Dusk for CEO McNealy as SUN rises for Jonathan Schwartz

Scott McNealy, the often outspoken co-founder of Sun Microsystems Inc. and one of Microsoft Corp.'s most vocal critics, stepped down Monday, ending a 22 years long career as one of Silicon Valley's most colorful and controversial CEOs.

In an era so dominated by cardboard cutout CEOs, McNealy, who stepped down at a time when pioneering maker of computer servers reported a wider quarterly loss, never missed an opportunity to throw out the cheesiest, most outrageous quote imaginable, knowing full well the press hounds would pounce. And as McNealy stepped down, the company's stock shot up 7.4% in extended trading, reaching its highest level.

However, investors hoping for big changes may be disappointed as Jonathan Schwartz, Sun's president who is retaining his current position and taking over as chief executive says the company is on the right track as he succeeds McNealy. McNealy will remain chairman and a full-time employee of Santa Clara-based Company.

Over the years, McNealy has taken his lumps in this space for his inability to find--and stick with - a winning strategy. McNealy's mantra "The network is the computer" helped Sun grow into one of the dominant providers of large computer servers that sell for tens of millions of dollars apiece. Following the collapse of the Internet bubble in 2000, he saw revenue decline and frequently came under pressure for not cutting costs enough. Sun has seen its share in the server market erode steadily. The company's major selling point had been its high-quality corporate servers, which businesses use for such tasks as monitoring inventory and managing payroll. But Sun's machines were based on a chip and an operating system of its own design - the Sparc chip and its version of Unix, called Solaris. Sun's rivals, led by IBM, Hewlett-Packard and Dell, sold machines based on industry standard chips and operating systems, mainly Windows and Linux. Although some competing products were considered less sophisticated than Sun's, they were less expensive and considered good enough for companies that had become more cost-conscious.

Turns out McNealy's prickly self-confidence has truly taken root at Sun (SUNW), the company he co-founded in 1984 and made him a household name in tech circles. Schwartz's appointment appears to signal the continuation of McNealy's strategy, which has been praised for creating a tech powerhouse in the 1980s and 1990s - but which has been criticized for failing to adapt to new market conditions. All signs suggest that the company has no plans to make any of the drastic changes that investors seem to be clamoring for. Since the company's sickening fall from grace in 2000, McNealy's valiant efforts to restore growth and profit without slashing spending on R&D have failed to pay off for shareholders. Even as other technology companies revived from their dot-bust nadirs, Sun remained stuck in neutral. With the stock stuck for nearly 13 months under $ 5, Wall Street obviously didn't believe in the company.

Jonathan Schwartz, the new Sun CEO, sold his company to Sun in 1996 & is a tech-savvy, who knows tons about business and is utterly convinced he's right about everything when it comes to his company. Schwartz says that while he will undertake a broader-than-usual review of Sun's business plan, he has no intention of swinging a big ax or making any moves that aren't in keeping with McNealy's view of the world. "This is not about how we take a whack to headcount," Shwartz said. "The goal is to make sure we focus on top-line growth and increasing the value of our shares." Asked if there would be a major change in Sun strategy, Schwartz was quick to answer in another call with analysts and reporters. "No. Here is our vision: The network is the computer," echoing one of Sun's slogans.

Martin Reynolds of Gartner said Sun's path is still unclear even with Schwartz taking the helm. "He has a vision as to where he is going," he said. "The challenge is growing the business. It did not grow much with Jonathan as president. The question is will the CEO role make the difference. If it doesn't turn around, we will be looking at more change." The rap against Schwartz, that he lacks gravitas, however seems unfair. During the conference call held announcing the official passing of the baton, he sounded forceful enough. Besides, even without the title, the guy has basically run Sun for the last year. What's unknown is whether Schwartz has enough charisma to avoid easy comparisons with his larger-than-life predecessor. A year from now, we'll know the answer to that question. In the meantime, Let’s hope for the best.