Sun plans more subscription pricing

Sun 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 CFO, 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 CEO.

“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 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 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.

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 $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 $1,499 per year.

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 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 and Advanced Micro Devices.

“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.