I got to know Steve Jobs during a period when success eluded him. When he’d left Apple, and founded NeXT Computer, Inc. In 1989, a few friends and I started a software company, Lighthouse Design, that devoted itself to the NeXT platform. Whether any of us admitted it at the time, Lighthouse was built by a group of people for whom Steve Jobs was the gravitational center of the universe.

At Carnegie Mellon University in 1984, we’d all drained our savings (in my case, my parents’) to buy the first Macintoshes available. We followed every product launch, Steve’s departure from Apple, the founding of NeXT, the Pixar purchase. Two years out of college, I remember being at a friend’s house planning our startup, looking at the early NeXT product collateral – like the machines he’d just unveiled, the printed collateral was exquisite. The blackest black you can imagine, a perfect square. Like the engineering, it was artwork.

Where Steve went, we, and a small legion of others – employees at NeXT, as well as software developers and a very patient Japanese investor – would follow. He had an ease about him, his self-confidence was captivating. Quit your job and join the future? Why not.

When Steve made his first call to my office, I figured it was my friend Ray, pulling a prank. It wasn’t. Once Steve had my direct line (and then my home number), he freely dispensed opinions about everything we did, from product features to naming and pricing. He was a passionate user. At all hours of the day and night.

Not all the calls were pleasant. I remember one in particular, when Steve learned how we were going to price a new presentation product, $995/user. He barked that we were blowing it, we’d never get to millions of copies sold at that price. I agreed, but the problem wasn’t Lighthouse reaching millions of copies, it was NeXT’s – if you weren’t running NeXTSTEP, we couldn’t sell to you. And NeXTSTEP was selling in the thousands of units, so perhaps he should lower his pricing. We didn’t always agree.

He was remarkably loyal and supportive. I remember the day he told me how proud he was of his friend Larry, whose company had just eclipsed a billion dollars in revenue. On our walks around NeXT’s offices, Steve dispensed personal advice as freely as pricing strategy. He demonstrated the same confident ease in his personal reflections as he did in his professional perspectives. I have never met a more principled man.

Principled people are often difficult.

When the internet bubble began inflating, Lighthouse was approached by acquirers, and Steve didn’t hesitate to offer his guidance. I was disappointed we weren’t going to be joining NeXT – he wasn’t certain whether NeXT would survive. He was frustrated, but understood our choice. We spoke only seldomly thereafter.

Perhaps I’m biased by age or experience, but I don’t think my social graph is the only one to see Steve as a gravitational force. Every startup aspires to be an Apple of their field.

And every CEO I know aspires to so effectively captivate their audience -and their shareholders (and board).

For Silicon Valley, he has, in many ways, been the star around which we all orbit. His absence is disorienting. I can’t think of a better way of describing it.

Rest in peace, Steve, thank you from the bottom of our hearts.

We’re not saying much beyond “we’re focusing on the intersection of innovation and public health,” but we are starting to build out a dev and design team. So if you care about health and technology, we’d love to hear from you here.

Why are we focusing on health? It’s ultimately a personal choice for both of us. For me, perhaps the most satisfying part of my last job was seeing Sun’s technology used in ways and by people that changed the world. Whether that was inventing a new business, creating a new market or creating national infrastructure, I had infinite faith in my team and our technology, so it was easy to sell what we offered.

But the most exciting (and frankly, the largest) opportunities were those that changed lives, that changed the way you thought about or lived in the world (think eBay or Baidu). It wasn’t that I didn’t love winning SAP deals to consolidate regional bank processes, it’s that it was hard to feel an emotional bond to the outcome (especially when the banks were collapsing, and Moore’s Law was miniaturizing those wins).

Health is something different.

Everyone cares about it in a deeply personal way (it’s tough to say the same about specialized microprocessors). Mums, Dads, children, friends, loved ones, nurses, doctors, even insurance companies and governments – everyone on earth, in one form or another, cares about health and well being.

To me, that’s easy to get excited about.

And a pretty big market.

So at the risk of repetition, if you care about health and technology, we’d love to meet you here.

