Software Makers’ Subscription Drive

November 20, 2013 Leave a comment

Software Makers’ Subscription Drive

By Sam Grobart November 14, 2013

In 2013 consumer software companies proved they could pull off the switch from one-time software purchases to an online subscriber model that costs customers more long term. Market researcher IDC estimates software subscription revenue has risen about 16 percent, to roughly $65 billion this year from $56 billion in 2012, and will approach $78 billion next year. IDC analyst Amy Konary says it’s too soon for those software makers to declare victory, “but what they consider a success is having a [subscription] model out there, having customers choosing that approach.”Photoshop maker Adobe Systems (ADBE) was the boldest, moving its entire suite of applications to a subscription package called Creative Cloud. The boxed collection of the same programs used to cost $2,500; subscribers pay $50 a month. By mid-September the company was selling about 25,000 subscriptions a week, up from 8,000 a year earlier, when outright purchase was still an option. “We’ve exceeded our expectations thus far,” says David Wadhwani, Adobe’s senior vice president for digital media.

Microsoft (MSFT) hasn’t given up the purchase model for its $140 to $400 suite of Office applications, but it has sold 2 million $100-a-year subscriptions to Office 365 Home Premium since the product’s debut in March. The subscription-based Office was Microsoft’s fastest product to hit annual revenue of $1 billion.

There are benefits for users: They’re guaranteed the latest features and security patches with no wait, surcharge, or trip to the store. Julia White, Microsoft’s general manager of Office marketing, says her company can more quickly adapt to user feedback through the cloud, too. “We can see if they are using the new capabilities,” says White. And with no need to maintain support for older programs, “we can deploy a lot more of our resources to future efforts.”

For companies trying to shift business models, the tricky part is absorbing a short-term revenue hit. A subscription must be much cheaper than a license to entice customers to switch, meaning companies have much less cash in hand during the early going. At the end of its last quarter, Adobe’s revenue fell from $871 million to $645 million. Microsoft experienced a similar drop and says the switch won’t pay off until at least 2017.

Those companies can afford to play the long game provided consumers continue to need their products. (Those relying more on occasional big paydays, like architectural and engineering software maker Autodesk (ADSK), have been slower to shift.) Microsoft is betting Office users won’t jump to Google Docs (GOOG) or Apple’s (AAPL) Pages. Subscription sellers are also counting on customers trained by Netflix (NFLX) and Hulu to subscribe to movies and TV shows—and license their iTunes music and Kindle e-books, rather than buying them—to keep growing more comfortable with the end of ownership. Expect more software to move to this model.

Filed under TMT Trends

Unknown's avatarAbout bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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