Sun Fires First Shot in the Server Subscription Wars

All of the big IT companies are trying to sort out the future of computing and how we are going to pay for it. Last week, Jonathan Schwartz, the young, pony-tailed software exec from Sun Microsystems who was recently named president and COO, outlined his vision for computing, which he boringly called “network services.” Poor name aside, the subscription model that Schwartz is betting on for Sun’s future is one that every IT shop should be aware of because it may make technology more fluid that we are used to.

Since Schwartz took the helm a few months ago, Sun is thinking, quite literally, outside of the box. All of the company’s divisions have been instructed to make their lines compatible with a business model that prices and delivering products as services instead of the normal hardware and software purchase and upgrade cycle that we have become accustomed 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 address at the SunNetwork event 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.

While Schwartz was a little thin on the details of Sun’s 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.

While the IBM “on demand” marketing effort is evolving toward something akin to what Sun is talking about, capacity on demand features for hardware and software is not the same thing. When Sun says the whole Java Enterprise Server stack, from the Solaris operating system on up, can be had for $100 per employee per year, it is saying more than use as much as you want. It is keeping the pricing simple, leveraging the market value of integration, but not forcing customers to pay huge sums of money to buy software they may never use. Sun is asking for modest amounts of money for all of its software, some of which customers may never use. And what Sun has found out is that over time, customers start using more and more of its software, and therefore get better value for the dollar.

As you might imagine, the AS/400, the iSeries, and the eServer i5 would make an excellent platform on which to deliver computing with a similar subscription-based pricing model, particularly since it is better integrated than Sun’s stack, given that it has a database. OS/400 shops could forget worrying about leasing. It would be like getting a cable box, and when you think about it, the data center is kind of like the cable box for corporations. Every few years, Time Warner encourages me to move to a new box, and I pay a little more for some new features, like the new pause button and movie recording that comes with the DVR unit I just got. I use the features that are useful to me, and they made the upgrade painless. Most importantly, I didn’t have to negotiate with the CEO of the household (in this case, my wife) to buy three years worth of cable upfront. I can look her in the eye and said it is only a few bucks more a month–no big deal. When vendors ask us to acquire technology rather than subscribe to it, they are essentially asking for all the money up front. It is now dawning on many IT players that just because we want control of the box does not mean we want to own it. They are not necessarily the same thing.