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The titan is out to slam Sun Microsystems where it hurts--the market for corporate networks

In the software industry, there's a curse that often comes with success: attracting the attention of Microsoft Corp. The giant is legendary for the way it targets a rival, dissects its strengths and weaknesses, then finds a way to devour its market. Think about Borland, Lotus, WordPerfect, and Novell. Each was mighty in its day, but they were hobbled after Microsoft set its sights on them.

Last year, the target was Netscape Communications Corp., whose head start in the Internet market set off alarms at Microsoft. Now, Microsoft says that threat has been contained. ''It's all about focus,'' says Tod Nielsen, Microsoft vice-president for developer relations. ''Microsoft does best when it focuses on customers and a key competitor.''

Who's next? For the answer, take a peek at Nielsen's Redmond (Wash.) office. It's plastered with 241 photographs of Scott McNealy, CEO of Sun Microsystems Inc., along with the coffee-cup symbol that represents Sun's hot Java software. At the end of the day, if Nielsen feels he has done something to knock Sun down a peg, he rewards himself by checking off one of the pics.

''YAP-YAP-YAPPING.'' There's no mistaking that the object of Microsoft's attention is Sun and its outspoken CEO. After months of public bickering, the intense rivalry reached fever pitch on Oct. 7, when Sun filed a breach-of-contract suit against Microsoft, claiming that the way Java is used in the software giant's Internet Explorer 4.0 browser violates the licensing agreement.

Outside of the courts, McNealy needles Microsoft execs with a steady stream of digs and one-liners. When, for example, Microsoft called on Sun to hand its Java programming language over to an industry standards body, McNealy quipped: ''Having Microsoft give us advice on open standards is like W.C. Fields giving moral advice to the Mormon Tabernacle Choir.'' Says Microsoft Executive Vice-President Steven A. Ballmer: ''Scott's yap-yap-yapping has certainly galvanized us.''

But where Microsoft is training its firepower is not just on Sun's Java, which contributes less than $10 million to Sun's $8.6 billion in 1997 revenues. Instead, Microsoft is going after Sun's lifeblood: the $40 billion market for powerful Unix-based workstation and server computers. Microsoft already dominates the software market for personal computers. The workstation and server markets offer a chance to sell more expensive software, such as Windows NT, the SQL Server database, and other programs that run the back offices of large corporations. Analyst Rick Sherlund of Goldman, Sachs & Co. predicts that Microsoft's revenues in this market could jump from $1.8 billion last year to $5 billion in 2000. ''It's a great opportunity to just grab, grab, grab something new,'' Ballmer says.

SQUELCH. That's not to say Microsoft doesn't hope to take the steam out of Java, too. If Java is widely adopted, it could rival Microsoft's Windows as a platform for creating software. McNealy has been promoting a vision of network computing in which servers such as Sun's do most of the work, sending Java applets to slimmed-down network computers. If Microsoft can get a foothold in this ''enterprise'' market, it might be able to squelch Java before it catches fire with corporate customers. ''Sun is squarely in our sights now, and you'll see us attacking on all fronts,'' says Deborah Willingham, vice-president at Microsoft's enterprise customer unit.

Call it Operation Sunblock. In July, Microsoft launched an all-out campaign to woo Sun's current and potential customers over to NT. The software giant is expanding its corporate sales accounts from 2,500 to 8,000 and is beefing up its worldwide sales and support staff by one-third, to 7,000. To make sure there are plenty of business-strength programs that run on Windows NT, the more powerful sibling of Windows 95, Microsoft is cementing relationships with software makers such as Germany's SAP, whose programs corporations count on to run their operations. At the same time, the Redmond (Wash.) company is making allies of Sun's hardware rivals, such as Hewlett-Packard Co., and is wooing Sun's top resellers. And it's focusing on Sun's traditional market strongholds in finance and telecommunications.

Microsoft's timing is no coincidence. Its four-year-old Windows NT network operating system is coming of age. In September, Microsoft shipped NT Enterprise Edition, an improved version that harnesses the power of two computers for greater horsepower and to prevent crashes of the system. And in mid-1998, it expects to release Windows NT 5.0, equipped with a new directory program for organizing and finding all sorts of information on a network.

Moreover, Microsoft has plenty of help in its fight. Intel Corp. is building ever-more-powerful chips to run NT. And Microsoft's PC partners are gunning for Sun's market as well. The way Microsoft Chairman William H. Gates III sees it, this battle pitches the entire PC industry against Sun. PC makers rely on basic components, such as microprocessors from Intel and operating systems from Microsoft, which keeps their costs down. Sun, in contrast, must finance its own microprocessor design and the development of its computers and Solaris operating systems. For example, Compaq Computer Corp. spends less than 2.5% of sales on research and development vs. 10% for Sun--although Sun's profit margins remain fatter than those of its PC rivals. ''The tide of the PC revolution is rising around them, and they can move up the tree for only so long,'' says Gates.

Check in with McNealy, though, and he doesn't act like a guy who's up a tree. If anything, he seems to relish having provoked such a vehement reaction from Microsoft. ''Maybe we've pushed the right buttons,'' he says. He's certainly trying. Sun recently ran a two-page ad showing a hand holding a tiny toy computer, with the line: ''We love Wintel servers, but we're always careful not to swallow 'em after they come out of the cereal box.''

