Sun Microsystems exploded onto the Silicon Valley scene with an
incredible business model and astounding growth.
Sun eventually became one of the Valley's most important and iconic companies,
worth some $140 billion at its peak.
But over time, that brilliant Sun burnt itself into a husk.
The company's decline was long and painful.
In this video, we take a look at the dawn and dusk of one of
Silicon Valley's computing pioneers: Sun Microsystems.
## Beginnings
In 1978, a Stanford student from Germany named Andreas "Andy"
Bechtolsheim becomes a no-fee consultant for the Xerox PARC research laboratory.
There, he sees the most amazing thing - a bunch of Alto computers networked together.
At the time, chip designs were starting to be done on computer,
but designers did not have individual computers powerful enough to run those softwares.
Andy comes to the belief that what PARC had - powerful personal
computers like the Alto - would work far better.
And since Xerox had no interest in commercializing PARC's work,
he can build his own version at Stanford. So in 1981, he joins this project to build
low-cost personal workstations for computer-aided design or CAD work.
The hardware was based on the Motorola 68000 chip,
the first commercially available 32-bit microprocessor.
The project and that first workstation computer was named SUN,
which stands for the Stanford University Network.
Notably, the SUN-1 workstation computer had a bitmap display like
the Alto and an Ethernet connection for networking. A few years later,
it could run an older version of Unix - Unix System III.
## The Company
By 1981, Andy and the team were making a good number of these computers,
printing custom circuit boards in Margaret Jacks Hall. Unfortunately,
Stanford ended the project when it started to gather some real commercial traction.
Andy's first action after this was to license out
the Sun hardware Design. He found a few customers, charging them $10,000 each.
However, these licensees did not want to build the powerful and personal
workstation that Andy really wanted to do. If you want something done right,
well then you have to go do it yourself. But first, you need to put together a crew.
## Getting a Crew Together
A secretary connected Bechtolsheim with another fellow Stanford alum - a
recent MBA graduate and serial entrepreneur named Vinod Khosla.
Khosla had once worked at a company called Daisy Systems,
a pioneer in the Electronic Design Automation or EDA market.
The company eventually failed, and one of the reasons why had been the lack of
sufficient hardware. Khosla grasped that these workstations could meet that need.
He and Bechtolsheim wrote out a six-page business plan laying out the strategy
of building and selling Sun workstations at a price range between $25,000 to $100,000 each.
That is about $75,000 to $300,000 in 2022 dollars.
Sun recruited two more co-founders. Khosla had a very good friend named Scott McNealy,
a Harvard graduate with whom he had previously worked on a failed startup called Data Dump.
Six months later, Bill Joy - then a grad student at UC Berkeley - joined as a full
co-founder working on software product design. Joy was then
known for working on the Berkeley Software Distribution of the Unix operating system.
McNealy reached out to two venture capitalists - US Ventures and
West Coast Ventures. He showed them the workstation, and quickly got some funding.
Later on, Kleiner Perkins and August Capital joined in as well.
Sun Microsystems opened its doors in February 1982. Khosla served
as CEO. McNealy was VP of manufacturing. Bechtolsheim in hardware product design,
with Joy joining him later on the software side.
## The Product
The workstation is a bit of an interesting product
category. Back then, if someone needed computing power like for CAD work,
they had to reserve time on a larger, more powerful computer - the minicomputer.
They communicated with these minicomputers through something like a VT50 computer terminal.
This somewhat ironically named "minicomputer" is called "mini" because it was smaller,
cheaper, and less powerful than a mainframe computer from IBM. But it
still cost over $25,000 at the time, or about $190,000 today.
What Sun first envisioned and sold back in those days was more like a
high-end desktop computer. More like a Mac Studio or a Mac Pro perhaps.
The workstation has more power than your average low-grade consumer
computer - enough power to run these complicated CAD softwares. However,
it was also affordable enough for the average prosumer to own on their own.
## Growth
Sun Microsystems had orders before the company even started. People at universities and
research institutions had heard of the Sun project at Stanford and put in pre-orders.
Interest really surged when they heard that Bill Joy joined and
that the workstation would - eventually - run the Berkeley Unix operating system.
The team worked tirelessly to design and ship their new workstations. Their first workstation
had only 256 kilobytes of memory and sold for about $8-10,000 at 50% gross margin.
The Sun-2 - with better specs and Berkeley Unix installed - followed later that year.
There were other workstation makers at the time. Sun's main competitor
was Apollo Computer. Apollo had started a year before Sun and was
their main competitor. The EDA and CAD companies also made their own hardware.
Sun's advantage was that they leveraged open and available resources. Their first
workstations were made from off-the-shelf parts - standard power supplies,
Motorola microprocessors, and Fujitsu disk drives.
For software, an off-the-shelf operating system,
Berkeley Unix. This later turned into SunOS, a Unix OS which after that became Solaris.
