Sun to offer more subscription pricing

Sun Microsystems Inc. plans to offer subscription pricing for more of its products as part of an effort to ensure a steadier flow of revenue into the company, Sun executives said this week.

Sun hopes to generate as much as two thirds of its revenue on a recurring basis, up from about one third today, said Steve McGowan, Sun’s chief financial officer, at the company’s analyst conference this week. As part of that effort, Sun will offer a subscription option on as many of its products as it can, said Scott McNealy, Sun’s chairman, president and chief executive.

“We’ll establish a subscription model, a recurring revenue model, in as many places as we can, for hardware, software, services, through financing, through our storage division and all parts of our product line,” McNealy said. “To do the (research and development) we want to do, we need a consistent revenue stream.”

Recurring revenue can also be derived from support services, managed services and on-book leasing, McGowan said. Other software vendors also have been moving toward a subscription model, including Microsoft Corp. with its Software Assurance plan.

Sun already offers its Java Enterprise System on a subscription basis, for US$100 per employee per year. Its N1 Grid Containers software, which lets customers partition a server using a single instance of Solaris, may be next. Sun is considering several models for the software, including a price-per-server and a price-per-software container, said Jonathan Schwartz, executive vice-president of Sun’s software group.

Sun didn’t say when further subscriptions would be introduced but suggested it will be sooner rather than later.

One analyst said a subscription model that includes multiple products along with some services could benefit both Sun and its customers.

“One of the most important things is that it balances the needs of Sun with those of the customer. Sun gets some surplus revenue, but it also loses some of the extraneous revenue that it might have got from billing the customer for all those pieces separately,” said Stephen O’Grady, a senior analyst with RedMonk, in Bath, Me.

Customers should look closely at which pieces of the offering they would expect to use and see if it makes sense for them, he added.

As well as ensuring a steady revenue stream, one of Sun’s top priorities is to grow its revenue, McGowan said. After two years in decline, Sun’s revenue flattened out last year, but financial analysts still aren’t expecting growth in fiscal 2004 and revenue has yet to return to its “pre-bubble” level, he acknowledged.

To grow revenue the company will focus on boosting the number of servers it sells, with the hope of selling storage, software and services with those systems. It will price its systems aggressively, taking advantage of some of the more than US$250 million it expects to save this year through cost-cutting efforts, mostly from savings on components such as disk drives, McGowan said.

Sun also plans to offer more “happy meals,” or bundles of products that include extra hardware or software at no charge, McNealy said. It launched a promotion for registered Sun developers in the U.S. this week that includes a Sun Opteron server if they sign up for a three-year subscription for its Java tools, priced at US$1,499 per year.

Sun hopes the bundled deals will distinguish it from competitors such as Microsoft, Dell Inc. and IBM Corp., McNealy said. Microsoft and Dell can’t offer similar deals, he argued, because they sell either hardware or software and not both.

Schwartz also said that Sun plans to begin charging developers who download its version of Solaris for x86 chips, which include processors from Intel Corp. and Advanced Micro Devices Inc.

“We did about 500,000 downloads of Solaris for x86 last year. For the most part that was for no charge, because we wanted to build a developer community. You’ll see us start to create a subscription model that lets us harvest some of the opportunity there and build value into the maintenance and upgrade cycle,” Schwartz said.

“The bottom line is, we’re going to move the entirety of our software business to a recurring revenue model,” he said later.

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