There's substance behind McNealy's swagger. In the past half-decade, the 42-year-old has transformed Sun from a workstation company into a high-margin server maker, with a market capitalization of $16.6 billion. Sun execs figure the company has plenty of room to grow by taking over corporate computing tasks previously handled by mainframes. What's more, it has just released a new lower-priced server, the Enterprise 450. With prices ranging from $14,650 to $60,000, it's aimed squarely at servers sold by rivals such as Compaq that run NT. Sun also is working with software makers to offer lower-priced programs for industries such as telecommunications and finance.

Still, many experts say Microsoft's high-volume, low-cost strategy with Windows NT will eventually dominate the market for low and mid-range servers, once a Unix stronghold. ''The encroachment of NT will be inexorable,'' predicts analyst Dorothy Rosenthal of International Data Corp. (IDC). Microsoft plays on the fact that its NT servers are designed to work hand-in-glove with the 200 million Windows PCs out there. And NT machines are typically cheaper than those running rival Unix systems such as Sun's. Even Sun's new cut-rate Enterprise 450 server costs 30% more than the most economical NT server in its class, according to the Transaction Processing Council.

After investing an estimated $1 billion to date to develop and market NT, Microsoft is beginning to see big returns. NT and related software generated some 16% of Microsoft's $11.4 billion in revenues last fiscal year. In the first quarter of 1997, shipments of NT-based workstations grew 242% vs. 10% growth for Unix-based machines, says Dataquest Inc. And last year, NT servers for the first time outsold all the varieties of Unix servers put together--732,000 units vs. 616,000 Unix servers (80,000 of which were Sun's), says IDC.

In terms of revenue, though, the Unix market is still more lucrative. Approximately $30 billion worth of Unix servers were sold last year vs. $11 billion for Windows NT machines, according to Dataquest. But Windows NT is clearly gaining the confidence of corporate computing chiefs. A soon-to-be-released IDC survey of 561 U.S. companies shows that 62% of them have or plan to use Windows NT within two years, compared with 45% for Unix. ''Large companies are adopting NT higher and wider than we had expected,'' says IDC Research Director Tom Harris.

Since midsummer, Microsoft has set its sights higher and wider still. After sizing up Sun's strong and weak points, Microsoft zeroed in on its rival's network of resellers--one of its key strengths--and set out to convert them to NT. First contact was made on June 9 when 40 Sun resellers arrived at Microsoft's campus. Microsoft's proposition: Catch the NT wave, and make profits on service.

IN A HUFF. The pitch worked on some. Sam Jadallah, vice-president at Microsoft's organization customer unit, claims all but seven of the resellers agreed to ally with Microsoft and partner HP, in addition to Sun. ''We're moving to NT because that's what our customers are asking for,'' says Daniel Vahalla, president of Sole Source Computers Inc. in Carlsbad, Calif.

But not everybody was ready to play both sides of the street. ''NT is not there yet and won't be for years. I wouldn't bet my business on it at this point,'' says Patricia F. Shanks, president of BASIS Inc., an Emeryville (Calif.) systems integrator and president of Sun's Reseller Council. Indeed, several Sun resellers declined to attend the event. And David A. Falter, CEO of New Logic Inc., a Chicago systems integrator, says he walked out in a huff. ''I was so tired of their Java-bashing,'' he explains.

Microsoft has just begun to woo Sun's resellers, but it's already making headway with Sun's software developers. According to a July report by ComputerSelect, which tracks market data, 51% of Solaris software developers now also offer NT programs, compared with just 6% two years ago.

How's all this playing where it counts--with customers? Microsoft has made marked progress cracking some of Sun's strongholds. NT is now No.1 in Internet servers, according to IDC, and it is gaining ground with Internet service providers. NT has also swept into the financial-services industry with all the fanfare of a triple witching hour. Merrill Lynch & Co., for instance, is rolling out 1,200 NT servers for its 600 branch offices. ''This to me shows Windows NT is ready for the enterprise,'' says Mark Sanders, director of internal consulting at Merrill Lynch.

But even some of the most rabid NT aficionados reserve their most demanding computing tasks for Unix systems or mainframes. Barbra Cooper, for instance, vice-president for information systems at Toyota Motor Corp., decided in July to run her large database on Unix servers, even though she has 150 NT servers running other applications. ''We needed to decide quickly and we needed proven technology,'' she says.

That's the way it is with NT. Most corporate customers and analysts say it won't be powerful or reliable enough for several more years to handle the largest databases and applications. ''NT has not demonstrated it can handle large numbers of users,'' says Sun customer Stuart Davie, vice-president for information at Howmedica Inc., a unit of Pfizer Inc.

The ability to master the largest computing tasks is Sun's main bulwark against Microsoft's relentless attacks. If it converts mainframe and minicomputer users to Solaris while NT is still bulking up, it can establish itself in corporations that are slow to change. Later, even as Windows NT improves, it will take dynamite to dislodge Sun from those accounts. So it could turn out that Scott McNealy's tree is tall indeed.

But you can bet Nielsen will certainly keep McNealy in his sights. He used this photo-focus thing before, in 1992, when Borland International Inc. and its brash then-CEO, Philippe Kahn, emerged as threats to Microsoft's desktop software. Nielsen retired that photomontage years ago--long before Borland declined to the point of near-irrelevance. Given Microsoft's track record, McNealy will have to remain quick on his feet for Sun to escape the same fate.

By Steve Hamm in Seattle, with Robert D. Hof in San Mateo, Calif.


TABLE: Sun Lashes Out: McNealy on Microsoft

TABLE: How Microsoft Aims to Outshine Sun

TABLE: Sun's Counterthrust


Updated Oct. 16, 1997 by bwwebmaster
Copyright 1997, Bloomberg L.P.
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