Blog Entry

Jul 9
2013 

The Tectonic Shifts in Software Business Models Signal Need for Technology, Process

The IT industry is in the midst of a massive shift toward what IDC calls the 3rd Platform. The 3rd Platform is characterized by a proliferation of always-connected smart mobile devices coupled with the widespread usage of social networking, and layered over a cloud-based server infrastructure supporting important new workloads such as big data analytics.

The 3rd Platform is not just a technology revolution; it’s also a customer revolution. Unlike the previous generation of software, 3rd Platform applications will be designed for the consumer and enhanced for the enterprise. Consumer-like expectations for ease of acquisition and access as well as simplicity and transparency will dictate pricing models and payment terms. In addition, expectations for ease of use and interoperability will also be gleaned from consumer experiences.

Flexible subscription pricing models
that align cost with actual consumption or experience are a key tenet of the 3rd Platform. Measurements could include user- or feature-based metrics as well as infrastructure-related metrics such as per-gigabyte storage or bandwidth, and costs scale up or down. Service elements such as availability or scalability could also factor into the cost. Per-unit costs may be higher (more flexibility generally equals higher cost), but units will be purchased at a more granular level than in the past, enabling efficiencies for customers and helping to improve the cost/value perception of software. Pricing will also be more transparent and simplified to a certain extent, although the mechanics around the enablement of these models will be anything but simple.

There will still be applications on-premise, licensed in the traditional perpetual sense. But the growth is in subscription Cloud offerings. This means that many software publishers will be managing and supporting a hybrid scenario, while customers will be facing a complex combination of many more applications and devices to manage; decentralized application purchasing, and the proliferation of application access. The net software pricing scenario:

  • A mix of on-premise, cloud, and embedded software
  • Perpetual and subscription licensing
  • The introduction of granular consumption-based metrics
  • Up-front and recurring revenue for vendors; fixed and variable costs for customers

According to IDC survey research, the most trusted cloud providers still line up closely with the long-standing hierarchy of software providers. However, this will change over time. Not only do these companies have legacy business models that pervade their cultures, organizational structures, and shareholder expectations, they also have systems that were set up for selling distributed software. These do not support large scale, high volume subscription pay-per-use (PPU) businesses.

The promise of the 3rd Platforms is as exciting for software publishers as it is for software customers, but the transition will not be quick or easy. However, like they say, it’s the journey, not the destination. Software publishers need to make sure that they have the right strategy—as well as the right tools—in order to make sure that they aren’t left behind.