McNealy, Scott

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McNealy, Scott

(1954-)
Sun Microsystems, Inc.

Overview

The story of Scott McNealy and his company Sun Microsystems is a textbook example of Silicon Valley success. McNealy co–founded Sun Microsystems in 1982, and the company became the leading global supplier of network computing systems, generating sales of over $18 billion. Since taking the helm as CEO in 1984, McNealy has spurred the company to even greater expansion and profit. McNealy's mission is to prove the company's slogan: "The network is the computer." Sun Microsystems specializes in network computers (NCs), as opposed to personal computers (PCs), and hopes that its Java software will succeed in breaking up the near–monopoly of Microsoft's Windows operating system.

Personal Life

Scott McNealy and his wife Susan were married in 1994 and gave birth to their son, Maverick, the following year. Characterized as brash, fun–loving, and extremely energetic, McNealy enjoys creating catch phrases to explain his business philosophy ("have lunch or be lunch") and strategies ("the network is the computer"). His motto, "kick butt and have fun," sums up his general approach to work. In fact, humor is an important part of Sun's corporate culture. For example, elaborate April Fool's Day pranks have become a corporate tradition, with company engineers targeting McNealy and other executives.

Scott McNealy was born on November 13, 1954, to Marmalee and Raymond McNealy. He grew up in the Detroit suburb of Bloomfield Hills with his two brothers and a sister. His father, who rose to the level of vice chairman of American Motors Corporation, often engaged his teenage son in discussions about business. He even took him golfing with Lee Iacocca, former chairman of Chrysler Corporation, Raymond McNealy's later employer.

Although Scott McNealy has an impressive educational background, he was not a model student. After attending Cranbrook Kingswood, a private preparatory school where he served as captain of the tennis team, he earned a degree in economics from Harvard University in 1976. But his initial applications to the graduate business schools at both Harvard and Stanford universities were met with rejection. Finally, McNealy was admitted to Stanford on his third try. A manufacturing major, he received his master's degree in business administration in 1980.

Career Details

While awaiting acceptance to graduate school, Scott McNealy took a job as foreman and plant scheduler for Rockwell International at a plastics facility that produced truck hoods for the company's automotive operations. Anticipating a labor strike, Rockwell officials ordered its employees to work double shifts in order to maintain production. McNealy contracted hepatitis two months into the accelerated schedule and was hospitalized for six weeks. In the meantime, he was admitted to Stanford, prompting him to quit his job in Ohio and head for California.

McNealy's first job after receiving his MBA was at a tank manufacturing facility owned by FMC Corp. of Chicago, Illinois. He resigned from this position 10 months later, however. As he later told a reporter for Fortune magazine, "FMC put me on a strategy team, and I wanted to be a plant manager. I wanted to make something."

In 1981 McNealy was hired as the director of manufacturing for Onyx Systems, a minicomputer company based in San Jose, California. Assigned to improve quality control, he achieved this goal by meeting with employees, talking about the difficulties that they faced, and encouraging them to solve problems on their own. Yet he was still not quite satisfied with the way his career was unfolding. Though his passion for manufacturing had not waned, his commitment to the demands of corporate life was not as strong. In fact, as he revealed to Industry Week, McNealy dreamed of owning a small machine shop. "If it all worked out," he explained, "I figured my kids would run it someday and I'd get out when I was 45 or 50 years old and play golf."

McNealy's plans underwent a sudden and dramatic change, however, when a former Stanford classmate and engineer named Vinod Khosla invited him to become involved in a new computer company that he planned to establish with product designer Andreas V. Bechtolsheim and programmer William N. Joy. Although he knew very little about computers, McNealy accepted his friend's offer and began work as head of manufacturing for the newly–formed company. In the end, the creation of Sun Microsystems, Inc., in 1982 catapulted McNealy to the ranks of an elite group that Forbes magazine dubbed "high tech's new royalty."

McNealy proved to be highly skilled at his new job, enabling the company to meet the explosive demand for its products that propelled sales from $9 million in 1983 to $39 million in 1984. Soon McNealy was also running the sales department and actively seeking funds to help the company expand. In 1984 Eastman Kodak Co. agreed to invest $20 million in the company if McNealy were promoted to president. Around the same time, Khosla left Sun and McNealy was named interim president. Within a few months the company's fortunes took off and McNealy, at the age of 30, was named Sun's CEO.

