Struggling Sun Microsystems Opts for Subscription Model

Roughly 20% of Sun's current revenue is recurring, mostly derived from software maintenance; the other 80% is produced by conventional sales revenue.

"We'd like to reverse that ratio," Singer said. How long that will take is unclear, but Sun is implementing the strategy immediately. In any case, it's unlikely that Sun will ever be out of the business of selling hardware and software.

Actually, unit sales of Sun servers have been strong, but the market has focused on the problem of falling revenue. In the first quarter of 2004, for example, sales of units increased year over year by 26.5%, according to market research firm Gartner. But revenue from server sales decreased by 12.5% in the same period, while the entire server market grew revenue by 9.3%, Gartner found.

Shifting to a subscription model will lower margins and initially lower revenue since revenue from large subscription-based sales will be booked over a period of time instead of upfront. "I'm not worried about margin points; I'm thinking about margin dollars," Singer said. He expects that increased volume will ultimately more than make up the loss of upfront cash.

Also on the plus side of the financial equation are lower sales costs. It's cheaper to make one sale that includes servers, software, storage and services, than to sell the same items separately, Singer said.

Of course, the argument will be entirely academic of customers don't play ball. "In theory, this sounds great. But IT people are very conservative. It's asking a lot to get them to change in mid-stream," said Dana Gardner, a senior analyst at the Yankee Group, an information technology consultancy. Gardner, who was briefed in advance of Sun's announcement, found some skepticism in her survey of IT customers. "They said it was a leap."

Sun's new sales model is complex, and will vary from service to service and market to market. But a deal cut with ACS(ACS Quote) is something of a template, Singer said.