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Sun banks on open source for its survival

With latest restructuring, it's make-or-break time for vendor's open-source strategy

Sun Microsystems is slashing its workforce on a scale typically reserved for automakers, announcing Friday that it plans to lay off up to 6,000 employees -- a restructuring that comes on top of earlier cutbacks made over the past year.

In moving to cut its current workforce by between 15 and 18 percent, Sun is trying to stay ahead of a falling knife. And Friday's announcement made it clear that Sun officials are banking on the company's open-source strategy to help it pull through.

Sun finished its fiscal first quarter, which ended in September, with a US$1.7 billion loss on US$3 billion in revenue, down 7.1 percent from the same period last year. The company needs to boost its sales at the same time that the growth of worldwide IT spending is slowing down.

But in the current economic climate, "it will be difficult to depend on increasing sales," said Charles King, an analyst at Pund-IT. "The only way the company will achieve profitability of any sort is to deeply slash expenses. And the easiest way to achieve that goal is to start laying off people."

Nonetheless, Sun CEO Jonathan Schwartz contended that the economic downturn will work to his company's advantage and vindicate its open-source moves, which include the release of the OpenSolaris operating system and the acquisition earlier this year of database vendor MySQL AB.

"We are preconfigured for the downturn," Schwartz said in an interview with Computerworld last month. He claimed that users will be more inclined to try open-source products such as MySQL, OpenSolaris and Sun's GlassFish application server during a time of economic stress.

But the company itself wasn't preconfigured for such a sharp downturn -- a message that Schwartz is sending with the internal restructuring announced today. In addition to the planned layoffs, Sun shook up its software organization, creating two new business groups -- one focused on application platform software, the other on cloud computing and developer technologies. Sun also folded its systems platform software products, including Solaris and its virtualization tools, into its systems group.

Schwartz said in a statement that the software realignment was designed to "accelerate our delivery of key open-source platform innovations." Sun's announcement added that the new organizational structure "is a recognition of the comprehensive role software plays in the company's growth strategy." And it said that as part of the changes, Rich Green, who was Sun's executive vice president of software, "has chosen to leave the company."

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Jean Bozman, an analyst at market research firm IDC, said that Schwartz has intended for Sun to be the category leader in open source for enterprise users. Sun officials hope to make money off of open-source technologies through technical support contracts and by selling hardware to users, Bozman said. But, she added, "clearly they weren't feeling that they were getting the maximum leverage they could" from the open-source products.

One of the risks for Sun is how the job cuts will affect its financial performance and its ability to service customers. The company had 34,900 employees as of the end of its last fiscal year in June. The new layoffs will eliminate between 5,000 and 6,000 workers over the next 12 months; combined with earlier cutbacks, that will leave Sun with 27,000 to 28,000 employees, for a head count reduction of as much as 21 percent since mid-2007.

Sun hopes that the layoffs will save up to US$800 million in expenses annually. But when a company cuts this many people, "if it's not done properly, the effects on the company could be deleterious -- awful," King said.

Stepping back, though, Sun still has deep resources. It has US$3 billion in cash on hand, and its revenue for the fiscal year that ended last June amounted to nearly US$14 billion. And although the company is seeing a slowdown in sales of its high-end enterprise servers, its line of chip multithreading systems, based on the UltraSparc T2 processor, has been selling well.