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Sun Microsystems’ efforts to improve its profitability may very well be jeopardizing its reputation and relationship with its channel partners.

That’s the conclusion of Sanford C. Bernstein & Co., a financial analyst firm, in a research note released April 30.

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The report lists several moves the computer systems company has made over the last year and a half that have left channel partners scratching their heads and looking at alternatives from vendors such as Hewlett-Packard and IBM.

They include:

  • A reduction in commissions on services contract renewals. According to the report, in early 2006 Sun cut the commissions in half on service renewals to federal and government accounts. And then at the end of January 2007, Sun cut these revenues in commercial accounts from 15.5 percent to 8 percent. “In contrast to hardware commissions, which for select products can be less than 5 percent, services contract commissions are highly lucrative,” said Toni Sacconaghi, Jr., senior research analyst covering IT hardware, in the report. “The cuts were made with no ostensible boosts in other areas and were received very negatively by the channel.”
  • Sun also announced that it was working to reduce channel inventories from four weeks of inventory to about one week by the end of June. “Channel partners have been frustrated by this initiative, particularly going into Sun’s seasonally strong Q4, arguing that stock/availability is a key ingredient in the channel’s value proposition, and that lower inventory levels will undermine their customer service levels,” said Sacconaghi, noting that competitors typically provide four weeks of inventory.
  • Partners have also complained about the company’s more difficult deal registration process, which can take hours of time. “Resellers indicate that this process has become increasingly cumbersome,” Sacconaghi said, while they lauded programs from other companies such as Symantec and NTAP.
  • The growing discontent only gathered more momentum with Sun’s recent direct sales promotion, running from April 23 through May 7, which initially offered customers up to 50 percent off on some of the company’s most popular lines of products if they bought directly from Sun online, effectively cutting partners out of the deal and undermining deals in progress. After an outcry by the channel, Sun relented and extended the discounts to include products sold through the channel. “While Sun’s intentions may not have been malicious with this promotion, the channel’s reaction has been vitriolic.”
  • Last week, a reseller alliance that includes many Sun new and used equipment resellers in the United Kingdom announced that it was suing Sun, saying that the company’s move to stop certifying used equipment as OK to sell in Europe effectively made Sun the only company that could resell used Sun equipment there, according to Sacconaghi. By contrast, Sacconaghi said, HP, IBM and Cisco all provide the necessary provenance information to allow for a used equipment market.

“While Sun’s actions with regard to the channel appear consistent with its goal to drive improved profitability, we do worry about increasing dissention in Sun’s reseller channel,” Sacconaghi said. “Several large partners we spoke with had already begun to take on other vendors such as IBM or HP and/or are considering doing so.”

The research note goes on to question whether “continued alienation of Sun’s channel—while potentially helping margins in the short-term—could hurt Sun’s revenue momentum going forward.”

Indeed, the research report noted that 63 percent of Sun’s revenues in 2006 came from indirect channels. Undermining those channels could undermine the financial health of the company.

“Our conversations with channel partners over the last 18 months have made us increasingly concerned that Sun’s focus on improved profitability may come at the expense of revenues going forward,” Sacconaghi said.