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Sun to Widen Lease Options

The company plans to add data storage and other services to its pay-as-you-go format to boost market share.

June 02, 2004|From Times Wire Services

In an effort to halt losses and shrinking sales, Sun Microsystems Inc. on Tuesday outlined plans to expand subscription-based services as an alternative to selling computer hardware.

Sun will allow customers to use its products -- including its main storage unit, StorEdge 9980 -- on a pay-as-you-go basis, similar to leasing. That could let customers cut equipment costs by as much as two-thirds and help the Santa Clara, Calif., company catch up to competitors.

Sun is stressing pay-as-you-go service to lure business from leader IBM Corp., No. 2 Hewlett-Packard Co. and Dell Inc., said Larry Singer, vice president of global marketing.

Jonathan Schwartz, Sun's former software chief, who took over as president and chief operating officer six weeks ago, wants to increase sales from sources including service contracts to two-thirds of revenue.

"In our world, you will subscribe to the software and the hardware is free," Schwartz said.

The company's new storage service, with prices starting at 2 cents a megabyte a month, will include installation services, Sun support and software licenses.

"Sun is transforming its model from upfront product sales to recurring revenue," said Tom Kucharvy, president of Boston-based Summit Strategies Inc., which helps computer makers design on-demand sales programs. "It's like an annuity. It's definitely a very important step."

Shares of Sun rose 16 cents to $4.33 on Nasdaq. They had fallen 3.1% this year.

Sun, IBM and HP see on- demand computing as a way to sell computing power over high-speed networks in the same way electricity is sold to utilities. Customers could buy processing power, software or data storage as needed.

Sun already offers subscription-based service for its Java software on desktops and servers to corporate customers. The firm also is expanding service to governments such as China's.

Sun has reported losses in 10 of the last 12 quarters totaling more than $5 billion, and sales have declined for three years as rivals including Dell sold cheaper servers.

Sun's server sales declined 15% to $1.22 billion in the first quarter. Industry sales of servers, which run company databases and websites, rose 9.3% to $11.8 billion, Stamford, Conn.-based technology research firm Gartner Inc. said. Sun's global market share shrank to 10% from 13% a year earlier, Gartner said. In the United States, Sun is in fourth place behind Dell.

A Sun storage product that sells for $6 million could cost as little as $2.1 million on the subscription method, depending on use, spokeswoman Kathy Engle said. It could cost as much as $7.1 million if use is heavy.

Sun has to compete against low-cost vendors in each of these categories, such as Microsoft Corp. for operating systems and Dell for servers and storage.

"We're competing against a variety of vendors today," Singer said. "We're narrowing it down to one, and that's IBM."

When Sun announced fiscal third-quarter results April 15, Chief Executive Scott McNealy said the company was changing to a business strategy that emphasizes recurring revenue more and product sales less.

Bloomberg News and Reuters were used in compiling this report.

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