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.

It may be coincidence, but HP also recently admitted that it is revamping its Utility Data Center (UDC) solutions to make them more price competitive. Up until now, HP had been promoting UDC as a holistic alternative to traditional, legacy IT environments. While UDC had plenty of attractive features, it proved to be too expensive and disruptive for most enterprises to implement. So, now HP is disassembling its monolithic solution in favor of a more modular product architecture and more aggressive pricing strategy.

Maybe Nicholas Carr was right when he suggested over a year ago in his infamous Harvard Business Review article and subsequent book that IT has become a commodity and corporations should treat it as such. For all of the IT industry's indignation regarding Carr's views, it appears that a growing number of IT solution providers, led by Sun and HP, are doing all they can to prove him right.

Unfortunately, the utility computing market's quick jump to a price-sensitive business reduces the opportunity for vendors to market their on-demand solutions based on business value rather than on pure cost savings. So far, IBM has been able to avoid this trap by wrapping its utility computing products in a veneer of new ebusiness possibilities and process innovations driven by Big Blue's Global Services division.

However, IBM's approach has played well primarily among Fortune 500 corporations. Despite the mass market appeal of IBM's amusing advertisements, many IBM personnel admit in off-the-record conversations that they are facing the same pricing and packaging challenges as the other major vendors as they try to convert their high-end solutions into mass market products and services without succumbing to the escalating price wars of the on-demand marketplace.

As we approach the end of 2004, the technical viability of utility computing is no longer an issue. But, in 2005 the way vendors package and price their utility computing solutions will be the major determinant of how pervasive on-demand computing will become.

THINKstrategies

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