Sun (SUNW:Nasdaq - news - commentary) is in an odd position in the computer business, and it always has been. It doesn't have to worry much about the PC pricing wars or about whether Dell, Compaq or anyone else is on top at the moment. That's because it ignores Windows and the rest of the PC landscape, focusing instead on the juicier Unix workstation and Unix server market.

Until fairly recently, that distance from the vagaries of PCs, Windows and the like has insulated Sun from many of the ups and downs of the computer marketplace. Sun's Unix boxes, both workstations and servers, sold pretty steadily in both good and bad times, and while there were some competitive pricing pressures from Hewlett-Packard (HWP:NYSE - news - commentary), IBM (IBM:NYSE - news - commentary) and other denizens of the Unix world, Sun has had almost a chokehold on its market.

That led to fat margins, fat profits and a fat price-to-earnings ratio.

Defying Gravity

The Web boom came along at exactly the right time for Sun. Its powerful Netra servers were the high-priced spread for Web outfits -- and well worth the higher cost, many Webmasters figured, for their industrial-strength reliability and reputation. Sun's server business soared as the Web did.

Sun seemed free of the market factors that hurt other computer makers, almost free of the effects of gravity. The computer market went up, the computer market went down; the Web went up, the Web went down.

Sun just went up. And up. And up.

Now, though, market realities have thoroughly fouled up Sun's gravity-free path across the sky:

The collapse of the Web has unleashed a flood of lightly used Sun equipment on the used market.

Sun dealers with back rooms filled with sealed boxes have been dumping that inventory.

And customers, suddenly a lot more price-sensitive, are no longer so sure they're willing to pay the whopping premium required to run a Sun shop.

Though the stock price has in fact been declining for almost a year -- it has fallen by almost a factor of 10, from the high $120s last September to Wednesday's close at $13 and change -- there has always been a strong cult arguing that Sun was about to come back... all the way back to those glory-days share prices of old.

Nonsense. If the past year -- and especially this painful summer, as Sun has oscillated between the low teens and about $20 -- has taught us anything, it's that Sun's Unix business is no safe haven from the realities of the computer marketplace. Nor from general business slowdowns.

Wednesday afternoon brought that reality home with a thud. Sun CFO Mike Lehman said it would be "quite challenging" for Sun to eke out even break-even performance this quarter, ending Sept. 30. While Lehman said U.S. demand is about as expected, both European and Japanese sales are way down. And Lehman refused to provide analysts on the company's midquarter call with even a guess about sales in this quarter.

Lehman told the truth, a hard truth, and Sun's stock price suffered. The share price fell 13 cents in trading Wednesday, then lost another dollar in after-hours trading, after his comments, to around $12.50.

Market Realities

The problem isn't only selling prices: Sun has always dealt hot and heavy on prices -- and continues to -- but its average selling prices haven't fallen much. And it isn't mainly competition: Yes, Sun has lost some server market share to Compaq, Dell and IBM, but it's still the big gorilla.

The Sun Also Sets Can it regain its former glory? Not likely.

What has dropped is demand, period -- thanks in large part to that huge shelf of unsold inventory. Wednesday night I found almost 2,000 Sun workstations, servers and accessories for sale on eBay, a shocking number of them higher-end models, often brand new. The amount of additional inventory being offered cheaply by Sun resellers is unknown, but may be even larger.

In a sense, this is like the Cisco inventory overhang. (And to be fair, last night I found 2,700 Cisco products for sale on eBay.) In both cases, the companies' gear is so reliable that even older equipment still works fine, and both corporate and Webmaster buyers are searching for buys these days wherever they can find them.

The market itself is also slowing sharply. Buying extra servers "just in case" and trading up late-model workstations for only-slightly-better-performing ones are out of style now; making do is in. That hurts Sun, too.

So while Sun's news Wednesday night was depressing, this wasn't a case where we were seeing the darkness before the dawn. This was the darkness before more darkness.

Short sale now or not, Sun sure isn't "coming back" overnight. And back to its historic high levels? You're kidding, yes?

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