure overhead is actually dragging SUN the company down.
The cause of these two issues is a failure of SUN's senior management – not its products or even coal faced staff. The issue of layoff's and acquisitions can also be placed at the feet of senior management. There is really only 1 mistake at SUN – Senior management. Resolve that and the real value of SUN would show through. (I estimate that with good senior management SUN should be making $1billion a year off revenues of $10billion - at PE of 10. If correct its share price should be a minimum $20 per share.)
