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The Recurring Revenue Revolution: How Much, How Fast, and Know-How

Amy M. Konary Program Director Software Pricing, Licensing, and Delivery. The Recurring Revenue Revolution: How Much, How Fast, and Know-How. October, 2004. Agenda. Key Trends Industry Perspectives Growth Projections Next Practices Essential Guidance. IDC Background.

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The Recurring Revenue Revolution: How Much, How Fast, and Know-How

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  1. Amy M. KonaryProgram Director Software Pricing, Licensing, and Delivery The Recurring Revenue Revolution:How Much, How Fast, and Know-How October, 2004

  2. Agenda • Key Trends • Industry Perspectives • Growth Projections • Next Practices • Essential Guidance

  3. IDC Background • Global market intelligence and advisory firm on IT and telecommunications industries • 700+ analysts worldwide • Founded in 1964 • U.S. headquarters in Framingham, MA • 50 offices in 42 countries • Subsidiary of IDG, an industry-leading media, research, and events company

  4. Software Licensing to Morph Information Week, 3/2004 “WW growth of software subscriptions will outstrip perpetual license…”Forbes, 7/2004 Shift to Subscriptions Means More Choice for CIOs CIO, 5/2004 Software-Licensing Market Taking New Shape VARBusiness, 8/2002 Software Licensing Grows Complex Network World, 7/2004 “Software is dead” Marc Benioff, Chairman, SalesForce.com “Software is dead” Shaun James Browne, SuperPowerNet.com “Software is dead” National Post Online “Software is dead” Bruce Fram, Silicon Valley Entrepreneur “Software is dead” Jack Mamais, Heavy Gear 2 Director “Paying for software is dead, too” InetBlog Big Changes in Licensing? CRN, 4/2004 Pay-as-you-go software at a VAR near you Computer Dealer News, 6/2004 Licenses Kill TechWeb, 4/2004 In the Midst of Major Change

  5. Change is in the Air… Q.- “Have you made changes or are you considering making changes to your licensing model?” (% of respondents) 35% of vendors that made changes in the last year are considering changes in the next year too N = 107 Source: IDC’s Future of Software Licensing Study, Q46 Vendor Survey 1, 2004

  6. Change is in the Air… Vendor- “Please describe the changes” N = 62 and 60 Source: IDC’s Future of Software Licensing Study, Q54 Vendor Survey 1, 2004 Note: Multiple Responses

  7. PREDICTABILITY Indirect 5% 15% SALES APPROACH 80% Direct REVENUE APPROACH VOLATILITY Annuity One-Time Shift from One-Time to Annuity

  8. Why the Revolution? • It’s becoming increasingly difficult to make money as a software provider • Customers continue to be cautious with spending • Discount levels are trending upward • No “killer app” on the horizon • The lines between software and service are blurring • New delivery models • New competitors offering hybrid software/service models • Vendors are searching for sources of predictable, recurring, revenue • Vendors want to get off of the “perpetual” merry-go-round • The financial community is pushing for this… sort of

  9. Before We Proceed- License Definitions • Subscription License- Subscription licenses are paid for with a recurring (often annual) fee to continue using the software. The customer does not own the software license. • Perpetual- Perpetual licenses are paid for on a one-time basis, giving the user the right to run the program as long as he/she chooses. It does not imply a right to upgrades, which are typically sold separately as part of a maintenance agreement or on a per-upgrade basis. Some vendors sell perpetual licenses on a term basis, which on the surface appears to be subscription based because the payments are spread out over time. However, from a deal perspective, it amounts to a financing approach in which either the vendor or a third party helps amortize payments over a specified period. The software does not stop running after that time period, and the customer is granted a perpetual license.

  10. Maintenance Definition • Software Maintenance- An agreement between the licensee and software developer through which the developer continues to improve the packaged software product by repairing known faults and errors or enhancing, updating, or upgrading the product. It may also include technical support and is generally priced as a percentage of either the net or list license cost.

