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Sun must shed light on cost strategy, say analysts

Analysts have signalled that Sun Microsystems needs to shed light on how its low-cost turnaround strategy fits in with an increasingly varied product line.

The company is making the final preparations for its first major European conference in Berlin, which starts tomorrow (Wednesday).

Although Sun has long prided itself on being a maverick player in the industry, specialising in high-end systems fitted with its Solaris operating system and Sparc processors, increased demand for cheaper, low-end servers has prompted a change in direction.

Facing mounting competition from low-end providers such as Dell and Hewlett-Packard and precipitously declining revenue, Sun has been inching toward lower-cost computing, showing off servers running Linux and Intel.

How Sun's new - and some say rather late - interest in the low-end market fits with its past emphasis in serving up more costly, high-end systems remains to be fleshed out, analysts have claimed.

When SunNetwork Berlin gets under way, the company "needs to explain their new initiatives in terms of rolling out products and show that they are really as committed to Linux as they say they are", said Illuminata analyst Gordon Haff.

However, Elie Simon, president of Sun for Europe, the Middle East and Africa, insisted the company's commitments were clear.

"Customers will buy a platform because of cost and overall performance," said Simon, adding that whether customers need powerful, high-end systems running the company's Solaris operating system or low-cost Intel-based servers, Sun can fill this range of needs.

"It's not about getting our foot in the door to sell high-end systems later on or outdoing competitors, it's about filling demand," he said.

IDC analyst Chris Ingle said Sun had to take this approach to stay in the game.

"One of the benefits of being a Sun customer is you knew what they would sell you when they came in the door. But customers started asking for these low-end systems and they had to respond," said Ingle.

This new come-one, come-all approach has been paired with an aggressive pricing initiative which, the company hopes, will fuel its market turnaround.

Last month at Comdex, Sun chief executive officer Scott McNealy announced a partnership with Advanced Micro Devices whereby Sun will roll out a series of servers based on AMD's 64-bit Opteron processors targeting the low-end x86 server market.

Sun hopes to battle this market loss by feeding Linux cravings with its new Java Desktop System. In the second major Comdex announcement, McNealy trumpeted a deal with China Standard Software to develop computers based on the Linux-based Java Desktop System.

Similar deals are expected to be hammered out in Europe in the near future, according to Simon, as the company continues to push low-cost Linux.

Grid computing is also growing faster in Europe than in North America, and the company's ability to show its agility in these areas could win it some profitable new contracts, said Simon.

But having unveiled these fresh initiatives, the company still has to clarify how its low-cost strategy will strengthen its bottom line, said analysts.

"Sun needs to show how it can get back on solid footing in the near term, not over years," said Haff.

Simon appeared well aware of this concern, admitting that the number-one question SunNetwork Berlin attendees will have coming in the door is: Are you near a turnaround? "The answer is probably, if we do a good job," he said.

Sun is banking on attracting previously untapped markets, including cash-strapped governments and smaller businesses, with its low-end offerings. But already, some analysts are questioning whether customers will be confused by Sun's swelling product line.

Gartner analysts wrote in a recent research report that while AMD will clearly benefit from Sun's endorsement of its 64-bit processor technology, it is unclear how Sun will benefit since it will have to fit the Opteron-based products into an already crowded server line.

Sun remains committed to its Sparc chip technology and is still offering Intel processors in some of its high-volume servers. As a result, Sun will be challenged to fit Opteron into its server line "without generating confusion in the sales organisation or general market", the Gartner analysts wrote.

Simon conceded that there "will clearly be a need for some customer education" to explain the benefits of different offerings but said he has no fear about the low-end products cannibalising its traditional offerings.

"If someone has to cannibalise, we figured we would do it ourselves," Simon said, although he insisted that there is still strong demand for high-end systems.

McNealy is scheduled to give a keynote address tomorrow at SunNetwork Berlin, with executive vice president and chief technology officer Greg Papadopoulos taking the stage on Thursday.

The show has already sold out, according to Simon, with attendees coming from 52 countries and five continents. "The customer response rate has blown every expectation," he said.

But the real question may be whether Sun's response to their questions - particularly around the company's future - will do the same.

Scarlet Pruitt writes for IDG News Service


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