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05/01/2014

Software as a Subscription, not as a Service

The rise of the subscription business model for software licenses, with differences and similarities compared to the Software as a Service delivery model

Introduction

In the past few months the subscription license model for software products has seen a significant increase in the software market landscape. Many software vendors are gradually adopting the “SaaS”, Software as a Service business model, abandoning the traditional on-promise license model, and offering monthly or annual payments plans to their clients. This model is very similar to leasing, since the user pays a regular fee in order to use the product, but he does not “own” the software, he is just entitled to use it for a specific time period. When the payment plan is terminated, the user cannot actually access the software.

However, there is some general confusion in the software market about the label “SaaS”, which sometimes is used improperly for software products that have replaced the traditional perpetual model by the increasingly popular subscription plan.

This paper aims at clarifying the ambiguities over the subscription license model and alerting on the risks and pitfalls under the license management point of view.

Key facts and figures around the SaaS

According to Gartner1, the SaaS market will grow at a steady CAGR of 19.5% through 2016, having increased the forecast slightly (.4%) since its latest published report.  Global SaaS spending is projected to grow from USD 13.5bn in 2011 to USD 32.8bn in 2016.

CRM will continue to be the largest global market within SaaS, expected to grow beyond USD 5bn in 2012 to USD 9bn in 2016, achieving a 16.3% CAGR through 2016.  

The highest growth segments of the SaaS market continue to be office suites (49.1% CAGR 2011-2016), followed by digital content creation (34.0%), business intelligence applications (27.4%) and enterprise content management (25.9%).

Within the SaaS market, it is important to distinguish what is pure SaaS from other similar offers.  Software vendors are actually introducing different kind of services which sometimes do not completely correspond to SaaS, but can be considered a sort of hybrid solution.

SaaS has been defined as a software delivery model in which applications are hosted by a vendor or service provider and made available to customers over a network, typically the Internet2.

Typically, SaaS is provided through a subscription plan. The subscription model means that instead of paying an upfront for a perpetual license (and periodic maintenance fees where applicable), the user will have to submit regular payments  every month or every year in order to use the software. A subscription license is just a payment plan for access to the software, but it differs from the delivery model.

Some software vendors have switched to the subscription business model, but their offer cannot be called “pure SaaS”, since the software is still actually installed on the local machine, instead of being hosted by the vendor, and it is not delivered through the internet. In this case the label SaaS could be misleading and should potentially stand for Software as a Subscription, not as a Service.

The subscription model into details

SaaS is by now an important element within the software market industry and many vendors are focusing their strategy on this delivery model. However it seems that the term SaaS is sometimes abused and frequently used to refer to any software that has a subscription plan, and few additional features such as cloud-based storage. This approach can be confusing and sometimes detrimental for customers who expect to take advantage of features and benefits of the SaaS offer.

According to industry experts, the advantages of SaaS in terms of delivery model include:

  • easier software deployment and administration: the software is hosted and fully managed by the vendor
  • automatic updates and patch management
  • improved compatibility: all users will have the same version of software.
  • easier collaboration, for the same reason
  • global accessibility through web-based access and easier deployment on different platforms

Based on this definition, some recent offers by major software providers, like MS Office 365 and Adobe Creative Cloud, do not actually fit the pure SaaS definition, since the software is not web-based but it is still installed and running on the local machine. Those products are positioned in between the traditional on premise model and the SaaS, more similar to a leasing model, which we will label “quasi-SaaS”.

Analysing the characteristics of the “quasi-SaaS” products and comparing them with the key characteristics of SaaS, it is possible to identify the significant differences between the two models:

Software vendors that offer subscription license models

In the recent years, many software vendors have started to offer a subscription model instead of the traditional perpetual one. In 2011 Microsoft launched MS Office 365, facing the increasing competition of Google’s similar services. Beside Office 2013, Microsoft includes social networking, collaboration and cloud storage services like Lync, Exchange, SharePoint (in the Business Edition) and free space in OneDrive.

The CAD world is also joining the “cloud”

Also the CAD world has moved in this direction, even if the offers are still not mature. Siemens PLM solution Solid Edge is one of them. Users access the monthly subscription license through the Solid Edge online store, and then download a full version and run it on their own machines. The offer is not cloud-based and users can still choose between the perpetual and the subscription option.

Different is the case of Autodesk. Considered the first software vendor to offer cloud-based CAD solutions, Autodesk had developed a portfolio of products under the brand Autodesk 360, like for instance Autodesk Fusion 360, defined as a “thin-client modelling environment that connects to the cloud where the model is uploaded and stored”. Autodesk Fusion 360 is a web application, which means that it connects to a cloud service where all the data and changes of the design are automatically saved.

Experts in the industry are currently analysing and reviewing this type of products, which still has to achieve full maturity, pointing out benefits and drawbacks: for example, storage capacity is one of the main advantages while data transferral capabilities still represent an issue because its dependency on the network bandwidth.

The case of Adobe Creative Cloud

But the most popular case that has actually “inflamed” many discussions over the internet is the case of Adobe. In 2012 Adobe announced the release of Creative Cloud, the cloud-based offer of Adobe Creative Suite, switching from the perpetual license model to the subscription model.

As for MS Office 365, the product (or package of products) is downloaded and installed on the local machine, allowing the user to use two devices with the same license. Graphics and media contents can be saved on a cloud-based storage and users can actually work offline.

