Interview: Schwartz smells the services

Sun Microsystems set tongues wagging last week with the launch of its Java Enterprise System and Java Desktop System. InfoWorld’s Executive News Editor Mark Jones sat down with Sun’s Executive Vice President of Software, Jonathan Schwartz, at the SunNetwork show in San Francisco last week to discuss his penchant for software services and beating Microsoft.

InfoWorld: How well do you know Salesforce.com’s Chairman and CEOMarc Benioff?

Schwartz: I know Marc very well.

InfoWorld: Sun’s CEO Scott McNealy has made a couple of Salesforce.com references lately, and now you’re talking about the services business. Do you agree that Sun and Salesforce.com offer the same flavor of software philosophy?

Schwartz: That flavor’s been around for an awfully long time. It’s called the service provider model. You have to understand something important about Sun, which is that Sun doesn’t operate services. What we wanted to do is take advantage of the service provider licensing model without being a service provider and competing with our core customers. This actually enables them to be far more transparent about how they are pricing. What [you] can do now — whether you are a brokerage house, a transportation company, a media company, or health care concern — is you can look at the software that you [acquire] at $100 per employee and then with impunity turn to your customers, whether they are brokerage account holders, travelers, patients, or viewers of your TV show, and deliver services to all of them and not pay a penny. So what is a real disembarking point for us with the service provider model is we wanted them to pay for the software that they could then run for their customers at infinite scale with an infinite right to use.

InfoWorld: Will Sun ever become a hosted software company?

Schwartz: Absolutely, flatly not. That’s because we believe every company is a hosting company. Think about it: Your company is a hosting company — you have way fewer employees than you do customers online. The same thing is true for a hospital, for a brokerage account, for a telecommunications company, for a media company, for a travel [company], for an airline — it’s all the same. They’re all becoming service providers, it’s just that the services they vend are Web services.

InfoWorld: People like to talk about software as a utility delivered by wire. Is this the same strategy you want to see played out in enterprises?

Schwartz: In the long run, yes. There are four phases in the evolution of Web services. First, you run a stand-alone box. Once you put it on the network, you can now share resources with a small population of people on your LAN. Second, if you put it on a shared network, like an Internet network, now you have a shared service. In the instance of an MRI [Magnetic Resonance Imaging] machine, if it runs stand alone it’s interesting, if it runs on a local area network, the whole hospital can use it and you don’t have to run downstairs to get the image. [Step three,] if you put it on a public network, or at least on a wide area network, now a whole state can take advantage of that imaging system. The fourth evolution of this is really interesting. Once you’ve gotten to a shared service, now you can host that service [or] someone else can host the service for you. There are beginning to [be] imaging centers — not in hospitals — where all they do is provide hosted imaging services. And what’s more fascinating is that the people who provide the diagnostics on those imaging devices are in New Zealand. Why? Because after 5 p.m. PST in the U.S., radiologists go home. Well, 5 p.m. in the U.S. is whatever, 9 a.m. in New Zealand. So now everybody is available to do diagnostics.

InfoWorld: What are large companies looking to roll out now?

Schwartz: Typically authentication and messaging systems, which is authentication. Why do we have two systems, one for employees and one for customers? I provide e-mail to my employees, why do I need another one for my customers? Why don’t I just have one?

InfoWorld: Java EnterpriseSystem is currently missing a number of elements, including support for Jiniand Jxta. What other services will you roll out in subsequent releases?

Schwartz: Streaming, peer-to-peer services, look-up and discovery services, automated provisioning, and device provisioning. How do I put new software on new devices, whether those devices are medical instruments, cellular handsets, set-top boxes, or PCs? [The answer is] smart card authentication, so that you can physically authenticate to a device to get away from those ridiculous anonymous devices on the network that we have today. That’s a good start, and those will all be [available] within the first couple updates.

What we’ve done at Sun, just to try to put this in context, is we have made changes which are invisible to you as an outsider but which are really structurally fundamental at Sun. We’re going to pull 3,500 people into shipping one product. Since that one product exists, we can now look across the product line and say, “Okay, I have an HTTP engine in my Web server, an HTTP engine in my portal server, and an HTTP engine in my app server. Why do I need three?”

