I recently contributed the first of a three-part series of articles to Business View Magazine about how the new subscription-based economy is affecting traditional technology companies. In my first article, "The Terror Facing Tech," I discuss how both the product revenues and even service revenues for many well-established traditional technology suppliers are beginning to shrink. In response, they’re making the pivot toward the new as-a-service business models, yet are struggling to achieve profitability. So, what can they do to bridge this gap? Here is an excerpt of the article, which you can read in full online on Business View Magazine's site.
Impact of the Subscription Economy
When customers decide to rent and not own assets, three things happen:
1. Customers do not pay for capacity they do not need.
2. Customers are not stuck with assets they no longer want or need.
3. Customers have more flexibility to switch providers.
These three realities break down the traditional tech business model, where customers made significant up front investments to purchase assets. Once these investments were made, the customer then paid ongoing maintenance costs as an insurance policy to protect the value of those tech assets. In the subscription economy, the technology provider is responsible for maintaining the assets. No high margin insurance policy required.
In theory, subscription business models can result in a high margin business where tons of customers are paying year after year to access a common platform. At TSIA, we believe the potential is there. However, the vast majority of tech companies are not optimized to support subscription business models. Even the born in the cloud companies! We track forty of the largest cloud computing companies on the planet. Their revenues are growing at double digit rates, but, on average, these companies are losing money.
While it might seem like doom and gloom for now, the good news is that there is hope on the horizon. In my next article, I will be discussing what it means to embrace as-a-service offers in a tech business model and how that can lead to future profitability, so stay tuned!
About the Author
Thomas Lah is executive director of TSIA. Since 1996, he has used his incisive analysis, strategic thinking, and creative solutions to help some of the world's largest technology companies improve the efficiency of their daily operations. He has authored several books, including, Bridging the Services Chasm (2009), Consumption Economics (2011), B4B (2013), and Technology-as-a-Service Playbook: How to Grow a Profitable Subscription Business (2016).