Virtual Software: Changing Business Models

One of the best texts I’ve ever read about business models was written by Cory Doctorow, a famous writer and entrepreneur. His novel Makers was not only a great story, but virtually a doctoral thesis on how business models can change and have a radical impact on everything they touch.

A couple years ago, I helped launch a new virtualized software product line for Dialogic. The PowerVille™ Load Balancer was different in many ways from other products I’d managed. The software was totally agnostic to the underlying hardware, courtesy of a Java code base which was highly portable to multiple topologies. As a result, it fit nicely into a variety of virtual environments and also was poised to make the leap into emerging Cloud architectures, in line with trends like the emerging Virtualized Network Function (VNF) and approaches like the use of HEAT templates for configuration.

A few months into the launch, my manager and I talked about how to take this product to the next level and realized that we needed different business models for this kind of product. The traditional load balancer provided by industry leaders such as F5 was built on top of proprietary hardware platforms, and the business model followed suit. Pricing was typically based on a purchase, where all of the hardware (and software) was purchased upfront, accompanied by a service agreement which was renewed year by year.  This approach is often called the perpetual model.

But with the Cloud taking over, customers were looking for different answers. Cloud Services such as Amazon Web Services (AWS) and lots of industry software had moved to subscription or usage based business models. For example, if you buy a subscription to to a software product like Adobe Acrobat, you get the right to use the product so long as you keep paying the monthly subscription fees. Amazon went further. You can buy rights to AWS services and only pay for the usage of the Cloud infrastructure you have purchased. In the world of virtual services, this permits customers to scale up for high usage events—think of the capacity need to support online voting via text for a television program like American Idol—and then scale back down as needed, perhaps even to zero.

We considered these kinds of changes for the Dialogic load balancer, but other virtual software products at the company ended up taking the lead in becoming available under subscription or usage based models. The implications were huge. Salesreps loved the perpetual model, since they’d get a big chunk of commissions every time they sold a big box.  In a subscription or usage based model, the revenue—and the commissions—move to a “pay as you go” model. Hence, no big upfront commissions payout and you need to keep the customer happy to get that recurring revenue stream. By contrast, finance executives now had a revenue stream which was less bumpy, since there was somewhat less incentive for Sales to go out and close those end of quarter deals. Customers also like the flexibility of subscription models. Typically, they may pay more over the long haul vs. the perpetual model, but they also have the option to change to a new product or service mid-stream. In summary, the move to virtual software and related technical innovations such as Software as a Service (SaaS), Infrastructure as a Service (IaaS) or by extension Anything as a Service is likely to drag in new business models.  These new business models change the finances both on the customer and vendor side and not everybody will be pleased with the results, but momentum for these trends continues to grow.

If your organization has participated in the evolution from perpetual to subscription or usage based business models, please  weigh in with your comments. If you’d like to explore strategies on how to evolve your application solutions or other communications products in this rapidly changing business environment, you can reach me on LinkedIn or on our web site.

 

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About James Rafferty
James Rafferty has been active in the world of telecommunications, standards and related businesses in a variety of roles. He's been a thought leader in areas such as Voice over IP and Internet fax through his consulting, product management, marketing and standards activities. He loves to write and talk about new connections, applications and business models as communications and related technologies evolve.

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