Under McNealy's leadership, Sun made its name by manufacturing computer workstations of the type traditionally favored by sophisticated users like engineers and scientists. When a network links such computers, their resources are multiplied geometrically, making them more powerful than individual personal computers or terminals served by a mainframe computer. McNealy's commitment to network computing paid off during the 1990s, as major business clients turned to the format in increasing numbers. Among the firms Sun supplied with networks for their internal operations were Federal Express, the Gap, AT & T, Universal Card Services, and Charles Schwab.

Network computing proved to be an important Internet tool as well. In 1996, for example, some 35 percent of World Wide Web servers were Sun computers. These servers, the type of machines on which companies tend to install all of the software that run their business, proved to be more reliable, versatile, and powerful than those driven by software developed by Sun's competitors, chiefly Microsoft Corp.

Sun Microsystems created two other important products that catered to the needs of Internet users and large businesses. The first and most revolutionary one was Java, a universal computer language that enabled all networked computers to communicate with each other and share applications, regardless of which operating systems they were using. Unveiled in 1995, Java created quite a stir in the computer industry as enthusiastic programmers marveled at the notion of writing software that could flow without restriction from machine to machine along a network. Furthermore, Sun engineers demonstrated that Java mini programs, called "applets," could spice up Web pages with the ability to program motion with words and images. Java thus had the potential to generate revenue for Sun in several ways—as a licensed language, as the language used in Sun–authored programs, and as its own operating system.

Sun Microsystems was one of the first computer companies to offer network computers (NCs), disk–less machines made especially for working on the Internet. With an NC, a user's files and applications were stored at a remote location that was accessible via the Internet. A second–generation version of this machine, the Sun Ray 1 enterprise appliance, was launched in late 1996. Called a "thin client" in Silicon Valley parlance, the $800 Sun Ray was both a new era for the network computer and a return to the early age of computers. Before microprocessing chips revolutionized the desktop computer, such units didn't even possess the capability to store major software systems. The thin clients' access to the retrieval capabilities of the Internet, in fact, might someday even render the disk drive obsolete.

Some critics speculated that the Sun Rays were not likely to appeal to the average consumer. McNealy, impervious to such criticism, remained a staunch champion of this and all of his company's product introductions. He theorized that in the end, a bit of negativity only adds to the product's value. "I mean, if everybody thinks breathing is a good idea, how do you differentiate yourself in the market?" he queried in Maclean's. "So I want everybody to think it's a dumb idea. I do. There's plenty of time and the customers will decide, not some writer who doesn't know."

Chronology: Scott McNealy

1954: Born.

1976: Received degree in economics from Harvard.

1980: Received MBA from Stanford.

1982: Co–founded Sun Microsystems, Inc.

1984: Became president of Sun Microsystems.

1984: Became CEO of Sun Microsystems.

1995: Unveiled Java computer language.

1998: Entered partnership with chipmaker Intel.

1999: Introduced StarOffice software suite.

2001: Launched Jini technology.

McNealy was among those excited about Sun's prospects. Others expressed a hint of caution, noting that even though Bill Gates and Microsoft lagged behind Sun in the world of networked computers, it would be dangerous to downplay the threat that they posed. "We're not going to make any money on Java, but that's all right," McNealy admitted in OEM Magazine. "We'll make money selling servers and desktops and network–management software. We just want the world to be free from having to write to Windows." Indeed, Sun's sales rose to over $762 million by the end of 1997.

Over the years McNealy became one of the most vocal critics of Microsoft and its business tactics, fervidly supporting the U.S. Justice Department's anti–trust suit against Bill Gates' company. "If anyone can loosen Microsoft's choke hold on the future of technology, it may well be Scott McNealy," declared Forbes. The head of Sun Microsystems served a number of volleys, some through legal channels, in the war against Microsoft. He voiced strong objections to Microsoft's increasing investment in telecommunications and cable companies. Many of these innovative firms, poised to earn daily fortunes with the digital revolution of the twenty–first century, were lucrative clients of Sun's. Their systems typically used Sun servers and the Solaris operating system, developed in partnership with Unix, and stood as the primary competitor to Windows 2000, formerly Windows NT.

