Computing is being revolutionized by the cloud, whether it’s actually in the cloud or in the data center. In fact, the line between the two is blurring in a number of novel ways that might give us some insight into how applications, data centers, and IT will look in five or ten years. Not surprisingly, the changes are being driven by a combination of new technology and the overall industry competitive dynamic.
An example of the latter point is THIS article in SDxCentral about HPE’s initiatives, described at HPE’s Discover event in Las Vegas this year. Built around its previously announced “Greenlake” initiative, HPE is crafting a framework to deliver “everything” in as-a-service form. What this really means is shifting from relying on a pure capital purchase model (which will still be available for most traditional IT purchases) to offering a pay-as-you-go/use subscription or aaS model.
If you want to understand the principle behind the move, you need look no further than Adobe, whose revenue and profit surprise has its shares up by over 5% this morning. Most of the gains, say the company, are from its subscription model. Adobe, like most software companies, have been shifting to a model where they sell software on an annual subscription, which provides users with continuous updates and improvements. Most important, it provides the company with continuous new revenue.
The subscription approach deals with a problem that, decades ago, killed Novell, the leader in the enterprise WAN and resource-sharing software. Netware, at the time, was the gold standard for file and printer sharing in offices, but the problem was that when you had a version of Netware that did what you wanted, it was harder and harder to offer features that would induce you to upgrade and generate more revenue. It was also easier and easier for competitors to offer “basic” capabilities, or to simply build the resource-sharing stuff into their products as an additional feature.
For the last decade, the whole IT space has been moving toward the “Novell problem”. For decades, the whole of the IT industry has been focused on bringing computing to more and more applications. During this period, companies had both a “modernization budget” to sustain their existing IT framework and a “project budget” for each incremental improvement to operations. New benefits justified the latter, and when the projects were complete, the infrastructure was added to the modernization pool. Other projects took their place.
Up to about a decade ago. Then, we saw nearly all the low-hanging and even mid-level operations opportunities realized. The ratio of project to modernization shifted, and even modernization became more “sustaining” than progressing. Everything was about technologies to reduce cost, which of course means reducing the revenues of the IT vendors. One obvious approach to holding revenues up is to shift more to that subscription model, to get annual payments so users can’t hunker down on infrastructure investment until it rusts into dust.
Subscription is a great idea, then? Well, look again to the software space and you’ll see the downside of subscription. Two of them, the same two we mentioned regarding Novell, in fact. Feature starvation and competition.
Subscriptions are valuable to the user when there are meaningful updates to be made, and where users consider it “likely” or “justified” to get the new versions. As the number of truly meaningful updates declines, users start to resent the subscription costs because they perceive themselves has having the same capabilities (the stuff they actually use) for a recurring cost. They get antsy, and they’re particularly interested in a change of vendor if the vendor announces a price increase. Which, if the total addressable market is largely saturated, is the only way that additional revenues can be raised in a subscription model.
When buyers get antsy, competitors get opportunistic. Adobe’s competitors have split between adopting their own subscription model as an option or requirement (Cyberlink offers both models, and Corel is moving with at least its flagship product to subscription-only), or positioning against the Adobe pricing model by saying they have a perpetual license.
There’s a buyer-side progression at work here, one that everyone considering subscriptions or as-a-service has to consider. When new stuff creates new and clear benefits, people will stay up-to-date and spend regularly because it benefits them. As the benefits become less clear, something like a subscription or as-a-service approach will tip some over into continued regular payments for a time. Eventually, though, nobody will pay for what they don’t think they need, and somebody will offer them what they really want.
Does this mean that HPE’s move isn’t going to work? Yes, eventually, but it could also be a very valuable tool in buying time. We are in the midst of a computing revolution created by the Internet, virtualization, and cloud computing. We’re in the midst of a revolution in IT engagement with cloud services sold directly to line departments and low-code/no-code tools to let any reasonably capable worker do at least light programming. It’s very hard to say where these revolutions will lead us, and thus there’s a big benefit to being able to tie yourself over the transition period with a subscription or as-a-service play.
But a transitional strategy eventually depends on something to transition to. What is the end-game here? Clearly a new form of IT, clearly something based more on modern application and hosting models. How does this new IT work, what do you need to use it to open new areas of IT application and reap new project benefits that justify incremental spending? Those are the questions that vendors like HPE need to answer in the long term, and they’re not easy to answer. Which is why vendors need to be working on the answers now.
Are they? We don’t know for sure. I think that some vendors, such as IBM/Red Hat and Dell/VMware, actually see the future in enough detail to be creating the ecosystem that’s needed to support it. These vendors are already cautiously positioning for the future. I think what’s new about the HPE announcements is less the as-a-service as it is the recognition of a new IT model. Here’s the relevant quote:
“Companies today have a tremendous opportunity to embrace digital transformation in order to create new and compelling customer experiences, differentiate their business, and grow revenue. In order to do so, organizations demand a consistent cloud experience for managing all their apps and workloads, the ability to innovate at high velocity, and the freedom to choose the combination of technologies that best meet their needs. Unfortunately, the current paradigm for enterprise technology underserves the market – customers are forced to accept an inconsistent experience between the data center and the cloud; inflexible, expensive, and proprietary stacks that prohibit choice; and limited in-house IT skills, budgets, and options for financing.”
This isn’t a ringing call for a totally new IT model, but it’s a step toward justifying one. IT vendors, like most vendors, recognize that too much revolution doesn’t sell. You have to creep up on change, get buyers disconnected from the comfortable past and then get them to face not the ultimate future but a future that’s not too frightening. This is what all the IT vendors are now doing, and it’s a transformation of positioning that’s going to lead to more interesting announcements later this year, and beyond.
