Tech Industry Subscribes to New Revenue Model

All signs point to a bright future for subscriptions. The Internet of Things and wearables mega trends promise to open the floodgates to subscription opportunities. For a case in point, Apple just bought Beats for $3 billion, not so much for the popular Beats headphones, but rather for subscription-based streaming music service.

The era of subscriptions is upon us, and vendors courageous enough to adopt a subscription model for selling goods and services stand to pocket long-term payoffs in customer loyalty and recurring revenue.

That's the message at Subscribed 2014 in San Francisco this week, a well-attended event with attendees evenly split among finance, IT, marketing and operations.

tech industry

"In the last nine months, we've seen Adobe, Autodesk, even SAP make bold moves to pivot" to a subscription model, says CMO Brian Bell at Zuora, a Silicon Valley subscription-management software vendor that hosted the event.

[Related: SAP Adds Subscription Pricing for Hana Cloud Services]

Many signs point to a bright future for subscriptions. There's the Internet of Things and wearables mega trends promising to open the floodgates to a myriad of subscription opportunities, such as health-related, auto-related and home-related services. Apple just bought Beats for $3 billion, not so much for the popular Beats headphones, rather Beats' subscription-based streaming music service.

As the popularity of cloud computing rises and the digital economy becomes the new normal, subscription pricing will overtake perpetual licensing and maintenance by 2019, predicts Gartner. Over half of companies have changed or are in the process of changing how they price and deliver goods and services, according to the Economist Intelligence Unit. (Ironically, Subscribed 2014 took place at the Westin Hotel in San Francisco's Union Square, the famous shopping mecca where luxury goods and services are still sold in the traditional way.)

Executives from Deloitte in Australia, Telecom New Zealand, Thermo Fisher Scientific and Adobe took to the stage at Subscribed 2014 to tell stories about digital disruption, leveraging subscriptions, and reaping the rewards, most notably recurring revenue recognition. Other subscription-model benefits include long-term customer loyalty or lock-in, more detailed data about customer subscribers, and the potential to scale their number.

Say Goodbye to Software?

Among software developers, the subscription model might put an end to traditional on-premises software, says Mike Volpi, general partner at Index Ventures, a Zuora investor. A few years from now, he says, "there will be no investment in [startup] packaged software companies."

The road to the subscription model, however, is wrought with sharp curves and hidden pitfalls. It disrupts existing sales and distribution channels, product bundles, supply chains, sales commissions, pricing models and upends expensive ERP investments. Often, there's a short-term hit on revenue when transitioning from a traditional transactional sales model to a digital subscription model.

[Related: Box Swivels to SMBs with New Subscription Plan]

"This is a complicated transition," says David Wadhwani, senior vice president and general manager of digital media at Adobe. The biggest challenge companies face when weighing the decision to transition to a subscription model, he says, is "overcoming institutional inertia."

Adobe flipped the switch to the subscription model more than two years ago, converting its Creative Suite perpetual license business that posted roughly $2 billion the year prior. Instead of recognizing an $1,800 license under the old model, Adobe would receive only $50 a month. Consequently, there was a short-term impact on Adobe's financial results when comparing with results in prior periods.

"To help the financial community understand this business model transition, and with a goal to communicate our Creative business remained healthy during the transition despite declining reported revenue, we introduced several metrics to indicate the value of the new business we were building," says Mike Saviage, vice president of investor relations at Adobe. "This transparency calmed concerns about our reported financial results."

On the upside, Adobe gained new customers who were willing to pay the relatively cheap monthly subscription fee. In the past, many of these customers were likely pirating the software, Wadhwani says. Today, 20 percent of subscribers are new to Adobe.

Reaching a New Customer Base

Thermo Fisher Scientific, a $17 billion company providing innovative products such as a microchip that reads and analyzes DNA, has also made the shift to the subscription model. The move has led to new customers with no dip in sales. Scientists who could not afford the cost of Thermo Fisher Scientific analysis software before -- or perhaps wouldn't use the software often enough to justify buying it -- could now purchase the cloud service through a subscription based on usage.

Nevertheless, the subscription model has disrupted Thermo Fisher Scientific's entire way of doing business, even thinking about business, which isn't hyperbole.

"You have to take a long-term view, not a quarterly view," says CTO Mark Field at Thermo Fisher Scientific. "It's something we're still struggling with."

Tom Kaneshige covers Apple, BYOD and Consumerization of IT for CIO.com. Follow Tom on Twitter @kaneshige. Follow everything from CIO.com on Twitter @CIOonline, Facebook, Google + and LinkedIn. Email Tom at tkaneshige@cio.com

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