More to come (and with a greater frequency than once every six months, which is a story in and of itself)…

In 2003, after I unveiled a prototype Linux desktop called Project Looking Glass*, Steve called my office to let me know the graphical effects were “stepping all over Apple’s IP.” (IP = Intellectual Property = patents, trademarks and copyrights.) If we moved forward to commercialize it, “I’ll just sue you.”

My response was simple. “Steve, I was just watching your last presentation, and Keynote looks identical to Concurrence – do you own that IP?” Concurrence was a presentation product built by Lighthouse Design, a company I’d help to found and which Sun acquired in 1996. Lighthouse built applications for NeXTSTEP, the Unix based operating system whose core would become the foundation for all Mac products after Apple acquired NeXT in 1996. Steve had used Concurrence for years, and as Apple built their own presentation tool, it was obvious where they’d found inspiration. “And last I checked, MacOS is now built on Unix. I think Sun has a few OS patents, too.” Steve was silent.

And that was the last I heard on the topic. Although we ended up abandoning Looking Glass, Steve’s threat didn’t figure into our decision (the last thing enterprises wanted was a new desktop – in hindsight, exactly the wrong audience to poll (we should’ve been asking developers, not CIO’s)).

Bluster and Threat (Often Credible)

As in life, bluster and threat are commonplace in business – especially the technology business. So that interaction was good preparation for a later meeting with Bill Gates and Steve Ballmer. They’d flown in over a weekend to meet with Scott McNealy, Sun’s then CEO – who asked me and Greg Papadopoulos (Sun’s CTO) to accompany him. As we sat down in our Menlo Park conference room, Bill skipped the small talk, and went straight to the point, “Microsoft owns the office productivity market, and our patents read all over OpenOffice.” OpenOffice is a free office productivity suite found on tens of millions of desktops worldwide. It’s a tremendous brand ambassador for its owner – it also limits the appeal of Microsoft Office to businesses and those forced to pirate it. Bill was delivering a slightly more sophisticated variant of the threat Steve had made, but he had a different solution in mind. “We’re happy to get you under license.” That was code for “We’ll go away if you pay us a royalty for every download” – the digital version of a protection racket.

Royalty bearing free software? Jumbo shrimp. (Oxymoron.)

But fearing this was on the agenda, we were prepared for the meeting. Microsoft is no stranger to imitating successful products, then leveraging their distribution power to eliminate a competitive threat – from tablet computing to search engines, their inspiration is often obvious (I’m trying to like Bing, I really am). So when they created their web application platform, .NET, it was obvious their designers had been staring at Java – which was exactly my retort. “We’ve looked at .NET, and you’re trampling all over a huge number of Java patents. So what will you pay us for every copy of Windows?” Bill explained the software business was all about building variable revenue streams from a fixed engineering cost base, so royalties didn’t fit with their model… which is to say, it was a short meeting.

I understand the value of patents – offensively and, more importantly, for defensive purposes. Sun had a treasure trove of some of the internet’s most valuable patents – ranging from search to microelectronics – so no one in the technology industry could come after us without fearing an expensive counter assault. And there’s no defense like an obvious offense.

But for a technology company, going on offense with software patents seems like an act of desperation, relying on the courts instead of the marketplace. See Nokia’s suit against Apple for a parallel example of frivolous litigation – it hasn’t slowed iPhone momentum (I’d argue it accelerated it). So I wonder who will be first to claim Apple’s iPad is stepping on their IP… perhaps those that own the carcass of the tablet computing pioneer Go Corp.? Except that would be AT&T. Hm.

Having watched this movie play out many times, suing a competitor typically makes them more relevant, not less. Developers I know aren’t getting less interested in Google’s Android platform, they’re getting more interested – Apple’s actions are enhancing that interest.

Sun was sued numerous times – most big companies are sued almost constantly by entities or actors whose sole focus is suing others. Groups with no business focus other than litigating patent suits are affectionately known as trolls – pure litigation entities. (For good humor, read this, an application to patent the act of trolling. If granted, it would give the patent holder a reciprocal claim against a patent troll.)