However, the reaction of Adobe users was much stronger and widespread compared to all the other cases of subscription model previously mentioned, especially after Adobe announced it would no longer release future versions of its Creative Suite software in May 2013. Feedbacks and comments from the internet have not been much in favour of this change and the main reasons are the following:

  • The perpetual license model has been completely replaced by the subscription model: new users cannot choose the option to keep the perpetual model
  • Users have to pay monthly or annual subscription to use the software. If subscription is stopped, users cannot open and view their Adobe files, unless they had a previous Creative Suite version installed
  • Creative Cloud offers less choice regarding product packages. Users now have to choose between full Creative Cloud offer or single products, like Adobe Photoshop, Dreamweaver, etc.. Previous suites like Design Standard or Web & Design Premium are not available anymore
  • Perception of users is that in the long term they will pay more compared to the old perpetual model, without receiving a balanced and fair added-value in the new offer

An important point to notice about this general dissatisfaction is the profile of Creative Suite clients. A part of them consists of free lancers, small graphic studios and individual artists. The protest on internet comes mainly from this group: their income is quite unsteady, depending on the variable requests from their clients and, based on their professional requirements, they can actually work with old product versions (no need to have continuous upgrades).

On the corporate side some questions and concerns have been raised as well regarding the new cloud-based offer. As expected, Adobe account managers are actively presenting the new offer, highlighting new features, benefits and added value for their clients. However, product presentations are usually followed by commercial offers that propose to replace the entire Adobe Creative Suite portfolio of perpetual licenses with the new subscription model, at a not negligible price.  Propositions may also include Acrobat Standard and Pro, now also available through the subscription model, but those products can still be purchased as perpetual licenses, at least for now.

A gradual replacement of the Adobe portfolio, through new user demand, represents a more suitable option for companies, rather than a total license replacement, which might not be covered by financial resources.

The rising interest of alternative software

Despite controversy over the move to the subscription-based business model, software vendors are actually winning. At the end of 2013, Adobe claimed to have already 1.4m individual and team Creative Cloud subscribers, and to have closed more than 1,000 Creative Cloud enterprise licensing contracts, which are generally three-year agreements. In March 2014 Adobe announced and additional 400k new subscribers, achieving 1.8m Creative Cloud users.

There is no doubt that users will have to eventually accept this change and submit to the subscription model as older copies become obsolete and potentially incompatible with newer formats.

However, users are actually turning their interest to comparable products, which are still based on the traditional perpetual licensing model, and offer similar solutions at a more convenient price. 

After the launch of Creative Cloud, Adobe’s competitors like Corel, Pixelmator, and Quarkhave started to lower their prices and launch attractive promotions in order to attract dissatisfied Adobe users. 

According to the Economist3  Adobe’s decision regarding the subscription model was a brave move that eventually will be followed by many others software vendors. The advantages from the vendor point of view are evident, since subscription tends to provide more predictable and recurrent revenues. In fact, despite the sharp drop of net income in the first quarter 2014 (-28%), the fifth consecutive decrease in year-on-year earnings, share price of Adobe Inc. continues to soar, showing a +63% over the past 12 months.

In fairness, the move to the subscription model for software products seems to be a not reversible trend, which will continue to grow and evolve in the next years. However, software vendors should make this important evolution more flexible and smoother for their users, in order to ensure a seamless and painless move.

Illustration: examples of alternative software to Adobe Creative Cloud products

Main impacts and challenges on Software Asset Management

As pointed out by experts in the field, SaaS and similar models do not simplify the license metric. If we consider the “pure SaaS” solutions, like Salesforce for example, there are a few things to take into account.

In a paper published by BSA (Navigating the cloud: Why Software Asset Management is more important than ever), the risks and pitfalls of SaaS regarding license management are pointed out:

  • Software components: some SaaS solutions include plug-ins or other user-side software that require proper licensing and management.
  • Unauthorized use: breaching geographical constraints, shared logins, incorrect logins (e.g. Admin accounts rather than regular accounts) providing logins to third parties, generating value from the SaaS system and sharing with others who don’t have access.
  • Shelfware (software paid for but not used): usage of licenses should be continuously monitored in order to identified unused licenses
  • User profile definition: given the “multi-tenant” architecture, only one product version is deployed for the whole organization (based on the size of the company, the product features and user requirements) and cannot be changed until the end of the contract

In the case of Salesforce, only one Edition can be chosen for the whole company (e.g. Enterprise Edition). Instead, Salesforce offers many license types, depending on the profile and necessary authorizations for each user (e.g. Salesforce, Salesforce Platform, Force.com, etc.). According to contracts conditions, the number of purchased licenses cannot be decreased during the contract period, but only be increased. The only way to achieve potential savings is to recycle the user’s portfolio, which means to replace the leaving user with another user, without buying a new license. In order to reduce the number of licenses the company has to wait for the end of the contract and to renegotiate the number of licenses needed according to the real usage monitored and observed.

Different could be the case of a “single-tenant” SaaS architecture. In that case, different configurations are possible, according to the requirements of each user.

In case of the so called “quasi-SaaS”, like Adobe Creative Cloud, the license metric does not change compared to the old perpetual model (for example by installation). This means that, unless those licenses are properly managed and controlled, the compliance risk can still be high.

Contrary to the general opinion regarding SaaS licensing, Software Asset Management practices are still very important within the IT departments and should be reviewed in order to properly cope with the new license models.

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1Gartner, February 2013
2Definition from SearchCloudComputing
”Super subs”, The Economist, March 22nd, 2014
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