When does a buzzword become a technology? It’s hard exactly, but “Subscription” is a great example. It started as a simple idea. Software sales groups spend a lot of time and money chasing after customers. They want customers to buy the latest version of software, but the cost and effort to buy and install software are often too much for too little benefit. Even worse, the customers who invest the least, end up with the most obsolete hardware and software and require the most support. Maybe they need to squeeze another year out of obsolete equipment. Either way, these customers consume the most resources and pay developers the fewest fees. A subscription/cloud solution could solve this problem! Software would be up to date, and the sales revenue from updates would be more predictable! That’s not a bad goal, but it could create changes that will disrupt the Tech sector. Let’s dive in and go through the details!
The concept of a subscription is that consumers pay a fee every year (or monthly) for every user of a software product (or suite). Customers with an ebb and flow of projects only need to pay for the licenses needed to work today. In the old days, a big project at the beginning of the year might require 100 licenses; when the project ended, and only 10 licenses are needed for the rest of the year, you can’t get your money back. You might be able to rent licenses from a subcontractor, but that is usually expensive and messy. A subscription is just turned off when you’re done. That’s a big advantage, that can lead to big cost savings.
Of course, once you use a subscription, if you ever fail to pay the fee, the product stops working. Just like failing to pay the phone bill means that it is disconnected. That’s quite different than the old model where if you fail to pay for a new version of software or fail to pay for a support contract, you run an outdated version of the software or you cannot call for support.
Subscription models also automatically renew. As a customer, you may not see this as a wonderful feature, but your software provider loves this feature. It makes their revenue predictable. Before subscriptions, customers chose if they wanted to upgrade. Customers tended to skip some upgrades and install others. A new release might have great features, or it might just contain incremental fixes. Even when you want to upgrade, an enterprise rollout of a new version of software involves much more that licensing fees. You may need to upgrade your O/S, hardware and networks, other software, test drivers, change printers and other equipment. That involves a lot of IT hours and a lot of potential conflicts with other corporate projects. When customers fail to embrace a new version of your software, the loss of revenue can hurt your bottom line.
The bigger the corporation, the greater the impact of a weak release. Lost revenue is just the beginning. Public firms MUST announce their predictions for an upcoming release, long before it is ready. To must report when the release will happen, how many customers will adopt it, expected revenues and anticipated problems. When expectations are not met, Wall Street analysts are not forgiving. Ger ready to be hammered a second time! The weak release cost your revenue, and now the analysts downgrade the value of your stock or recommend that your shareholders sell. Even if it is a very small miss, or even if you met your prediction, analysts may be unhappy that you did not exceed it. An unsuccessful release can force out a CEO or crush a publically traded firm. Regular releases that need to be purchased create an “event”, that analysts want to comment on. Subscription models spread out revenues and make them more predictable. That’s very alluring to the C-Suite, which explains the growing popularity of the model.
Another incentive is… cost! Older computers (and printers, servers, etc.) cost much more to support. As drivers slowly go out of date, old software is no longer supported or doesn’t run reliably. Automatic upgrades, a standard in subscription software, constantly test your configuration, and “ping” you as individual pieces of older equipment become obsolete. Rather than big messy upgrades, subscriptions create small incremental hardware upgrades. “Cloud” component are standard with many subscriptions, moving large parts of the storage and processing offsite, allowing the use of simpler/cheaper workstations. That further reduces the need for expensive upgrade projects. So far, so good? Here’s the downside.
The first item is the cost. What is the right price for a subscription? Under the old model an expensive software product, such as Autodesk’s Autocad, costs thousands of dollars for a minimal installation. A full suite of tools easily costs $10,000 or more per user, not including PCs, printers, and networks. How do you count licenses? Are they concurrent (i.e. maximum number of users at any one time), or is each license owned by a specific user (total number of users employed this month)? That’s a BIG difference if the product is used infrequently. If you can change your license count, these “flexible licenses” are usually expensive and more difficult to
If your license count changes frequently, “flexible licenses” are often expensive, difficult to count, and harder to use (can you only change count once per month?). Will your annual license be based on a “natural” purchase cycle of once every 5 years ($10,000 / 5 = $2,000 annually), every $3 years ($10,000 / 3 = $3,333), or something else? Whatever calculations are used, some new subscription users, especially those who upgrade infrequently, are going to pay more under the new model.
While a particular business might be greatly impacted by new pricing model, the operational model creates the real impact. Because subscriptions and Cloud services often go hand in hand, they will trigger massive consolidation. Imagine you run a business that relies on computer software. You switch to a subscription plan that moves your software and data files to the Cloud. You now have little (or no) need for servers, and for desktop storage. Your firm’s IT infrastructure shrinks, dramatically reducing the need for servers, customized PC’s, software installation and support for remote computers. Your IT department moves to the Cloud, but the jobs don’t.
For you, supporting technology is a cost center. For your vendor, providing software is how they generate profit. Automatic updates dramatically reduce the support cost for vendors. Taking the hardware platforms of a thousand corporations and consolidating it into just one big environment is massively more efficient. BUT… vendors are not building servers and hiring new techs. Instead, they too are moving their services to Cloud providers, such as Amazon Web Services (AWS).
Software developers no longer want to create their own storage centers, because they cannot create storage servers centers as cost effectively as AWS and its rivals. In 2014, AWS had over 1,000,000 customers, and their annual revenue grew by 40%. Microsoft, Iron Mountain, Rackspace and many other providers are seeing similar growth. New technology startups often begin building their model with cloud storage and processing baked into their model.