The most egregious of such suits was filed against Sun by Kodak (yes, the film photography people).

Egregious, because Kodak had acquired a patent from a defunct computer maker (Wang) for the exclusive purpose of suing Sun over an esoteric technology, Java Remote Method Invocation (“Java RMI” – not exactly the first thing that comes to mind when you hear “Kodak”). Given how immature Kodak’s technology business was (they were just starting out in the digital world), we had little we could respond with – I suppose we could’ve hunted for a Wang-like opportunity to hit at their core, but Kodak was a customer, which certainly complicated things, and the time and expense involved would’ve been prohibitive.

Their case was eventually heard before a jury in Rochester, New York, famous for being home to… the Eastman Kodak company. Lo and behold, the local jury decided Sun should pay Kodak more than a hundred million dollars. So here’s something I could never say as Sun’s CEO.

I prefer SmugMug.

__________________________

*To see a Looking Glass demo, click here - it starts at the ~2:00 minute mark.

As a CEO, you have an obvious and explicit agenda in nearly all communications – drive awareness for the company, its products and ideas. The same applies across internal and external audiences (the notion you can separate audiences is comically antiquated – ubiquitous social media renders listeners just as powerful as speakers).

As an individual, my agenda isn’t nearly so clear (at least one reason it’s taken me so long to post a first entry). On the one hand, I’d like to put context around some of the decisions I faced at Sun. There was almost always more going on behind the scenes than was obvious to the outside world, and some of that backdrop might be interesting.

In addition, I’d like to put my personal experiences in context. I’ve reconciled myself to the reality that such insights may only be of interest to my mother, but that seems like an acceptable downside – from which I’ll endeavor to protect you by liberal usage of the personal tag. If it’s interesting, have at it. If not, you’re in charge of ignoring it. (And for an interesting personal blog, may I recommend Mike Dillon’s – he was formerly Sun’s General Counsel (the top lawyer), and he’s decided to bicycle across the US to clear his head.)

As for those that read my blog in one of the eleven languages into which Sun translated it… I’m not sure I have an easy answer just yet. If you’ve got a suggestion or idea, feel free to leave it in the comment section.

More to come.

The more interesting stuff was What I Couldn’t Say. And that’s what this blog (and maybe a book) is going to be about.

Mostly.

You’ve probably seen the news – the Sun/Oracle transaction has closed. With the passing of that milestone, I can once again speak freely.

Having had nine months to accelerate down the runway, there’s not a doubt in my mind Oracle’s takeoff and ascent will be fast and dramatic. I wish the combined entity the best of luck, and have enormous confidence in the opportunity.

Greg Papadopoulos, one of the brightest people I’ve ever known, once made a very interesting statement – all technology ultimately becomes a fashion item. It was true for timekeeping, and it’s definitely true of computing and telecommunications. To that law, I’d like to add a simple corollary: the technology industry only gets more interesting. It’s been true my entire life.

As for where life takes me next, you should follow me via Twitter at openjonathan to find out. I’ll also be rehosting this blog (and again, stay tuned to Twitter by following me here). I expect to do my part to keep things interesting.

Thank you for your support and commitment. I wish you all the best of luck building, taking advantage of (and likely wearing) the future!

Jonathan Schwartz

CEO, Sun Microsystems, Inc.

A Wholly Owned Subsidiary of Oracle Corporation.

