Sun's product revenue declined 20 percent annually, according to figures released for the June quarter. But spending on research and development is 14 percent higher than it was at the peak of the dot-com boom, when revenue was 38 percent higher, according to JP Morgan. Papadopoulos said that level of spending is imperative if the company is to build the enterprise-scale infrastructure it needs to make N1 a success.
To keep its server gravy train running as long as possible, Sun has cut prices in response to increased competition. The company's unit shipments are in line with targets, but it is selling more low-cost, low-margin servers as opposed to more profitable Sparc systems.
Still, its server revenue is down, in contrast to rebounding sales from IBM, Dell and other competitors that also have cut prices, according to the report by Milunovich.
No hard numbers are yet available for recent months, but many analysts believe Sun has lost market share to IBM, which emphasises sales of Linux and Windows-based servers. While sales have been sluggish because of overall spending on technology throughout the industry, analysts believe that Sun has taken a bigger hit -- indicating that customers are moving away from big Unix products.
That leads to another troubling possibility: some analysts, such as Bill Shope at JP Morgan, think that the improving tech economy may actually accelerate the move away from Sun's Unix servers to cheaper Linux systems because companies that finally have money to spend will attempt to maximise their investments. That means more affordable Intel servers running Linux or Microsoft's Windows systems could look even more attractive.
As a countermeasure, Sun is pushing software for business intelligence and corporate portals as a way to boost server sales.
To complement the Java Enterprise System for server software, the company also has announced a desktop bundle called the Java Desktop System, which includes StarOffice and other software. To combat market leader Microsoft Office, Sun has priced the software at $100 per computer per year or $50 per employee per year.
On paper, the N1 plan looks like a solid proposition that builds on the two dominant industry trends: Web services, for easy integration of systems, and utility or on-demand computing, which lessens installation headaches.
Now, all McNealy and Co need to do is build it.
"At least from a software perspective, I think they have a good story to tell, and they are doing things to be successful," RedMonk's O'Grady said. "Whether they can execute is up in the air, but customers we have spoken to say this is interesting."
News.com's Martin LaMonica contributed to this report.
