Sun Microsystems is switching to a subscription pricing model for nearly all of its products, executives have announced.
The company wants a steadier revenue flow and plans to generate as much as two-thirds of its revenue on a recurring basis, up from about one-third today, said Sun CFO Steve McGowan at the company's analyst conference. As part of that effort, Sun will offer a subscription option on as many of its products as it can, said CEO Scott McNealy.
"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 have also been moving toward a subscription model, including Microsoft with its Software Assurance plan.
Sun already offers its Java Enterprise System on a subscription basis, for $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 price-per-server and price-per-software containers, said Jonathan Schwartz, executive VP 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 at researcher RedMonk. Customers should look closely at which pieces of the offering they would expect to use and see if it makes sense for them, he said.
Besides 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 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 said.
To boost revenue, the company will focus on increasing the number of servers it sells, with the hope of selling storage, software and services with those systems. McGowan said Sun will price its systems aggressively, taking advantage of some of the more than $250 million it expects to save this year through cost-cutting efforts, mostly from savings on components such as disk drives.
Sun also plans to offer more "happy meals", or bundles of products that include extra hardware or software, at no charge, McNealy said. In the US, for example, the company has launched a promotion for registered Sun developers that includes a Sun Opteron server if they sign up for a three-year subscription for its Java tools, priced at $1,499 per year. A UK-specific deal has yet to be announced.
Sun hopes the bundled deals will distinguish it from competitors such as Microsoft, Dell and IBM, McNealy said. Microsoft and Dell can't offer similar deals, he said, because they sell either hardware or software, not both. Schwartz also said Sun plans to begin charging developers who download its version of Solaris for x86 chips, which include processors from Intel and AMD.
"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.