But not all Java runtimes are the same. For most devices, from RIM’s Blackberry to Sony’s Blu-Ray DVD players, original equipment manufacturers (known as “OEM’s”) license core Java technology and brand from Sun, and build their own Java runtime. Although we’re moving to help OEM’s with more pre-built technology, the only runtimes currently that come direct from Sun are those running on Windows PC’s.
And oddly enough, that’s made the Windows Java runtime our most profitable Java platform. I thought I’d provide some insight into that business here, and then introduce a project we’re planning to unveil at this year’s JavaOne, known internally as Project Vector.
As a business model, traffic for traffic’s sake isn’t that interesting (but never confuse traffic with adoption). Free internet traffic is only interesting if a third party is willing to pay to drive distribution of their content to your audience – from highway billboards to internet runtimes, businesses will pay for exposure and distribution to drive their business, whether through branding/advertising, delivering news, or selling movies or retail products. “Getting distribution” used to mean getting access to bricks and mortar distributors in shopping malls – nowadays, it means having another company propel your content into the market via the internet.
Now to that point, a few years ago, we called our friends at one of the world’s largest search companies (you can guess who), to talk about helping them with software distribution – because of Java’s ubiquity, we had a greater capacity than almost anyone to distribute software to the Windows installed base. We signed a contract through which we’d make their toolbar optionally available to our audience via the Java update mechanism. They paid us a much appreciated fee, which increased dramatically when we renegotiated the contract a year later. Distribution was becoming quite valuable to us and to them – and given the “take” rates, or the rates at which consumers were choosing to install new content, the Java audience saw value in the new application.

The year following, the revenue increased dramatically again – when an aspiring search company (again, you can figure out who) outbid our first partner to place their toolbar in front of Java users (this time, limited to the US only). Toolbars, it turns out, are a significant driver of search traffic – and the billions of Java runtimes in the market were a clear means of driving value and opportunity.
The revenues to Sun were also getting big enough for us to think about building a more formal business around Java’s distribution power – to make it available to the entire Java community, not simply one or two search companies on yearly contracts.
And that’s what Project Vector is designed to deliver – Vector is a network service to connect companies of all sizes and types to the roughly one billion Java users all over the world. Vector (which we’ll likely rename the Java Store), has the potential to deliver the world’s largest audience to developers and businesses leveraging Java and JavaFX. What kinds of companies might be interested?
If you talk to a Fortune 500 company or a startup, pretty much everyone craves access to consumers – which is the one problem we’ve solved with the Java platform. Most folks don’t think of Sun as a consumer company, and largely we’re not, but our runtimes reach more consumers than just about any other company on earth. That ubiquity has obvious value to search companies, but it’s also quite valuable to banks looking to sign up new accounts, sports franchises looking for new viewers, media companies and news organizations looking for new subscribers – basically, any Java developer looking to escape the browser to reach a billion or so consumers.
How will it work? Candidate applications will be submitted via a simple web site, evaluated by Sun for safety and content, then presented under free or fee terms to the broad Java audience via our update mechanism. Over time, developers will bid for position on our storefront, and the relationships won’t be exclusive (as they have been for search). As with other app stores, Sun will charge for distribution – but unlike other app stores, whose audiences are tiny, measured in the millions or tens of millions, ours will have what we estimate to be approximately a billion users. That’s clearly a lot of traffic, and will position the Java App Store as having just about the world’s largest audience.

This creates opportunity for everyone in the developer community – and specifically, for any developer (even those not using Java/JavaFX) seeking to reach beyond the browser to create a durable relationship with their customers (and btw, don’t forget to join us for CommunityOne – the day before JavaOne, June 1st, same location – click the graphic to learn more). Remember, when apps are distributed through the Java Store, they’re distributed directly to the desktop – JavaFX enables developers, businesses and content owners to bypass potentially hostile browsers.
For details on how Vector will work, when it’ll be available, how to submit your content or application – alongside insights into Project Vector’s technology, roadmap, features and business model, come see us at JavaOne… In the interim, you can learn more about the latest JavaFX news at sun.com/javafx, and download the latest JavaFX design tools at netbeans.org.
And although we obviously don’t comment on rumors, we might even have a special guest or two at JavaOne.
See you in San Francsico (or on the webcast…)!

1. Technology Adoption
2. Commercial Innovation
3. Efficiently Connecting Adoption and Commercial Opportunity.

I’m hoping you’ve got a clear picture surrounding the first of these two priorities – how and where we drive software adoption, and focus our commercial efforts.

So now I’d like to talk about the linkages – while also addressing one of our biggest strategic challenges, our scale.

Selling Scale
First, why is scale a challenge for Sun? To be clear, I’m not talking about purchasing scale. As I’ve said before, we use innovation to drive product profitability, not simply bulk purchasing leverage. The scale to which I’m referring is selling and marketing scale. With Sun’s current products, we could be selling to twice the number of customers we currently serve – our products appeal to an audience far greater than our customer base. But we’re limited by our size – our sales and partner force has a tenth the resources of our biggest peers.

