During the last months I had a number of conversations with vendors about the licensing and business models for their cloud offerings. And frequently the conclusion was that the models aren’t really adequate for the cloud. Some might work today and for some period of time, but they are not likely to be successful on the longer term.
One ob the obvious shortcomings are accounting periods which are too long and thus don’t provide the required flexibility which is a key advantage of cloud services. Contracts which run at least 12 months or accounting periods which look at the peak use within a calendar month are not what we need for the cloud. Over time, customers will expect the ability to switch their provider quickly and to pay-per-use. For sure there are services where customers aren’t that likely to move ever or on short-term (salesforce.com, SAP BusinessByDesign). But I’ve seen that model as well at the platform and infrastructure level.
But pay-per-use models can be critical as well. If there are either too many elements in or elements which can’t be predicted, these models don’t provide the advantage of reliable cost models which are as well a key advantage that cloud services can and should provide. That is the same like with ISPs in the past – there will be a logical move to flatrate models. Noone likes to become bankrupt because he is too successful.
The reason for these sometimes inadequate business models are obvious:
- Many vendors in the cloud are experienced with classical, license-based business models and have no experience and sometimes little understanding of new cloud business models. They are insecure and have to learn.
- Customers currently frequently accept these business models – but that will change.
However it is very interesting to observe the change in these business models over time. In the cloud, business models are always under stress test. The impact of actions of other vendors is strong. For example, Microsoft in fact has defined an maximum price tag for hosted Exchange services with their own offering. Providers which want to earn more will have to very clearly show the added value to their customers.
That will not automatically lead to a situation in which the cheapest provider wins. But for sure cloud service providers will have to react on what others are doing. Thus, flexible business models and an efficient production of cloud services are mandatory. Vendors who are not able to pick up the pace of these changes in business models are likely to disappear from the market.
Is it so much the Cloud model which is the threat or the SaaS model?
Margin erosion is going to creep in fast when lift off really occurs but that will be a while yet. SaaS represents something between 3 and 6% of the software market currently, leaving 94% firmly in the hands of vendors and their perpetually protective licensing models.
So what does this mean? For the moment at least the uptake will remain slow because the larger enterprises will not throw their investments in legacy systems away to pay more for the services delivered via SaaS (Cloud or not). This is all about the economic model and less about the security paranoias and all the other voiced objections to date. Mid to large enterprises will continue to have their feet in both camps, perpetual licensing with maintenance and EAs, as well as SaaS. Vendors will have to downgrade their dreams of delivering everything across the web from newly formed business units to the more realistic model of hybrid delivery supporting distributors and reseller channels as well as the on-demand channel.
Only the adventurous will wander down this road and if we are to believe all the rhetoric from Microsoft about threat to their business model and how Azure is shifting the paradigm well just consider this; they have never been thought leaders or first movers up to now, why would they throw their long haul marketing budgets up the wall to be first movers now? Their investment is all about stalling for time until critical mass has been reached and then in for the kill on price.
The question is whether the channels can become more effective and efficient enough to drive vendors into a corner where they have to consider alternatives to 'perpetual' subscription based pricing. Committed Monthly Recurring Revenue benefits only for vendors while pricing is so high. Their customers will suffer long term high pricing until they can demand better bundling, risk based pricing, or drive vendors to be more diligent about their own revenue assurance which in turn will make them more profitable on lower margins.