Not A Moment Too Soon: Sun Microsystems' Scott McNealy Passes Baton to Jonathan Schwartz

After 22 years at the helm, Scott McNealy, hockey-playing CEO of Sun Microsystems, has stepped down and passed the baton to Jonathan Swartz, the bespectackled, ponytailed COO-blogger who charmed an industry and brought great karma to the once proud DOT in DOT-COM. (Think they regret that ad campaign?)

eWeek.com has the rundown for us:

"The time is right," McNealy said. "Our product line is fixed … our customers are probably happier with us than they have been in years."

President and COO Jonathan Schwartz speaks on his agenda for Sun.

McNealy will remain chairman of the board of directors, and will focus on expanding Sun's presence around the world, concentrating on such areas as the company's open-source initiatives.

McNealy also will take the role of chairman of McLean, Va., technology company Sun Federal, which works only with the U.S. government.

In addition to becoming CEO, Schwartz will also keep the title of president.

McNealy credited Schwartz, who came to Sun in 1996, with driving the turnaround at Sun, which for years stuck stubbornly with its legacy SPARC/Solaris platform even as industry demand shifted to the x86 architecture powered by Intel processors and running Windows, and in the face of the rise of the Linux operating system.

Over the past few years, Sun has embraced the open-source movement, kicking off initiatives to open-source such Sun technologies as Solaris and the new UltraSPARC T1 chip, formerly code-named Niagara, which launched in fall of 2005.

Rumors of McNealy's departure were rife before the announcement. What were some of the factors behind the decision?

At the same time, the company has undertaken a drastic revamping of its server product line, adopting Advanced Micro Devices' 64-bit Opteron processor as the tool with which to push its way into the competitive x86 market. During the earnings call, Schwartz said the company was experiencing "outstanding" growth in its Opteron-based Galaxy systems, with an annual run rate of about $400 million.

Schwartz also said he expects that number to continue to grow. "Our biggest challenge is that many of our customers still don't know that we have x64 servers," he said.

Along with the Galaxy systems, Sun also is pushing in new directions with its RISC-based servers. The company two years ago announced it was partnering with Fujitsu to continue developing a traditional SPARC line of servers while freeing up R&D funds to enable Sun to pursue other projects. The servers, powered by Fujitsu's upcoming dual-core SPARC64 "Olympus" chip and dubbed the Advanced Product Line, will start rolling out later in 2006.

Sun's UltraSPARC T1 chip features up to eight cores, each of which can run up to four instruction threads simultaneously. In addition, Sun in April of 2006 taped out the next-generation chip, the T2, which is due to appear in servers next year. Sun also is working on another RISC chip, code-named Rock, scheduled for release in 2008.

In response to an analyst's question, Schwartz said Sun going forward will be more growth-oriented, looking for new customers and new opportunities. During the past four years or so, Sun was more focused on stabilizing the company and improving the product line and winning back traditional customers—as evidenced by its highly public courting of Wall Street companies, longtime users of Sun products that had begun to migrate over to x86 platforms running Windows.

McNealy and Schwartz "have been in lockstep on a number of issues … in the last four to five years in particular," Schwartz said. Now that the work of stabilizing the company is done, Sun needs to push for growth, he said.

Sun's leadership change mirrors changes at other large technology companies. Bill Gates stepped aside at Microsoft, giving the CEO reins over to Steve Ballmer, while Michael Dell left the CEO post at his namesake company in 2004, remaining as chairman while giving control over to longtime second-in-command Kevin Rollins. Rollins handles the day-to-day operations for the computer maker, while Dell focuses more on strategy, though both still work closely with one another.

The rumors are about 22 years old for the 22 year old firm, but the best backgrounder on rationale was found at eWeek.com:

It must be tough for McNealy having the dubious honor of being the CEO most predicted to leave or be forced out of any modern-day high-tech firm, not just because of how it affects his ability to effectively run the company, but also because of the enormous impact the endless rumors must have on the thousands of Sun staff. 

So why has the rumor mill reached fever pitch on this issue yet again? There are a few primary reasons for it.

Firstly, a number of Sun executives have left the company in recent months, including John Loiacono, Sun's former executive vice president of software, who moved to a position as senior vice president of creative solutions at Adobe Systems after 20 years with Sun; Marge Breya, formerly Sun's senior vice president of marketing in global sales operations, who went to BEA Systems; and Chief Competitive Officer Shahin Khan, who joined Azul Systems.

But, on the flip side, a number of former executives have also returned to Sun, including former Chief Financial Officer Michael Lehman, who came back from retirement as Sun's CFO in February, and co-founder Andy Bechtolsheim, who now leads the design team for its Galaxy line of x86 servers.