This is a particularly tough problem to solve in the midst of an economic downturn. Growing customers while reducing employees is an obvious challenge.

But it’s also a huge opportunity. We have fewer than 100,000 customers worldwide. Using just one example, there are more than 10,000,000 MySQL users globally – reaching an additional 1% of them could more than double our customer base. The question is obviously how – we know we’re relevant to those users, but we and our partners can’t very well put sales reps on airplanes to visit all 10,000,000.

To answer that question, I’d like to examine what may seem like a tangential topic… the search business.

Discovering Intent
Now, why is the search business so valuable? Because it’s an exceptionally efficient means of harvesting intentionality – if a consumer is searching for “flights to Cairo,” the odds are good she’s in the market for a trip to Egypt. That intent represents a ton of value for the airlines, hotel chains and car rental companies that serve travelers to Egypt. Whoever first recognizes that intent can broker a relationship between the traveler and those businesses, and charge a healthy toll for the privilege (that’s the heart of on-line advertising). A discount airfare to Cairo, presented alongside the results of a “flights to Cairo” search, has a far higher likelihood of generating a ticket purchase than an unqualified billboard or ad in a newspaper. It’s easier to find needles in haystacks when the haystacks are sorted by needle count.

Now I want you to think about the model I’ve described in these last few entries – Sun’s business starts with exceptionally high volume free software adoption, literally millions of assets each day. What does that have to do with search?

Well, what is a customer telling us when they download software? Depending upon what they’re downloading, they’re telling us about what they value. If you’re downloading MySQL or ZFS, you’re more than likely storing data. If you’re downloading OpenOffice.org, you’re likely to create, save and maybe print documents. If you download VirtualBox, our virtualization software, you’re telling us you work with multiple operating systems. An enormous stream of this kind of data funnels into Sun every day – signaling intent from customers spanning every corner of the world’s technology market. That’s the foundation of our analytical marketing activities.

Individuals and organizations opt-in to tell Sun, by what they download, what they’re intending to do – which gives Sun a unique vantage point surrounding what comes next. If your company is downloading Lustre, the leading parallel file system for supercomputing, the odds are good you’re on your way to building a supercomputing facility. Sun uniquely optimizes our solutions around Lustre, and we target those offers to an obviously interested user community.
This is one reason we’ve been growing in the supercomputing market. We use software innovation to drive preference for Lustre – the majority of top supercomputing sites now use it. We target our product and service development to optimize for facilities using Lustre. And we target our selling and marketing activities around users that identify themselves to us – by downloading Lustre, or whitepapers and content related to it.

But as I’ve said, the majority of free software users aren’t going to be building million dollar supercomputers, nor will they be issuing million dollar software purchase orders. And therein lies a new opportunity – one that helps us address our scaling challenges, as well.

Introducing Sun’s Cloud
That opportunity is for Sun’s Cloud – which we just announced today – to deliver commercial network services to the entire free software community.

Let’s start with what we announced today.

This morning, Dave Douglas, the SVP of our Cloud Computing business, announced we’re building the Sun Cloud, atop open source platforms – from ZFS and Crossbow, to MySQL and Glassfish. With more than 4,000 developers hard at work on these enabling elements, and a twenty year history of network scale software innovation, we’re very comfortable with our technology lead. By building on open source, we’re also able to radically reduce our costs by avoiding proprietary storage and networking products.

Second, we announced the API’s and file formats for Sun’s Cloud will all be open, delivered under a Creative Commons License. That means developers can freely stitch our and their cloud services into mass market products, without fear of lock-in or litigation from the emerging proprietary cloud vendors.

Third, unlike our peers, we also announced our cloud will be available for deployment behind corporate firewalls – that we’ll commercialize our public cloud by instantiating it in private datacenters for those customers who can’t, due to regulation, security or business constraints, use a public cloud. We recognize that workloads subject to fiduciary duty or regulatory scrutiny won’t move to public clouds – if you can’t move to the cloud, we’ll move the cloud to you.