To really understand how large the changes were inside of Sun, we will move our order entry system so that you can buy the whole [Java Enterprise] system in a single partner number. We have already changed the compensation of the sales force on that basis. That is rolled out, globally.

[Barbara Gordon, Sun’s vice president of software sales, enters the room.]

Schwartz: Barbara chaired the Compensation Committee last year that pulled together the new architecture for how we pay salespeople.

InfoWorld: What changes have you made to the sales force?

Gordon: One thing we’ve done is substantially increase the acceleration on software. The situation that we’re facing is that when a sales representative sells a $15K [server], they get a big [commission]. And when they sell a stand-alone directory, [it’s less money], a smaller ticket item.

InfoWorld: What is acceleration?

Gordon: It means that a dollar of software is worth, depending on where they are, three to four to five times as much as a dollar of hardware [in commission].

Schwartz: So if we’re selling $100,000 worth of software, they can be compensated the equivalent of selling a $500,000 server.

InfoWorld: How will that work, given the theoretically low margins you must now make on software?

Schwartz: It’s a huge market in software. I don’t know why the industry believes there’s a low margin on software. We have a 94 percent gross margin on software, net margin is a different issue. Microsoft [does] 90-plus percent gross margin on their software.

InfoWorld: What’s going to happen in the marketplace as a result of your approach to software and services?

Gordon: Sun can explain [its products] in a way that [people] understand. I can tell [them] what their expense by headcount is. And now they’re going to Microsoft, and Microsoft’s going to say, “Well, that’s not really the way you should look at it.” I think we’ll be very much in the driver’s seat.

InfoWorld: Given that Nokia is about to launch its Nokia Enterprise Services division, do you think it or Motorola will become serious competitors?

Schwartz: Nokia’s not going to compete with Sun, Nokia’s going to compete with the carriers.  I think that may be a problem if Nokia’s too aggressive.

InfoWorld: Do you think Sun has underestimated how desperate Microsoft is to win the cell phone war, given its alliance with Motorola?

Schwartz: It’s not up to the handset manufacturer to determine what they put into a network, it’s up to the carrier to determine what they put into the network. The reason why Microsoft has failed hasn’t been because they produced a crappy handset. The reason they failed was because no self-respecting service provider would want to divorce themselves from their customers by giving the value to Microsoft. Why would they?  A carrier could get 100 percent of the revenue on phones that the carrier owns and operates.

InfoWorld: So Microsoft’s PC and server business model does not translate to cell phone clients?

Schwartz: They have failed. Here’s my theory on Steve Ballmer’s career. Since taking over Microsoft, he has presided over a 30 percent decline in Microsoft’s equity line. Since taking the helm at Microsoft, their stock price has only gone down. If you look at the number of businesses they have, they ship [apps for] PCs and laptops, [they ship] operating systems. They ship game boxes, they ship cell phones, [and] Microsoft TV set-top boxes.  But they have failed in every other business, other than their core market on the desktop. The only way for them to drive new revenue at a profit is to raise the prices in the market that we are directly targeting, which is that desktop. I don’t think they can pull it off.  They can’t raise prices in mobile handsets, they’re price sensitive. They can’t raise prices on set-top boxes. Game boxes, they might be able to raise them, but Sony’s kicking their butt. The only place where they can go for incremental revenue growth is back into their installed base. We’re going after them, so I think Microsoft’s stuck between a rock and a hard place.

InfoWorld: One of Microsoft’s strengths, however, is the channel. Given that, who will be your most important partners, ISVs or VARs?

Schwartz: VARs, I believe. We made some really massive changes in how we work with partners.  If you serve a company with fewer than 1,000 employees, Sun will not directly approach the customer. It’s partner-owned. So if you’re a Microsoft VAR or a Dell competitor, all of a sudden you have a point of differentiation, because those guys are trying to squeeze you out by going direct.

InfoWorld: What value-adds do you see coming from partners?

Schwartz: Local expertise. They can serve you locally, they can speak your language. They understand your business and they understand what to do.