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THINK ABOUT IT: Rise of subscription purchasing bodes ill

THINK ABOUT IT: Rise of subscription purchasing bodes ill

Technology purchasing is undergoing a subtle revolution. Slowly but surely, the old model of purchasing hardware and software for an upfront fee is being replaced. The IT user of tomorrow is unlikely to ever own their technology - they will be more likely to rent it, or engage in some other ongoing payment program.

The model is being driven by vendors who are tired of lumpy revenue streams. The size of many contracts means that the week in which they are signed can have material impact the company's quarterly sales figures - a few delayed contracts can mean the difference between meeting and missing analyst expectations. Many vendors have decided it's much better to have clients paying regular amounts on a monthly basis.

Several companies have already gone down this path. Computer Associates took a bold step three years ago to recognise revenue on a monthly basis. The decision decimated its quarterly revenues, but should give it better forward visibility. Microsoft tried a subscription-style model for its software, but faced revolt from customers over its cost and lack of flexibility. And many applications service providers (ASPs), who billed for hosted systems on a monthly basis, found little success. Sun has taken a novel twist, giving away a free Opteron server to developers who pay $US99 to 'subscribe' to its software suite.

The company is so happy with uptake that is chief operating officer, Jonathon Schwarz, is investigating other ways that it can give away its hardware in return for locking customers into subscription contracts.

Schwarz acknowledges that not all companies who have tried subscription have been successful.

"We have looked carefully at why businesses have failed in pursuing this strategy," Schwarz said. "And we believe we have managed that risk out. And as we have introduced the concept on our website ... we've had an electrifying response from developers."

Schwarz claims all computing will be purchased this way eventually, as the industry moves to a model of 'utility computing', where applications and data are accessed from remote locations over secure networks. Clients will subscribe to the services they need, much in the way that businesses subscribe today to the various features of mobile telephony networks.

This model also has huge ramifications for third-party sales groups. A decision by a vendor to collect its revenue on a monthly basis places the same constraint on all other members of its sales channel.

For many small companies, this may result in improved visibility of revenue over the long term. But in the short term it will fundamentally alter their cash flow, as they will no longer be able to rely on big deals to tide them over for long periods.

What is most disturbing for the channel, however, is that the most successful user of the subscription model utilises no channel whatsoever.

The US-based CRM software maker, Salesforce.com, has signed up mote than 10,700 clients globally, using a direct sales model. Clients have a relationship directly with the service provider - indeed, the software remains hosted on Salesforce.com's servers. The company has also been particularly successful at recruiting SME customers - a group that is the bread and butter of resellers and VARs. In the Sun model, the deal is struck through a partner, who collects a margin, but the relationship is very much between the vendor and its client.

Other companies including heavyweights, Siebel Systems and Oracle, are attempting to follow Salesforce.com's lead in the hosted model.

Whether they can retrofit their models to succeed is debatable - most early attempts at ASP-style service delivery failed dismally. The extent of channel involvement in this model's delivery is also open to debate.

But should these early attempts portend a greater strategy - one that stipulates a strong direct relationship between supplier and client - none of this bodes well for the channel.


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