Software Monetization Featured Article

Why Cisco, Others Are Introducing Subscriptions

October 27, 2017

Cisco (News - Alert) (News - Alert) this morning introduced wireless software subscriptions. That followed the company’s earlier move to sell its Catalyst 9000 series switches with a software subscription. The fact that one of the tech industry’s most successful infrastructure companies is making its products available via software subscriptions is yet another sign of where things are going.

“Why is this so important? Historically Cisco has monetized our software innovation via a hardware model,” the company explains. “Many people are surprised to discover the vast majority of our engineers are software engineers. But when we sold our products, customers purchased the hardware with a perpetual software license. Now, the industry is shifting towards a software-centric consumption model.”

Cisco explains that the software-centric model enables customers to purchase a software subscription for a set term – typically three, five, or seven years. These software licenses are portable, can scale as business customers require, and allow for increased financial predictability in terms of the customer spend, Cisco adds.

Frost & Sullivan (News - Alert) indicates that the transition to software business models can be good for suppliers like Cisco, and for smaller businesses and developers as well. Companies that offer their solutions via a software model tend to have better financial performance because their operations, fulfillment, and material costs are all lower than businesses locked into the hardware model, the research firm suggests.

“Software is inherently more profitable than hardware, with margins for pure software businesses typically exceeding 50 percent, while hardware margins are often lower than 10 percent,” Frost & Sullivan says in its white paper Get Connected to Profit: Embracing Software Propels Growth in IoT Era.

The research firm adds that gross sales of software tends to be lower, but net profit and profit margin should be focus. And Frost & Sullivan says that profit margins for software-based business units can range from two to five times higher than for hardware-based ones.

That – and the fact that digital transformation at companies in all verticals is making the shift to software a business imperative – helps explain why three in four software publishers now offer usage-based pricing options. Frost & Sullivan also notes that such major companies as Adobe (News - Alert), GE, Microsoft, and Rockwell Automation have also embraced software-centric strategies.

These strategies, the research firm adds, mean that fundamental business processes such as reporting revenue, managing reserves, and incentivizing sales forces need to change.

“Back-office infrastructure must evolve rapidly to support seamless integration for new business models and improved visibility,” Frost & Sullivan says. “Rather than grapple with so much change and uncertainty all at once, businesses often seek to take evolutionary or incremental steps to stem their loss of revenue and tackle slowing growth. The truth is, however, that we are squarely in the midst of a revolution.”

Edited by Mandi Nowitz