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Business Editors/High-Tech Writers
DELRAY BEACH, Fla.--(BUSINESS WIRE)--June 8, 2004
The Association of Service and Computer Dealers International (ASCDI) issues statement regarding Sun Microsystem's April 27, 2004 Software Announcement:
Sun Microsystems at War with Its Used Equipment
Issues Addressed in this Statement:
1. Solaris license Pricing and Availability
2. Solaris license Transferability
3. Residual Values
On April 27, 2004 Sun Microsystems announced pricing and license availability for its Solaris Operating System versions 8 and 9 for Sun products purchased from non-Sun sources (the "Announcement"). With this Announcement, the price of a Solaris license is now at an all time high. At the same time, residual values for Sun hardware are hitting record lows. (We refer to hardware in this Press Release because the Solaris Operating/System (OS) does not travel with the hardware.) This is not a coincidence. Through the combination of licensing fee increases and by restricting license transferability, Sun is deliberately attempting to eliminate the secondary market for its machines worldwide.
Solaris licenses for Sun products purchased from non-Sun sources are available only from Sun; authorized dealers cannot participate presumably due to Sun's inability to control the gray market for its products (authorized dealers selling new-in-the-box product to the secondary market to meet sales quotas).
Affected Parties
All parties who maintain an ownership interest or collateral position in Sun hardware are directly affected by the Announcement. If you are a Sun customer/end-user, a lessor of Sun products and/or a financial institution financing Sun products you are affected. This Announcement is the latest in a series of software pricing announcements designed to erode the residual value of Sun hardware products in which you have an interest.
Solaris Transferability:
Prohibiting Solaris transferability means you rent the software - you do not own it - you have nothing of value to pass on to the next owner/user and no value to recapture upon resale. When a new Sun system is purchased directly from Sun or an Authorized Sun Reseller, a licensed copy of Sun's proprietary Solaris O/S is installed on the system and its cost bundled into the purchase price. It is Sun's position that this licensed copy of Solaris does NOT travel with the product to its next owner.
This practice would be similar to the purchase of a new automobile that includes the motor and an operating system to control the motor setting; yet the operating system used to control the motor is not transferable and can not be resold with the automobile. A buyer must purchase an operating system to control the motor which can only be purchased from the Original Equipment Manufacturer (OEM).
The policy of prohibiting license transferability is taking on greater importance as the cost of the license becomes an increasingly larger component of the overall purchase price. Here is why. The hardware component of a Sun system can theoretically be resold and part of the cost recaptured. The greater the portion of cost allocated to hardware, the greater the potential for cost recovery upon resale. The reverse is also true; the greater the portion of cost allocated to the Solaris license, the lower the potential for recovery of cost upon resale. Unlike Sun hardware, Sun software is not transferable and its cost cannot be recouped because there is nothing to transfer to the next user. This means the cost of ownership of a Sun system is increasing as value is stripped out of the hardware and moved into software (Solaris). As Sun continues to increase license fees - thus transferring value from hardware to software, the cost of Solaris and lack of transferability will become a major factor for Sun customer/end-users.
Sun is the Only Major Computer Manufacturer in the Midrange Space Demanding Significant Relicensing Fees from Purchasers of its Product from the Open Market:
The practice of requiring the 2nd owner of a Sun product to repurchase a new copy of Solaris O/S and pay the ever increasing license fee is NOT a standard practice in the computer industry. For example, the IBM AS/400 or iSeries Base Operating System, OS/400 or i5/OS, is dedicated to the machine serial number and must travel with the machine to its 2nd, 3rd, and 4th owner etc. No additional fee is payable to IBM. With respect to the RS/6000 (P Series) AIX Operating System, current releases have no transfer charge. Owners of DEC and Compaq products pay a $300 transfer fee by merely going to a web site. Effective June 7, 2004, H/P users will pay a $400 fee to transfer the software licenses for used machines. Microsoft users know that Microsoft licensed products travel with the hardware with no additional fees payable upon transfer. Sun appears to be the only major computer manufacturer to demand significant relicensing fees from purchasers of its product purchased on the open market (from non-Sun sources). As will be shown, the reason for demanding significant relicensing fees is simply an attempt to control or eliminate the resale of its hardware products in the Secondary market. Here is how it is done:
Example 1. New vs. Used:
According to the Sun Announcement, the Solaris license (Product No. SOLI-090-Y999) is normally bundled with and included in the price of the Sun V1280 system. Solaris (SOLI-090-Y999) is currently priced separately at $35,000. The V1280 system has a list price of $59,995 and typically sells to the end-user at a 10-20% discount. The end-user purchase price is thus somewhere in the $50,000 range. Thus the actual value of the new hardware is now $15,000 ($50K-$35K=$15K).
