Software As A Service: A New Corporate Trend

software development in progress

A new trend is sweeping the software industry — providing software as a service. Traditionally software has been stuck in the gray area between a wholly owned or licensed consumer commodity. That is, either the consumer owns the software itself or has a license to use it depending on who you ask and interpretations by the courts.

Regardless of whether software was owned or licensed the bottom line was that you paid for the it once and were able to use it perpetually. Some companies such as Red Hat provide support service as a complement to their product. Subscription based product support has proven to be very profitable for Red Hat, and other companies have taken notice.

I Am Altering The Deal

Microsoft and Adobe are two major software powerhouses that are trying to do away with the software status quo. Both companies have decided to change the way they sell their flagship products. Instead of the traditional pay once, use perpetually model they are now offering software as a service: pay monthly if you want to keep using the product.

SaaS is not a novel concept. Oracle and Salesforce have been doing it in the enterprise space, and massively multiplayer online games have been subscription based since the beginning. The model makes sense when the vendor is hosting the software and providing a benefit to the customer such as managing massive server farms and software maintenance on the customer’s behalf.

For a product like Microsoft Office or Adobe Photoshop the reasons for a subscription based service are less clear. MS Office 365 does offer some benefits for enterprise users such as moving Exchange and SharePoint servers to Microsoft’s cloud. However for home users the only things Microsoft offers with the subscription are 20 GB of storage for SkyDrive and 60 minutes of Skype phone call time per month. Services that are completely unrelated to Office apps.

Adobe is touting the main benefit of their subscription model as access to all their software. However, since most users don’t need the entire suite of Adobe’s software, a perpetual license for a single application like Photoshop would be a better investment (one year of Creative Cloud subscription is equivalent to a perpetual Photoshop license). This is especially true considering that both MS Office and Adobe Photoshop are mature applications which users don’t need to upgrade very frequently.

User + Subscription = Guaranteed Revenue

If you are starting to think that software as a service is an evil scheme for milking more money from consumers you’re partially right. Partially right because the reason for implementing this model is not primarily to make more money. Microsoft and Adobe could easily achieve that by raising prices on their products. No, the main reason these corporate giants are moving to the subscription model is the lure of guaranteed revenue.

With a traditional business model, both companies would release a new version of their software every couple of years. They would get a surge in upgrade sales, and then the sales would level off. The revenue curve would then look like a sine wave. Up, down, up, down. There’s nothing that Wall Street hates more than unpredictable revenue projections, and this in turn reflects on the company’s stock price.

By going with software as a service, the company is able to literally guarantee how much revenue they will bring in every quarter. They can tell Wall Street “we have X subscribers that are paying Y dollars monthly so we will have Z revenue this quarter”. Compare this to “we are going to release a new version of Creative Suite next quarter and we expect to generate X dollars of revenue, but we can’t know for sure how much it will be”. Which sounds better to you as an investor?

The Silver Lining

Despite the fact that there are currently few benefits to consumers in buying software as a service, things may change. Adobe for instance can greatly increase the value of its subscription by going further with its cloud than mere remote storage. One of the benefits of a server cloud is the vast processing power it provides. Adobe’s cloud can allow users to batch process a large number of high resolution images in a fraction of a time it would take on their home computer.

Will Adobe and Microsoft come up with real benefits to offer users purchasing software as a service? It’s hard to say, but the possibility is definitely there. Regardless of whether we will see software giants get creative in how they use the cloud in conjunction with their software, it is clear that the subscription model is here to stay. Companies stand to gain many benefits from this business model. Too many for them to ignore it or go back to the way things were.

This post includes Cloud by James Cridland used under the Creative Commons Attribution 2.0 Generic license.

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