Microsoft's purchase of stakes in such telecommunications companies as AT & T raised McNealy's ire. Other telecom giants, including Qwest, Comcast, and Nextel, were also seduced by a Microsoft investment, and some of them switched from Sun's platform to Windows NT. "The way McNealy sees it, this is all a grand strategy to kill his company," explained David Kirkpatrick in Fortune.

McNealy's firm was far from distressed, though. Sun's revenues continued to climb throughout 1999, and its stock performance rose likewise, jumping from $30 a share to $120 a share in the span of 12 months. The company forged a partnership with former Microsoft partner Intel to create a new chip, the Merced, for its Solaris system—a working partnership that posed a greater threat to Microsoft. Several e–commerce sites remained loyal to Sun, among them the Internet auction site eBay and bookseller Amazon.com. McNealy and his company also ventured into the software business with the acquisition of a German company and the launch of its StarOffice product. Considered a competitor to the Microsoft "Office" suite of word–processing, spreadsheet, and communications software, Sun offered free downloads of StarOffice over the Internet, and at the end of 1999 some 40,000 people were downloading the software daily.

By September 2000, when the Internet technology market peaked, Sun was valued at $210 billion, roughly 10 times its revenues and 100 times its earnings. Over the preceding 18 months, the company's revenues had climbed 60 percent to $15.7 billion, and profits had increased 150 percent to $1.9 billion. The chief reason for this explosive growth lay in the nearly exclusive use of Sun computers wherever Internet applications ran, whether in e–commerce firms, telecommunications service providers, or traditional companies.

With the rapid collapse of the Internet technology market, in particular the dot–com companies, in the early months of 2001, Sun's fortunes took a dramatic downturn. In the first three months of 2001, revenues had fallen 20 percent from the previous quarter, and profits were down 43 percent from the previous year. In response, the company's stock declined in value by about 70 percent.

Nevertheless, McNealy managed to remain optimistic in the face of the dire news. After all, Sun Microsystems had seen its fortunes rise and fall before, and it had survived through worse. In fiscal years 1989, 1992, and 1993, earnings had also declined significantly. And in 1998, before Internet sales began to take off, the company had posted only a 14 percent gain in revenues. By mid–2001 Sun was still in good shape, as it had not made any layoffs, it had a manageable inventory, and it had already cut its sales, marketing, and overhead expenses by $40 million in the first quarter of the year. At the end of fiscal 2001, Sun's sales made an impressive turnaround, up 16 percent to over $18 billion.

In 2001, after months of anticipation, Sun Microsystems launched its new Jini technology. Using the Java language as its foundation, Jini software sought to make computers and other devices as easy to use as plugging in a telephone. Sun held a press conference to announce that 35 companies, including Sony, Philips Electronics, and Hewlett–Packard, were licensing the technology, but industry insiders cautioned that it was still in its early stages.

Social and Economic Impact

With both its Java software language and the network computer (NC), Scott McNealy made a concerted effort to challenge the near–monopoly of the Windows operating system and its creator, Microsoft. McNealy was determined that his company remain poised as a competitive threat and avoid becoming merely another of Windows' many vendors. Sun's unique Solaris system and Intel partnership gave his company the ammunition necessary to fulfill McNealy's aims. Brent Schlender observed in Fortune, "He has forced Microsoft to rethink basic aspects of its business and play a little catch–up." For that alone, McNealy stood out in an industry that had seen its share of big names, including IBM, Apple, and Netscape, that took on Bill Gates and Microsoft and lost. It is a fate that McNealy had no intention of sharing.

After the U.S. Justice Department's announcement of an anti–trust investigation into Microsoft's business practices, Sun's corporate nemesis increasing became a target of the McNealy wit. A regular speaker at industry gatherings, McNealy gained a reputation for a vast roster of jokes that poked fun at Microsoft, Windows, and Gates himself, whom he referred to as "Billy Big Bucks." Interviewed by Fortune in 1997 at the height of Sun's Java launch, McNealy kidded the editors about Gates' frequent appearances on the magazine's cover, and asked what he would have to do to make it there himself. The editors responded that he should wear a Superman suit with a "Java" logo on it, to which the self–assured CEO readily agreed. "That cost me about an hour to do the shoot," McNealy told Maclean's. "And a little dignity, but that ain't so expensive. We got a wonderful article out of it."