Last week, the San Jose Mercury news reporter Brandon Bailey wrote an article commenting on the potential synergies if IBM purchased Sun (Why would IBM buy Sun Microsystems? Software, services). I cannot comment on the potential upside or downside of such a merger, but I can observe what the potential failure of Sun says about the viability of enterprise companies that are product-centric.
In the article, the following observations are made regarding Sun’s business model:
Sun has based its current business strategy on open-source software and on developing new technology for cost-conscious customers. In recent months, the company has been at the industry’s vanguard in offering new storage and server systems that exploit innovations in software and solid-state memory. It’s also been developing new cloud-computing services for software developers and Web-based businesses.
Sun continues to pursue what we call a “Product Provider” business strategy. The main emphasis is on product and technology innovation, with secondary emphasis on services to drive adoption of technology. The tell tale sign of this business strategy is a relatively small professional services business. Looking at Sun’s last annual report published August of 2008, PS and Education revenues combines were running less than 10% of total company revenues.
IBM, on the other hand, does not treat services as a secondary component of their business strategy. IBM pursues what we classify as a “Systems Provider” business strategy. The San Jose Mercury News article made the following observations regarding IBM:
But some say IBM is succeeding where Sun has failed. Several analysts said IBM would gain both products and expertise from Sun, which would strengthen its hand in advising other companies on how to build or transform their data centers and IT networks. That market is hugely lucrative, as many businesses shift to cloud computing or upgrade their networks to take advantage of new technology that costs less to operate and consumes less energy. “The strategic value comes in places where IBM has or is pursuing global services contracts” for transforming clients’ computing systems, said Susan McNeice, an analyst who studies technology used in the telecom industry for the Frost & Sullivan research firm.
As the technology industry matures, how hard will it become for companies like Sun to profitability maintain a Product Provider strategy where services remain a secondary consideration? Can Sun be successful with open source software or cloud computing without services capabilities? We can think about this question in terms of large technology providers that are still maintaining a Product Provider profile. HP, the largest Product Provider left on the planet, recently purchased services company EDS. Cisco remains a hard core Product Provider and they sustain that profile by continuing to acquire new technologies. Cisco’s expansion into consumer technologies may not require a shift in services strategy, but an extension into enterprise servers or cloud computing may force the issue.
There are companies that are successfully maintaining a product intensive, Product Provider strategy. Beyond Cisco, Netapp and Juniper quickly come to mind. But the current challenges of Sun and the previous challenges of SGI provide lessons for all Product Providers—maturing technology markets force the issue of services strategy to the forefront.
Finally, it is worth referencing my previous post on how companies with a more balanced portfolio of products and services posted better profits in 2008. This data analysis is an exclamation point on the theme that services are playing a critical role in the survivability of technology product companies.
Product-centric companies like Sun are exposed when technology markets mature and capital spend retracts. That exact perfect storm has hit the world of enterprise servers.