The Developing Cloud
How will developers use the cloud? Let me give you a very basic example – inside Sun, we’re just now rolling out a version of OpenOffice extended for the cloud. If you take a look at the File menu in this picture, you’ll see menu items that don’t exist in your version -

but will exist in Sun’s distribution. “Save to Cloud,” and “Open From Cloud…” will enable OpenOffice users to use our public cloud to store and retrieve documents from the network, rather than their PC. We’re in beta deployment inside Sun as we speak, and with around 3,000,000 new users joining the OpenOffice community every week, the opportunity to deliver this as a public service, to nearly 200,000,000 users, adn their employers, is really exciting.

The same applies to, say, VirtualBox – our desktop virtualization product, used by millions of users across the world. VB users will see a new feature later this year, offering an upload service to those wishing to archive or run multiple OS/application stacks – in Sun’s Cloud. Those users have already told us they run multiple OS’s – now that we know their intent, delivering a cloud to add value is a simple step forward. The same will apply to Glassfish and NetBeans, whose adoption helps us discover and recruit application developers – who might have a similar interest in running and/or storing apps in the cloud.

So in addition to offering the basic infrastructure services developers have come to expect (storage, compute, bandwidth), we’ll be bringing tens of millions of free software users a library of cloud services and design patterns – designed to enhance the value they derive from the underlying software, while encouraging community development around open clouds. And all this will be based on what users have already told us they’re interested in.

The Network is the Computer
To me, this is the embodiment of Sun’s vision statement, the Network is the Computer. The breadth and quality of Sun’s open source software is well known, and has created a user community that numbers in the hundreds of millions across the globe. The evolution of Sun’s cloud and cloud services, from remote storage to remote execution, will allow us to grow our market, and the value we deliver to customers – even in, and perhaps amplified by the economic downturn. Clouds are just as interesting to students and startups as they are to Fortune 500 customers. If you’re interested in Sun’s Cloud, just head over to sun.com/cloud.

The network is the computer has always been one of the most powerful statements describing the future of the technology we build. For the first time, we expect to translate that mission statement to our business model, investing in the free software community to grow our market, and leveraging the network to grow the value we deliver – to a market, and partner community, far larger than Sun.

And in that connection between adoption and commercial opportunity, we see near limitless opportunity, measured only by the scale of adoption we can achieve in a world where bandwidth is as pervasive as electricity, and free software adoption continues to accelerate.

With that said, this brings to a close this discussion of who Sun is, and where we’re headed. I hope it’s been useful. We’re a very simple business, we strive to do three basic things. To drive free software across the world, both because it’s good for the planet and innovation, and it’s good for our business. Second, to deliver the world’s most compelling technologies to captivate developers and deployers, alike. And finally, to put those assets to work in creating opportunities in the cloud, for our customers, our partners and for Sun, as well.

Thank you for your time and attention, I’ll see you next time.

1. Technology Adoption
2. Commercial Innovation
3. Efficiently Connecting 1. and 2.

This entry focuses on the second, Commercial Innovation, and reviews our core revenue products, services and strategies.

By now, you understand Sun’s approach to growing the market – driving adoption of key technologies drives Sun’s addressable market. Once you’re using one of our fundamental technologies, Sun’s innovations focused on those technologies are relevant to you. The beauty of free distribution is you don’t have to pick customers, they pick you.

Three very valuable markets emerge from this adoption. I’ll focus on the first two here, the products and services we sell.

The first market is obvious. Software isn’t downloaded onto air.

Systems Innovations
There’s always some system platform underneath software – sure, it might be a laptop in a dorm room*, but it’s just as likely to be into a Fortune 500 company, attached to servers, storage and networking equipment. All told, this datacenter systems market is more than $150b annually.

