Struggling Sun Microsystems Opts for Subscription Model

Hoping to revive its flagging performance, Sun Microsystems(SUNW Quote - Cramer on SUNW - Stock Picks) is moving away from its traditional sales model -- selling hardware and software and collecting revenue upfront -- and turning to pay-as-you-go services.

The plan, a variation on the subscription model used with mixed results by companies such as Microsoft(MSFT Quote - Cramer on MSFT - Stock Picks), Computer Associates,(CA Quote - Cramer on CA - Stock Picks) and Siebel Systems(SEBL Quote - Cramer on SEBL - Stock Picks) has some appeal because it will provide a smoother, more predictable revenue stream.

But the risks are high: even Sun admits that margins will suffer and it is not at all clear that customers will be willing to do business so differently.

Jonathan Schwartz, Sun's newly appointed president and chief operating officer, was scheduled to unveil the strategy at a conference in Shanghai on Tuesday morning, where Sun also announced 30 new products. "Servers, software, storage and networking...will be reconstituted as services -- such as CRM [customer relationship management software], collaboration tools, Voice over [internet protocol] and video-on-demand -- that will translate into business value and competitive edge," he said in a statement released prior to the conference.

Stripped of the marketing hype, Sun hopes to sell services, rather than simply pushing hardware and software at its customers, and have them pay as they use those services.

The biggest advantage from Sun's point of view, Senior Vice President Larry Singer said, is recurring, predictable revenue.

"Right now we are being punished by stock market. It's not confident that we can keep unit [sales] numbers up. This gives us renewable revenue," he said during an interview last week. (Sun shares entered Tuesday's session down nearly 30% from their 52-week high of $5.93.)

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