Meanwhile, back at your office, your reduced IT staff is struggling to provide 24 x 7 support. Time to move the rest of your servers to the Cloud? Most corporations will save quite a bit of money, get higher security and more reliable backups. New software rollouts will be faster and take less planning. When everything was on-site, you would wait weeks or months for an opening in IT’s maintenance schedule. Cloud providers have reduced this to the flip of a virtual switch. Let’s break this down:
- Server Scale: A cloud-based service allows you to grow or shrink your operations, without any previous notice. That means fewer barriers to running the latest versions of software and drivers. The more up to date your environment, the lower the number of problem calls per user, and the lower the cost of operations.
- Budgets: Installing new software in the corporation means buying new software licenses, new equipment, and budgeting time for the techs to do the work and fix the inevitable follow-on problems. For a big upgrade, you may need a big budget increase over last year. These periodic surges in the budget are difficult for IT managers to explain to financial managers. That leads to delayed upgrades, which leads to higher complaints. Subscription based services may not lower the budget, but they make budgeting more predictable.
- Support Cost: Data centers at AWS and its competitors are far larger than most corporations. They buy more servers and storage and get lower prices. Cloud providers can sell each GB of storage or CPU Cycle for less than you can pay. And you get built-in services such as…
- Anti-Virus: Virus attacks, malware, spyware and targeted attacks on corporate data centers have shown how vulnerable most centers are. The cost of security rises every year, and so too do the number of large-scale “hacks”. Cloud storage bakes in anti-virus/malware software plus other security services into the data center design, making another layer of corporate techs unnecessary. Few corporations can compete with AWS’ in-house virus lab. Corporate reputations have been permanently damaged by cyber-attacks. IT heads are increasingly turning to dedicated storage providers for an answer.
- Automation: In order to be the most efficient providers of storage and CPU’s, services like AWS make use of far more automation than corporate IT groups. Gone are the endless meetings with IT to authorize and schedule work. Gone too are the IT techs and managers. Instead of submitting requests, you move a slider on a control panel and… you have more space. Installations and uninstallations are automated. AWS, for example, also provides automated software testing facilities, eliminating the need for (human) techs to perform this function. This may not spell the end of software testing as a career, but it dramatically reduces employment.
- Efficiency: CThe scale of Cloud-based services allows them to manage and update your environment more quickly and at a lower cost. Even if Cloud services were no more efficient than corporate IT department, merely consolidating a thousand IT groups would yield massive redundancies. Let’s assume a 50% improvement, which we’ll call “A”. However, AWS storage is much more efficient than a typical corporation. By buying an order of magnitude more equipment than the typical customer, hardware prices are much lower. Add automation that is years ahead of their customers, and you have at least another 50% in efficiencies that we will call “B”. Finally, future growth from customers joining the Cloud will drive the next generation of efficiency, for another 50% that we call “C”. “A” x “B” x “C” is 12.5%. Optimistically, less than 20% of IT support will survive the next 5 to 10 years.
The Bureau of Labor Statistics (BLS) lists 4 million support techs and software developers in the U.S., plus half a million IT managers. Add to that another 2 million sales and sales support positions in the technology industry. What happens to the sales staff under a subscription model?
Sales staff either finds new customers or helps customers move from their first interest in a product to negotiating a price, training staff and installing the product. Sales groups are usually divided into “hunters” to find new customers, and “farmers” to grow existing accounts. Farmers focus on renewing licenses on-time and growing the number of licenses for an existing account. Subscriptions automatically renew, eliminating that part of farming. Adding, deleting and reassigning licenses is better handled by Artificial Intelligence (A.I.) than human sales staff. An A.I. just needs to monitor accounts and message customers when they need adjustments in their license count. Users can make other changes themselves.
That just leaves the “Hunters”. Small software firms still sell their products directly, while larger firms outsourced most of their hunters in the 1990’s. They use “channel distributors” or “Value Added Resellers” (VAR). Developers create products, pay for ads, provide technical support and training (to VARs and customers), pay for conferences and events, and send sales leads to distributors.
Distributors are independent firms that sell products from one or more software developers, plus add-on products, training, installation services, and support. Simple products (ex.: MS Office), are sold on-line or in big box stores. Expensive products that require professional installation and training (ex.: a full suite of CAD products from AutoDesk, for $10,000 or more per license) usually involve a VAR. Developers surrender a large part of their revenue stream to distributors because distributors usually cost less (30% less) than internal sales groups. With subscription based sales, sales groups and VARs will need to cut over 50% of staff.
With a Cloud/subscription model, the few remaining sales staff will each be paid less. Today, in a market like New York City, top sales people get compensation of $250,000… $500,000… even $1,000,000 or more. A very, very few of these will remain but most are destined to become support, and might be moved into customer service. The subscription product is so much simpler, commissions will be few and far between. I have seen communications from developers to distributors explaining how the new subscription world will work. They all talk about change, some mention staff reductions, none discusses the need for more sales staff.
The subscription model is picking up steam and will probably be the standard in less than 5 years. Six million tech and sales jobs are at risk, and most will be lost in 5 years with the rest gone in no more than 10 years. Customers never asked for this model, the benefits to the customer (simplicity, consistency, better support, maybe cost savings) make it very compelling. Developers drove the model, and their benefits (lower support costs, higher revenue, elimination of distributors, reduction of sales staff, stable revenue) make the model inescapable.
A few firms or customers will refuse to go along, but they can only delay, not derail subscriptions. If you’re in technical support or sales, the future is a bit grim. On the other hand, by reading this you have become one of the privileged few who knows exactly what’s coming. And still has time to prepare for it. At least, that’s my Niccolls worth for today! Follow the next blog where we discuss alternatives to the coming Robotic revolution… such as the creative economy!
What do you think? Do you agree that the subscription model is about to disrupt sales and support positions? What are the alternatives? Write in and tell us what you think!