Sun Throws Down Gauntlet on Subscription Pricing, Windows

by Timothy Prickett Morgan

If you are wondering why Scott McNealy, Sun Microsystems' chairman and CEO, is smiling these days, it is not just because his company got a $2 billion settlement from archrival Microsoft to end Java licensing and antitrust issues. It is because Sun now has a new president and chief operating officer, Jonathan Schwartz, who has put together a new team of executives who are going to bring the subscription pricing model to computing and just perhaps turn the computer industry on its head. Even if Sun fails in this endeavor, no one will be able to fault McNealy, Schwartz, and the Sun team for trying to think outside of the box.

Quite literally outside of the box. Sun is making its quarterly announcements at the SunNetwork conference in Shanghai, China this week, and if there is any consistent theme at Sun these days, it is what the company is calling "network services," which is Sunspeak for pricing and delivering products as services instead of the normal hardware and software purchase and upgrade cycle that IT is used to.

Schwartz spent the better part of an hour explaining Sun's history and religious belief in "the network" to the 5,000 people who listened to his keynote in Shanghai. He went over a lot of ground that many other Sun executives have covered, explaining how getting everybody and everything connected into "the network" would open up more opportunities for Sun and other IT players as well as businesses in general to make more money.

"There is a huge relationship between the size of the network and the size of the opportunity," he explained, adding that technology, in the raw sense meaning new technology driven by innovation, was not a commodity, but oddly enough, that the network itself--meaning the Internet and all other internal nets based on Internet protocols--was becoming a commodity. The snake eats its own tail.

Schwartz explained that commodities (such as energy and telecommunications) relied on open markets and exhibit universal, perpetual demand. Yup, that sounds like the Internet as well as corporate networks. He then said that open markets rely on open networks, on which communities inevitably collect; these communities in turn create business opportunities (think eBay), which attracts competition that itself causes innovation as competitors try to differentiate.

Schwartz said that while Sun was glad to put its lawsuits with Microsoft behind it, he said that Sun used to be a workstation company. "It seems like we ought to get back to making workstations," he muttered while showing off a dual-processor Opteron workstation code-named "Metropolis," which was running a 3D graphical user interface called "Looking Glass" written in Java for the Java Desktop System. Looking Glass has translucent application windows that can overlap, windows that can rotate and be set into the interface like books on a shelf as well as a 360 degree wraparound virtual desktop that looks more like a 3D game than the 2D Windows screen we are all used to. He was adamant that while Sun had settled with Microsoft, they were certainly rivals when it came to the desktops and servers.

"We were very happy to get that $2 billion from Microsoft," he said. "But let me make something absolutely clear. Microsoft is the competition, and we believe the evolution of Java offers a more secure and reliable alternative to the Windows environment." Schwartz also brought up on stage representatives of China Standard Software Company, which promoting a variant of Sun's Linux-based Java Desktop System as a standard for the 1.3 billion citizens of China. "China is opening the world to the idea that an alternative to Microsoft will exist, not just can exist," said Schwartz. Sure hope that Microsoft check has cleared.

While Schwartz was a little thin on the details of its future subscription-based pricing models for hardware and software, he pointed out that General Electric sells jet engines at or below cost, puts sophisticated sensors inside the engines to track their performance and help with maintenance, and then sells maintenance services back to the airlines. Telecom companies give away handsets for $100 to $300 dollars because over the lifetime of a wireless contract customers will use more services if they have a sophisticated handset, and the company makes more money. He talked about meeting executives at a car manufacturer who did some math on the back of an envelope and discovered that they could afford to give a car away for free if they could get drivers to pay $220 a month for various services, such as maps and movies and wireless communication embedded in the car.

Schwartz clearly hates the idea that when Sun's customers add server capacity, they owe some big ERP vendor a lot more money. "That should be history," he said. "The future we see is that instead of buying parts, our customers become subscribers to the system and they have an infinite right to use the software on that system."

He explained how Sun was giving away a Sun Fire V20z server for free to developers who pay $1,499 a year to get all of Sun's tools, and that this kind of a approach would be absolutely extended to the systems in data centers. Perhaps most significantly, by pricing based on a subscription basis, Sun engenders such subscription pricing for its customers, who do not have to worry about spending big bucks up front for big iron as they did during the dot-com boom.

This is the single most diabolical idea Sun has, and Schwartz glossed over it.

In a conference call that kicked off the Shanghai event on Tuesday, CEO McNealy did a better job putting this subscription-based pricing into perspective. Sun owns its hardware platforms, its operating system, and its middleware stack. (It is missing a database.) When asked by Wall Street analysts about what Sun would do if Microsoft, IBM, Dell, or HP responded to this "network services" threat, he said they could not. Dell can't give away an operating system because they don't own one, and Microsoft can't give away hardware because it doesn't have any (unless we all start using Xboxes). "We don't want people to follow us," he said, meaning Sun's competitors. "We want to go where they can't go. I'm not looking for check--I'm looking for checkmate." McNealy said is that what Sun was going to be chasing from here on out was unit volume for servers and software, which attracts customers, then ISVs, and then more customers. "You get into this positive upward spiral."

Right now, the JDS and JES pricing, the developer machine, and a new deal on StorEdge storage arrays where Sun is charging 2 cents per MB per year for storage are pretty much the only examples Sun has to point to. It will be interesting to see how Sun tries to maintain revenues and profits as it shifts to the subscription model and away from product sales. It is hard to see how the math can work out, even if Sun is right. Moving from a rental base to a sale model, as IBM did in the 1980s with mainframes, is one thing. But moving from sales to rental is a different animal.

While there is much to admire in the pricing models that Sun is proposing on all of its products and implementing on a few of them--particularly as this pricing relates to customers--there are also some downsides to watch out for. It is precisely the same subscription models, the large installed base of equipment, and the difficulty of changing technologies for millions of customers that has made it difficult for big telcos and cable operators to make investments in new technology. They get used to making profits at a certain level and are hesitant to pony up the big bags of cash to do a system upgrade.

Sun has to be careful not be left holding the bag with a lot of vintage hardware and software on its books if and when customers start switching to another vendor that tries to offer a similar IT pricing model. While acquisition shifting off the books of its customers is going to be very appealing to them, Sun has to make money too and has to be careful about having a lot of IT gear on its books when technology shifts inevitably come and drive changes in subscription streams.

Moreover, while Sun's government pricing of its Java Enterprise System based on the relative wealth of the economy of a country, based on rankings by the United Nations, is interesting and commendable, like changes to a computing system, such changes can have unintended consequences. It may just be that the relatively high cost of industrial-strength computing power embodied in a Sun Fire server is what has given the Western economies a chance to have some profits.

What happens to outsourcing and offshoring when, by default, the governments of developing nations (and maybe soon their corporations) can rent their new IT infrastructures for a third to a seventh of the cost paid by developed nations in the West, who coincidentally have invested trillions of dollars in the past five years into owning their technology--which they cannot afford to write off. Just like Sun can go where its competitors may not be able to follow, Sun's customers may not be able to so easily follow where Sun is trying to lead them.

That said, anything that shakes this industry up as McNealy, Schwartz and their team clearly want to do, is probably good for Sun and good for IT.