And in this datacenter market we build exceptional systems – screaming fast entry level servers, all the way up to the most efficient mainframe class systems. We build super fast storage, from our new flash based platforms to eco-efficient tape and archive solutions. We also build the world’s fastest networking switches, powering the planet’s largest supercomputers. We cover the entire spectrum, and work with the smartest partners in the industry to serve customers across the globe. Although we focus on our own technologies, like Java, MySQL and Lustre, we also optimize for VMware, Microsoft’s Windows and we’re generally recognized to run Oracle better than anyone on the planet.

Now, you heard me call these our Systems products, not just hardware products. These systems are obviously more than just naked components, they’re engineered with remote management and monitoring, component redundancy, integrated virtualization, and on board storage and networking. That’s why our margins are higher than the industry’s***. I’m very proud of our Systems team, they are the most talented platform engineers on earth, and they earn consistently stellar reviews.

But where’s this first market headed? Here’s where it’s going to get interesting.

Datacenter Systems Convergence – Who Plays? Wins?
As I’ve said before, general purpose microprocessors and operating systems are now fast enough to eliminate the need for special purpose devices. That means you can build a router out of a server – notice you cannot build a server out of a router, try as hard as you like. The same applies to storage devices.

To demonstrate this point, we now build our entire line of storage systems from general purpose server parts, including Solaris and ZFS, our open source file system. This allows us to innovate in software, where others have to build custom silicon or add cost. We are planning a similar line of networking platforms, based around the silicon and software you can already find in our portfolio.

At the heart of this convergence is Solaris – enabled by technologies such as ZFS (around which we’re building our entire storage line), and Crossbow (around which you’ll see us build some very compelling networking products). Technologists interested in ZFS and Crossbow can visit OpenSolaris.org, or request an OpenSolaris CD (click the CD image).

I’ve provided a picture here to make the point – these three industries (servers, storage and networking), are converging, driven by the raw performance of the underlying server operating system and microprocessor.

That means these adjacent markets are all open to Sun and the Solaris community. Leveraging inexpensive, general purpose components is one big advantage for us, but there are others – using a general purpose OS allows us to easily embrace specialized components (from flash memory to GPU’s), or adapt to new storage or networking protocols entirely in software. The underlying OS and server are so fast, these extensions and enhancements are simple feature updates, and ones we can leverage across servers, and storage and networking.

This isn’t to say the networking or storage companies don’t have their own operating systems. They do, but in both instances, they’re proprietary, have tiny volumes, and despite paying lip service to open standards and the Linux community, their core operating software is unavailable to developers, it’s truly proprietary. Their niche OS’s also lack cross industry support, which is why our Solaris OEM agreements with IBM, Dell, Intel, Fujitsu and HP are so important to our end customers – they know they’ll never be locked in. Today’s storage and networking vendors remind me of the server vendors in the late 1990′s – with expensive software bolted to expensive hardware. Ultimately forced open by innovation.

At Sun, open source isn’t for servers. Open source is for datacenters.

Where’s the Money?
Let’s also look at the financial backdrop to this convergence. For these networking and storage vendors, entering the server market means suffering profit degradation – the server industry is vastly more competitive than the storage and networking marketplace.

On the other hand, as Sun grows into the storage and networking markets, we’re thrilled with higher profit margins. We’re unique among platform vendors in being able to deliver Servers, Storage, Networking and Virtualization on our own terms, very well integrated and at our own prices. How will we differentiate against our peers?

Simple. Integration, innovation, and as a result of building atop open source and commodity components, we are the low cost supplier. They, on the other hand, will be forced into all kinds of contorted partnerships and complex reselling arrangements. They may ship the boxes, but they won’t control the platform software – or profit streams.

How is our Systems business doing? The portions of this business sensitive to software adoption, primarily the low end of all these products, is doing quite well, growing double digits**. The weakness in our Systems business is really focused on the high end. This reflects really two things – the first is the deferrability of high end system purchases. Our high end business was up 20% a little over a year ago, it was down more than 20% in the December quarter of 2008 – across the industry, customers are holding off on big ticket purchases.

The second, and arguably more important headwind was a decision made back in the 1990′s to cancel Solaris on Intel, in the belief it would protect Sun’s SPARC hardware business. Conversely, that mistake destroyed a generation of Solaris developers, and accelerated the rise of alternatives to traditional SPARC hardware. And now you understand why we prioritize developers – they are the seeds from which great forests grow. If you don’t water the roots, the trees wither.

