Sun Banks on Solaris for Next Rise

In one of its boldest attempts yet to revive its flagging credibility, Sun Microsystems(SUNW Quote) said Tuesday that it will stake much of its future on its Solaris operating system -- possibly even selling some computer hardware at a loss in order to grab software revenue.

The strategy marks a profound change for the Santa Clara, Calif.-based server and storage outfit, which rose to prominence selling top-of-the-line hardware at a premium in the roaring 1990s.

Acknowledging the need for a new direction, President and Chief Operating Officer Jonathan Schwartz noted on a conference call, "I'm a stockholder in Sun, and I'm not happy with the stock price." After nearing $6 in February, Sun shares have dropped 12% this year, underperforming the 5% decline of the Nasdaq.

Of course, skeptics might point out that selling hardware at a loss would just mean more of same for Sun, which has trailed far behind its rivals in the recovery. In the past nine quarters, it has delivered only three profitable quarters (including its most recent quarter ended in June).

Still, the comments from Schwartz, delivered in a presentation to Wall Street IT buyers, were strikingly blunt in an industry where top server executives have tiptoed around the fact of increasing commoditization. Schwartz said he expects Dell(DELL Quote) to prevail against its peers in stand-alone, low-margin servers. Rather than compete head-to-head against Dell, he said, Sun will focus on selling its operating system.

As part of what Schwartz called a "fundamental culture shift" at Sun, the company has rejiggered its sales incentive programs to explicitly reward software-only sales. For example, if one of Sun's salespeople sells Solaris to a customer with Dell systems, he will now be rewarded as if he had sold the underlying Dell hardware, Schwartz said.