Can Eco-responsibility Make Sun Shine

SIJ Feature

Courtesy Sun Microsystems

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Sun Microsystems CEO Scott McNealy says the 2-inch-square Niagara processor is at the heart of his company’s new environmental initiative, an ambitious effort to boost profits.

Can Eco-Responsibility make Sun shine? BY C ELESTE LE C OMPTE

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hen times were good in the dot-com era, they were very good for Sun Microsystems (Nasdaq: SUNW). The fast-paced, venture capital-fueled companies were building out data centers and filling them chock full of Sun’s expensive, high-end Web servers. But the days were numbered, and when venture capital ran out, many of Sun’s customers folded. The company’s stock tumbled steadily from pinnacle prices of more than $100 to today, where shares have been trading steadily at about $4. Now, the company is gearing up to stage a comeback, and CEO Scott McNealy says the key is the company’s new Eco-Responsibility Initiative. While the dot-com crash goes a long way toward explaining how Sun fell so far, so fast, it doesn’t explain why Sun hasn’t been able to pull out much of a recovery. Another part of Sun’s woes — perhaps the most damaging over the long run — is related to broader shifts in technology demand. Sun’s core market is in providing products and services for network computing,

where individual computers are connected over a network, and servers, powerful centralized computers, store information and run different programs and operations. The server industry is a $50 billion market and comprises a lot of different products, prices of which range from $1,000 to more than $1 million. The portion of the market where Sun has made its business, however, has been slowly declining over the last several years, according to David Wong, an analyst with A.G. Edwards Inc. (NYSE: AGE). Perhaps to make up for losses in its server market, Sun has embarked on several high-risk initiatives designed to turn the company’s poor revenue performance around. Sun has sunk approximately 15 percent of its revenue into research and development activities — compared with just 5 percent spent by competitors such as Microsoft (Nasdaq: MSFT), IBM (NYSE: IBM) and Cisco (Nasdaq: CSCO), according to Brent Bracelin, an analyst with Pacific Securities. In terms of actual dollars, Sun isn’t outspending its competitors, but Wall Street has punished the company for “overinvesting,” says Bracelin. Worse

yet, Sun hasn’t produced much of a payoff. Now, Sun says it’s set to enjoy a long-awaited return on investment, with the roll out of its latest product line and the Eco-Responsibility Initiative.

Changing the conversation Sun’s Eco-Responsibility Initiative comprises three main strategies: improving the efficiency of server technology, driving a shift from personal computers to networked displays called “thin clients,” and emphasizing reduced resource use in its own operations. “First and foremost, we believe that energy, space and innovation matter,” says Ed Hunter, a senior technical advisor for Sun. “Second, we believe that network services will rule, and that volume always wins. That’s the big picture for Sun.” Although a key new product, the latest Sun Fire server, headlines the initiative, Hunter readily admits the Eco-Responsibility Initiative ties together a lot of products and services Sun has already introduced. “The development of Eco-Responsible products

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is a logical extension of Sun’s current design philosophy,” Hunter says. That may be, but the timing appears right, too. With oil prices high, it makes economic sense, McNealy said at an event launching the EcoResponsibility Initiative. “People wonder, what are you up here for, what are you doing?,” he said. “Well, we’re here to make money. Understand that. But we think we can do that in a way that pays off not only for our shareholders but for everybody on the planet.” Getting technology users to talk about energy hasn’t been hard. Energy efficiency is at the heart of Sun’s Eco-Responsibility Initiative, and new products, services, and company policies wear it on their sleeves. Sun’s strategy taps into many IT managers concerns about energy use, data center design, and spiraling energy costs. Faster processors take more power, and more power makes the machines hotter, which requires more cooling for buildings where servers are housed. As a result, data centers today can use 50 to 60 watts per square foot, according to Jonathon Koomey, a staff scientist at Lawrence Berkeley National Laboratories, compared with 5 to 8 watts per square foot in the average office building. Individual companies are feeling the pinch of higher energy prices and looking to make cuts in their consumption.

Sun’s marquee products for the EcoResponsibility Initiative are the Sun Fire T1000 and T2000 servers. Both models use a processor, nicknamed Niagara, that reportedly uses just 56 watts of power — less than a standard light bulb, and just half that of Intel’s competing Xeon processor, according to Sun. Niagara servers also have a “wow” factor Sun believes will lure new buyers. Using what’s called “multi-threaded” design, Niagara can perform as many as 32 separate tasks at a time. By comparison, Intel’s Xeon processor can only handle four. What remains to be seen is whether Niagara can perform the tasks as quickly, critics say. To the uninitiated, it may sound like a bunch of boring tech talk, but the market is listening — and it seems optimistic. In early December, Sun announced that eBay’s (Nasdaq: EBAY) PayPal division is piloting the servers, and there are substantial rumors that Google (Nasdaq: GOOG) is set to purchase Niagara-based servers as well. If Niagara takes off the way Sun hopes, the environmental impact could be substantial, says Hunter. “We’re talking about saving considerable amounts of power,” he says. If half of the entry servers (those priced under $100,000) sold in the last three years were replaced with the Niagara processors, “over 11 million tons of CO2 emissions, or the equivalent of that emitted by about 1

Oregon Environmental Council FORUM

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EC is pleased to present the 11th season of the Forum for Business and the Environment. This series is unique in its goal of engaging Oregon’s business leaders in a dialogue on emerging triple bottom line industries and public policy strategies. The 2006 season will highlight the integration of green thinking into various business stages: from inception to marketing, job creation to operations, and from energy usage to manufacturing.

