Where's the market for Sun's pay-as-you-go?

In addition to $1 per hour for AMD Opteron CPU cycles running in Sun N1 Grid Containers (minimum 4 hours) and 80 cents per gigabyte per month storage, Sun plans to offer its thin client Sun Ray desktop system as subscription service, charging by the week, month or year. McNealy offered a scenario in which Sun would give away Sun Rays in exchange for a two-year subscription.

Thin client computing is an old idea that hasn't taken off yet on the massive scale that McNealy predicts. Both McNealy and Oracle's Larry Ellison have long been proponents of diskless, networked PCs that access data and services from the network. The concept makes sense in the age of the Internet and wireless broadband. It has near zero administrative cost, low energy consumption -- and its secure. With a Java card, a user can access their complete desktop via any thin client on the network.

But people like to carry around their own data. McNealy said he has a solution--working with bandwidth providers to "beam" desktops securely to stripped down notebooks, which are mostly a display and radio chip. Sun was working with Lucent to provide VoIP for Sun Rays, which would eliminate the need for a separate phone system.

Sun has 30,000 users of Sun Rays, and McNealy has managed to convince the U.S. Department of Defense--which likes highly secure systems--to become 70- to 80 percent Sun Ray enabled by 2007. But, getting millions of desktop Windows users to switch is a different matter. McNealy is looking to target developing countries, which like the low cost of acquisition and administration. "The farther away you get from New York, the more attractive [Sun Ray] becomes," he said.

The Sun Ray economic proposition, as well as the company's pay-as-you-go initiatives, are largely based on Sun's native software, such as the $50-per-year-per-user Java Desktop System (JDS) and $100-per-year-per-user Java Enterprise System (JES). And, McNealy is convinced that Sun's ownership of both software and hardware and its business model makes the company the low-cost provider." "IBM can't do $1 per CPU hour," McNealy claimed. "It blows up their WebSphere or consulting services model." Dell cannot offer $1 per CPU hour, McNealy said, "because they don't use Opteron processor, which has a 40-percent price/performance edge over comparable Intel, and they have to pay Microsoft and others for all the software that comes with their systems." McNealy has a good point, but in the scale-out world of Intel-compatible processors, Dell is aggressively taking share and putting together pre-integrated solutions.

McNealy believes he can get a 50-percent gross margin selling $1 CPU hours, which gives Sun a lot of headroom in its pricing. The question is whether can Sun get lots of customers. At this point, it's unclear. The company plans to have 5,000 to 10,000 CPUs on an N1 Grid in the first half of next year. But, McNealy told me that he doesn't know yet what the market is for Sun's subscription services. Wall Street is interested in thousands of CPU cycles per week for running Monte Carlo simulations and other tasks, but that's still a specialized, high-performance computing play. He expects to be surprised by what is the big win in Sun's pay-as-you-go future. How about Dell and Lenovo bundling the JDS and JES with their hardware on a subscription basis?

You can write to me at dan.farber@cnet.com. If you're looking for my commentaries on other IT topics, check out my blog Between the Lines or my column archives.