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Corporate America Wary of Subscription Software
medical_geek writes: "According to this
article
on cio.com,
MS's subscription service is failing in the business world. I guess
that personal users are not the only group that balks at paying a yearly
fee for software. My question is have you at your job bit the bullet
and signed up as an early adopter, or are you rolling the dice and seeing
if this experiment fails?" This article focuses only on Microsoft, but the same analysis probably explains why ASPs haven't taken off like they were supposed to, either.
I won't buy into a software subscription service for my software for a few reasons:
1.) I can use a given software packages for years at a time...for me, SecureCRT comes to mind, though my license won't support any of the downloadable versions.
2.) The overall cost of subscription is higher. My company's official office software suite is STILL Office 97. Not that there's anything wrong with 2k or XP, but 97 gets the job done...and it's already paid for.
3.) But the big thing is what happens when a product becomes unsupported? Does the program up and quit and force an upgrade, possibly bring a screeching halt to whatever business process you working on at the time? Does the program send off a little message so the marketing drones relentlessly pound on my phone line, reminding me to renew? Are all my data files locked out?
Even though the initial cost is higher, I much prefer to just buy my software. Unfortunately, subscription is pretty much here...it's in every program that requires an Internet connection to "activate" their products. It's not confined to Microsoft Office anymore...it's just a "lifetime" subscription thing to start getting us used to the idea.
// Agent Green (Ian / IU7 / KB1JQO)
// IEEE 802.3: All 10base Are Belong To Us
Ironically, the reason why CIOs feel empowered is that they probably have most of what they want out of their PCs; they're "good enough". Improvements post-Win2000 and older Office suites don't look that compelling. So why lock yourself into some unnecessary upgrade stream?
--LP
My company is in no rush to adopt XP. At the current time we're sticking with NT4 (some 2000). The reason is quite simple (and two fold) - the overall cost over the 'product lifespan' is significantly more. If you buy a copy of NT, then you own a copy of NT (or site license). It will remain 'valid' for several years (5 or so) and is a one off cost. Even better is the fact that when we buy a new PC this is included as the Redmond tax and thus is an 'invisible' cost to the business.
(No I don't like this practice, but the company as a whole does)
The other reason is the difference between capital and ongoing running costs. If you are renewing an XP license each year, your _service_ cost increases per desktop. As an IT department, we don't care, but our users definitely do.
The 'capital expenditure' of buying a new workstation and a copy of an OS goes into a different 'budget bucket'. It makes it easier to explain as 'we need to buy a PC and a copy of windows' rather than 'We need to buy a PC, and then we need to pay for a license for it each year'.
I'm really hoping this master plan of microsoft is going to fail. IT is the same situation as ASP - software developers want to have a steady income, but end users and companies see it as a 'I pay x bucks for your product'.
As long as any software distributer is selling 'forever' licenses, few are going to opt in to an ongoing fee service (IMHO).
One of the biggest factors keeping companies from adopting the "software as a service" model has been, as you suggest, fear of outsourcing critical business functions to shaky ASP Internet startups. However, in the current economic environment, most "bad" ASPs have already gone away, or are hanging on by their fingertips -- no longer are you seeing people dumping Windows apps over the Internet using Terminal Server and crap like that. It is just not cost-effective.
Still, outsourced software provides real value in many cases, and companies want it dearly. For example, if you have any idea how expensive it is to pay IT staff simply to support MS Exchange for a medium to large-size company, the costs are huge. Several companies are currently making a living hosting Exchange, Oracle Financials, and other "hostable" commercial software packages because over time it is actually cheaper to pay someone else a flat monthly fee to manage it than to hire your own staff, especially if you are a large organization. Intermedia is one ISP I've seen that hosts Exchange, for example.
Many solid ASPs are also targeting more distributed types of organizations, one of which is Professional Services. Companies such as Portera provide collaboration tools such as online time sheets and expense sheets, as well as document sharing and versioning, all over the Internet through a browser.
For PS organizations or Contract Agencies distributed around the globe, a hosted application avoids the staggering infrastructure costs that go along with having a global company. Take into account maintaining your VPN gateways, so you can get to varied internal applications, which must also be maintained, plus licensing and support costs, plus hardware/network and you are talking big money. With a hosted app, you pay your flat fee, after which all you need is an internet connection and you're in.
As for big-money (but new) service-arena players like Microsoft, it seems obvious they are trying to leverage customers into an even tighter spot with this new licensing scheme, without providing real added value. This subscription thing doesn't seem to work very well with shipped products, since you are forcing people to "throw away" something tangible that they feel works fine, and upgrading desktop machines costs dollars not only in licensing but also in the whole loss of inertia in the company with the upgrade (and IT staff). However, as M$ moves more toward providing .NET services we will see them become more successful in selling subscriptions for web services and the like. That is, as long as they don't shoot themselves in the foot with Passport. ;)
--Micko
Interestingly, though, this can make life difficult for the vendor. While the subscription model has its advantages (dependable revenue stream even after 100% customer adoption of your product, low incremental start-up costs for your customers), it can also be deadly to a startup.
The basic problem is that costs grow at the same rate for a company selling shrink-wrapped software or subscription software. However, where shrink-wrapped vendors get paid in large chunks (at least for serious enterprise software, $50K++), subscription vendors get paid in increments. As a result, revenues can severely lag costs--you've borne the expense of developing, selling and supporting the product, but you haven't recouped much money until you sign up lots of customers (leading to rising sales and support costs).
In a profitable company, this isn't deadly. But for a startup, every dollar in losses must be funded through selling stock. Booking revenues is the best way to increase the value of your company and to give up less stock in each sale, thereby preserving your ownership. In times like these, when funding is hard to come by, slow revenue progress can equal death.
The other issue, which applies to all companies, is that you're putting off a stream of payments (revenues) into the future, instead of collecting it all at once. Based on the time value of money, the sum of the subcription payments must exceed the up-front purchase price (as there is a discount factor for dollars to be collected way out into the future). The basic idea is that if you had the full lump sum today, you could invest it over the same time period of the contract. To your customers, it's a wash economically. But in a competitive market, it might be trouble, as it might mean you have to charge incrementally higher prices, leaving you vulnerable to competitors.
Finally, figuring out the pricing of an ASP subscription is really tough. How many months of payments should be required to have equalled the up-front license cost? Set it too low, and your customers get sticker shock. Set it too high, and you just put your own revenues further and further out into the future. Software pricing can be pretty arbitrary to begin with, and ASP models can add a layer of complexity. It's not that they can't succeed--plenty of businesses bill per-month. It's just a question of whether it's the right model for enterprise software companies.