I personally believe Sun's problems began way before the downturn, but the downturn provides a great excuse for them to report really bad earnings and lay off people. And, as a bonus, they get to drag down confidence in the tech sector in general!

I used to work at Sun. The major problem is that they don't understand how to make money from open source. Their business model has always been high price contracts with big companies. Unfortunately, that model no longer works for them and despite great wordage and brilliant engineers, they haven't been able to reinvent themselves.

Sun's current cost structure doesn't begin to be supported by revenue. It has ~32,000 employees, and makes $12 billion in hardware revenue, with declining gross margins (Dell, Rackspace etc. are commoditizing servers). Their "strategy" for growth is open source, but after 10 years, they still haven't shown how they will make money out of Java. MySQL is a $100 million a year business, respectable, but there is no way to see how it grows to billions without pissing off and driving away the very users that made MySQL successful.

If I were them, I would cut deep, real deep, like 50% lay-off, assume further drastic erosion in their margins (and plan to be profitable with such drastic erosion), and crucially, with a slim-but-sharply-focused R&D division, focus on coming up with innovations that people are willing to pay for.

Apple did it, Sun could. It has the heart of a great company faintly ticking somewhere deep inside, but alas, current leadership hasn't shown it is up to the job.