Sunday, November 23, 2008

Setting Sun

In the mid-1990's, when the Internet was just beginning to expand from the domain of tech-literate nerds, I got into an argument with a friend about the similarities between Apple Computer and Sun Microsystems. His premise was that Apple and Sun were very similar companies, but that Sun had a more viable forward-going business plan, and that Apple would be doomed if they didn't adapt their own business plan to be more like Sun's.

Fast-forward to November of 2008: Apple, Inc. (the company dropped the 'Computer' from their name during 2007) continues to see extremely strong sales of its flagship Macintosh computer, while Sun Microsystems seems locked in a death spiral, having lost over 95% of its stock value from its Internet-bubble peak, and being the subject of seemingly weekly speculative articles about which other tech giant will step in and snap up the struggling company (or not).

How did we get here? And why was my friend so wrong in his prediction? To understand the present, it helps to look back at the past -- in this case the distant past of the 1980s.

The Internet as we think of it today didn't exist back then, but computers were still fairly common, if not quite as ubiquitous as today. The two most commonly seen computer lines, both in homes and in schools, were built by two different companies: Commodore Business Machines (whose PET became popular in schools after its introduction in 1977; the Commodore 64, introduced in 1982, was more popular in homes), and Apple Computer (whose Apple II line, also introduced in 1977, seemed equally popular in homes and schools). It wouldn't be much of an exaggeration to suggest that the people who built the Internet largely grew up on Apple and Commodore machines (though other models, such as Radio Shack's TRS-80, had their proponents).

A trio of Stanford University computer students founded Sun Microsystems in 1982 after one of them, Andy Bechtolsheim, developed the SUN1 workstation from spare parts as a graduate project (SUN, at least with respect to that computer, stood for Stanford University Network). Apple, under the direction of founder Steve Jobs, developed the Macintosh during this period, releasing it for sale in 1984. (In the first of a number of similarities between the two companies, both companies' computers ran on Motorola 68xxx processors.)

By the late 1980s and early 1990s, both companies found additional innovations that contributed to additional success for each. For Apple, the introduction of Macintosh System 7, which allowed Apple to increase their dominance of the desktop publishing market, combined with the introduction of the first PowerBook in 1991, one of the earliest and most popular 'laptop' computers (as opposed to the luggage-sized 'portable' computers of the 1980s) allowed Apple to surge into what some observers would call their first 'golden age'.

Sun's innovation, meanwhile, would not come from within, but from without -- in 1989, English computer scientist Tim Berners-Lee had proposed a system of linked documents over a computer network and even developed a prototype of how that system would function, in effect, developing the first web server. (Ironically, Berners-Lee used hardware and software produced by NeXT, the company founded by Steve Jobs after he was ousted from Apple in 1985.) While Sun continued to produce workstation-class machines (the company's stock symbol during this period -- SUNW -- stood for Sun Workstations, after all), the company also aggressively pursued a place in the emerging market for server-class machines, and successfully became one of the best-known server hardware manufacturers of the time.

Sun still employed a number of very smart computer engineers, however, and in 1991, one engineer began a project which would ultimately be released to the public in 1996 as Java, a new programming language that intended to be platform-agnostic (the philosophy behind the language, 'write once, run anywhere', was very popular with the nerd-crowd). By this time, the Internet was beginning to take the world by storm, and the two companies, superficially very similar**, were moving in very different directions -- Sun was selling servers as fast as they could manufacture them, while Apple was struggling with the baggage of their legacy workstation-centric operating system and trying (and failing) to update it with internal re-invention projects.

** - Both Apple and Sun derived the lions' share of their revenue from hardware sales, but by late 1996-early 1997, both companies were arguably far better known for their flagship software products -- MacOS and Java, respectively -- than for their hardware. In addition, both companies were seen as hardware specialists -- Apple in desktop publishing and to a lesser degree in education, Sun in server hardware -- though both also had designs on a broader base of hardware sales. Lastly, both were seen as competitors of Microsoft Corporation, despite the fact that Microsoft was not itself a hardware company -- MacOS was seen as a direct rival to Microsoft's Windows operating system, while Java was seen as a product that could eventually make operating systems like Windows (and MacOS) obsolete.

It was at this time that my friend and I had our argument, and while his side of the argument continued to look good for about another five years, in the end his side of the discussion fell apart due to nothing more complicated than an unwillingness to think beyond the current business cycle. In fact, by the end of 1996, the seeds of both companies' 2008 fortunes had already been planted -- it would simply take time for each set of seeds to bear fruit.

