McNealy Hands the Sun Reins to Schwartz

Published: April 27, 2006

by Timothy Prickett Morgan

As Sun Microsystems was going through its financial results for the fiscal third quarter this week, chairman and chief executive officer Scott McNealy, one of Sun's founders, came on the call to do his normal cheerleading and barb throwing, and then he did something new: he stepped down as chief executive officer and handed the company over to his protégé, Jonathan Schwartz, who has been president and chief operating officer for the past few years.

McNealy will stay on as chairman of the board, and has also been appointed as chairman of the Sun Federal unit, which was created to sell Sun products and services to the federal government in the United States. And while the tongues will wag about whether or not McNealy handed the reins over or had them ripped out of his hands after many quarters of losses, he didn't want to leave anyone with the wrong impression of what happened in this regime change.

"For 22 years, I have been running this joint, and I have had a lot of fun with it," said McNealy on a conference call to explain his new role and that of Sun's new CEO. McNealy, who is 51, explained how he got to know Schwartz after Sun acquired a small software company called Lighthouse Design in 1996, and how he fast-tracked Schwartz into the pool of executives who would eventually compete to be his replacement. McNealy said that the two of them can "finish each other's sentences," and that Sun's recent pushes into open sourcing its hardware and software, in using subscription-based pricing, and its "edgy new marketing" were examples of his protégé's handiwork.

McNealy explained that Sun's board of directors has been examining the succession issue for quite some time, which is not surprising given the rocky road Sun has been traveling on for the past six years.

"When you start a company, you always wonder who you are going to hand it off to. You can't run it forever," McNealy explained. "I wasn't going to hand it off when we were growing too fast. I wasn't going to hand if off after the bubble burst. The time is right to do it now. All the demand indicators are strong." During a question and answer session, McNealy laid to rest any idea that he was pushed out. "This was my decision, which was supported by the board," he said, adding that there was an enormous number of things he wanted to see get done--dual-core UltraSparc-IV+ chips, the Fujitsu alliance, getting Sun co-founder Andy Betcholsheim back inside Sun and back designing servers (the Opteron-based Galaxies are his designs), getting Solaris 10 and the Java Enterprise System middleware stack open sourced--before he handed over the CEO title to anyone. With all of these things done, McNealy was ready, and even though Schwartz is only 40, McNealy says that he is ready, too. "The timing fit me to a T," McNealy said. "It was my call."

Schwartz has been behind so many of Sun's products and initiatives in the past three years that it seems unlikely that anything Sun will do or say will change much in the near term. If anything, press conferences and launch events will be a lot less funny, and that will be a big change for the IT industry. (Loosen up, Jon. Have a Bud. It won't hurt you.)

Schwartz was a consultant at McKinsey & Co in the financial services industry when he started his IT career, and holds degrees in economics and mathematics from Wesleyan University. After he joined Sun, he managed the company's venture capital fund from 1999 through 2000, then was promoted to strategy and planning in the boom-bust period of 2000 through 2002, which is also when a lot of Sun's old guard vacated the company as it started to decline. In 2002, he was named head of Sun's software unit, and in April 2004, he was named president and chief operating officer of the company, second in command to McNealy.

In the next 90 days, Schwartz says that he will be moving into a shared office with Sun's returning chief financial officer, Michael Lehman, which will allow him to get a handle on costs and focus on the annual budgetary cycle that Sun goes through from late April through late June to set its goals for the coming fiscal year. Schwartz's ascendancy seems to be timed so that he makes the calls this time, rather than McNealy. He said that he would be working with the top managers at Sun to quantify and qualify its management, its technical assets, and its market opportunities and to make sure that these three are aligned to get Sun not only growing sales, but growing net earnings and therefore its stock price.

"Demand for network innovation will not decline as long as I am on this earth," declared Schwartz. "We are not concerned about demand, but in intercepting demand. It's going to go to someone." Sun just wanted to get what it considers is its fair share, which is a lot more than what it has now.

While Schwartz might be a little young to take the reins of a $12 billion company with close to 38,000 employees, he is very bright and he seems to have the backing of Sun's employees--at least the ones that still work there. (This executive change, perhaps, puts the recent exit of John Loiacono, the former head of Sun's software business, in a new light, since Schwartz is also retaining the title of president as well as CEO and COO.) And, if something goes terribly wrong, McNealy can just come back down out of the boardroom, stop flying around the world evangelizing for Sun to corporate and government leaders, and attend a lot of boring staff meetings. This sort of thing has happened before to founders.