Sun Explores Negative Margins to Win Business

"We may depress margins on things to get business and then upsell to make more money over time. You'll increasingly see us do things to make it painful [for competitors]," Schwartz told about 180 solution providers at Net@Work, the annual conference held by the MOCA division of Arrow Electronics in Carlsbad, Calif. "If we do, we will make sure the value added by Solaris way more than offsets investments into hardware. We will help you make money,"

Schwartz used Verizon as an example of a company that has a successful model in which it absorbs margins of minus 25 points on phones in order to win annual subscription contracts that could be worth thousands of dollars.

"We can do exactly the same thing and put a ton of competitive pressure into the industry as a result," Schwartz said.

At the MOCA event, Tom Kuni, president of SSI hub city, a Metuchen, N.J., solution provider, said that the commoditization of hardware and software is a fact of life. "Anyone who doesn't know that has his head in the sand," he said. "Our business is built around services."

Sun's strategy would place more pressure on competing hardware platforms and also on Linux vendors such as Red Hat, Schwartz said.

"If we give away the hardware to get the OS deal or give away the OS to get the hardware deal, they can't play," he said. "If you're Red Hat how do you respond? I would think that would be an uncomfortable conversation with Michael Dell. Can't you give us hardware for free? No. Now say we subscribe to hardware and give you the OS for free? How does Dell respond? Do they call Microsoft and have an uncomfortable conversation and say can we have the software for free? No."

It's a concept that Sun can explore because the company's reputation is increasing again, it has the right products to offer and "free" Linux isn't free anymore, Schwartz said.

"It would have been completely unfair for us to have asked you two years ago. Now customers are coming back with a huge bill at Red Hat," he said.

During his keynote presentation, Schwartz mentioned Red Hat at least a half-dozen times to drive home the point that it is indeed the enemy.

"For an OS supposed to be free, it's not. We will be less expensive than Red Hat. At end of the day, this is a fulcrum, a turning point of the industry. We can't compete against a social movement called Linux, but we can compete against a company called Red Hat," he said.