For networking, they used TCP-IP, which had recently been declared
the standard for all military computer networking. Networking in particular
had been important, as it allowed users to collaborate from their own spaces.
Through its open business model, Sun produced really good,
widely adopted technology. The vision of selling standardized,
widely compatible computers caught fire. One workstation for each user. People loved it.
## Managing Growth
Sun opened its doors in February 1982. They became profitable by May,
ultimately generating $8.5 million in its first fiscal year. The fiscal year after that,
Sun grew to $39 million. The year after that, $115 million.
Managing all that growth however proved to be a bigger challenge.
It was a bunch of 27 year olds running the place, and there were growing pains.
The board wanted Sun to recruit some more experience so they recruited
the 42 year old Owen Brown. But Brown clashed with Khosla and quickly left.
Scott McNealy took over as interim CEO. Despite being so young, he ran the company
well and eventually the board decided to have him remain as the company's leader.
Khosla left Sun the next year in 1985, joining John Doerr at Kleiner Perkins.
There, he would make incredible investments like Juniper Networks,
which returned 2,500 times its investment.
Today he runs his own firm, Khosla Ventures.
## Sun-3 and IPO
Every six months from 1982 to 1987, Sun doubled the number of workstations it shipped.
In 1985, they launched their Sun-3 workstation series.
Featuring an upgraded Motorola processor - the Motorola MC68020 - Sun-3 introduced
a brand new distributed file system standard, Network File System or NFS.
Sun licensed the NFS code to others for a nominal fee, turning NFS into a widely adopted standard.
The Sun-3 was an immediate success,
accounting for a third of total sales in the quarter after its release in September 1985.
Sun had to open a new factory in nearby Milpitas to handle all the new orders.
By 1987, Sun had eclipsed its once-biggest competitor, Apollo Computer. Creator of
the personal workstation market, Apollo did have better hardware,
but customers chose Sun's cheaper computers. The Sun-3 was 15% cheaper than anything Apollo had.
Apollo would eventually be acquired by Hewlett-Packard in April 1989,
and soon thereafter shut down.
In March 1986, Sun IPOed with $210 million in revenue. They raised $45 million,
the biggest tech IPO in 3 years. In their first annual report, it says:
> Our rejection of proprietary systems in order to concentrate
on our model of distributed computing, technology standards, and high quality
is itself an innovation. And in a very real sense, this is Sun's proprietary product.
## SPARC
From 1986 to 1988, Sun's revenues quintupled from $210 million to
$1.1 billion. The company was moving fast on all cylinders. But soon developed a problem.
Over time, it soon became clear that one of the company's critical partners was
not keeping up. And that was Motorola - the company that provided Sun's microprocessors.
They had just one design team, and could not keep up with Sun's demands. One memory
bug took them 2 years to fix. It took them just as long to go from 10 megahertz to 12.
Sun tested an Intel compatible workstation, which did not go very well. After which,
Bill Joy came up with the idea of designing their own microprocessor
using a thing that IBM recently wrote about called a RISC architecture.
The key point about RISC is that each instruction performs just one function.
IBM claimed in their writings that this could potentially speed things four times over.
So in 1987, the team led by Anant Agrawal finalized the SPARC CPU,
fabbed by Fujitsu. It was indeed much faster than what others can offer.
And eventually, it would be used in Sun's next big workstations - the
Sun-4 or SPARCStation series, released in 1989.
## The Unix Wars
Sun makes the majority of their money selling systems. They leveraged open,
off-the-shelf parts to create cheap, high-powered workstations
for specific technical applications in government, corporate, or Wall Street.
But what did "open" mean? Encouraged by their success with NFS, in 1987 Sun
partnered with 20% investor AT&T to collaborate on Unix.
Over the years, the Unix tree had gotten complicated and Sun
wanted to unify this gnarled tree. Sun envisioned a new, unified Unix
as the pathway out of workstations into the broader consumer market.
However IBM, Hewlett Packard, and other Unix licensees rebelled. Fearing what Sun and
AT&T might do with Unix, they created the Open Software Foundation or OSF.
OSF - McNealy calls them the "Oppose Sun Forever" foundation - started signing up
vendors and developers under the banner of being "truly" open - with no single company in charge.
Sun and AT&T formed their own competing organization - Unix
International - and signed up companies like Toshiba and Motorola and others.
The Unix Wars as it was called had long lasting effects on both Sun and its competitors.
It crippled Sun's microprocessor strategy. Sun would try to license its RISC-based
SPARC chip designs to other companies, but insisted on retaining control over
the IP. Preventing any fork killed any chance of SPARC's widespread adoption.
A few years later in the United Kingdom,
another company selling RISC designs - Advanced RISC Machines Ltd or Arm - would be founded.
When it comes to software, the War stalled technical progress on Unix itself and
divided its community. Neither side really produced a competitive commercial product,
though the Sun and AT&T collaboration would eventually produce the Solaris operating system.