Per Sun's Announcement, a purchaser interested in acquiring a used V1280 system from the open market must pay the following: (1) the price of the hardware, (2) the Solaris license fee ($35,000); and (3) a recertification fee to Sun to assure maintenance agreement acceptability (chargeable by Sun even if the system had been continuously maintained by Sun). In many cases, these charges will render the used hardware valueless in the hands of the initial end-user/owner/lessor. In the end, the potential buyer for the previously owned equipment may have no choice but to return to Sun for a new product.
Example 2. Remanufactured vs. Used:
Sun sells an E6500 remanufactured machine for $89,100. This price INCLUDES the Solaris 9 O/S, Server 32, 32 CPU Max license. However, the Solaris 9 O/S, Server 32, 32 CPU Max license is priced separately for a used machine purchased from a non-Sun source at $100,000. A customer, lessor or financial institution with an interest in a used E6500 will lose all or substantially all of the residual value it was anticipating in this machine as a result of this pricing scheme.
By this and previous pricing actions, Sun is dramatically shifting the value of its systems from hardware to software. In so doing, Sun continues to deflate the market value of its worldwide installed hardware base. End users and lessors need to know this and take action to adjust the Sun hardware values reflected on their respective balance sheets and to account for the impact that Sun's actions described above and in the Announcement will have on resale and residual values.
When the next purchaser of a used Sun product from a non-Sun source attempts to purchase the proper Solaris O/S license, the reality of the April 2004 announcement will become obvious: the cost of a new Sun product or a remanufactured machine, that comes bundled with the Solaris O/S and Solaris license may cost less than the cost of a used Sun product including a "proper" license from Sun. Referring back to the used car example, imagine the cost of a new operating system to run the motor being priced high enough to render the new car less expensive than the cost of a used car!
From the standpoint of the secondary market dealer seeking to make a market in used Sun product, the result is even more dramatic. Used products typically sell at discounts of 20% or more off the "street price" of new products. The $50,000 Sun V1280 system described in Example 1 would sell - assuming no discount for age - for $40,000 (80% of the street sale price of $50,000). Deduct from this amount the Solaris license fee of $35,000, the recertification fee of $2,700 and finally, the value of 12 months of Sun maintenance for $5,700 and it would appear that the maximum an end-user would or should pay for this hardware is minus $3,400. Is this a mistake? No, it simply means the machine in this example now has no resale or residual value - the hapless owner/end-user is without a competitive option and is forced to go back to Sun for its next machine. It is as though the hardware is rented, not owned.
Lending institutions take a dim view of financing equipment heavily loaded with soft costs. Soft costs have no collateral value. The "non-marketable" Solaris license representing over 50% of the cost in Example 1 may make financing a problem absent additional collateral, (i.e. other business assets). This is true whether purchasing new or used Sun products. Sun products will eventually have no resale value as Sun continues shifting value from hardware to software within its product mix.
The same is true for third party leasing companies. The third party leasing industry, long a mainstay for buyers and sellers of high tech equipment, traditionally makes an investment in hardware based upon residual value assumptions that the hardware will have value at the end of the lease. The residual value of equipment in its lease portfolio is one of the principal elements upon which the leasing industry relies to generate a profit. It goes without saying that the higher the residual value the lower the lease rate; and the lower the residual value the higher the lease rate. Owner/end-users of Sun equipment need to know that as value is artificially shifted from hardware to software, the third party leasing industry will be forced to reassess residual value assumptions that have been made regarding Sun hardware in the past and certainly in the future. The Sun owner/end-user will find itself:
1. Paying higher lease rates for Sun equipment; and
2. Finding lending institutions reluctant to finance Sun equipment unless the credit worthiness of the end-user is impeccable or has other collateral.
The challenges for Sun are twofold: (i) to determine whether it wishes to stay competitive in the marketplace by adopting practices and policies which are customer-friendly and reward customer loyalty by maximizing value and to reverse those practices and policies which are not; and (ii) to view its legacy product not as competition to be reckoned with but as an extension of its customer base to be supported with customer friendly policies making ownership of used Sun hardware an investment and not a liability.
The ASCDI (Association of Service and Computer Dealers International) is an international trade association of manufacturers, dealers, lessors, maintainers and installers of IBM, H/P, DEC, Cisco, Sun and related products. The ASCDI is vitally interested in protecting the economic value of the computer products in the secondary marketplace.
For additional information on the ASCDI, please visit our web site http://www.ascdi.com. For industry policies and information on Sun Policies including the "White Paper: Sun Microsystems: At War with its Used Equipment" please refer to http://www.ascdi.com/IndPolicies/SUN.asp or contact Joseph Marion at ASCDI headquarters at 561-266-9016 or jmarion@ascdi.com.
COPYRIGHT 2004 Business Wire
COPYRIGHT 2004 Gale Group
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