Sometimes technology moves in cycles and sometimes shifts are permanent. Right now a permanent shift has taken place as consumers and businesses alike have shifted from purchasing shrink wrap software, and its equivalents in other content like music and movies, and have now moved to a hybrid download/subscription model or cloud delivery model.
Two of the clearest examples of this fundamental change are in the consumer space with Netflix and Pandora – and their numerous competitors. Netflix with their video subscription model is changing the marketplace as people are increasingly deciding not to purchase videos and instead rent them by mail or stream them on demand. Pandora with their personalized internet radio stations based on your mood and favorite music means that you just click and instantly you’ll hear music that you find interesting. These two trends are born out by rapidly dwindling DVD and Music sales.
Even when consumers are purchasing items they are moving away from shrink wrapped CDs and shifting to online purchasing or subscriptions with the iTunes or Xbox Music Marketplace. Beyond the obvious shift of moving from physical media to digital media one of the secondary effects is that consumers were purchasing entire Albums by artists, but now purchase select songs. This shift has devastated the music industry whose traditional model is not well-suited to the newly fragmented marketplace and purchasing methods.
An example of this is the Lady Gaga phenomenon. For a while she was the hottest thing happening in the music industry, with more media buzz than Madonna had at the same stage in her career. But the similarity ends when it comes to sales numbers. Lady Gaga’s sales of her first two albums are less than 1/4 of Madonna’s sales numbers for Madonna’s first two albums, and that was over 25 years ago.
So while Lady Gaga is very much a publicity phenomenon, she isn’t generating anywhere near the same amount of revenue as Madonna once did. Questions of music quality aside, the primary reason for this revenue disparity is that today people can choose to buy the 3 really good tracks that they want from iTunes for $.99 each instead of having to buy the entire album full of filler for $10 to $15 just to get those same three tracks.
What is true in the consumer space is also true in the business space. Companies are increasingly moving to subscription models deliverered via the Cloud for their software and service needs – instead of making a major upfront purchase and trying to consume those investment for years. Whereas in the past a company might have spent months and years rigorously evaluating a product trying to determine whether it would meet every foreseeable business need for the next 5-10 years, now companies are increasingly deciding that old model doesn’t work because there are too many variables to consider and because the up-front capital costs are too substantial with that model.
This is why companies like Microsoft (just for the record my current employer), SalesForce, et al are now offering most, or all, of their software in online, subscription versions, with free trials. A free trial that let’s companies begin using the software with no obligation, no unfront costs and no infrastructure to support. It’s hard to understand why a company wouldn’t switch over to this model of consuming the software which helps run their business given the numerous examples of failed big-bang software investments, with Waste Management’s failed SAP implementation and resulting lawsuit against SAP being among the more spectacular failures.
Increasingly, what is happening is that companies are choosing to implement solutions that meet their needs for the foreseeable future with no expectation that that solution will be a permanent one, or even be a comprehensive one, at least initially. In fact some business units are able to implement these solutions in weeks and months with little or no involvement from a company’s IT department. Which raises questions about the relevance of IT in some businesses when non-technical business professionals choose to implement IT projects without involving their colleagues in IT.
In some ways the subscription model resembles what used to be called the maintenance model. Under the maintenance model companies had to pay an annual fee, typically 20-25% of the software purchase price, to receive support and software updates. After the initial capital investment, this annual maintenance fee was essentially the cost of running their software each and every year. What is different now is that the software companies are including new features into their subscription software on a regular basis and only those customers paying the ongoing subscription fee are able to take advantage of those new capabilities.
There are several reasons for moving to a subscription model for software providers beyond the obvious one – a steady revenue stream. By shifting to a subscription model with regular ongoing updates customers are more likely to use the most current version of the software. This helps software providers increase customer satisfaction while lower the cost of supporting their software, and it also provides a bulwark against competitors who would be better able to compete against an older version of the software.
The shift to a subscription service also increases the velocity with which features and products get out the door helping in the eternal battle between perfection and good enough. After all the perfect is the enemy of the good – because waiting until your software is perfect means that by the time it’s released it may not be relevant or it may never get released.
Of course subscription software isn’t a panacea and many customers find that they may spend more in absolute dollars for any number of reasons, and because the software is delivered in a subscription model they feel that they have less flexibility during downturns to reduce costs since their software costs have shifted from a one-time capital expense that can deferred, to an operating expense that must be paid every single month.
Of course these trade-offs and the potential benefits must be considered by businesses making this decision, but increasingly businesses find that a subscription model, despite the ongoing costs, actually gives them more flexibility to respond to changing business needs. Whereas once it was assumed that every IT project entailed a massive upfront investment in software, hardware, data center space and consulting – now many businesses are asking whether or not almost every project can be delivered as a service, either in the public cloud or in a private cloud located in their data center.
As this trend matures from a nascent albeit a rapidly growing choice, Will those subscription services become increasingly calcified as capabilities are added accreting to the point that they are just as unwieldy and unresponsive as previous software implementations? It’ll be interesting to watch how companies and service providers both change as the service offerings mature. Most interesting in some ways will be how businesses will change their IT departments and organizational structures to reflect the shift from software running on their own hardware in their own data centers to consuming a service delivered from a provider over the internet. I don’t know what will happen, but I can guarantee that things very few people expect will happen. When in doubt bet on change. -t
Note: Just a reminder – this blog reflects my personal opinions and in no way reflects anything, in any way, resembling something official from that of my employer, which is currently Microsoft.