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Tech industry subscribes to new revenue model

Tom Kaneshige | June 6, 2014
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.

"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.

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 manager 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.

"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.

 

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