Sun Microsystems has seen the future - it's in the StarOffice and it's on the Java cards

At Sun Microsystems' manufacturing plant outside Edinburgh, a stack of flyers in reception advertises servers for sale. It may not be quite takeaway prices, but the servers, which are the size and shape of pizza boxes, are now being marketed like pizzas and cost less than the average home computer on sale in the high street.

The pizza boxes are not made at Linlithgow. Like most other IT companies, Sun now outsources manufacturing of its low-end hardware in order to remain price competitive. And Sun's fourth-quarter results, published last month, show that price pressure is across the board, not just on cheaper systems. Revenues for the fourth quarter fell to $2.98bn (£186bn) from $3.42bn, the ninth quarter in a row sales have fallen. Sun's usually outspoken president and CEO, Scott McNealy, is now hiding behind the familiar excuses of tough price competition and lower overall IT spending.

Sun was one of the main beneficiaries of the dot-com boom, and when the bubble burst it was hit hard. Companies such as IBM and Hewlett-Packard - criticised during the boom for relatively pedestrian performances - are now the main beneficiaries of a more conservative attitude among computer buyers.

Sun, which has always prided itself on its technical leadership as well as a willingness to take risks, is being squeezed on one side by both its larger rivals with integrated consultancy, software and services arms, such as IBM and HP, and on the other by companies that compete on cost. Prominent in this second group is Dell, the company created and still run by Michael Dell.

Speaking during a visit to Scotland last week, McNealy admits that Sun has yet to shake off the post-boom hangover, and is now being punished by the markets for its fall from favour. But he denies that the business itself is dramatically off track.

"We sold $3bn of equipment last year," he says. "Five years ago I would have said that would have been pretty aggressive growth." He also points out that Sun has $5.7bn in cash.

"Sun is going through a difficult transition," says Andy Butler, research director at analysts Gartner Group. "A few years ago, they would have described themselves as box shifters - now they are a company selling hardware, software and services. And they are having to do this at a time when the industry is depressed and most companies are risk-averse when it comes to buying technology."

Then there is the threat posed by Linux, the "open-source" computer operating system. Linux shares the same roots as Sun's Solaris software and offers many of Solaris's features. But Linux is free and, more importantly, runs low-cost hardware built around Intel or Intel-compatible microprocessors, which dominate the industry. Sun has responded by rewriting its own Solaris operating system to run on Intel chips, and developing its own Intel-based computers. Confusingly, Sun also sells computers running Linux.

Other computer companies sell several types of computer: IBM supports Linux, Windows and its own version of Unix, called AIX. But IBM has long maintained the need to offer the whole range of computers from PCs to mainframes to its mostly large, blue-chip customers. And by embracing Linux, Sun looks to be hedging its bets.

"Some of the advantages Sun had from its superior platform have gone away," says Gartner's Butler. "The unique advantage that compelled many corporations to do business with Sun has been lost."

In that context, offering low-cost equipment based around industry standard hardware makes sense: by offering its own Linux and Intel-based computers, Sun should lose fewer sales to Dell or HP. In fact, McNealy goes further: he believes Sun can compete on price too.

"In price performance we are faster than Dell, and we don't have the cost of the software Dell has to buy in," he says. "Nor does the Dell or Red Hat [Linux] customer have the software and the worldwide support and services that we have."

But to dwell on operating systems is to talk about "piston rings", he claims. McNealy, who used to work in the auto industry, would rather talk about the whole car. He likens the way IT managers buy their systems today to kids buying scrapyard parts to build a custom jalopy. Instead, Sun offers preconfigured systems assembled and tested in its factories.

McNealy also believes that companies are spending too much time and money running their own computer systems and especially software, when employees spend less and less time using them.

The alternatives to shrink-wrapped software from giants such as Bill Gates' Microsoft are "rack-wrapped" programs, given away with the hardware by companies such as Sun, and "gift-wrapped" software that is often free to use. He points to search services on Google, email on Yahoo! and even games on mobile networks such as Vodafone as examples of the gift-wrapped alternative.

"Employees are spending as little as 10 to 20 per cent using corporate IT, yet 100 per cent of the IT budget is still going to the IT department," he says. And he suggests that companies can make further savings by moving away from programs such as Microsoft's Office to StarOffice, a lower-cost alternative from Sun.

StarOffice runs on Windows PCs, Linux and Solaris and, like Linux, has its origins in the open-source software movement. Although Sun charges for StarOffice, an open-source (ie free) version is also available on the web from OpenOffice.org.

For McNealy, StarOffice is a vital weapon in the campaign against Microsoft. "Why are people still using Microsoft Office?" he asks. "There is no reason - none. StarOffice runs great on Windows. It's an order of magnitude less expensive and more capable than anyone needs."

He points out that StarOffice is available from Dell, and that every desktop computer with Linux also comes with StarOffice or OpenOffice. And each person who switches to StarOffice is not just a customer gained for Sun but also money lost for Microsoft.

"The adoption rate for StarOffice is accelerating. It is near the tipping point and we are leaning on it big time," he says. "There is nothing Microsoft can do except lower cost. Each copy is incremental profit for Sun but a lost profit dollar for Microsoft. If you throw in Linux on the desktop it becomes a pretty interesting challenge."

The real battle with Microsoft, however, will not be over word processors or spreadsheets, however keen McNealy is to dent Microsoft's market share.

The areas where most analysts believe Sun can halt Microsoft's hegemony are web services and mobile devices. They are also where Sun's intellectual property could be a real asset.

Web services is a set of technologies that allow computer applications to communicate and share information; web services can also be used to build large, complex applications from smaller parts. Microsoft is pushing web services through its .Net architecture; Sun has Java.

Using Java, computer programmers can create software that runs on any type of hardware, which is clearly an advantage when it comes to sharing information. And McNealy hopes that J2ME, the mobile version of Java, will become the lingua franca of mobile phones.

"We think that with Java we have victory on the mobile delivery platform. It is a guarantee of compatibility: you can write an application once and run it anywhere. I don't think there is a mobile operator that wants to see Microsoft win."

Yet Sun makes no charge for Java. "We don't have to make money on J2ME because if operators run Java we have the chance to sell our servers. If they use Microsoft technology, they have to use a Microsoft server."

And, although Sun faces stiff competition in computer hardware, McNealy's vision of the future depends less on PCs or servers than on a range of intelligent devices and sensors talking to each other across a network, hopefully using Java and connecting to Sun equipment in the back office.

"A lot less of the world's computing happens on a PC today," he says. "There are many billions of microprocessors but only 120 million are in PCs." He points to his Sun identity pass, with its in-built microchip, adding: "This Java card is more powerful than the Apple II computer and we have shipped 300 million of them."