hardware software subscription

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The technology market moves in cycles, and one of the most extended cycles has been moving from a subscription model to sales of hardware and software and, most recently, back again. Both models have advantages: the sales model is more tactical, and the subscription model is more strategic. This move back to a subscription model begs the question: Why we started with this model, why we moved away from it, and then the drivers and benefits for moving back.

Let’s cover both this week – and why this is good news for vendor channel partners.

Why the IBM Subscription Model Failed

Up until nearly the end of the 1980s, IBM dominated the computer market. I worked for them for most of the 80s and wrote one of the reports internally on why the company nearly failed. IBM rose to dominance in computers without actually selling anything. You couldn’t buy a mainframe. You could only lease it, and the product came with software initially, and the services came as part of your lease.

The benefits to the buyers were low entry cost, one throat to choke (IBM owned the deployment) so you knew who to call with a problem, IBM was tightly coupled with the accounts so they prioritized care, and the engagement was all OpEx. Generally, approvals were far easier to accomplish.

The benefits to IBM were a revenue stream that was invulnerable to market change, customers paid on a schedule, forecasting revenue and expense were relatively easy (making IBM’s financials nearly as consistent as a clock), and very high customer loyalty and satisfaction (reducing churn costs).

The disadvantages to a customer were lock-in (you really couldn’t move), IT (called Management Information Systems or MIS back then) tended to be intractable (they operated as an interface into IBM often poorly), and the lack of a buy option.

The disadvantage for IBM was that they eventually saturated the market, and so management, to push revenue up and show growth, came up with the idea of selling the hardware, decoupling the services, and then charging for anything, including patching, that was done. Of course, once most customers had bought their hardware, all of the benefits of the services were largely lost. IBM went into sharp decline and nearly failed.

So the services model worked for decades but failed when IBM management was motivated to sell, with near-disastrous results for IBM.

Why the Services Model is Coming Back

The core benefits of the service model remain primarily intact. Still, the driver for this latest move appears to be more about having expenses that ramp up and down with the company’s needs and the ability to allocate expenses to different operating groups on the buyer side. Depreciation is brutal to allocate; it can’t be adjusted against revenue, and it potentially reduces agility (you have to take a write-off on the prematurely decommissioned systems).

From the seller’s perspective, increasing engagement, customer loyalty, and providing a product that the customer favors are all significant drivers behind this industry trend. In addition, instead of uneven revenue streams tied to sales, they get a steady revenue stream that works more like an annuity, making it far less likely they’ll miss a forecast or the stock analysts will overset expectations.

Finally, under services, the buyer and seller are naturally tied closer together, focusing the seller on assuring their products are operating correctly and the buyer on assuring the relationship. It is the difference between dating and marriage; the first is transactional, the second is a relationship. And relationships tend to be less aggravating as long as both sides, as is generally the case with services, want to preserve it.

Dell, HP, and Lenovo are some of the vendors aggressively moving to services to address this increasingly critical customer need.

Good News for Partners

I find it fascinating that after abandoning services in the 1980s, the market is finally coming back to them and adopting a more strategic and long-term relationship with their customers. This move should create deeper loyalty between the customer and those providing the services to them; it should make both customers and vendors more agile, and it should increase customer satisfaction and loyalty.

Thus, unless someone decides to go tactical again, this move to services should raise all boats, improving the ability for both vendors and their customers to sustain and manage revenues and costs long term and better assure a prosperous future for vendors and their partners providing their offerings as a service.

Further reading: Subscriptions: Software Licensing on Steroids