As I referenced in my prior entry, I’m reviewing Sun’s three major strategic imperatives, and our progress going in to next fiscal year. Our strategic imperatives, in order, are:
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.
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.
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.
* 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.