Sun reported a 25% drop in quarter to quarter storage revenues this month. Painful, since storage is traditionally a very profitable area for the company. But the most interesting comment in the Byte & Switch article is that Sun’s attach rate — storage sold with its own servers — is about half the industry average. Translated that means that if Sun were able to be average it would have been profitable this quarter and possibly for the last two quarters as well. Stockholders (of which I am not one) should hold McNealy’s feet to the fire over this pitiful performance.

This is not a new problem for Sun. Even ten years ago Sun’s storage attach rate was about 75% of the industry average and the problem has only gotten worse. Why?

First, McNealy just doesn’t get it. To him, networks, CPUs and software are sexy. Storage isn’t. Despite the fact that Sun loses money on its SPARC microprocessors (the servers are modestly profitable) and has never made much on networks (ethernet ports are cheap) while storage has brought in billions of margin dollars, Scott has just never understood that storage could be, and should be, a core competency for Sun. As a result Sun’s storage group has mostly been a dumping ground for execs on the way out, while the competent are either recruited to more prestigious and functional groups or get frustrated and leave.

Second, as alluded to above, Sun’s storage group has a dysfunctional culture. While the company has made billions on internally developed products such as the original quarter-speed FC SSA array or the later full FC A5000, the company has spent hundreds of millions on failed acquisitions (Encore, Maxstrat, High Ground and probably Pirus) while starving its internal development efforts. While partly due to the general Valley distaste for hardware development (software margins are so much better!) it is also due to the weak leadership of Scott and the storage group. Any large storage organization inside a server vendor has to deal with two cross-currents: the server groups who look upon storage revenue and R&D budgets as rightfully theirs; and storage qualification engineering who will always argue that it is cheaper to buy than build. Since storage is peripheral to Sun’s sense of self, these arguments have crippled Sun storage development efforts.

Finally, Sun has never had a vision of what it wants to do in storage as it had in servers and software. This is Scott’s failure, and a puzzling one. Storage margins are good, the industry is rife with vendor lock-ins that chafe customers, and the technology is a commodity. The exact same conditions held for servers at Sun’s founding. Sun and Scott nimbly exploited those conditions then and could do so now. True, the engineering and test requirements are non-trivial, but a company that builds Starfires can certainly master them. The main requirement is vision.

Is there any hope that Sun will rise to meet this opportunity? Sadly, very little as long as Scott is running things. The one glimmer I see is that with Andy Bechtolsheim, Sun’s original hardware guru, back on board, internal storage development may get his backing. But Sun has consistently snatched defeat from the jaws of storage victory for the last 10 years. I doubt it will change with Scott at the helm.