Apple's did so first (if you'll pardon the labored analogy). By the end of 1996, Steve Jobs had returned to Apple when then-CEO Gil Amelio decided to purchase NeXT to acquire the NeXT operating system with the intent of using that OS as the core for the new Macintosh operating system. By mid-1997, Amelio had been removed as CEO and Jobs was back, and just over a year later, Apple released the product that would signal the beginning of their comeback: the iMac. Jobs also cancelled projects that Amelio and former CEO Michael Spindler had initiated to make Apple look similar to other PC manufacturers, including a period where Apple agreed to license the Macintosh OS to third-party hardware vendors.

Sun's failure at first looked like success, as the continued Internet Boom led to massive sales of Sun Microsystem's server hardware, driving up Sun's stock price to about $250 per share. Seeing the momentum building behind their Java programming language, Sun used their profitable server hardware business to bankroll the development and maturation of the Java language, and though the company did not choose to give away ownership of the Java language, they committed to the concept of 'open source' software (though they also continued to be the expert and made most of the significant advances and improvements to the language).

By 2001, it was clear that both companies fortunes had reversed -- Apple had released MacOS X, the 'modern' operating system the company had been trying to develop for nearly a decade in different projects and flavors (Copland, Rhapsody, etc.). Apple also opened their first retail stores, ending a long-time practice of serving as supplier to small, expensive 'boutique'-style proprietors. (Apple had already opened their online store back in 1997 when the iMac was released.) Steve Jobs buried the hatchet with Microsoft, long seen as an Apple competitor, by setting long-standing lawsuits with Microsoft and announcing a partnership where Microsoft would agree to continue to produce Microsoft Office for MacOS in exchange for $150 million in investment capital. Last, but obviously not least, Apple introduced the iPod -- seen by longtime technology pundits as 'just another MP3 player', the iPod did what previous models didn't: establish a default brand and configuration in the minds of non-tech-savvy consumers, turning Apple from a commodity tech hardware company into a true consumer electronics company.

Sun, meanwhile, was just beginning to see hardship. The sudden deflation of the Internet Bubble hit Sun's hardware sales hard, as companies that had purchased large 'farms' of brand-new Sun servers declared bankruptcy and sold those same servers for pennies on the dollar to budget-conscious rivals. Unlike Apple, Sun embraced the role of Microsoft antagonist, not just via Java (which was the source of another large number of lawsuits brought against Microsoft), but through Sun's acquisition of the StarOffice office productivity suite to serve as a direct competitor to Microsoft's other flagship product, Microsoft Office. Lastly, Sun's market position as a server vendor was beginning to be challenged by competitors which a much more focused hardware strategy, specifically IBM, Hewlett-Packard, and Dell.

Since 2005, my friend's argument has been strangely inverted, with Sun beginning to perform actions that Apple was doing or had already done in an attempt to remain profitable. Sun settled its long-standing legal arguments with Microsoft, supplanted its proprietary SPARC-based workstations and servers with products using Intel Corporation's CPUs, and even began aggressively seeking new markets to enter. Unfortunately, the company has had just a handful of profitable quarters since that time and, as noted above, has been hemorrhaging money and stock value so badly that many think that Sun is ripe for a takeover bid. Yet the most significant thing of value left in Sun's portfolio, the Java programming language, was simply given away by company executives in late 2006 when they chose to license the language and related code under the terms of the GNU Public License. Though Sun may have intended to prevent Java from being swallowed up and buried by a hostile takeover, the reality is that even Sun, the creators of Java, will now have difficulty turning a profit from it.

The two companies have one final, interesting similarity -- as of mid-2007, the two companies had very similar numbers of employees: Apple employed approximately 32,000 workers, while Sun reported having just over 33,000 employees. The similarity ends there, however -- Sun's 33,000 workers produced just $13.8 billion in revenue in 2007, and $408 million in profit over the same period, while Apple, with fewer employees, generated $32.48 billion in revenue and $4.83 billion in profits during the same period. In the first quarter of 2008, Sun posted a loss of $1.68 billion dollars, while Apple posted a record $1.58 billion profit over the same period.

The two companies are once again rapidly moving in opposite directions, and this time, it is Sun that looks like the company on the road to oblivion.

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