But how do you make money giving software away to developers? Well, let’s switch gears, and talk about Software and Services.

When Free is Too Expensive
One of my favorite customer stories relates to an American company that did nearly 30% of its yearly revenue on Christmas Day. They were a mobile phone company, whose handsets appeared under Christmas trees, opened en masse and provisioned on the internet within about a 48 hour period. When we won the bid to supply their datacenter, their CIO gave me the purchase order on the condition I gave him my home phone number. He said, “If I have any issues on Christmas, I want you on the phone making sure every resource available is solving the problem.” I happily provided it (and then made sure I had my direct staff’s home numbers). Christmas came and went, no problems at all.

A year later, he was issuing a purchase order to Sun for several of our software products. To have a little fun with him (and the Sun sales rep), I told him before he passed me the purchase order that the products were all open source, freely available for download.

He looked at me, then at his rep, and said “What? Then why am I paying you a million dollars?” I responded, “You can absolutely run it for free. You just can’t call me on Christmas day, you’ll be on your own.” He gave me the PO. At the scale he was running, the cost of downtime dwarfed the cost of the license and support.

Numerically, most developers and technology users have more time than money. Most readers of this blog are happy to run unsupported software, and we are very happy to supply it. For a far smaller population, the price of downtime radically exceeds the price of a license or support – for some, the cost of downtime is measured in millions per minute. If you’re tracking packages or fleets of aircraft, running an emergency response network or a trading floor, you almost always have more money than time. And that’s our business model, we offer utterly exceptional service, support and enterprise technologies to those that have more money than time. It’s a good business.

All in/all up, our Software business is among the fastest growing businesses at Sun. I’ve attached our latest financial summary at the end of this blog. We span network identity (built with the OpenDS community), application infrastructure (biult with Glassfish and OpenESB), data management (built with MySQL, ZFS and Lustre), embedded software (such as Java, and the emerging JavaFX), alongside our core operating system and virtualization software (Solaris, OpenSolaris and VirtualBox). These open source platforms generate, alongside the services attached to them, over a billion dollars a year, making Sun by far and away the world’s largest open source software company. (For those that continue to ask if we make money with Java, the answer is yes, it’s on a ramp to hit about $250m this year – one of our best businesses – and that’s just Java on consumer devices, excluding servers).

Every day, these products are being adopted globally, driving university curriculum, corporate trials and design wins, influencing skills, even supporting Presidential campaigns. We know not every download yields revenue or users, but they do yield awareness and trials – a small, but intensely valuable portion of which yields revenue and profit. Our sales reps see the purchase orders at the point of value, not at the point of download. The revenue’s recognized over the period of the Service contract – a business model the rest of the industry, at least for mass market products, will inevitably adopt. Fighting free and open software, like fighting free news or free search, is like fighting gravity – and btw, gravity gets a lot stronger during economic downturns.

Conclusion
And in a nutshell, that’s how we monetize adoption – with targeted, high value innovations.

We deliver the world’s most effective and efficient Systems portfolio, spanning x86 and SPARC servers, storage and networking. And the world’s most appealing Software and Services products, spanning embedded software to high performance file systems.

We call all these products network innovations. I know that defies industry categorization, but that’s what innovation’s all about, defying categorization.

I’ve only touched on two of the three opportunities opened by mass adoption. And with that as a teaser, I invite you to return for the final blog entry, talking about what might be the most valuable of them all – a market enabled by the innovations described above, and set to transform the entire marketplace. Embodying the phrase, The Network is the Computer.

See you then.

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* and before you dismiss those users, some of the world’s biggest internet companies/datacenters were started on laptops in dorm rooms… a trend I expect to accelerate.

** Sun’s x86 systems business, for example, grew over 11% last quarter, when both HP and IBM’s comparable businesses shrank in double digits. For those wondering “how do you differentiate?”, just ask our customers.

*** Compared to other industry standard server vendors.