  11. In the next year, will your maintenance revenues represent an additional 10% or greater of your total revenues relative to last year? In the next year, how likely is it that your company will use maintenance as a primary vehicle to offer additional services, rather than just a version upgrade insurance In the next year, how likely is it that the software industry will move toward subscription licensing? Vendors on Maintenance and Subscription • 27% of vendors think this is highly probable • 26% of vendors think this is highly probable • 33% of vendors think this is highly probable

  12. The Macro Environment- Customers • Suspicion abounds… conspiracy theorists flourish • Dissatisfaction with vendor licensing practices • Customer expectation that the vendor is trying to squeeze as much money out of them that they can • In 2003, customers allocated an average of: • 33% of their software budgets to new license • 25% of their software budgets to upgrades • 20% of their budgets to maintenance • From 2004-2005, customers will increase the % of their software budgets on maintenance at the expense of new license and upgrades

  13. Software Maintenance Increase Customer – “By what %, if any, do you expect the percent of your IT budget spent on software maintenance to increase or decrease from 2004 to 2005?” (% increase or decrease) (% of respondents) N = 57 Source: IDC’s Future of Software Licensing Study, Q5 Customer Survey 2, 2004

  14. Will vendors begin to use maintenance as a primary vehicle to offer additional services, rather than just a version upgrade insurance Do you expect the cost of maintenance to increase? In the next year, how likely is it that the software industry will move toward subscription licensing? Customers on Maintenance and Subscription • 48% of customers think this is highly probable • 42% of customers think this is highly probable • 33% of customers think this is highly probable

  15. 49% 41% Software Market Forecast Worldwide Software Market Revenues, 2003-2008, ($M)

  16. Why Customers Purchase Maintenance Customer- “When you purchase maintenance/ subscription, is it because…” (%) of respondents N = 40; Applications only Source: IDC’s Future of Software Licensing Study, Q25 Customer Survey 1, 2004

  17. Perspectives on Subscription Subscription Pros Subscription Cons • Vendor • Predictable revenue • Low up-front cost for customer • Upgrades • Customer • Upgrades • Relationship with or support from vendor • Low up-front cost for customer • Vendor • Revenue disadvantages • Complexity or cost for vendor • Onus on value for vendor • Customer • Long-term cost • Unpredictable cost • Automatic upgrades

  18. 66% 81% Software License Forecast Worldwide Software License Revenues, 2003-2008, ($M)

  19. Next Practices- Microsoft • Launched Software Assurance in 2003 • What they did right: • Made the upgrade purchase process easier for customers • Included additional services beyond upgrades that addressed customer pain points, such as eLearning, home use rights, and training • Where they fell short: • Did not ensure upgrades would be valuable to customers • Did not communicate the benefits of the additional services effectively

  20. Next Practices- SAS Institute • Company has offered a subscription model for decades • What they do right: • Philosophy- Move customers’ businesses forward • Simplicity (usage rights to the software during the paid period, including maintenance, Tech Support, bug fixes, updates and new releases) • The model requires that SAS be accountable for innovative, reliable software year after year • Why they have an advantage? • They’ve been doing this all along

  21. Next Practices- Computer Associates • CA moved to ratable revenue recognition • CA offers a licensing portfolio • Includes subscription for specific purposes • Why they have an advantage? • CA has factored their own receivables for years • CA made the shift when the chips were already down • Why they had a disadvantage? • Reduces their market share in a revenue view • Hard to anticipate market reaction

  22. Essential Guidance • Consider the benefits of maintenance or subscription: • Revenue benefits • Benefits WRT your relationship with the customer and the customer’s allegiance to the software • Opportunities to encourage customers to use valuable tools and services • Consider how to build recurring $ without sinking the ship: • Licensing portfolio • Increase maintenance renewals • Every situation will be unique

  23. Questions? akonary@idc.com

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