Commoditization, not open source, killed Sun Microsystems
<p>The patent-troll industry is in full panic over the consequences of the <a href="http://en.wikipedia.org/wiki/Alice_Corp._v._CLS_Bank_International">Alice vs. CLS Bank</a> decision.  While reading up on the matter, I ran across the following claim by a software patent attorney:</p>
<p>&#8220;As Sun Microsystems proved, the quickest way to turn a $5 billion company into a $600 million company is to go open source.&#8221; <!-- http://www.ipwatchdog.com/2014/09/12/the-destruction-of-a-high-tech-economy/id=48490/ --></p>
<p>I&#8217;m not going to feed this troll traffic by linking to him, but he&#8217;s promulgating a myth that must be dispelled.  Trying to go open source didn&#8217;t kill Sun; hardware commoditization killed Sun.  I know this because I was at ground zero when it killed a company that was aiming to <em>succeed</em> Sun &#8211; and, until the dot-com bust, looked about to manage it.</p>
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<p>It is certainly the case that the rise of Linux helped put pressure on Sun Microsystems. But the rise of Linux itself was contingent on the plunging prices of the Intel 386 family and the surrounding ecology of support chips.  What these did was make it possible to build hardware approaching the capacity of Sun workstations much less expensively.  </p>
<p>It was a classic case of technology disruption.  As in most such cases, Sun blew it strategically by being unwilling to cannibalize its higher-margin products.  There was an i386 port of their operating system before 1990, but it was an orphan within the company.  Sun could have pushed it hard and owned the emerging i386 Unix market, slowing down Linux and possibly relegating it to niche plays for a good long time. </p>
<p>Sun didn&#8217;t; instead, they did what companies often try in response to these disruptions &#8211; they tried to squeeze the last dollar out of their existing designs, then retreated upmarket to where they thought commodity hardware couldn&#8217;t reach.</p>
<p>Enter VA Linux, briefly the darling of the tech industry &#8211; and where I was on the Board of Directors during the dotcom boom and the bust.  VA aimed to be the next Sun, building powerful and inexpensive Sun-class workstations using Linux and commodity 386 hardware.</p>
<p>And, until the dot com bust, VA ate Sun&#8217;s lunch in the low and middle range of Sun&#8217;s market.  Silicon Valley companies queued up to buy VA&#8217;s product. There was a running joke in those days that if you wanted to do a startup in the Valley the standard first two steps were (1) raise $15M on Sand Hill Road, and then (2) spend a lot of it buying kit at VA Linux.  And everyone was happy until the boom busted.</p>
<p>Two thirds of VA&#8217;s customer list went down the tubes within a month.  But that&#8217;s not what really forced VA out of the hardware business.  What really did it was that VA&#8217;s hardware value proposition proved as unstable as Sun&#8217;s, and for <em>exactly the same reason</em>.  Commoditization.  By the year 2000 building a Unix box got too easy; there was no magic in the systems integration, anyone could do it.</p>
<p>Had VA stayed in hardware, it would have been in the exact same losing position as Sun &#8211; trying to defend a nameplate premium against disruption from below.</p>
<p>So, where was open source in all this?  Of course, Linux was a key part in helping VA (and the white-box PC vendors positioned to disrupt VA after 2000) exploit hardware commoditization.  By the time Sun tried to open-source its own software the handwriting was already on the wall; giving up proprietary control of their OS couldn&#8217;t make their situation any worse.  </p>
<p>If anything, OpenSolaris probably staved off the end of Sun by a couple of years by adding value to Sun&#8217;s hardware/software combination.  Enough people inside Sun understood that open source was a net win to prevail in the political battle.</p>
<p>Note carefully here the distinction between &#8220;adding value&#8221; and &#8220;extracting secrecy rent&#8221;.  Companies that sell software think they&#8217;ve added value when they can collect more secrecy rent, but <em>customers</em> don&#8217;t see it that way.  To customers, open source adds value precisely because they are less dependent on the vendor. By open-sourcing Solaris, Sun partway closed the value-for-dollar gap with commodity Linux systems.</p>
<p>Open source wasn&#8217;t enough. But that doesn&#8217;t mean it wasn&#8217;t the best move.  It was necessary, but not sufficient.</p>
<p>The correct lesson here is &#8220;the quickest way to turn a $5 billion company into a $600 million company is to be on the wrong end of a technology disruption and fail to adapt&#8221;.  In truth, I don&#8217;t think anything was going to save Sun in the long term. But I do think that given a willingness to cannibalize their own business and go full-bore on 386 hardware they might have gotten another five to eight years.</p>