Anyway the wars opened the door for a new competitor: Microsoft.
## Microsoft
In 1993, Microsoft released Windows NT 3.1,
an operating system produced for workstations and server computers. NT took parts from Unix,
IBM, and others to create this single "business-oriented" operating system
that was 32-bit and had networking and file-sharing for multi-user collaboration.
It was the right product at the right time. Unix
was distracted and some parts of it sat in dubious legal territory;
Linux - an open-source Unix-like operating system with a big role
to play down the line - was not yet desktop-ready;
Apple and the Mac was post-Jobs and had no idea what they were doing;
To a lot of businesses, Microsoft was the only game in town. Sun's competitors like
IBM and HP rapidly started adopting Windows NT for their own workstations. Sun for their
part felt that Unix was a far better product, and refused to adopt Windows.
However it soon became clear that Windows NT and Windows 95 after it - combined with Intel's
rapid improvements in CPU performance - were eating into Sun's original workstation market.
## Switch
Throughout the 1990s, Sun switched to a more vertically integrated business strategy selling
complete systems centered on SPARC for the hardware, and Solaris for the software.
As Microsoft and Intel increasingly encroached on
the high-end workstation market, Sun moved upwards into the enterprise server market.
In 1996, Sun acquired Cray Business Systems from the famous supercomputer-maker. Cray
had adopted the SPARC and Solaris technologies to enter the commercial
business market but had failed to make a splash.
Sun snapped up the division for $15 million. As it turned out, Sun's vertically integrated
stack - from networking to processor to operating system - was perfect for the server market.
Solaris is known for its symmetric multiprocessing capabilities,
which means you can add a large number of SPARC processors to the system for easy
scaling without much latency. Windows and Intel on the other hand can handle just four to eight.
So Intel might make a far faster individual processor than Sun can. But Sun's servers
can still perform better on a system basis because you can add in up to 100 processors.
As the Internet started to become a thing in the 1990s,
this web-connected server market grew to become even larger than Sun's old workstation business.
## Beginning of the End
Being in the internet server business turned out to be a double edged sword for Sun.
eBay, Yahoo, Dell, Bloomberg, Merrill Lynch and even Microsoft adopted Sun enterprise servers
for their web operations. The company grew revenues 50-60% each year. Things were good.
Then the internet bubble popped and sliced that multi-billion dollar business by nearly half.
Thousands of Sun system units were being resold on the secondary market at fire sale prices.
Management struggled through several unprofitable years. They made $1.85 billion and $927 million
profit in 2000 and 2001. Then lost $587 million in 2002, and then $3.4 billion in 2003. Good times.
R&D costs remained persistently high due to
Sun's need to support technology ecosystems like SPARC, Solaris,
and Java - their popular programming language. Java alone required 4,000 developers a year.
## Open Source
Then came open source. For a long time, Sun used the "open" verbiage.
Compared to its entirely proprietary competitors in the 1970s, yeah sure
Sun was open. But it was not "truly" open in the way we might think about it now.
For instance, until 2005 you cannot download and look at the Solaris source code. You
needed to sign a contract, and even then they would not let you see all of the
source code. And we already talked about some of the issues they had with SPARC.
Frustration with these practices would give rise to the grass roots open source movement,
personified by Linux. For a long time throughout the 1990s, Linux was a hobbyist's toy.
Then suddenly, people realized that it had gotten good enough to be used in real,
business-critical production environments.
Businesses and organizations found that they can scale up by creating clusters of Linux servers,
all of them the same with commodity hardware.
## The End
Widespread Linux adoption annihilated Sun's enterprise server business. And with that,
the company had no more tricks up their sleeve.
Throughout the 2000s, the company attempted to get back to their "open" roots by open
sourcing their technology. They acquired various technologies like the database
MySQL and data storage StorageTEK, paying too much for something that made nothing.
But with the Global Financial Crisis roiling the industry,
investors got tired of the endless losses and a good offer came along.
In 2009, Oracle bought Sun for $7.4 billion. From 2000 to then,
Sun had lost over $10 billion of revenue and over 90% of its stock
value. The company has since been digested and its products rebranded.
## Conclusion
Sun was a brash company. They were known for sharp elbows and
not playing very nicely with their competitors. And when they were the
Uber of the 1980s and 1990s - growing 30, 40, 50% a year - that was fine.
But this attitude eventually got to them as technology trends changed
around them. Sun refused to change, sign on, or collaborate. And in the
end they became this lonely outpost of technology far from the leading edge.
It would be interesting to contrast this attitude
with Microsoft before and after Satya Nadella became its CEO.
And Nadella had in fact worked for Sun before joining Microsoft in 1992. I wonder
if watching what happened at Sun helped shape his attitudes in Microsoft's subsequent turnaround.