Also back in the Sun fold are Tom Goguen, back from Apple, as vice president of operating system products; Karen Tagan-Padir, who moved back from Red Hat to lead the development of Sun's Java server software; and Peder Ulander, who left Sun in 2004 for embedded Linux specialist MontaVista, but recently rejoined the firm as vice president of software marketing.

So that essentially undermines one of the theories being floated that Sun executives are fleeing a sinking ship.

But one of the biggest questions fueling the speculation fervor is why someone like Lehman, who could become the CEO or CFO of just about any company, would come back out of retirement and off the Sun board to take exactly the same job he held before.

A former Sun executive who still has close links to the company told me that that question is what is driving most of the speculation within Sun. No one can understand why Lehman would come back unless it were to transition to a more senior position like CEO. 

He also cited as an example former Sun Chief Operating Officer Ed Zander, who left Sun and became CEO of Motorola the next month.

So, while Sun management has said Lehman is tasked with looking at how to further cut costs and make the company a leaner, nimbler and more competitive one, few are buying it. Instead many are speculating that he is actually looking at how to restructure top management and that he could potentially be McNealy's replacement.

Adding to the speculation was the prediction made in March by Mark Stahlman, a research analyst for Caris & Company, that McNealy would step down. Stahlman was widely reported as saying that when he last spoke with McNealy, he said would stay on until "the job was done," which entailed three things: re-establishing product superiority, regaining control over costs and igniting demand in a broad and balanced customer base.

"In our opinion, these three criteria have largely been met," Stahlman said. "Accordingly, we will not be surprised if McNealy does indeed decide to step down."

Maybe Ed Zander's to blame:

The latest move by Sun has been overdue since July 1, 2002—the day Ed Zander left the company. The best person to run Sun is now doing a great job at Motorola. When Zander was about to split, McNealy should have stepped aside. At Microsoft, Bill Gates did it for Steve Ballmer.

McNealy, however, didn't get the memo. The bottom line is today's successful CEOs look a lot like Hewlett-Packard CEO Mark Hurd. They stay quiet, focus on operations and the customer, get the job done and let the numbers do the talking. But Sun didn't make a move, even as industry leaders such as General Electric and Citigroup replaced flashy chief executives with the strong, relatively silent types.

In the end, McNealy was clearly too 1999 to deliver for today's technology company.

The numbers tell the tale. McNealy had to leave just to get Sun's stock price above the $5.01 closing price on Zander's last day. In after-hours trading following the announcement, Sun was comfortably above the $5 mark at $5.37. As recently as the summer of 2005, Sun shares meandered in the $3 range.

Sun apologists—those folks who love technology more than running a business—may call that comparison unfair, but consider that Sun shares used to be in the $70 range during the dot-com boom.

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Now the big question is whether Schwartz is up to the job. Will Schwartz be able to make the hard choices McNealy couldn't to please Wall Street? Will McNealy, who isn't likely to be a quiet chairman, let Schwartz make them? Is Schwartz long on technology skills but short on operating savvy?

The jury is still out and Schwartz will get his honeymoon, but you have to wonder what Sun would have looked like with Zander running the show.

eWeek.com calls McNealy the anti-Microsoft tragicomic figure:

The landscape of IT history is littered with the carcasses of companies that tried to be the one that finally brought down Microsoft: Ray Noorda's Novell, Jim Manzi's Lotus and Philippe Kahn's Borland (Larry Ellison and Oracle are still going strong).

But no one tried harder, or wanted it more, than McNealy. The Sun CEO and co-founder, who stepped away from his role today, made sticking it to Microsoft his personal Holy Grail.

Two years ago when Sun and Microsoft settled their most recent Java lawsuit, which included a public truce of sorts, I wrote that you could see the end of McNealy's reign when he couldn't make fun of "Latehorn" or the "giant hairball" that was Windows, or insult "Ballmer and Butthead" anymore. My favorite routines were always the Top 10 lists he delivered at keynote speeches.

Sun tried hard, and its vision and technology were largely superior to Microsoft's, with Java, Solaris and the SPARC processor as its key weapons. But with its eye always on Redmond, Sun never seemed to be completely focused on what it was doing.

Was trading out CEO McNealy the right move for Sun, but carried out too late?

The reality was the billions in shareholder value that vanished during McNealy's tenure. Though there have been a few recent positive blips, for the most part the company has been on a downward financial spiral since it peaked in late 1999 and early 2000, and the company again lost money in the latest quarter, reported April 24, 2006.

Sun has a capable replacement for McNealy in rising star Jonathan Schwartz. And while Schwartz certainly won't replace the barbs, and their delivery, that McNealy made famous, he is a witty guy in his own right. But the company will never see the glory of the past unless drastic changes are made.

We'll certainly find out of Schwartz has it in him to fill McNealy's shoes - my own thinking is, this change is about three (or five) years too late. 

- Arik