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Creativity and Sustainability:The Future of Economic Development SPEAKERS: Kirk Watson and Joe Cortright January 27, 2006 • 5:30-7:30 pm

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Oregon faces unprecedented economic challenges and competition worldwide. New research - and actual performance in the marketplace - shows that creativity, quality of life, and a focus on environmental sustainability are major forces driving economic development. Kirk Watson, former Mayor of Austin, Texas, whose work was spotlighted in Richard Florida’s The Rise of the Creative Class, and Joe Cortright, Economist, Impresa Consulting, who has been researching local and regional economic trends, will discuss their work and how Oregon may further capitalize on these developments.

million SUVs, would be eliminated each year.” But Sun’s not alone in the energy-efficiency game. Most of the major manufacturers, as well as new competitors such as Santa Clara-based P.A. Semi, have zeroed in on energy efficiency in both processors and servers. Meanwhile, Lawrence Berkeley National Laboratories, the U.S. Environmental Protection Agency and the Rocky Mountain Institute have all undertaken projects with industry partners to help minimize data center energy use through other design innovations. While Sun got a jump on competitors with its 2006 release, the proof is in the pudding, and customer response could make or break the company’s risky new strategy. In press interviews, McNealy has repeatedly acknowledged that investors won’t be convinced until customers begin buying the product and sharing their — hopefully positive — experiences. Servers are expected to ship in March 2006. “How do you change the conversation?” McNealy asks. “How do you get customers to actually think about this and actually buy it? I mean, [what] if you go invent it and nobody uses it?” Getting customers to use its products — no matter how great they might be — presents a true challenge for Sun. The company has been criticized by investors and users alike for focusing exclusively on its own, in-house products —

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F R E E C ATA L O G

Courtesy Sun Microsystems

Courtesy Lawrence Berkeley National Laboratory

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The server farm (left) at the National Energy Research Scientific Computing Center uses heavy amounts of energy — a key selling point in Sun Microsystems’ newfangled marketing efforts (right).

hardware, software, and services that work best or work exclusively with each other. While the tech industry has slowly migrated toward creating compatible components, Sun has lagged behind. Even with recently announced initiatives designed to open up its products to the marketplace, Sun is still focused on doing things the way Sun thinks they should be done, says Scott Kveton, associate director of the Open Source Lab at Oregon State University. Even if that’s good for the environment and a company’s bottom line, users are resistant to being told what’s best for them. “That’s not how people want to do it,” Kveton says. The same problem could plague what seem to be the company’s most environmentally innovative technologies.

‘The Network is the Computer’ In the late 1980s, Sun Microsystems coined its slogan, “The Network Is the Computer,” meant to communicate the company’s view of computing as a service, rather than computers as a product. The Eco-Responsibility Initiative, beyond the eye-popping efficiencies touted for Niagara attempts to re-launch the idea. “Our whole view is that people shouldn’t own computers, they should use them,” McNealy said in November. What that means is a shift away from personal computers and greater dependence on broadband networks and shared servers to provide computing power. Sun envisions a future where computing — from low-end tasks like word processing to

high-end financial services analysis and virtual modeling — is stored on highly efficient, shared servers, and accessed by logging into networkenabled thin clients. Sun calls it “Desktop over IP” (Internet protocol). Thin clients use about one-tenth of the energy required to run a standard PC, says McNealy. Sun, which uses the technology in its own offices, estimates it saves about $2.8 million dollars per year in energy costs alone, and an additional $21.2 million in other system costs. On the production side, thin clients cut raw material use by a factor of 150, according to Hunter. What’s more, thin clients let users access their desktop from any machine. The flexibility allows the company to radically change its office footprint. Nearly half of Sun’s employees can work away from the office, or in shared “hotel offices,” saving the company $300 million in real estate costs, according to Business Week online. “It’s awfully expensive to outfit, build an office, air condition it, put lighting in, all the rest of it, so that you can hang a picture of your Chihuahua on the wall and have a nice warm cozy place for that thing to be all the time,” quips McNealy. Thin clients also have the potential to extend the life of older hardware by delegating high-end processes to the networked servers. “A thin-client model could slash the number of central processing units manufactured for computers ... by allowing older or less-powerful ones to be useful for double, triple, maybe five times as long as they are now,” says Jeremy Faludi, a freelance designer and consultant based in Seattle. Sun appears to be banking on a gain in popularity for this kind of networked computing.

“As we lower the cost of network computing, you’re going to see fewer people having to hop in their cars and do things,” says McNealy. “There’s going to be more reason to have a broadband network into your home and let the network do your driving for you. So we’re pretty excited about it.” The question remains whether users will be as excited about it as Sun. In February 2005, the company introduced its Sun Grid “utility computing” service, which would provide the functions of in-house data servers over a network connection for “a buck an hour.” The first retail customer signed in November. Despite the slow start, Sun announced in June that it would spend $4.1 billion to acquire StorageTek, a data storage company. That’s a big gamble, considering it’s the last serious cash deal Sun can afford in its current financial state. While the purchase stretches Sun thinner, some analysts believe data storage has been an Achilles heel for the company. The purchase could put Sun in a better position to move forward with its long-term goal of expanding network computing — and lessening the environmental impact of its business. Better data storage may allow Sun to provide greater security for sensitive intellectual property on the Sun Grid. With that piece of the puzzle in place, Sun’s stars could be re-aligning after five years of adjustment. For now, Wall Street remains cautious. “Sun’s done a lot to help revive growth at the company, but that has not yet materialized,” says analyst Bracelin. “They’ve bet the farm, if you will, on some of these new products or initiatives. And at this point, the jury is still out whether it will pay off or not.” G

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