On-demand price wars

Well, that didn't take long.

Typically, new technologies go through a series of stages before they deteriorate into price-sensitive commodities. Whether its consumer or corporate technology, the cost of developing initial products usually dictates high prices that only a relatively small segment of early adopters are willing to accept. As products gain mainstream acceptance, demand rises and the cost of production declines, product prices also tend to drop. This cycle usually takes two to three years before the technology becomes a commodity and its price is no longer a factor in the purchase decision.

Welcome to the brave, new world of utility computing where vendors, like Sun Microsystems, are already introducing cutthroat pricing despite the fact that many enterprises are still trying to understand the fundamental value proposition of on-demand computing.

Sun announced in September that it would begin offering its N1 Grid technology via a fully managed on-demand service with prices starting at $1 per processor, per hour. Sun's radical new pay-as-you-go utility computing pricing model represented a bold challenge to the rest of the IT industry and marks a significant change in Sun's go-to-market strategy.

Scott McNealy openly admitted during a speech to the Massachusetts Telecommunications Council (MTC) on October 1 that Sun expects to lose money offering this on-demand service at the announced price. However, he was also confident that the move would accelerate Sun's N1 market penetration efforts and enable it to leapfrog its competition -- primarily IBM and Hewlett-Packard (HP) -- who had won far more mindshare and greater marketshare than Sun.

Sun's move was also an important admission that delivering today's utility computing technology in the form of on-demand services was better than continuing to sell standalone grid computing products. Again, McNealy candidly made the case at the MTC event that enterprises and SMBs should abandon their traditional approach of building their own unique IT infrastructures in favor of buying 'by the drink' standard computing power, such as Sun's N1 grid architecture, as a service. Not only does this approach reduce the time-to-market of deploying new computing power, but it also reduces the cost of maintaining and managing new computing systems.

It wasn't long ago that McNealy and Sun were advocating that corporate customers avoid on-demand services, especially as a part of mega-outsourcing deals, because they were perceived as Trojan horse mechanisms to lock in customers. But, with customer acceptance of these services growing, Sun has decided to take the bull by the horns and challenge its competitors to offer comparable pricing.

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